Greetings;
First of all, regarding the impending rail strike ITYS - hello PEB #250! MEMBERS APPOINTED TO PEB NO. 250 – National Mediation Board (nmb.gov)….second, just back from a visit to a very good Short Line Holding Company and I can report that the entrepreneurial spirit is alive and well, that labor shortages reach down to the smaller carriers (although they have some more flexibility in dealing with it, including hiring temps and using managers in the field), and that Class One service is costing them (all) volumes….
CSX & UNP Report Earnings – Top of the Second, some hits/hope offered but no (service) runs yet. There wasn’t much for the regulators or shipper trade associations to smile about – good financial results, higher prices, worse service (OK< maybe the trade associations are smiling). There were some – a fair amount of - similarities in the results and webcasts – both carriers:
- Beat Street expectations, which weren’t that high
- This was done by big jumps in yield (RPU), often misdiagnosed as price (which I am sure was fine, and both reiterated “rail inflation plus” guidance) – note the 58% increase in CSX coal yield (+54% revenues)
- Both faced the vast majority of questions on service and growth – all of the stakeholders are aligned on priorities Jim Foote: “We’re focused on near-term execution”) which isn’t seemingly understood in DC….
- Both defended PSR – stating that this is an ahistorical labor situation, not one of physical capacity or strategy
- Both showed only slight and selected month-to-month service metric improvement, and year-over-year numbers were lousy (for example velocity down 16% at CSX and 12% at UNP)
- Both have ~500 T&E employees in training
- Both showed a flat-to-down trend in safety, worth monitoring….
- Car supply hurt both; unable to meet demand – in domestic IM (CSX) and Food/reefer, grain, and Forest Products (UNP), for example; both had double-digit gains in auto volumes
- Both kept to the majority of their Guidance numbers, despite not beginning the second half as they expected in April (and January); CSX reiterating double-digit revenue and OPI numbers, and UNP reiterating its 4-5% full-year volume gains! Well, UP further trimmed H2/22 OR guidance (see below) to the consternation of some (and the statement of the obvious to most).
- Both reiterated their Capex numbers, up YOY which was both good (they aren’t cutting as some expected given economic uncertainty) and bad (they aren’t accounting for the big inflationary impact); both bought back ~5% of their shares
CSX faced up to the labor challenge and the mystery of it all – hiring, and more confoundingly, attrition. JF stated that they would get to their target (7K T&E) by the end of this quarter, but that’s flattered by the Pan Am deal closing June 1 – but faced questions about why, since they were the first carrier to report crew shortages last year, and to talk hiring, weren’t we seeing progress yet in their service metrics? That remains a mystery.
- CSX believes that it has “stabilized” and maybe even “turned the corner” in its operations; this means, for me, putting off for 90 days any real sense of the labor/service equation. Local service performance hit 83%, up 4 points YOY and 2 points Q/Q. Some short lines I know would question that stat….
- CSX maintained decent margins – (55.4% OR)
- Employees in training was 509 in Q2/22, way up YOY and from the beginning of the understanding of the shortage a year ago – but down 52 from Q1….
- Intermodal gives some support for the inflection thesis – Trip Plan Performance inched up 1% to 90%; volumes were up 1%, and countering the overall trend as reported by IANA, international was up, domestic down
- Carload didn’t so much – TPP down 10 points to 59%. Merchandise volumes were flat (3/7 sub-groups were up, led by autos +10%)
- Coal going out with a bang, but like everything, asking more questions than providing answers (export volumes down 7% due to port capacity issues, but still the big driver of yield; total coal volumes down 3%)
Union Pacific seemed a tad more confident that it was “recovering the network” (Lance Fritz), whilst admitting they had expected both the “pace being a little quicker” and the “volume coming on sooner as the network improved” (the critical issue of the nature of “pent-up demand” and the labor/service equation). They see no irregular issue with employee attrition, unlike CSX. That H2/FY volume target faces greatly easing comparisons but starting at +1% for the first half (after a -1% Q2/22) makes it seem….optimistic. But, they have two/thirds of their H2 Volume outlook listed as “+”
- IM volumes down 8% but domestic up 1%, helped by one of their two big wins (despite a deterioration in IM Trip Plan Compliance over the course of the quarter. Management expressed confidence in their having the capacity (and soon, the crews) to “on-board” (sorry) the new IMC wins. That has been an ongoing whispered question – I look forward to learning more at IANA Intermodal EXPO (as well as more on the ILWU contract and Rule AB5) after Labor Day….in Long Beach
- UNP also appears to have won some coal and Industrial Chems/Plastics contracts as well as auto parts from OTR; manifest/auto TPC improved each month of the quarter
- They suffered a 500+bps hit to OR, 380bps due to what they honestly called “core results” performance; UP saw big increases not only of course in fuel but in compensation (7%), Purchased Services/Materials (+30%), and Equipment/Rents (+15%). Headcount was up 2% YOY but T&E was up 5%
- Price and Mix were up (only?) 4.25% - a sign of that rail/rail competition?
- There was an interesting part in the webcast Q&A where UP leadership defended using temporary embargoes to steady service, and prevent deeper fluidity problems - CSX had stated a day earlier their deep reluctance to utilize that tool; CMO Kenny Rocker noted that they have a slew of contract wins coming after embargoes
- Also interesting closing commentary from Lance – essentially saying that they would not change their approach to cost-cutting (including labor0 in the event of a recession. Rails have without fail been able to “flex down” faster than investor modeling in a known downturn (see 2001, 2008, 2020); and after every recovery is understood they were able to “flex” back up – until 2021. I hope upon reflection they change that answer….
Also:
- Two steps forward/One step back Dept: The very first question asked of Lance Fritz was on OR! The Cult, like other “lost” cases, never dies out completely….
- JBHunt’s upside-surprise quarter is a ray of sunshine for rails, as their Intermodal volume increased sequentially throughout the quarter and they remained publicly optimistic about rail improvements in H2/22
- And the Ports of LA/LB had the busiest June on record, although POLA Director took the opportunity to slam rail performance in the port (some of that, as UP pointed out, is by design to protect fluidity in the inland ports such as Chicago, which was reported to be fluid)
- This should be big: The US (via the USTR) and Canada have had enough and have initiated actions against Mexico for the AMLO government support of Pemex and disruption of the refined product supply chain (a key growth story for KCS). This will take a while to play out but affects not only possible rail growth but also FDI, based on the lack of regulatory/legal/governmental stability as well as the fact that the current policy is hugely retrograde on carbon emissions (which impacts capital decisions)
- And this is even bigger: KCS (CPKC) won a 10-year extension of their franchise, to 2037….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18