Rails, IANA, Press, PSR, etc.

Cargo Freight Station at Night

Greetings;

Once more into the breach! Or, salutations from Burlington, VT (NEARS starts today). Extensive rail conference travel has delayed (and lengthened) this commentary and the previous missives, but has been more than worth it from my end. So, we’ll cover the big annual intermodal Expo, the nasty trade and business press turn on the rails, and a quick update on “the year of the Short Lines”; then follow in a few days with my views on NEARS and the bi-annual Railway Interchange (operations). For those of you who are sick of PSR discussion, you will be disappointed. The changes, actual, potential and perceived, remain the number one cause of angst and hope in the industry. Before the catch-up, first some interesting news, good news, and bad news:

  • The bad – sad – news is the death of CSX’ Pete Carpenter, a true gentleman, CSO of CSXT into and through the Conrail split….

  • More macro bad news in the form of the GM strike (CSX most impacted, as is UNP – and just yesterday GM announced the shuttering of a pickup plant in Mexico), the Texas floods (UNP, KSU), continuing trade craziness (China still out, Japan now in via a “mini-deal” which should help wheat exports but leaves autos and much else untouched) and the weakening manufacturing sector (the ISM numbers were the worst since 2009.

  • The good news is we have finalized our RailTrends 2019 agenda with the separate agreements with the two Canadian railways for much-anticipated return appearances – CP’s CMO John Brooks and CN’s CEO JJ Ruest! See www.railtrends.com for the full package and I hope to see you in the late fall! See below for the complete conference Preview (and remember I represent the front of the house, only!)

  • Oh, and the interesting news from a week plus ago – former CN CEO Claude Mongeau (former RailTrends “Innovator of the Year”)joining the board of Norfolk Southern is, as best I can tell, unprecedented and fascinating – and certainly adds credibility to their PSR/Top 21 rollout. I will be curious to see how public Claude & NSC will be….Meanwhile, it is clearer than ever that the US carriers going through PSR now, particularly UNP & NSC, are having to fight a two-front war; on the one hand, they have to be reassuring & collaborative to shippers (therefore to the STB and Congress) while assuring the Street that they mean PSR business. It’s a delicate balancing act….

The Business and Trade Press take on the Railroad Renaissance: After a CTD (Century to-date) love affair between the markets and the freight rails, the recent “freight recession” has seen, for a time anyway, the bloom comes off the rose. And nowhere is that more noticeable than in the business and trade press. They seem to all come to the conclusion that volume is weak YOY (obviously) and the benefits pf PSR are all in the past (heck, it’s just starting: NSC just began rolling out Top 21 on July 1st!! ). In many ways, it’s part of the deepening gloom on the Street, with profit warnings seemingly everywhere. Recent market-moving headlines:

  • WSJ/Heard on the Street: “Late Railroad Guru’s Legacy is Losing Steam” (I don’t think so. It is just starting at UNP, KSU, and NSC – and it continues at the rest).

  • Also the WSJ: “Railroads Carry Lighter Load as Economy Slows”, which is true (see QTD volumes, below) in terms of units, of course.

  • FTR “Soft Volumes Have Made it a Good Time to be a RR Shipper”, which ignores the key fact that it is the shippers’ soft volumes that are on the railroad (in smaller amounts)

  • The FT: “Railfreight Decline Hints at Slowdown Across the Wider Economy” – true, but remember that rail loadings are a coincident indicator….

  • Barron’s cover story a week ago: “Train Trouble” (“close to the limit on cost-cutting, investors should think about jumping off the freight train”) - a spectacularly ill-informed piece (just one of many examples they mention CSX’s IM declines without discussing that they were, for good or bad, planned reductions). It ignores the fact that we are in early innings in most of the US and while it does consider the Canadian experience, it notes that no OR has ever gotten below the mid-50s. That is so, and of course, it is on purpose. The Canadians, in PSR 2.0 (or the PHR Railways), have “pivoted to a growth (and market-extension) strategy. One would have thought that an investment publication as august as Barrons would understand that ROIC trumps operating margin, any day….

  • This one hurts the most – in his penultimate column, Fred Frailey of “Trains” magazine’s column is titled “Railroad Renaissance, RIP”. Its subtitle says it all: “Its (sic) focus on short-term rewards is leading the industry down a blind alley”. And there is some truth to that – as I have argued in discussing the “Cult of the OR” and the planned reductions in Capex (as Fred writes about – the fight for cash between a segment of the shareholders that is S/T oriented and others who appreciate the L/T nature of the business – and the returns that the rails provide. Again – look to the North! Industry-leading unit growth, IM growth, CAPEX spend (%/revenues) – and ROIC! It can be done, and if we are vigilant, it will be. It requires spending (see Interchange discussion), but pays dividends (literally). Don’t give up, Fred!

IANA/Intermodal Expo was a blast, as ever, and certainly seemed to bely the “trade is dead” mantra (that being said, yesterday the WTO changed its estimate of global trade growth to +1.2% - down from +3% in 2018, and the lowest growth rate since the Great Recession – and almost certainly below global GDP growth). On the other hand, given the distortions caused by trade “policy”, Larry Gross (speaker at RT19 – see below), comparisons of YTD vs 2017 might be more meaningful and certainly are better optically (International +6.8%, Domestic +1.1%). Some key themes and points:

  • Inflection? Many believe that the domestic IM situation is at last stabilizing and several carriers see outright YOY growth on the near horizon (CN, BNSF, NSC).

  • Steve Branscum, an old friend, won the prestigious “Silver Kingpin” award for his long service to IM, and to BNSF….

  • The current BNSF was available at Expo – always a rare treat. The made the case for capital investments, capacity enhancements, and IM (“foundational”) and completely downplayed the rumor (propagated by their western rival) that they were cutting international IM rates: (~” we utilize multiyear contracts – how would that show up? It’s a sector much more impacted by the trade wars, carrier alliances and port competition than rails’ inland pricing”).

  • But it was generally conceded that service was improved overall, but the west was still a problem (weather-related, to be fair). UPS took rails to task for not improving fast enough (see the full article in the current issue of Progressive Railroading, my RT19 partner).

  • NSC reaffirmed their total commitment to their domestic network and their “corridors”; they noted that car-load PSR (Top21) conversion began on July 1, the IM network’s was set for the near future

  • The future is coming! Amazon purchased 250 domestic (53’) containers!

  • The past is alive – NSC’s RoadRailer is still alive in one lane in the auto sector; its equipment will age out in roughly a decade. Will they reinvest?

The Year of the Short Line continues – and we’ll have more as there are (at least) 14 short line or regional railways here at NEARS. Anacostia & Pacific, the privately held holding company, takes this segment’s top honors by leading the discussion at IM Expo on short lines & IM then by showing us via a tour of their PHL (Pacific Harbor Lines unit, the switching carrier for the combined Ports of LA/LB – and by buying, along with Brown Brothers Harriman, a 23-site rail terminals business. That is A&P’s first M&A deal in a (loooong) while, and it is always nice to see the Harriman name back in the rail game.

Genesee & Wyoming continues on the rail-centric conference circuit, with CEO Jack Hellman speaking at Interchange (I missed but will see him in two weeks at the Railway Tie Association – it is important to grab what will be rare public appearance possibilities as the Brookfield buyout process continues. Mike Miller, the President of GWR North America (and an RT19 panelist, along with A&P’s CCO Eric Jakubowski and others) will speak at NEARS. Speaking of the Brookfield (led) deal, Brookfield itself held it’s annual Investor Conference last week, and the Infrastructure Partners (BIP) unit presentation, highlighting among others, the $500mm investment into GWR, was instructive – and not always positively. True, the low cost of borrowing makes it a good time to be in the PE business, and they were able to secure what he labeled “covenant-lite” bond deals. The BIP CEO probably shouldn’t be expected to know company detail (similar to a fund manager and a rail equity investment), but there were some missed or misused thematic issues, to whit:

  • It was stated that GWR was predominantly a bulk carrier (and thus not very cyclical – the last fact might be true but at slightly over a quarter of the volume, not the first)

    It was stated that there weren’t any real transportation alternatives – cue the TV sitcom “wooooo” sound – ignoring both the highway (& waterway) system but also handing ammunition to the shipper trade associations in the endless struggle of value conducted not on the network but in DC and Ottawa

  • In addition, he included GWR in his discussion of…. ”utilities”!

  • Lastly, BIP said they could contribute additional value through their global rail holdings which

    • Shows he didn’t read the FT opinion piece on BIP claiming they were a railway to investors and were not a railroad to regulators such as the STB

    • In reality, their Australian holdings are a below-track operation (i.e. they own but do not operate the system in WA; Watco does) which is very different than owning GWR

    • I didn’t see how their below-track Aussie Ops and Brazilian shuttle train operations would put them in a position of contributing value to GWR, but subsequent discussions suggested that increased CAPEX was on potential value-add, as were possible synergies with other BIP core holdings such as ports and warehouses. Finally, BIP is very tech-savvy, apparently.

  • To that (Down Under) end there was no discussion (and too limited Q&A) of Aurizon’s efforts to scuttle their sale of 51% of GWA to Macquarie, nor why they chose to sell the above-rail GWR and keep the below rail ARC in the west….

RailTrends 2019 – Deciphering the Code to Growth (November 21-22, Marriott Marquis Manhattan - www.railtrends.com )

Growth/Strategy/Technology in Rails: On the heels of last year’s rail star-studded and sold-out (?!) conference, we look forward to another RailTrends this fall full of real insight and silo-busting information – from the speakers as well as our usual unusually important audience. We will continue to endeavor to look behind the silo walls and maintain our unofficial, somewhat tongue in cheek “No CFOs!” stance (not that there is anything wrong with that exalted position, so critical to my stakeholder group in finance, but to try to avoid the party-line/here are the results from last quarter” so prevalent of many industry equity conferences. here will be familiar and new faces, reflecting the consistent change in the industry, with a real focus this year on the marketing and technology side, after the PSR-fueled CEO parade of last year. The two highlights in this regard are Rafael Santana, the CEO of Wabtec, and our 2019 Railroad Innovator of the Year, CEO Pat Ottensmeyer of the Kansas City Southern. As of this writing, we are yet unaware of who will represent both CP and CN at RT19 – given my year-long “We the North!” push (essentially that those who view Precision Scheduled Railroading – PSR- as a cynical, short term & anti-growth strategy need only look to Canadian railways), we will address that schedule gap….

Our Washington (and Ottawa) focus remains a constant for RT; this year we’ll feature more new names than old: In the leadoff panel, we will have the new head of the rail construction (NRC) group, Ashley Wieland, and old friend/new hat as the head of the Short Line (ASLRRA) group Chuck Baker, new-ish head of the rail car (RSI) group Mike O’Malley and for the second year, the CEO of the Railway Association of Canada Marc Brazeau. We will also feature the two regulatory bodies overseeing rails in DC, in terms of safety (and PTC), the Federal Railroad Administration (Administrator Ron Batory) and markets (Surface Transportation Board Vice Chairman Patrick Fuchs). And in his RT debut, AAR CEO Ian Jeffries will get a solo shot in the role formerly inhabited by last year’s Innovator, Ed Hamberger. Given the varying forces at work, the timing here appears to be more than fortuitous….

Railway Stars - RT19 features company leaders today and maybe the rail industry leaders of tomorrow. We have already bragged on Rafael (Santana, CEO of Wabtec) and Pat’s (Ottensmeyer, CEO of KSU and the 2019 Railroad Innovator of the Year) appearances; for the latter, it’s a multiple repeat performance, although this time he goes home with hardware), for the former his discussion from the epicenter of the rail/technology intersection will be echoed again by one of the industry’s thought-leaders, Oliver Wyman’s Rod Case. In addition to those three, we have excellent Class One leaders, all with recent new responsibilities and clearly the one to watch at their respective carriers:

  • CN’s CEO, JJ Ruest!

  • Union Pacific’s EVP/Marketing & Sales (i.e.; “CMO”) Kenny Rocker

  • CP’s CMO John Brooks

  • CSX’s EVP of Sales & Marketing (i.e.; CMO!) Mark Wallace

  • Norfolk Southern’s EVP/Chief Strategy Officer – back after presenting a remarkable clarion call on technology-and-regulation two years ago, John Scheib

Two of the above carriers (the northern ones) have reached the “PSR 2.0” stage – including the “mothership”, CN; three (and Pat’s KSU) are in the PSR-Transition process, CSX perhaps at the end of the process; while PSR was certainly the theme of RT18, it simply cannot and will not be ignored this year as well, though we’ll look at it from the idea of “begetting” or “pivoting” toward growth.

Putting the Band Back Together, or, The best & the brightest in the Year of the Shortline! This really has been a remarkable year for shortlines, in terms of growing importance through the PSR process, through more Class One segment sales (see CSX, above!) as well as other short line sales (the huge demand

creating its own supply) – and the privatization mega-deal for Genesee & Wyoming. I am thrilled that last year’s short-line CCO panel has come back in its entirety to talk car-load growth, technology, PSR, Class One interactions, deals, etc. We have representatives of most of the big holding companies (Anacostia & Pacific/Eric Jakubowski; Watco/Stefan Loeb; RJ Corman/Justin Broyles and of course Michael Miller of GWR) and a big regional (Pan Am/Mike Bostwick). And we added the newest short line CEO, our old friend Barbara Wilson of Rail USA! I believe that this will be hard to beat as the most interesting presentation/panel again this year….

Last, and given all of the above (and the TBA from Canada!), likely the least, are the annual Analyst Panel (me and the new TV star Donald Broughton and new addition Intermodalist par excellence Larry Gross) and the “Railcar Counts” presentation by Dick Kloster, the latter’s to be made more interesting by the progress of PSR, a strategy that has led to major deceleration of said car counts! When all is said and done, I expect that if one were to combine the star-power of the presenters with the power of the audience, it will lead to another celestial RailTrends!

(Lastly) Short Takes:

  • FedEx?!?

  • Mexico remains a mystery, as AMLO’s budget and backing of Pemex (the recent $5B injection was termed “ineffectual” by a noted observer) countered by backtracking acceptance of the need for more US refined product imports….

  • QTD numbers still lousy (-5% all-in in the US; + 0.7% in Canada)

  • Headline in “

  • BNSF and Wabtec will test a battery-powered loco in H2/2020 (just as Matt Rose predicted earlier this year; I suspect he might have known something)

  • NSC opened a PTC-sim “Lab” in their new ATL HQ

  • But….Daimler, which had played down the AV aspects for large (Class 8) trucks heretofore, is testing a Level 4 AV unit….

  • Class 8 truck orders off 77% in August; the market is moving slowly towards equilibrium….

  • China Daily (as inserted into the WSJ): “Global Trade is Good” so, there you have it….

  • Michigan State, whose rail certificate program I support every fall in Chicago, has issued a White Paper (or, really, a preliminary WP) on “Rail Optimization – Carrier/Shipper/Investor Relations” – which will hopefully yield some insight into restoring the stakeholder virtuous circle of the earlier years of the “Renaissance” (although it does start with some undue acceptance of shipper trade association shibboleths such as “arils grew on the backs of shippers” – ouch!)

 

Anthony B. Hatch
abh consulting
www.abhatchconsulting.com
abh18@mindspring.com