Greetings;
“I don’t need any help from the government in order to figure out what I’m supposed to do (to enhance and accelerate rail service recovery); I just….want to make sure the government does (nothing) that screws it up worse”
~CSX CEO Jim Foote, in response to a question about the STB letter of October 18.
So CSX produced an excellent financial result in Q3/21, with EPS up 34% YOY – and 18% above Street consensus They produced a slight (50bps) decrease in their OR, to 56.4% - but that includes the ~250bps from Quality Carriers! So – you do the math (although Jim Foote noted that the OR is “not the goal, that’s just the result”. However, I am sure that the Surface Transportation Board has done the math, too. In fact, a few days before the earnings release/call, Chairman Marty (Oberman) wrote a letter to CSX CEO Jim Foote noting customer complaints to the STB of CSX providing “substandard (service) performance” across the network, noting the lower metric numbers – and lower headcount, a big deal to the STB – and a “systemic problem” (as opposed to a pandemic-related problem, or an entire supply chain problem) causing the STB “grave concern”. Jim Foote noted that by now, “everybody figured out that it’s not really the railroads (at fault for the supply chain issues)”. In response, CSX was initially diplomatic, then acted perplexed on the call (“trying to unscramble it”) – but vigorously defended their railway and PSR, which was refreshing. But what caused this? Some thoughts:
- The ghost of Hunter Harrison? I have long argued that the specter of EHH seems to still play out in RR/regulator/public drama, from the recent KSU M&A battle (and the Chicago/J issue) to the (planned) sale of the WC lines from CN to Watco – many in government wanted a shot at the Great Man but he escaped their grasp, leaving his heirs to face the music
- CSX still has issues before the STB – their Pan Am purchase and their smaller Massena Line sale (to CN) – which weren’t discussed on the call, unfortunately
- CSX also had a boost from “intermodal storage and premise use charges as well as demurrage” – and that’s not what the STB likes to hear but they should be assured that CSX would trade those charges for fluidity in a NY minute
- For the STB, despite some obvious successes, PSR is a (seen as) bad thing, as are investors and stock buybacks and headcount reductions – CSX, Hunter’s last big project, touches all the bases! The fact that an early question was on Q4 OR will also seemingly provide the STB with a gist for its anti-Street mill.
- For now, all the STB can do is be gravely concerned – how this plays out down the….tracks in future discussions over things such as reciprocal switching will be determined by the speed and durability of the service recovery and the creation of true resiliency
- CSX offered a rebuttal, not just in the operating results, but in discussions of capacity additions from investment (tactical and strategic – overflow container yards, sidings, T&E hiring at least, new hires their “customer solutions team”, etc) and operating initiatives and technique. And COO Jamie Boychuk summed that up by stating that, for IM (the heart of the supply chain issues that are dominating press coverage) the principles of PSR are what helped to keep the IM network open. Take that!
- I am sure this will be a topic of discussion at RailTrends, with both the Chairman and CSX’s CMO Kevin Boone on the rich agenda (www.railtrends.com )
Getting back to CSX in Q3/21:
CSX produced a whopping 24% revenue increase, 1/3 of which was the QC, fuel surcharges, price (more to come), and +3% volume growth. Two areas stood out. First, coal (+15 units – and +39% in revenues! Domestic volume was up 22% - we knew that 2021 was that D/C bounce year for coal, but the Natgas rise (etc) has made that bounce a real Texas Leaguer. But also impressive was the 7% increase in export coal, and we know the profound effect that has on margins (we know that, just not the full extent of it). The second item to reflect on is the Intermodal performance, one of the better ones in the rail group in Q3/21. IM volumes were up 4% and revenues 14%; perhaps they could have been better without overall constraints but pretty good given that those constraints exist.
This is the pattern that CN (the Mothership) followed under Jim Foote – shrink and refocus then “pivot to growth” (per Mr. Creel, Jim’s former colleague). It will be interesting to see Norfolk Southern’s IM performance when they report tomorrow – and if they agree with CSX (Boone) that CSX’s “intermodal network continues to be the best in the east, operationally”. I still rebut the idea that eastern railroads want eastern port growth (vs. mini-landbridge from Chicago), but that, lower down on the international supply chain decision ladder, they must “make do”. Macro efforts of possible near-shoring and “re-evaluating forward positioning inventory levels” (Boone) play well for rails.
Meanwhile, QC added $200mm in trucking revenue, which was accretive to earnings, but the real anticipated synergies of increased intertwined (vis TransFlo, etc) share gains in chemicals are still in the future, delayed perhaps by the shortage of tank capacity and, of course, of drivers.
CSX maintained its 2021 outlook (10 months in). Capex will be at the upper end of their range, which is good both another rebuttal and also in the pattern formed back at the pioneering days of PSR back at the Mothership (as assets turns are increased, assets are reduced along with CAPEX, until The Pivot). Most importantly, they have so far held serve against the STB. It’s early in the match, but the ball is in their court….
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Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18