Subject: RRs - Q3 Earnings Matter (a little), ETC -
From me, I will consider the group, KSU below; the Canadians tomorrow (after my panel at WESTAC (www.westac.com – “the premier forum for transportation leaders in Western Canada”) then, in order, CSX, UNP and next week NSC. So far the trend is “Well above initial expectations but at or slightly below most recent consensus”; wait for January for any clarity, but things are improving. Apologies, I have been a bit distracted of late (I will let you guess as to why and it's not debates, etc. Well, that, too).
First, this (via Tweet): The $8B man on to new adventures? How chances mock, changes fill the cup of alteration with divers liquors! On 1/1/21, UNP COO Jim Vena will move to “Senior Advisor “- through 6/21; Eric Gehringer succeeds as EVP, Ops; meanwhile, Lance Fritz remains Chairman & CEO. More when we review their report…..
And there were other personnel changes of note:
- At the very same UP, rising star Jon Panzer was promoted to EVP Strategy and Rahul Jilali was recruited, from Walmart no less, to be the new CIO; both will report to the CEO
- Arthur Adams, the irrepressible CSX star of the speaker (virtual and live) circuit, was promoted to SVP, sales
Visibility into Railroad visibility at last? From my Tweet: The new JV, Rail Pulse, could/should/will be a VERY BIG DEAL; after months of being semi-undercover (I referred to it as the “pilot project”), it just received an FRA CRISI grant. RP is led by consortium including NSC with Watco, GWR, TRN &GATX (so far). This constitutes a real effort to finally gain true visibility by connecting all stakeholders – RRs (big & small), car owners & OEMs, shippers via GPS. Congrats – Big “Macs” all around!
Sigh….Of course, I have to keep my streak of losing some of you off of my list (apologies) and of “mea culpas” – in the last piece focused n short-liners, of course it is ROB Russell of OmniTRAX – who’s excellent and somewhat scary presentation (noting the loss of railroad shipper connections) from NEARS is HERE.
And there is an emerging theme out of Calgary – buying back your old assets. First, the CP bought back what was renamed the CMQ; and now the 83.5% of the Detroit River Tunnel that they didn’t own (they sold their ~50% stake to a PE firm in the 2008 GFR). The $312mm (yikes?) deal should close by YE. More in the CP earnings call write-up.
Rail earnings off to a modest (so far slightly below expectations) start – which will still look good as compared to the overall market (S&P500)E 21% decline in earnings….some were expecting clarity into 2021 but that’s asking way too much of the limited data we have. In fact, the guidance that is being restored is rather limited, with CN noting that it was rather foolish to give any for Q4 and they (and all of them) hoped to have more at their bigger, more detailed January call(s). By then maybe we’ll have some clues as to the length of the re-stocking boom versus the seasonal peak versus secular share restoration (in IM), as well as some political/trade clarity (it is assumed). Just as a reminder, just last week tariffs were put on ~$2B in aluminum, which is not really a rail issue in this case – but the ~$370B in tariffs on Chinese goods and the global recession has led to the following drops in Chinese imports (JoC) August YTD:
- Clothing -46%
- Footwear -40%
- Furniture -26%
- Toys -22%
- Electronics (pre-Iphone8) – 19%
Meanwhile, September and Q4TD traffic are really quite good. North American volumes were really quite good – carloads minus 8% (yes, after May that’s good) – with 7 of 20 categories up! USA had 8/20, Canada, jumping back into the lead position, 11/20, while Mexico had 1 (and a tie) of 20. The latter was and remains hindered by blockades by indigenous peoples, teachers, students, etc – shades of Canada in Q4 (reports are that a commandeered Corona truck was used to block the tracks – that’s when farce becomes tragedy). For all of the dysfunction in the US, we can be thankful for the Interstate Commerce Act. QTD volumes are +7% (!) in North America – that beaks down as +8% (USA & Canada) and -17% Mexico. Grain remains the star, up 21% in September (and Farm Products were up 44%0 but this month Ag was joined by lumber (+16%) and scrap metal (+12%) and waste (+4%). Exports from Canada (rail volume records) and the US (to China, although it is obvious that the Chinese import quotas won't be reached) are the drivers….
Meanwhile, Intermodal was up 5% in September (recent weeks have been doubling that); Q3 as a whole was up a “robust” 3% after dropping 13% in Q2/20. IANA, covering the whole IM supply chain, showed September numbers +9% with Domestic up fully 15% (TOFC +16%, boxes +14%) and international, somewhat congestion-impacted, still up 3%. Some interesting IM factoids:
- According to SeaIntelligence in M<ay 12% of the container ship fleet was idled; it is down to ~3%; the spot price for a container from Northern China to LALB is up 127% YTD!
- Piers/JOC reports that the US west coast has lost a lot of share – from 77.5% of the total import TEUs in 2005 to a still “robust” 60.6% last year (impacted by the trade war, of course).
- Of course, the biggest gainers are not the US east coast but BC (and the biggest losers, not LALB but the PNW and the Bay area (Go Dodgers), and an August report by the well-known consultants Mercator suggest that with major expansion coming on in 2022-23, that trend will not slow down anytime soon. Interestingly, the study was funded by the Pacific Maritime Association (PMA) representing US west coast ports, who may have a political interest in crying poor. Speaking of (west coast) ports and politics….
- Again, one issue to consider is the US congress as the delegation from the state of Washington feels very strongly (and, um, not positively) about the Harbor Maintenance Tax, which adds about $90/box
Diente de Tiburon (Shark Tooth) – that’s the pattern that the rails had to deal with in terms of the unprecedented volume plummet and the startling recovery, and none more than KC Southern, with its dependence on autos and IM among other commodities. In that light, KSU’s earnings miss (was it?) is more than understandable. This was, from an accounting perspective, another complicated KSU quarter (tax reversals, FX, hurricanes, oh, and COVID). Speaking of weather, I do appreciate the comments by CFO Mike Upchurch, who said weather was “just part of doing business in the part of the country we operate in” – Holy Hunter Harrison! As I hope you all know, I am not a card-carrying member of the Cult of the OR, but in this case, it’s instructive: despite a 4% drop in volumes (which was the result of a 60% increase from the May trough – diente grande!), an 11% drop in revenues – KSU dropped its OR by 640bps from Q2 and 190bps YOY to 58.8%.
- PSR helped – crew starts were down 23%. Headcount was down 9% (and that’s really only US – though Mexican Comp&Ben was 19% lower YOY). Train length was 16% bigger. Service suffered (velocity and dwell) from H1 levels but were still 4%/13% better YOY. This dynamic tension will be the thing to watch – “service begets growth” and all that. KSU didn’t provide safety data – the only rail to not do so (and I wish they would). They stated that they were on target for the goals of $95mm and $150mm in PSR savings in 2020/21.
- The key growth initiatives showed well – the “cross border franchise” was up 10% (CB-Intermodal volumes were up 19%, revenues 5% - and KSU got initial good news on permitting for a new bridge at Laredo). KSU states that it only has some 5-7% share in this segment. Mexico energy reform (always an AMLO worry) was up 34% (vols) – in fact, refined products revenue loads were up 61% and revenues 55%
- Overall volumes were up 2% in September – this is the theme/trend of this quarter’s calls.
- Capex was way down (-38% YTD), though Sameh Fahmy stated he had all he needed to lengthen sidings, etc. Share repos were up 70% and KSU added an accelerated $500mm repurchase plan. KSU management reassured (me) by stating that ongoing CAPEX would be in the 17% of revenues range – and that was instantly questioned (Jeebus!). Remember, only a small portion of the shareholder/analyst base thinks that way….
- Minimal guidance was provided (and, really, expected – FY2020 EPS up slightly, OR ~60%. But guidance for the next two months isn’t important anyway. There were no questions (allowed) on M&A, and none offered on AMLO and Pemex.
- Although they don’t see the auto industry in full recovery until ~YE 2021, we expect continuous sequential improvement by KSU….
Bloom off the rose, part 1? Or a lesson for me to stay in my own lane? Well, the Plastics Boom as promoted by PLG, etc (and, admittedly to a lesser extent, by me) hasn’t quite materialized. It's been a big one for construction in the US Gulf, some $96B since 2010. But now, given the lower oil/high natgas prices (reducing the US feedstock advantage) and the over-building, “Petrochem makers (sic) are pausing on multi-billion dollar expansions” after the C19 demand drop, according to the WSJ. The venerable business paper went on to opine that “surging investments in the hot area over-shot demand, as sometimes happens in business”. Thanks, WSJ, for that valuable lesson. Anyway, Dow, Chevron, and LyondellBasil are among those that hit the pause button….US chemical carloads were down 6% for September and 14% YTD (see below). Overall, the shale-impacted story has been just fine for rails, thank you….just not (insert Otter memory) great.
Bloom off the rose, part 2: Google reports that 2020 searches for “blockchain” are one-tenth of the level of 2017. Maybe it’s because we all understand it by now?
Freight Rail Independence Anniversary: It’s the 40th anniversary of the critical, and always challenged Staggers Act – and Logistics Management Magazine’s Jeff Berman talked with AAR CEO Ian Jeffries about it recently: HERE.
EV/AV Hype of the Week: IPOs/”Blank-Check Companies” in EV with no revenues: HERE; meanwhile, Nikola, they hype that keeps on hyping, “Released plans to reassure investors” (WSJ). I mean, what else were they gonna do? Meanwhile, there seems to be a growing sense that hydrogen cells are green, but hydrogen production is not….
- True believers - Unlike BHP, Rio, and South32, Glencore has ruled out coal divestment….
- Will Freightcar America, the rolling stock OEM, change its name now that it is out of Alabama and ramping up Mexico?
- Quantum Energy Partners, the US’ largest oil investor, stated that US shale has “drilled the heart out of the watermelon”, and “what we think of as daily production potential now is nowhere near as big as what we thought 3-4 years ago”. Sobering thought, for oil and for those who thought that watermelons were heartless.
- Canada avoids an election, perhaps sick of the TV adds seeping north over the airwaves….Meanwhile the town of Asbestos, Quebec voted to change their name to Val-des-Sources. According to Seth Meyers, that name narrowly beat out “Bitcoin” (and maybe “Blockchain”?).
- But the fight between the west and east lives on in the North – per Alberta Premier Jason Kenney, I wonder if “unicorn farts” are legally allowed to be shipped by rail?
- RIP Alan Boyd, 98, the first-ever Secretary of Transportation as well as a former CEO of the Illinois Central and of Amtrak….
- The publication Northeast Rails & Ports noted that Conrail may be in the Pan Am sale mix….now that’s interesting, creating another area of NSC/CSX cooperation….
- Although trucking demand remains (ugh!) “robust”, JBHunt produced an earnings miss. Trucking volumes jumped 14% (better than “robust”) but OR in that segment climbed 430bps to 97.3; Intermodal’s OR 90.1% (up 170bps – but take in that number, folks) on 2% volume increases. On their call JBHT noted that terminal congestion caused a drop of ~20K loads; it appears that BNSF and LALB are the culprits, though we don’t know that….
- A quick note to those of you who notice that I quote the trade/business/local press – I used to walk down the halls of my 100-analyst firm and pick up info on the various industries that ship by rail; then I went to some 30 conferences a year and heard from/talked to shippers and short lines etc. Now I am (semi) locked-down in a modest NYC apartment….so I do what I can with what I have!
Finally, I will be hosting a live panel discussion on October 28th from 10:00-10:45 AM PST, talking about how Kansas City Southern is driving innovation and modernizing its Interline Settlement System (ISS) processes. Erica Wilson, Revenue Modernization, Director Revenue Systems Modernization at KCS, Manish Kedia, Co-Founder & CEO at CloudMoyo, and Bishram Keshri, Sr. Product Manager at CloudMoyo, will be participating in this intimate discussion around the technology levers KCS is using in partnership with CloudMoyo to improve and simplify interline settlement processes. Here’s the link to more info on the panel and details to register.