Greetings;
Welcome back from the backyard or beach BBQs and Hola! from LGA on the way to Chicago for NARS, which has pivoted as events have unfolded following the STB decision (“Nyet!”) on the CN’s KSU-VT application (see my CN post boxing match report, attached). We cover three quick back-to-school topics – KSU/Traffic & the Economy/NARS plus the usual filler….
- KSU – on Saturday, of course – held a Board meeting and announced a (like) pivot back to CP stating that negotiations “could reasonably be expected to lead to a ‘superior’ offer” ; CP welcomes that, of course, but states its deadline remains firm at 9/12 (there are whispers of a deal done by Friday but we suspect that dawn Sunday fits this merger-of-inconvenient-timing scenario). CNI appears to have entered a quiet period while they consider their options – but keeping a net $700mm for not passing go seems OK by my standards (to be clear I do not expect a raised bid from CN).
- CNI may not have the luxury of time, as the TCI process gets underway and they seek to add 15% of the CN shares to their 5% to make up enough votes to call for a Special Board Meeting within two weeks; TCI admits to discussions with CNI shareholders and rumors suggest that they may have that 20% level and then some
- Status Quo the Enemy, Not Activist Investors - Railway Age – Frank Wilner makes a case for change, and it’s sort of amusing if you can get by the mention of Al Perlman, always the hero of the “slow down, whippersnapper!” set, he makes a fair if generic point
- Regarding the (clearly rushed) TCI letter, it does present an argument rather than an analysis, which is fine but ignores not just the “Feed-the-Beast” M&A that increases CN’s reported OR (TransX alone is 100bps) but also the GLT shipping impact – and most importantly the temporarily raised depreciation & amortization that came with the jumped-up capex/capacity additions from 2017-19 (not to mention CN’s conservative OR accounting excluding real estate)….It also highlights some of Jim Vena’s record at the UP, which is fair, but that started under CEO Lance Fritz before Vena (whom we called the “$8B man” after the market-cap reaction when he moved to Omaha) and, in fact, some of the yard/terminal closures under their PSR process has been reversed under the current supply chain stress….
- We await CN’s reaction and the reaction of Canadian shareholders. We may have closed one Odyssey to start another….
- Rail Traffic faces comparisons & congestion – and a more uncertain economy. According to the AAR’s RTI, North American rail volume was flat YOY in August: carloads up 2.7%, IM down by the same (and 12/20 commodities up). The splits are USA flat overall (yet 14/20) with carloads +4.1% (helped by an 8% increase in coal) with IM down 3%. Canada up 2.1% (yet 9/1/10) – carloads +1%, IM +3%. Mexico was down 10.9% (8/2/10) with carloads -7% and IM -16%.
- IM is a puzzle – how much is it comparisons versus congestions? It was down also a tad (0.4%) versus August 2019 and belies all of the busy-port/sustained demand talk. I will investigate thoroughly at IANA’s Expo starting on 9/12….
- Logistics Management magazine questions (cont.) – What will the rail/Intermodal market look like in five years? In anticipation of the IANA Intermodal Expo, I answer: Five years from now the rail IM markets had better be smoother and more tech-forward, with a digital system integrated with PTC that allows better visibility and control – and automation to equal or approximate the well-publicized developments we continue to see on the trucking side (including improved labor/.fuel/emissions efficiency). That’s the goal – the money and the technological capability is there (already) - can railroads avoid distractions and execute?
- NA grain was down 23% in August – the split was the USA -18%/Canada -20% (!)/ Mexico -6%. September will see the Ida-impact on the Gulf ports (50% of US grain exports)
- USA chemical carloads were up 5.7% - that will be a hot topic at NARS (below) and note, that while Ida appears to have left rail infrastructure in good shape, fully ¼ of Gulf Coast refining capacity was impacted
- Economic news hasn’t been sugar-sweet – the jobs gains of 235k was well short of the consensus estimate of ~720K; I/S ratios are still high and consumer sentiment dropped to the lowest level in around a decade….
- NARS schedule shifts – SEE SLIDES AND LATEST AGENDA (attached) - and so with CN quiet, I will pitch in with individual company “Fireside Chats” with CP (Keith Creel & CMO John Brooks, where I will focus on the increased synergy expectation – and what’s going on in the growth side ex-deal proposal (the PSR Capacity Dividend, which needs to be explored given the STB commentary and presence at NARS) and KSU (CMO Mike Naatz and COO John Orr, where I will also look beyond the deal to operations and markets south of the border given those August numbers). There will still be 5/7 Class One CEOs in Chicago, 6/7 present overall, and one STB Commissioner. After NARS is the IANA Intermodal EXPO, which couldn’t be timelier, then NEARS (North East Association of Railroad Shippers, where we can catch up more with the CSX/Pan Am deal and more of the STB’s interventionism (a lot of drama in new England for ~2% CAGR growth!). Meanwhile, steamship OTA averages have fallen to ~35% from 80% a year ago (according to CH Robinson).
Also:
- ESG update – all seven Class Ones have signed on to participate in the Science Based Targets Initiative (SBTi) on reporting but this is all still in its infancy – the WSJ noted that “carbon emissions data can be squishy” quoting a Dartmouth prof saying Scope 3 data “management, target-setting and management is a mess”. Scope 3 is measuring not just a specific company’s own emissions but also suppliers, etc – a fertile field for railroads.
- Ford and GM curtail production even further, in the US and Mexico (one major drag on those August numbers down south), with F even shutting down its F150s
- Plastics under watch – just a day or so after I wrote about Clarence Gooden’s warning on plastics, the Times wrote this in their lead editorial: Opinion | The Proliferation of Plastics and Toxic Chemicals Must End - The New York Times (nytimes.com)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18