Presentation on theme: "Rail Renaissance: Returns, Capital & Capacity AB HATCH 155 W68th St Suite 1117 NYC 10023"— Presentation transcript:
Rail Renaissance: Returns, Capital & Capacity AB HATCH email@example.com@mindspring.com 155 W68th St Suite 1117 NYC 10023 www.abhatchconsulting.com July 13, 2010 2010 Midwest Regional & Short Line Railroad Summer Conference
Economic malaise Rising capital requirements Regulation Maritime trade flows Rail Assessment OpportunitiesThreats Strengths Pricing Volume Growth Service levels / productivity Modal shift Consolidation? Strong secular growth Favorable market structure Supply constraints Solid barriers to entry Limited alternatives Challenges Capital intensity Capacity bottlenecks Port congestion Reliability vs. trucks
Railroad Performance Class I Railroads Index 1981 = 100 Source: Railroad Facts, AAR (Based on a design by R. Gallamore) Productivity Volume Revenue Price
Street influence on RRs – and Why that affects ALL stakeholders Battle for cash Managements reactions to pressures Investors, competitors, regulators, politicians, labor – oh, yes, and customers Rare Industry: Short term decisions (current economic outlook)/long term consequences (40+ year life of a locomotive) Remember 2004! (?) – rails unprepared for volume; embargoes Which bucket (Capex, share repo, DPS) will they place their chips?
Simple Math Rates Returns Capital Expenditures Capacity Service ARE ALL CONNECTED! Virtuous Circle (03-07) or Disinvestment?
Rail Freight Volume Major studies done in 2005-07 (ie; at the cyclical peak): DOT, Global Insight, Cambridge Systematics/AAR New Studies being undertaken – due late 2010 Visibility coming off of all-time lows (no solid feel for H2/10) Government role both supportive (PPPs, etc) and a threat (re-reg, coal) Major intermediate-to-longer term variables for coal, autos, paper, housing, retail, and trade sourcing Emissions a two-edged sword (coal flattens, intermodal growth accelerates) GDP has the highest correlation – by far
Future Growth Potential Oil, Carbon, Infrastructure & Efficiency Intermodal – International and Domestic Grain – the worlds breadbasket Coal? Exports The Manifest/Carload Problem MSW (garbage), perishables, others Point-to-point vs. Hub & Spoke (or Southwest vs. United)
Grain Traffic Major U.S. and Canadian railroads Source: AAR Railroad Time Indicators, February edition, page 12
Intermodal Growth Drivers Domestic and International Globalization Trade Railroad Cost Advantages Share Recovery From Highway Truckload Issues
U.S. Railroad Intermodal Traffic (millions) Source: Association of American Railroads Weekly Railroad Traffic Year 09e week 52 is estimated
Long-run Railroad Intermodal Revenue Growth Has Outpaced Coal (Short-run has not) Source: Carload Waybill Statistics (includes non-Class I railroads) Coal Intermodal
*Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports Intermodal and Coal as a % of Revenue* Coal and Intermodal are the Top Sources of U.S. Freight Rail Revenue
U.S. Railroad Intermodal Traffic Trailers vs. Containers (millions) Source: Association of American Railroads Railroad Facts Year 09e week 52 is estimated
Domestic Intermodal The real growth opportunity is the age-old goal of taking trucks off of the highway Driving down the LOH (requires very tight service standards) Corridor development (see NS Crescent); truck partnerships (see JBHunt) Fuel price, carbon footprint, infrastructre shortages and congestion, driver shortages (CSA 2010) Trailer (TOFC/Piggyback) the gateway drug for containerization Opportunities in unitized carload as well
DOT: Future Demand for Freight Transportation Will Continue to Grow p – U.S. DOT projection Billions of Tons of Freight Transported in the U.S.
CS: Future Corridor Volumes Compared to Current Corridor Capacity (Cambridge/AAR) 2035 without improvements Below capacity Near capacity At capacity Above capacity
Carbon Footprint– from cocktail chatter to decision point 2003 – 221/F500 report on carbon; 409/F500 in 09 Green supply chains enforcement by Wal-Mart (from $2B transport spend to $4B+ by 11); GE, P&G, etc…. Anticipating future EPA regs and emissions law
S0 -What is the growth rate? Great studies done – in 2007 Is there a Great Re-set? (paper, autos, retail, coal) Or do we look past 2035 and simply add a few lost years? (the emerging consensus save for the coal question) AAR new assumptions suggest coal is flat from DOT projections while the rest reaches 2025 targets despite Great Recession impact (ie; future intermodal/carload growth is higher than recent studies…) Will the government policy help to increase modal share by 10%?
UNCERTAIN Domestic Coal Rail Intermediate term volume prospects ABOVE GDP BELOW GDP Paper Auto Parts (?) ABOVE GDP Intermodal – Domestic (++) Intermodal - International Agricultural products Export Coal Ethanol GDP-GROWTH Autos Lumber Chemicals (+?) Aggregates Metals
Growth is Expensive Huge Capex - $40B in the last 5 years in the US – through the Great Recession! AND: Comeback of the share repo/DPS? EPS beat the Street consistently, yet: Uneven returns in the Modern Age Recent improving trend line Threats to ROIC threaten capacity
Regulatory Review/Discussion Staggers (1980) and predecessor Acts Freedom to set rates Freedom to sell/abandon low density track (growth of short line industry) Freedom to exit passenger business Impetus to cut costs, divest massive non-rail holdings & become pure rail plays
Source: AAR Revenue Volume Productivity Price Staggers Act Passed Oct. 1980 The Staggers Act: An American Success Story (Index 1981 = 100) Productivity decline due mainly to fuel price volatility.
Pipeline excludes natural gas. Source: U.S. DOT Railroads: The Leader in Freight Transportation Railroads Trucks Water Pipeline (% of Ton-Miles)
Finally, Railroads Making Decent Money... Net Income Source: AAR
Railroad Return on Equity Class I Railroads Source: Railroad Facts, AAR n.m. n.m. = not meaningful (negative value)
RR CoC vs. ROIC – RR Stocks have done well but… they still trade at a discount to all stocks Source: Surface Transportation Board Note: Cost of equity estimation method changed by Board effective 2006 and 2008.
Rail Regulatory Risk? STILL STILL Biggest Uncertainty in 2010 Safety Bill done/UTU influence S2889 (STB Reauthorization Act, formerly the Competition Bill AKAM-A-D) + Anti-Trust And yet, STB makes it 3-straight shipper wins Cost of Capital Revision shock (no replacement costs mandate – a study) 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? Rocky & The Dark Star – new horror movie?
Other DC Issues S2889 not fatal, would be a long time before changes manifest themselves; compromise could lead to future monies, for example: ($500B)Transportation Bill (SAFTEA-LU 2) already behind schedule, under extension – could have increased monies for intermodal - and yet potential truck size (TSW) threats Rail is not a particularly partisan issue (more regional) Administration – supports a 10% modal shift toward rail
Rail Capacity and Capex Rail Capacity is extremely fungible Heavier/faster track, double track., sidings; Larger cars (avg size: 80 79tons; 90 88.2 08 110.5) Unitization, shuttle trains Denser systems (2001 8.9mm RTMs/mi; 08 11.6) IT – planning, signaling, communications (PTC?) Unitization Equipment in storage (down to the dregs) T&E employees System Velocity
...And Tighter Capacity Up 31% Source: AAR (Ton-Miles Per Mile of Railroad )
High Density* Rail Miles Have Increased *Track with freight density of at least 20 million gross ton-miles. Excludes way and yard switching tracks. Source: AAR (Miles) 30% of Class I Network 72%
Second, Third, and Fourth Main-Line Miles Have Increased Data are for Class I railroads. Source: AAR (Miles)
Reflects two years following SP/UP merger. UP was conforming SP reporting to its own standards. During this time, miles were reported but density could not be determined for the entire system and so remained unreported. Average density of Class A main lines has continued to grow even as total mileage has increased Class A main lines have > 20,000,000 gross tons annually; Class B main lines have >5,000,000 gross tons annually but < 20,000,000.
Railroad Capital Spending ($ billions, constant 2008 dollars) Data are for Class I railroads. Source: AAR
Source: Association of American Railroads Net Income Capital Spending Class I Railroad Capital Spending vs. Net Income (Current Dollars)
Rail Service Cycles Is the recent improvement in the metrics sustainable? Systemic? Is it a product of huge capex injection and IT? Or, is it merely a product of lower volumes/less stress on the network…
Capacity Constraints The revival of passenger railroading (the vast majority of which is on freight network) HSR (and HrSR) TIH/NIH issues TSA and secuirity NIMBY – see the CN and its tortured purchase of the EJ&E; efforts on MSW
New Passenger Service Must Compete With Freight Growth Data are for Class I railroads. Source: AAR Millions of Revenue Ton-Miles Per Mile of Road Owned
Double the Freight on Same Amount of Fuel! Volume = revenue ton-miles. Source: AAR (Index 1980=100)
Net Income RRs Still Making Record Re-Investments RR Spending Per Mile Source: AAR
Current Issues Rails in the Recovery After the Rereg Fight what? Partnership with government? The Green mantle New Golden Age? PE &Infrastructure funds – back for good? Service
Key Class1 Issues in Recession 10 Re-regulation Bigger Threat than Ever Rates (versus Volumes) The Recovery (Pace & Durability) Service – The Key to the Future! Green Ramifications – positive/negative Stimulus, TIGER 1&2, MAP21, ATRK, HSR & HrSR - (ONERail) PTC-unfunded- and unknown -mandate
Service will be the Key to the Next Cycle Service at all time highs $40B spend in last 5 years (service ought to be better!) Putting increased traffic back on at current velocity means: Higher asset utilization, more market share gains, greater operating leverage (perfect circle affects all stakeholders) Implications for equipment fleets
Threats to the Renaissance Cyclical vs. secular argument New Congress –impacting labor & shippers Mandated Reviews – STB, Canada Rereg – the MAD answer Emissions impact shakeout (coal down, intermodal up, ethanol?) Execution: service Execution: merger (unlikely) Activist hedge funds? (unlikely) Liquidity? (proven not to be a direct issue in Q408)
Warrens $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!
RR/Investor Issues Summary- 3Rs3Cs Recovery? The Re-Set Re-Regulation Capital Needs Capital Cooperation Cash Flow
Developing website www.abhatchconsulting.com TopShipper Survey RailTrends 2010 September 28-29