RR Tech, Cars, Storms and Threats

Snowstorm

Greetings;


BNSF still hasn’t reported so we’ll hold off on final “Reflections."


Storms: Maybe, just maybe, we see some sun at the end of this extreme weather that hit Texas, and
most of the rest of the US. Again, we might begin to question what is normal, given how usual unusual
seems to become (John Phipps of “American Farm Journal” noted that 2020 was likely the hottest year
on record and, among other things, had 2X the “average” year number of hurricanes and, perhaps more
to the point, had 2X the number of severe hurricanes in the USA. This is, in fact, the 4th “Polar Vortex”
since 2014. And we know that Texas is the most important state for rails by many measures, including
the gateway to Mexico. The rails reached out to their various stakeholder constituencies, notably CN to
investors early in the game, and UP to its shippers on 2/15 announcing ~72-hour gate closures for
intermodal starting 2/16. The latter caused some consternation among customers and IM observers –
but I note that I have a mere envelope in the FedEx system that is a week late as of today with no set
schedule. For the rails, we sure hope they trot out that old war-horse, “resiliency”. We think they will
after they solid performance in the see-saw they were mid-year 2020, but not all shippers and observers
are so sanguine (one noting all of the redundant (“surge”) capacity removed under the most recent,
American phase of PSR.


Another storm brewing in a courtroom? The rails lost a complex motion to exclude some
communications in their defense of a lawsuit alleging antitrust/conspiracy in the application of the first
batch of Fuel Surcharges: OPINION denying 417 Defendants Motion to Exclude Interline-Related
Communications from Consideration for Class Certification or Any Other Purpose Prohibited by 49 USC
Section 10706; and denying 927 Defendants Motion and Memorandum of Law Regarding the
Interpretation and Application of 49 USC Section 10706. An Order consistent with this Opinion will issue
this same day. Signed by Judge Paul L. Friedman on February 19, 2021. (MA) (justia.com). a (pro-rail)
lawyer friend wrote to me: “I’ve read it. I don’t think it is good. How big will be determined….” How
big? “the 4 (US “Big 4”) defendant railroads to billions in potential liability if a jury rules against them”….


Rails & Technology

This has become a recurring theme, and that is a very good thing, even for this Luddite. A Rail/Tech Top
10 might include:

  1. Inspection Portals – inspecting cars better, and at speed - we first heard (and saw) on the CN,
    now becoming ubiquitous (in trials and in developing algorithms)
  2. New loco power – Anacostia’s PHL in LA/LB, BNSF/Wabtec (see below) battery-powered pilot,
    CP’s amazing hydrogen-battery development
  3. Track-inspection cars – inspecting track better, and at speed (again CN was first off the mark, at
    least to the financial community)
  4. Rail Pulse – a game-changer visibility project centered on merchandise (see below)
  5. Moving blocks and quasi-moving blocks (see BNSF’s patent application) – using PTC to add
    capacity (etc)
  6. Outside Investors – KSU disclosed in Progressive Railroading’s Rail/Tech Summit (below) that
    they had invested in (and accepted a Board position) in an AV-car company; and of course CN &
    UNP invested in Tu Simple
  7. New Hires from tech/outside the industry – most notably at CN (not just CTO but in their
    “embedding” program) and UNP – from Wabtec and Walmart, respectively
  8. Simulation not just for gamers anymore – Roy Blanchard’ WIR this week highlighted UNP’s
    Precision Train Builder – a super-simulator that can look at a 300-mile big train run in 8 minutes,
    down to the car and even component as they leverage bigger trains safely (and Roy thinks this
    will also help bring down dwell times)
  9. Remote meetings, mobility, which accelerated of necessity in the pandemic – such as remote
    crew “rooms”
  10. AV – the holy grail – for rails, and perhaps sooner, for yards and terminals

 

KSU tech strategy update yields some shocks to (my) system: Kansas City Southern Chief Innovation
Officer, Brian Hancock, highlighted the Progressive Railroading “Rail/Tech Summit” webcast much as he
did a few years back at RailTrends. There and then (2018) BH stated that KCS would achieve full
autonomy in 3-5 years (my optimistic, rose-tinted version) or 5-7 years (what he said) But one thing is
certain – at that moment, the focus was on KCS; at the Summit, BH noted, correctly, that this had to be a
network solution (due to, for example, the free-flowing car and locomotive pools from all carriers). This
is a network business, so it makes sense – but presents challenges for KCS (and CN & CP) in that the
other two NAFTA countries do not have PTC (yet? Or some cheaper, better format in the future?). So,
that was a change, or perhaps better, a clarification. Overall, BH gave the best presentation I have
heard for a layman to understand really what PTC and digitalization is and how it works, and in what
timeline to move from PTC and safety to Advanced Train Control (ATC) and added capacity, visibility and
information flow (the slides were excellent; I haven’t heard from KSU about availability). But aside from
the “network” bias clarification, other revelations were more dramatic:

  • Technology will not be an inhibitor – the roadblocks are political/regulatory (agreed)
  • PTC south of the border is not imminent, but KCS is lobbying (BH called being “a good partner
    for the Mexican government”) to get the right sort (post-PTC, or PTC 2.0, learning from the US
    process) of regulatory requirement
  • “There will always be a crew in the cab” – whoa! Stop the presses! Now, unlike many in the
    financial community didn’t think that the savings from consist reduction from two to one to
    none was the biggest future benefit in ARR (autonomous railroad) but it was something….and

    • The ability to schedule trains/train starts without consideration of crew costs
      could/would be a game-changer – as one COO said to me – short fast trains could be
      dispatched
    • BH, however, sees PTC and ATC helping with longer trains. Of course under an
      ATC/Moving blocks scenario, both long merchandise, and short & fast parcel trains could
      coexist…..BH sees “power management” as a “key element of the business case for
      automation”. And Moving or quasi moving blocks are critical to unlocking the capacity
      dividend from PTC.
    • What does BH’s belief, in crews remaining on ARR (which I attribute to focusing on the
      real rather than the “someday”)suggest about the labor negotiations still going on?
      There had been hope for further consistent reform, but I take this as a hint that it won't
      happen, at least this round (which means perhaps 5 years until it is addressed again)
    • KCS’ focus is on cars and locos rather than on automating yards and terminals (though
      they have a pilot in Dallas); some other Class Ones told me (see NSC, below) that
      automating terminals was a logical first step.
    • KSU is an investor in a trucking AV company and BH serves on its advisory board –
      similar to (but not as far as I can tell exactly the same) as the CN/UP investment in Tu
      Simple (above) where JJ Ruest sits on the Ad-Board

 

Table Stakes - More Rail/Tech Summit: Trinity unveiled a two-part digital strategy at the Summit; Dan
Anderson (VP Strategy) said the goal was to fulfill the “unrealized potential of rail”, which TRN is so
leveraged to as a leading rail car OEM (below) and leasing company. What’s the issue (as if we didn’t know)? Dan noted a 6% modal share loss in merchandise since the 2006 peak….gulp. The plan of attack
is through “Trinsight”, their own new digital platform, which is (unlike PTC) shipper-centric and has run-up wins in damage mitigation (by following a car’s flow), predictability, and better accuracy in billing and
taxes. The other is their founding coalition partner status in Rail Pulse (of course). Railroads control a
railcar only 40%-70% of the time, leaving big data/visibility black holes (and that, say, 40% control could
be multiple railroads). Noting that to the rail shipper, or prospective/former rail shipper, visibility is
antiquated, fragmented, and overwhelming. Trinsight and Rail Pulse (especially the latter IMHO) are part
of the comeback. Keith Dierx, Strategic Advisor Princeton Consultants, called visibility table stakes in the
battle for modal share….


Thoroughbred Technology Update – I had the chance to zoom with Fredric M. Ehlers, Vice President
Information Technology and Chief Information Officer regarding Norfolk Southern’s 4-part tech strategy
that seems to cover both sides of the ball, offense, and defense. Using PTC as a digital backbone
(something they as a company have discussed going back to John Scheib’s speech at RailTrends in 2018),
CIO Ehlers leads his Atlanta-based team which includes a data science “lab” (my term). He has a
background deep in ops but also with service design, a good blend; he reports to Annie Adams, Chief
Transformation Officer (who reports to the CEO, who is said to be fully supportive). Two new recent
Board members Chris Jones (head of IT Services, Northrup Grumman) and Jack Huffard
(cybersecurity) have tech backgrounds, not a coincidence. His work parallels and supports the Rail
Pulse effort that I have waxed enthusiastically about all fall and winter; that also is evidence that NS is
working on developing “both sides of the ball”, offensive (customer-facing, such as the visibility derived
form R/P) and defensive inspection portals, track defects, etc (as befitting a company with a deep
historic operational/safety culture). In his opinion, the company reached an inflection point in
technology in 2018, in terms of understanding (especially, at that point, on the cost side) – and funding.
The four corners (it’s ACC country, after all) of NS’ HD-Data tech strategy are:

  1. Unlock the power of data (for example, all of the new data from or soon to be from PTC)
  2. Advance automation (in practical terms, for now, this means dispatching, back office, and the
    source of what he says is “the next big opportunity”, inspection, rather than the “marquee
    project” rail AV (although yards and terminals are being worked on); work AI, machine vision, etc
  3. Empower the workforce – improved tools, mobility, areas that were super-charged by the
    pandemic (such as the virtual crew room)
  4. Derive rapid value (this is similar in my opinion to CN’s focus)

Although NS is a company with a long track record of build (rail cars, loco conversions, etc) here they
take a more balanced approach, and cite extensive work with Wabtec (on “train pacing” and movement
planner etc) and Salesforce as examples of “buy” project partners. Near term areas of interest are fuel
efficiency.


Railcar revival? This would surprise me – not over time, but for the right now, as we remember the
comparisons (both 2019 and 2020) when looking at volume projections and consider PSR, and the 25%
or so cars still in storage (even if 33% or so of those are legacy/never to return – but Barrons threw
some light (as in the opposite of shade) on GBX this weekend: “Greenbrier Stock Is Surging, and CEO Bill
Furman Bought Shares”….Greenbrier’s longtime CEO Bill Furman bought $2.2 million of the rail-car
maker’s stock as it surged to records. Greenbrier stock (ticker: GBX) has surged more than 25% so far
this year, far outpacing the S&P 500 index, a measure of the broader market. It’s a turnaround from last
year when shares of the maker of freight rail cars and marine barges managed a gain of 12.2%, short of
the index’s 16.3% rise. Furman bought Greenbrier stock as it set 52-week intraday highs, along with
much of the market. He paid $2.2 million over Feb. 9 and 10 for a total of 50,000 shares, a per-share
price average of $43.57. Furman now owns 512,518 Greenbrier shares in a personal account, and an additional 350,045 shares owned through a living trust, according to forms he filed with the Securities
and Exchange Commission. Greenbrier didn’t immediately respond to a request to make Furman
available for comment on his stock purchase. Furman has been CEO since 1994, and chairman since
January 2014. He last purchased Greenbrier stock in May 2020, when his trust paid $1.7 million for
100,000 shares, an average price of $16.52 each. On Feb. 27 (NOTE – Barrons came out on 2/20 so I do
admire their crystal ball) Cowen analyst Matt Elkott raised estimates on Greenbrier and lifted the target
price to $50 from $41. Elkott, who rates the company at Outperform, wrote in a research note, “We
expect rail car demand to recover this year, and Greenbrier is well-positioned to be a key participant.”
Valuation “remains compelling.” I like and respect both Bill and Matt….but I just don’t know, so I asked
“Mr. Rail Car”, my frequent collaborator, Auburn’s finest and RailTrends presenter, Dick Kloster:
My two cents. Deliveries in 2020 slightly exceeded 33,000 cars. In December, my forecast for 2021
deliveries were 27,800 cars, while others were in the low 20k car range. My sense was that there was just
as much upside potential as there was downside risk, and I think the farther we get into 2021, the more
apparent this upside will become.


Why? Freight volumes are getting stronger, the surplus is declining, and retirements are increasing with
higher scrap steel prices. This is creating a market environment where positive demand-side pressure on
the fleet is growing at the same time as negative supply-side pressure on the fleet is also increasing. Add
in a new car marketplace with a backlog that continues its slide down due to an anemic new car order
rate over the last couple of quarters, which can't help but motivate the market. Plus, there are
significant parts of the shipper/user base that has been just waiting for car prices to moderate so they
can relieve some of the replacement demand that has built up. The result is that this just might be the
beginnings of the next new car build cycle.


Some other thoughts:

  • Wabtec results were called “confounding” by my friend and former NatWest colleague and “ax
    “on WAB, Blair’s Nick Heymann, who noted that while transit did fine, higher-margin freight fell
    below expectations and didn’t show any recovery corresponding to the freight volume
    comeback – nor does ’21 guidance. Noteworthy – digital sales fell 22%, with implications for
    rail-tech above? And WAB expects rail car production to fall another 25% in 2021….also with
    implications for the above commentary….
  • You know ESG is big and getting bigger (KSU devoted one of its 4 slides to it at the Stifel
    Conference – analysts’ old friend Janet Drysdale along with AVP-Sustainability Chantal Despres
    will address the RBC Global ESG Conference on 2/26 (webcast available)
  • NSC hired Hunt Cary as VP-Operations Efficiency. What’s unusual, two things, actually, is the
    over the transom praise of this move by many of Cary’s former colleagues at….the CN. And
    that’s the second – in an industry with such a strong culture (and sets of culture) it is unusual to
    see executives change railways (except perhaps for those at the very top) much less have the
    experience of three carriers. Cary completed his round trip – starting at the NS (he is a VMI
    grad), to the CN in ’03 (PSR foundations) to the UP in 2018 (PSR!), and now back to the NS. In
    this pattern, he does follow in the footsteps of his boss, COO Cindy Sanborn, CSX to UP to NS.
  • UP Investor Day! Save the Date May 4….I suspect it will be a webcast but let’s go Moderna!
  • Speaking of vaxxing, etc – SWARS will still be live March 10-11 but I will be virtual (no
    comments) – still, as per usual it is a great event (Ottensmeyer/Miller/Cairns/Shaw et al):
    Southeast Association of Rail Shippers (swrailshippers.com)

 

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
abh18@mindspring.com 
Twitter @ABHatch18