Transcript Rail Renaissance: Returns, Capital & Capacity

Rail Renaissance: Returns,
Capital & Capacity
AB HATCH [email protected]
NG&F/MAUI!!
March, 2010
Railroads at historic tipping point
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The Railroad Renaissance is here – will it last?
Capacity issues across all modes – or so we thought?
Volume increasing – right?
Share, rates, service levels (yes) – and returns increasing
But pushback (shipper/regulator/union) also increasing!
A secular, not a cyclical story – right?
Capacity and infrastructure – and competitor - issues remain
Fully reflected in the market? Or is this just another cyclical
slowdown?
NET/NETThe industry is poised to go up – or down –
based on decisions made here & now
Railroad Performance
Class I Railroads
Index 1981 = 100
300
250
Productivity
200
Volume
150
Revenue
100
50
Price
0
64
68
72
76
80
Source: Railroad Facts, AAR
84
88
92
96
(Based on a design by R. Gallamore)
00
04
08
Street influence on RRs – and Why
that affects ALL stakeholders
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Battle for cash
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Management’s reactions to pressures
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Investors, competitors, regulators, politicians,
labor – oh, yes, and customers
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Short term decisions/long term consequences
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Remember 2004! (?)
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Which “bucket” will they place their chips?
Simple Math
Rates
 Returns
 Capital Expenditures
 Capacity
 Service
ARE ALL CONNECTED!
Virtuous Circle (’03-07) or Disinvestment?
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Key Class1 Issues in Recession ‘10
Re-regulation Bigger Threat than Ever
 Rates (versus Volumes)
 The Economy
 Service
 Green Ramifications
 Stimulus, MAP21, ATRK, “High” Speed
Rail (ONERail)
 PTC-”unfunded”- and unknown -mandate
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Threats to the Renaissance
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Cyclical vs. secular argument
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New Congress –impacting labor & shippers
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Mandated Reviews – STB, Canada
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Rereg – the MAD answer
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Execution: service
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Execution: merger
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Hedge funds?
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Liquidity?
Warren’s $44B “all-in” bet
Advantages of going private? (capex
cycle)
 Influence in DC
 “Robber Baron” vs. “Sage”
 Bets not (just) on economy – rereg, coal,
western intermodal
 Bought on the cheap!
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S&P 500 and Railroads
Monthly Data January 1980 – April 2007
Index Jan. 1980 = 100
1400
1200
S&P500
Railroads
1000
800
600
400
200
0
Jan-80
Jan-85
Jan-90
Sources: MSN and CSI, Inc.
Jan-95
Jan-00
Jan-05
Change in U.S. Railroad
Non-Intermodal Carloads
5%
07Q4
08Q1
0%
07Q3
-5%
07Q1
08Q2 08Q3
07Q2
-10%
08Q4
09Q4e
-15%
-20%
-25%
Source: AAR Weekly Railroad Traffic
09Q3
09Q1
09Q2
Change in Canadian Railroad
Non-Intermodal Carloads
10%
07Q4
5%
07Q2
0%
-5% 07Q1
-10%
07Q3
09Q4e
08Q1
08Q2 08Q3
-15%
08Q4
-20%
09Q3
09Q1
-25%
-30%
Source: AAR Weekly Railroad Traffic
09Q2
Grain Traffic
Major U.S. and Canadian railroads
Combined U.S. + Canadian
Average Weekly Rail Carloads of Grain
40,000
38,000
36,000
2007
2006
34,000
32,000
30,000
2008
28,000
26,000
Jan. 2010
2009
24,000
22,000
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Data are weekly average originations for each month, are not seasonally adjusted, and reflect
revisions from original reporting. Source: AAR Weekly Railroad Traffic
Source: AAR Railroad Time Indicators, February edition, page 12
Grain Traffic
Major U.S. and Canadian railroads
Combined U.S. + Canadian
Average Weekly Rail Carloads of Grain
40,000
38,000
2007
36,000
34,000
32,000
30,000
2008
28,000
26,000
Jan. 2010
2009
24,000
22,000
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Data are weekly average originations for each month, are not seasonally adjusted, and reflect
revisions from original reporting. Source: AAR Weekly Railroad Traffic
Source: AAR Railroad Time Indicators, February edition, page 12
Grain Tonnage 2008
Class I Railroads
All Other
3%
Barley
2%
Sorgum
Grains
2%
Corn
51%
Soybeans
15%
Tonnage
Wheat
27%
Corn
Wheat
Soybeans
Sorgum Grains
Barley
All Other
Total
75,810,216
40,434,205
22,049,468
3,718,586
3,043,311
3,923,866
148,979,652
Intermodal Growth Drivers
Domestic and International
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Globalization
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Trade
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Railroad Cost
Advantages
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Share Recovery
From Highway
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Truckload Issues
U.S. Railroad Intermodal Traffic
(millions)
14
12
10
8
6
4
2
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09e
U.S. Railroad TOFC/COFC Units
Source: Association of American Railroads’ Weekly Railroad Traffic
Year 09e week 52 is estimated
Change in U.S Railroad
Intermodal Units
5%
07Q1
0%
-5%
07Q2 07Q3 07Q4
08Q1
08Q2 08Q3
-10%
09Q4e
08Q4
-15%
09Q1
-20%
Source: AAR Weekly Railroad Traffic
09Q3
09Q2
Long-run Railroad Intermodal Revenue Growth
Has Outpaced Coal (Short-run has not)
$14
$12
Billions
$10
$8
$6
$4
$2
$0
1990
1995
Coal
2000
.
2005
Intermodal
Source: Carload Waybill Statistics (includes non-Class I railroads)
Coal and Intermodal are the Top Sources of U.S.
Freight Rail Revenue
Intermodal and Coal as a % of Revenue*
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
Coal
98
99
00
01
02
Intermodal
03
*Data for BNSF, CSX, KCS, NS, and UP
04
05
06
07
08
Source: Railroad financial reports
U.S. Railroad Intermodal Traffic
Trailers vs. Containers (millions)
10
9
8
7
6
5
4
3
2
1
0
88
89
90
91
92
93
94
95
96
97
98
U.S. Railroad TOFC Units
99
00
01
02
03
04
05
06
07
U.S. Railroad COFC Units
Source: Association of American Railroads’ Railroad Facts
Year 09e week 52 is estimated
08 09e
Railroad Return on Equity
Class I Railroads
14%
12%
10%
8%
6%
4%
2%
0%
n.m.
91
93
95
97
99
01
03
05
07
n.m. = not meaningful (negative value)
Source: Railroad Facts, AAR
RR CoC vs. ROIC – RR Stocks have done well
but… they still trade at a discount to all stocks
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
81 82
83 84 85
86 87 88
89 90 91
92 93 94
Cost of Capital
95 96 97
98 99 00
01 02 03
Return on Investment
Source: Surface Transportation Board
Note: Cost of equity estimation method changed by Board effective 2006 and 2008.
04 05 06
07 08
Railroad Capital Expenditures
Class I Railroads
Billions
$12
$10
$8
$6
$4
$2
$0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Railroad Facts, AAR
Class I Railroad Capital Spending
vs. Net Income
$12
(Current Dollars)
$10
$8
Capital Spending
$6
$4
$2
Net Income
$0
-$2
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Source: Association of American Railroads
Future Demand for Freight
Transportation Will Continue to Grow
Billions of Tons of Freight Transported in the U.S.
2002
2035p
0
10
p – U.S. DOT projection
20
30
40
Future Corridor Volumes Compared to
Current Corridor Capacity
2035 without improvements
Below capacity
Near capacity
At capacity
Above capacity
Railroad Rates- the old story
Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm
Cents
7
6
5
4
3
2
1
0
Constant $: Down 49% since 1980
Current $: Up 17% since 1980
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07
Source: Railroad Facts, AAR
Railroad Employee Productivity
Class I Railroads, Ton-Miles Per Freight Service Employee
Millions
12
10
8
6
4
2
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Railroad Facts, AAR
Rail Service Cycles
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Is the recent improvement in the metrics
sustainable? Systemic?
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Is it a product of huge capex injection
and IT?
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Or, is it merely a product of lower
volumes/less stress on the network…
Rail Regulatory Risk?
Rocky&the Darkstar
 STILL Biggest Uncertainty Entering ’10
 Safety Bill done/UTU influence
 “Competition” Bill (“M-A-D”) vs Anti-Trust
 And yet,STB makes it 3-straight shipper “wins”
 Cost of Capital Revision shock
Rocky & The Dark Star – new horror movie?
 Mandated STB, CTA “Reviews”
 AAR/RAC/ASLRRA have great “D” but hard to
score on defense
 Compromise or fight? Quid pro quo in the
future?
Tax Incentives to Leverage
Capacity Expansion
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Just ONE example of a
“future consideration”
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25% tax credit for
projects that expand
rail capacity
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Expense other
infrastructure capital
expenditures
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Leverage private
investment
RR/Investor Issues Summary3Rs3Cs
Recovery?
 The Re-Set
 Re-Regulation
 Capital Needs
 Capital Cooperation
 Cash Flow
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Developing website
www.abhatchconsulting.com
 TopShipper Survey
 RailTrends 2010 September 28-29
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ABH Consulting
Anthony B. Hatch
155 W. 68th Street
New York, NY 10023
(212) 595-0457
[email protected]