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By Tony Hatch
If you listened to CSX Corp.'s Jan. 16 earnings call, it might have seemed at first that time had gone backwards, what with the talk of “bulldozing Atlanta,” sharply cutting capex and headcount etc. But in between the lines, we heard signs of the post-Hunter world developing — as it continues to develop at CP and as it has done so well at CN.
President and CEO Jim Foote talked about re-engaging with shippers that have been affected by the dramatic, fast-paced and often disruptive changes as CSX rolled out Precision Scheduled Railroading (PSR). Jim will be keynoting at the Southwest Association of Rail Shippers (SWARS) 2018 annual meeting, to be held Feb. 20-21 in San Antonio — another chance to gauge the changes in CSX strategy. (Note: I'll be hitting clean-up.)
Foote’s first at-bat was a hit. A few initial thoughts on what appeared to be a good quarter, well up year-over-year (31 percent) and also well above consensus (by 8 cents, or 14 percent). And yet the quarter was confusing — comparisons were one week short of last year (sigh), plus changes, executive comp issues and the tax-cut impact. Also: There was very little actual guidance, reflecting three things:
1. Foote has been at CSX about two-and-a-half months and COO Ed Harris has been there about three weeks.
2. It appears CSX will adapt the CN model of limiting some guidance, particularly around pricing, which looks like it came in about +2.5 percent or perhaps higher. The revenue outlook for 2018, while hardly critical, was confusing (due mostly to the expected pace of anticipated share recovery; volumes were down 2 percent for Q4/17 versus the other Class Is' reporting increases)
3. The Big Investor Day has been rescheduled for March 1 in New York City, allowing management to defer and deflect (see #1).
Putting Some of the Old Band Back Together. Jim and Ed, with Hunter’s Plan — the markets appeared to appreciate the new management leaders, although the rail “chattering class,” as it were, along with some of the business press, seemed to focus on the age of two-thirds of the team (CEO & COO; the CFO is a youngster). That's perhaps not wholly wrong, given the tragedy of EHH’s death, and the fact that Ed Harris and EHH had issues (mostly around CP, thereby ignoring the subsequent naming of Ed H. – by Hunter — to the Chicago Planning Group, the panel of wise men that I named the “League of Extraordinary Gentlemen”). I would venture that to name anyone who worked with or under EHH and didn’t have “issues” wasn’t trying hard enough. Before Jim Foote named a veteran PSR/COO, the talk was: How could a marketing man instill an operations-driven cultural change? So, Jim answered by playing not only the best card available, but a card from the PSR suite. That to some observers that wasn’t good enough is down to the old maxim that “old railroaders don’t die, and they don’t fade away, they just bitch about how things aren’t as good as the (low return) olden days." In this they are like the late (and admittedly great) Bob Feller on “baseball salaries today.” Deal with it, folks.
More reflections and concerns (or, it’s not all blue skies):
• Hunter/Post-Hunter, or we need Jim to be Jim. Clearly, Foote needed to reassure some worried investors that the Big (PSR) Changes that have occurred at CSX wouldn’t be carried out (or even reversed), and both he and Ed Harris talked tough. That is all well and good, but while Hunter was the necessary revolutionary at CN (and CP), world-class status was achieved post-Hunter, using the PSR foundation, to be sure. Jim Foote (full disclosure: I consider Jim to be a friend since he was IR at the CNW in the early 1990s) has the vision to take CSX to the next level. That’s what I want to hear about on March 1.
• Not great. CSX differed meaningful discussion on service, noting that while velocity (+15 percent) and dwell (-10 percent) had improved year over year (and from the end of summer low point, for sure), the railroad was still running in the fifties in on-time arrivals (somewhat important to shippers). This is especially important for CSX (politically, as well as for market-share reasons), but it's also an industrywide issue entering 2018. For CSX, service recovery and strategic direction will dictate the fortunes of its critical intermodal opportunity — in light of the changes to the hub & spoke system, a possible re-think on the Baltimore tunnel project, Norfolk Southern’s own service issues and a domestic customer “rationalization” that shed fully 7 percent of the business. Intermodal should be a big part of the March 1 discussion.
• The Cult is alive. While CSX didn’t harp on operating ratio (OR) improvement (220 bps to 64.8 percent), I am are sure those investors in the “Cult of the OR” will on March 1.
• Is that all there is? Not bloody likely. If the “heavy-lifting” (and big projects/service disruptions) are completed, what’s next? Well, I know, taking the game to the next level — but did EHH really complete all of the PSR changes in eight months? If CSX achieved some $430mm in “efficiency gains” in FY17, what’s the hope for this year? Apparently they already have put out segments of its system in Florida and Illinois for review — soon to come might be the Northwest Ohio intermodal hub (which would draw big western rail interest, I suspect) and some other segments a former CSX officer told me were much more “main line” than traditional short line deals. Will there be a short-line holding company/private equity/Class I feeding frenzy?? Stay tuned.
• Capex & capital efficiency ... Danger, Will Robinson? CSX kept to EHH’s forecast/promise of a sharp reduction in capex to $1.6 billion (for the foreseeable future). This is over 20 percent below 2017's total, which was itself 25 percent below 2016's. In other words: This year’s planned number is fully, amazingly, 41 percent below 2016's. You all should know how I feel about that. To be sure, PTC is indeed moving from capex to opex (and appears to be on target for the 2018/20 deadlines); in 2016, there was big expenditure on locomotives ($600mm) and rolling stock ($200mm) — knowing that a cardinal tenet of PSR is “do more with less.” But … prices are up, service is down and a big IT challenge awaits CSX and the rail industry. Tellingly, there were questions on capex (not the usual “cut more!” but “are you spending below replacement?” — I love it). CSX has a long corporate history of deferring maintenance (very, very expensive money, in the long run) and the post-Hunter model railroad, CN, now talks of the long- term nature of railroading, of the need to greatly increase technology and of spending 20 percent of revenues!
Bottom line: Q4/17 was a good quarter for CSX, a good start for Jim Foote and the last quarter under Hunter Harrison. 2018 is a critical year for the carrier, and we’ll learn a whole lot more in seven hours on March 1 than we did during the past two speculative months.
I am confident that the right team is in place for the transition toward a post-Hunter, PSR+ railroad (assuming there is enough investment for the future!), and that the next-gen leadership team will be identified along the way. See y’all March 1!