RR Summer Grab-Bag

Summer: Ball in a Pool

Greetings;

Later this week will be the end of Q2/19 Review, now that the last two carriers have reported – albeit in a reduced fashion. After that, things will slow before picking up again….I will be spending the classic vacation part of the remaining summer at what we used to call “Roof-Hampton”, with a side trip (south) to the North Carolina Railroad’s (the below-rail owner, to use Aussie-speak, of the NSC lines in the Tar Heel State) Annual Conference. September brings travel opportunities galore, starting with the Railway Association of Canada’s Business of Rail conference in Ottawa (agenda attached), followed by the 2019 version of the power-party that is IANA’s Intermodal Expo; the following week is the mega biannual Railway Interchange with some 10K rail operations, IT/PTC and suppliers in Minneapolis and then as the baseball playoffs begin and the leaves begin to turn, NEARS…..And for you, clients, don’t forget the Cory meet-up on September 3rd after work (exact time and place TBA – please RSVP).

Since that report, the trade world has once again been upended (see the “Vanity Fair” take on it at the bottom); there have been a couple of DC meetings worth a comment or two, some rail announcements from North of the border, and the last two rails to report, BNSF and GWR….look for the Q2/19 Review next week; think of this as an interregnum report….Trade continues to be a market-driving issue, and China’s response, while perhaps predictable, is troublesome. The US Chamber immediately came out against the new tariffs, of course, and the American Farm Bureau called it a “body blow”. These moves are bring blamed for the weaker PPI number for July (weakest since ’16) and the slowdown in job growth in manufacturing (+15K in July but 2019 averaged 58K/month_ and construction (+14K versus 26K 2018/monthly average).

The Canadian rails made some important announcements:

  • Canadian Pacific the elevation of Mark Redd as EVP-Operations, replacing the retiring Robert Johnson (and Tracy Miller will be the new SVP-O/Eastern, replacing retiring Tony Marquis) – moves designed “to support continued success and drive sustainable, profitable growth” (emphasis mine – and theirs, to be honest….). There were other appointments as well, including the new role of “Chief Culture Officer” (insert Calgary joke here).

  • Canadian National, meanwhile, continued its “expand the brand (and reach)” policy by creating an intermodal deal with CSX to link the eastern USA ports (Philly & NY/NJ) to eastern Canada

BNSF’s Q2/19 results followed the group pattern and compared fairly well with western competitor Union Pacific – except for the all-consuming Operating Ratio. The optics will surely fuel the debates, on Wall Street, on the rails, and at Berkshire Hathaway. So, let’s see: revenues up a tad (0.3%) compared to UNP’s -1%; pre-tax earnings up 7% (6%); operating expenses down 3% (1%). Their OR of 64.8% (an improvement of 200bps) compares optically quite unfavorably to UNP’s reported 59.6% (-340bps)….adding fuel to the fire of the benefits of giving in to the PSR revolution. I wish we had more accessible data to further retired Executive Chairman Matt Rose’s arguments about the differences in mix, “brand” (as in their world-class IM sector) – and ROIC. By commodity:

  • Consumer Products revenues were down 4% on volume declines of over 6% - no great shakes, especially as compared to UNP’s Premium business (revenues -2% on -5% volume); one could infer that the pricing issue UNP has oft complained about in the international sector might not be so daunting (anymore?) – both reported Revenue/Unit – I know, I know – NOT price – of +3 and +4%.

  • Ag, where again BNSF is the “brand leader” in the west, showed volumes down 4% but revenues up 3% - this is the obvious impact of the devastated export grain business (UNP: volumes flat revenues +4%)

  • Industrial, where the roles are reversed, BNSF had flat volumes (thanking their stars for CBR, +6% revenues); UNP volume up 2% (plastics, Benjamin) revenue up 4%

  • Coal – BNSF had a 3% decline in revenues but volumes were actually up 1% - UNP’s were down 7% - so with BNSF’s 4% decline in ARC, maybe the pricing blues UNP has been singing in this category have some merit….

DC was the site of two Congressional meetings late last month, one a get-together, described to me as a low-key roundtable of shippers sharing “concerns” (AKA a - hint – rhymes with “niche” - session) and the other, PTC, an actual scheduled hearing; more of a regular update. The freight rails look to be in pretty good shape – read the AAR’s take. This was confirmed by the testimony of FRA Administrator Ron Batory – who noted that 87% of the impacted miles were now covered - and by a GAO report. That latter did note that the rails “faced some challenges” due to the “limited amount of vendors” in the segment (the largest of which is Wabtec, whose VCEO, Rafael Santana, is one of the highlights of RailTrends in the late fall (www.railtrends.com). The BNSF announced that they had achieved interoperability with Union Pacific, their largest competitor – and interline partner. While this was going on, an interview (in “Trains” magazine) with the just-retired FRA Associate Administrator for Railroad Safety, Robert Lauby, was interesting and somewhat “off the reservation”, in effect - arguing for ECP brakes (particularly for colder climates), although also (somewhat) supportive of the Automated Track Inspector cars of the CN – and for a slowed-down, collaborative version of PSR (the continuation of the HHH – the “Hunter Harrison hangover” - ??).

  • In nearby suburban Maryland & Virginia, MARC and VEA officials blamed their poor performance in the weather – and the growth in CSX traffic (“there are just a lot more trains on their system” stated the VRE Chief of Staff) – but where, exactly, given that both volumes are down (a fair bit) as are train starts (and train lengths are up)?

Two recent railroad conferences were even more illuminating than expected:

  • The AARS (Railroad Superintendents) was already somewhat discussed last week (I have attached the NSC Q2 write-up that covers CEO Jim Squires and his – yes – extremely forceful support for their brand of PSR, its relationship with customers and to growth, and the need to invest to support that). In addition to the NSC defense of PSR, if you will (“PSR is a growth enabler”), we heard from the CSX/CN continuum, with Dave Ferryman and in the key “address to the Supers” ex-CN and current CSX COO Ed Harris, who gave as fiery a pep talk as you would ever need….

  • A major railcar leasing company held its annual rail shipper meeting, filled with chit-chat about PSR, too (though not as fearfully as last summer), and well as short line sales (change is hard), etc. One highlight was the presentation from Beau Waldrop, the corporate strategist at ExxonMobil, who gave the (soon-to-be updated0 Exxon outlook to 2040 which included these chestnuts:

    • In 2040 transports will remain predominantly liquid (i.e. gasoline/diesel) fueled, although North America will see a larger-than-average increase in EVs – thus the average heavy-duty truck’s rate of 6.5mpg will hit 12 by 2040 (again, lots of work and investment out there seeking, directly or indirectly, to reduce the first two rails ‘advantages, manpower and furl efficiency – though not the third and biggest structural advantage – the network/infrastructure).

    • Coal is expected to remain flattish – globally – with Africa and Asia making up for the developed world’s reduced usage

In other rail-related news:

  • The short line holding company OmniTRAX added the Winchester & Western (despite the name, operating in MD/WVA/VA and NJ) railroad to its portfolio in a $101mm deal and will utilize “Precision Scheduled Short Line Railroading” (PSSLR!) to improve the W&W….OK, I need some things ‘splained to me here….

  • In another shortline announcement, Pioneer Railcorp and its dozen lines were acquired by Brookhaven Capital Partners and Related Infrastructure – and the former is headed by ex-Broe/OmniTRAX guru Alex Yeros

  • One way to potentially stop this boom in short line valuations? The “Stop Wall Street Looting Act”! amazingly since it is so heavy-handed, it has been endorsed by some reputable financial types such as the FT….

  • Was the FDX-AMZN “divorce” really a surprise to anyone as the latter builds out its own logistics capabilities? A key takeaway at Intermodal Expo will hopefully be a better understanding of AMZN’s developing railroad relationships….

  • Three (terrific) new RailTrends speakers announced, and so far not a CFO among them, not including the terrific Short Line Commercial Officers’ Panel (November 21-22 www.railtrends.com ):

  1. Chief Marketing Officer, Union Pacific Kenny Rocker

  2. Chief Marketing Officer, CSX Mark Wallace

  3. Chief Strategy Officer, Norfolk Southern John Scheib

From the trade (and other) press – and from the sublime to the ridiculous. You decide which is which….the FT’s take on coal is attached.

 

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