Greetings & Happy Holidays!
This will likely be my last missive of 2023, a year that saw rails leap from the business to the front page, hopefully not to be repeated in the coming year. Tis the season: I feature in the NEARS/Cowen holiday webcast - Christmas Special! – NEARS.ORG – first is Marty (STB Chairman Oberman) then a lot of Cowen fluff till the 2-hour (!) mark, which is me, in my “football’s coming home” regalia. It didn’t, by the way. Happy New Year and here’s hoping the “bomb cyclone” turns out to be a dud.
The two eastern rails offer hope and answers – Norfolk Southern in its Investor Day, and a visit to CSX in Jax, where I heard the sound again (paraphrasing the late, great Buck O’Neal – see at bottom). What did I want for Christmas? A railroad to lead with themes like growth, resiliency, and ROIC. I guess I wasn’t such a bad boy, after all. Now, let’s see if other observers (regulators, politicians, certain sell siders, etc) will be good enough to take in this message
Norfolk’s Investor Day at the beginning of the month may prove to be a watershed moment, and by focusing on resiliency and ROIC, NS carried the water for their peers. Perhaps now we can replace or modify the old war-horse the “rails only care about OR”; the Cult will never fully die out but it can be put back in its cave. From page one of the 102-page slide deck, reliability & resilience were stressed as the theme, and long-term growth the focus, led by (of course) intermodal, supported by Capex and technology and a new-found customer-centricity (shades of Oliver Wyman’s Adriene Baily and RTs 21-22 – but with at least three OW alumni working in Atlanta, that shouldn’t be a surprise!). NS acknowledged the rail cycle – periods of outperformance in operations and share gains followed “every 3-4 years” by failure – man-made, acts of God, or just too much success (volume). They aim to change the pattern. Highlights:
- Intermodal is expected to grow 2X GDP in the next five years – a goal that faced some skepticism, warranted perhaps by recent performance, but a goal I for one think is achievable, even surpassable. They see service restoration, eCommerce, industrial development, their strategic partnerships, and prior bog investment in their “Corridors’ as all being key. I am still skeptical that NS (or CSX) really benefits, net/net, from eastern port growth vs. LALB….as for true on-shoring, I remain a Missourian.
- NS quickly answered my burning question for the whole rail group – they will look long-term in assessing labor needs (in other words, investors shouldn’t expect big furloughs to support near-term earnings – thankfully). This will be a big step in the cross-industry attempt to re-set management/labor relations….
- Operations and metrics are improving sequentially, as illustrated by soon-to-be (1/1/23) COO Paul Duncan, whose investor coming out party this was….
- ROIC focus – a goal to grow from 12.7% last year to “mid-teens” by 2027
- Capex will be ~2.1B next year, an increase of 13-15% that more than compensates for inflation
- OR was mentioned, I think, just once in the presentations, and not at all by the CFO Mark George! As a smart observer noted, it was mentioned ~20X in their last Investor Day in 2019 – but, in effect, that was Phase One of PSR and this is Phase 2.
- I still don’t really know what “TOP/SPG/?” means….
- Technology was the key to three presentations within the Day, which is terrific, including mobility, automated inspection technology, and preventive maintenance, etc. Only disappointment – RailPulse fell to page 97!
- CEO Alan Shaw’s message, quietly radical, was pretty well received by the Street, indicating that the sense that it was margins-or-die as espoused at RT22 by Oberman (and Patterson) et al again reflects yesterday’s news. Of course, there was some headline caution about “growth headwinds in 2023/24” – but what can you do?
Rail management & labor back to work: With the labor contracts put to bed it is encouraging that some railroads are already beginning individual trade craft bargaining, reducing the punishment (points) with legitimate sick leave, for instance (CSX) and other efforts to improve quality of life – while at the same time beginning to look at “zero-to-zero” autonomy (CSX) using PTC with Wabtec’s Trip Optimizer, as a fuel savings measure (at first) and using ground-based conductors which could greatly change work schedule consistency (UP). The political fallout continues to dissipate slowly – Fortune showed the problems of moving the rail/labor issue to the front page (uninformed reporting) classically by blaming the issue on the hypocritical greed of Warren Buffet and Bill Ackman! The former lets his companies run themselves, and his $5B+ buyback- at Berkshire Hathaway - is equally unrelated to BNSF decision-making. The latter invested in a Canadian rail (CP) which has nothing much to do with the Railway Labor Act in the US, and he is now a minority shareholder. Print the legend!
- When you’re a hammer, everything looks like a nail. We view this as a rail crew shortage/attrition/hiring & training issue – and it is. But it’s a global issue: other wages have gone up, narrowing the gap to rail compensation, at a time when rails couldn’t increase pay (whilst in negotiations)
- “Male Malaise” – the NYT reported on a phenomenon of which I was unaware - during the Pandemic hundreds of thousands of blue-collar males – the historic backbone of the rail workforce – didn’t go back to work at all and have fallen off the labor rolls….
- Culture change at CSX! I had the privilege of spending a second hour (after RT) with new CSX CEO Joe Hinrichs, and…while perfect labor relations may only be true in fairy tales, I’m a believer….The day of the visit CSX was rolling out its attendance/points changes (above) and the beginning moves toward re-focusing on the employees (particularly T&E) – as JH stated bluntly, “the (current rail management/labor) culture is broken”. (I also got to spend time with CMO Kevin Boone discussing better capitalization and visibility in the 2023 coal supply chain, and business successes in CSX’s supercharged Industrial Development team led by Tom Tisa).
- Off to work on the rails! My Uber driver to 500 Water Street in Jax was on one of her last runs – she was about to go to Atlanta for CSX training as a conductor!
The “Beleaguered Union Pacific” went to Washington for its STB Star Chamber hearing on its greatly increased use of embargoes to meter traffic congestion (caused by T&E shortages). Chairman Oberman basically predicted this hearing – and how it would go for the target railroad (not too swell) in his fiery RailTrends speech – if Marty hints, believe it (coming up: common carrier obligations). UNP has, in effect, replaced CSX as the STB’s whipping boy (just as the FRA threatens to replace the STB as the rails’). UP has angered the Board over the year by failing (in the eyes of the Board) to produce timely or complete service recovery plans and was also given an emergency service order (Foster Farms)as well as joining the other rails in their reindeer (poor metrics) games. CEO Lance Fritz later thanked the Board for the hearings (“Thank you, sirs, may I have another?”) and UP – after the hearings – promised to limit embargoes as a tactical tool. Just another day in the office for the STB!
November traffic was lousy – unless you are a Canadian. But it just reminds us that the T&E shortage is primarily (though not exclusively) a US problem and that it was lousy to be a Canadian a year ago (droughts/fires/mudslides, etc). The AAR/RTI showed North American volumes down a bit (0.7%, with carloads up 1.4% (10/20 commodities showed increases) and intermodal down 1.4%. US totals were down 3.3% and Mexico was down 7%; Canada was up 10.5%, helped of course by Ag & Food up 41% (easy comparisons) and autos/parts up 23% (Mexico: down 11% - ? – while the US was +8%). Intermodal thoughts –
- November AAR numbers showed overall down 2.7% because the US was down slightly more than 5%, and Mexico slightly more than 6%, overwhelming the Canadian 10% increase
- IANA showed an overall 2.5% decline, with domestic down 7% (even domestic containers down 4%) and international up 3.1%, mostly in BC and the US east coast.
- Speaking of which, one of the key factors looking at 2023 and beyond is the level of share recovery at LA/LB; it won’t come easy as, for instance, Savannah is spending some $410mm to increase its container capacity by fully 50% - by 2025. What’s good for LA, in intermodal as well as baseball, is good for the wider (rail) world.
- Maersk has a new CEO, the first non-Dane ever, as they see a “challenging” outlook for the next year, with volumes currently running down by almost a third (Hapag Lloyd, however, sees a “soft landing” in the box trade).
- The challenge? The WTO (see below) sees global trade growing 1.1% in ’23 after ~+6% this year, and steamship capacity growing 8% next year and 9% the year after. The industry is returning to its traditional ways – which makes me wonder – will there be Congressional hearings??
Also:
- Was it any surprise that no rail was featured in the annual WSJ “Management 250” poll? I got excited for a second when I saw “Trane” at #62, but it turns out that’s an A/C company. Prologis (#51) has rail roots….and it’s encouraging that Ford ranked at #15
- Solar will top coal globally as a power source by 2027, so says the IEA. Glencore will accelerate its coal mine closures.
- Suicide is indeed painless, for rails anyway, as Tesla finally delivers its first Class * EV truck, 4 years late – but without any info on price (Bloomberg estimates the battery alone could run ~$100K) and charging times, etc – and a 500mi range. Driver feedback on social media was pretty brutal (it’s obvious they didn’t consult any actual truck drivers”).
- Activist investors push NS, UP – labor activists Trillium & Impact, that is, with pretty small positions, push for paid sick leave, another fallout from the loss in the PR game at the end of the labor contract kerfuffle. After what happened to Exxon, I suppose one must take them seriously….
- Trade War 2? The US ignoring of the WTO orders on the 2017 Trump Tariffs on steel and aluminum is….a bad sign
- RailInc and Commtrex announced a new partnership for rail-based logistics management- actually pretty exciting despite its name (“LMaaS” – sound it out)
- FedEx beat expectations but issued a gloomier global freight market forecast….FedEx is described by my friend Jeff Kauffman as being in the “investor’s doghouse” (woof!) beat consensus through better-then-expected cost cutting, rather than in any market strength (they still are being impacted by the normalization of eCommerce trends)
- Kicking the corn down the rails - Mexico agreed to push back its ban on GMO (ie; US) corn a year to 2025; US exports are beginning to look iffy in this crop year due to expected big competition from Brazil, and the China relations situation….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18