rail renaissance: returns, capital & capacity ab hatch [email protected]@mindspring.com...
TRANSCRIPT
![Page 1: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/1.jpg)
Rail Renaissance: Returns, Capital & Capacity
AB HATCH [email protected]
The Transportation Conference
Toronto September 2008 ::
![Page 2: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/2.jpg)
Railroads at historic tipping point
The Railroad Renaissance is here – will it last? Capacity issues across all modes 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/NET- The industry is poised to go up – or down –
based on decisions made here & now
![Page 3: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/3.jpg)
Railroad PerformanceClass I Railroads
0
50
100
150
200
250
300
64 68 72 76 80 84 88 92 96 00 04
Index 1981 = 100
Source: Railroad Facts, AAR (Based on a design by R. Gallamore)
Productivity
Volume
Revenue
Price
![Page 4: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/4.jpg)
Street influence on RRs – and Why that affects ALL stakeholders
Battle for cash
Management’s reactions to pressures
Investors, competitors, regulators,
politicians, labor – oh, yes, and customers
Short term decisions/long term
consequences
Which “bucket” will they place their chips?
![Page 5: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/5.jpg)
Show Me the Money
Share Price is the Indicator – over time!
Cash (Flow) is King
High ROIC = High Stock Price
And Vice Versa
Key is the phrase “through a cycle”
Old Model: Disinvestment
New Model: TBD (But CP gives us a clue)
![Page 6: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/6.jpg)
Simple Math
RatesReturnsCapital ExpendituresCapacityService
ARE ALL CONNECTED!
Virtuous Circle (’03-07) or Disinvestment?
![Page 7: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/7.jpg)
Sources of capital
FCF – booming at most carriers (capex vs. ROIC)
Governments – states, PAs, Feds, PPPs Governments – Canada as contrast Traditional Street sources & Banks Institutional investors Hedge funds Private Equity/Infrastructure Funds (still?)
![Page 8: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/8.jpg)
New Sources of Capital – Threat or Opportunity?
Fortress-RailAmerica/FEC (etc)
Infrastructure Funds (Toll Roads)
Hedge Funds & “Activists” (TCI)
PPPs – Heartland, Nat’l Gateway, CREATE
Share repos
C-1 Buyouts (DM&E)
JVs – Meridian, Patriot corridors
![Page 9: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/9.jpg)
Threats to the Renaissance
Cyclical vs. secular argument New Congress –impacting labor & shippers Mandated Reviews – STB, Canada Rereg – the MAD answer Execution: service Execution: merger Hedge funds? Liquidity?
![Page 10: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/10.jpg)
Railroad Daily Stock PricesJanuary 2, 2008 through September 16, 2008
50
75
100
125
150
175
1/2 1/16 1/30 2/13 2/27 3/12 3/26 4/9 4/23 5/7 5/21 6/4 6/18 7/2 7/16 7/30 8/13 8/27 9/10
S&P500 Simple Average of BNI, CSX, NSC & UNP
Index Jan 2, 2008 = 100
Sources: Yahoo Finance (adjusted for dividends and splits)
![Page 11: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/11.jpg)
Railroad Daily Stock PricesSeptember 2, 2008 through September 16, 2008
80
85
90
95
100
105
110
9/2 9/3 9/4 9/5 9/6 9/7 9/8 9/9 9/10 9/11 9/12 9/13 9/14 9/15 9/16
S&P500 Simple Average of BNI, CSX, NSC & UNP
Index Sept. 2, 2008 = 100
Source: Yahoo Finance (adjusted for dividends and splits)
![Page 12: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/12.jpg)
S&P 500 and RailroadsMonthly Data January 1980 – April 2007
Index Jan. 1980 = 100
Sources: MSN and CSI, Inc.
0
200
400
600
800
1000
1200
1400
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
S&P500 Railroads
![Page 13: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/13.jpg)
Railroad Return on EquityClass I Railroads
0%
2%
4%
6%
8%
10%
12%
14%
91 93 95 97 99 01 03 05 07
Source: Railroad Facts, AAR
n.m.n.m. = not meaningful (negative value)
![Page 14: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/14.jpg)
RR CoC vs. ROIC – RR Stocks have done well but… they still trade at a discount to all stocks
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
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 07p
Cost of Capital Return on Investment
Source: Surface Transportation Board, 2007p based on AAR filing and Railroad Schedule 250s Note: Cost of equity estimation method changed by Board effective 2006.
![Page 15: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/15.jpg)
Railroad Intermodal Revenue Growth Over 5% - Long Live the New King!-
19901995
20002005
.
$0
$2
$4
$6
$8
$10
$12
$14
Billion
s
Source: Carload Waybill Statistics (includes non-Class I railroads)
Coal Intermodal
![Page 16: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/16.jpg)
17%18%
19%20%21%
22%23%24%
25%26%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Coal Intermodal
*Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports
Intermodal and Coal as a % of Revenue*
Intermodal is the Top Source of U.S. Freight Rail Revenue
![Page 17: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/17.jpg)
U.S. Railroad Intermodal Traffic(millions)
0
2
4
6
8
10
12
14
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
U.S. Railroad TOFC/COFC Units
Source: Association of American Railroads’ Weekly Railroad Traffic
![Page 18: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/18.jpg)
U.S. Railroad Intermodal TrafficTrailers vs. Containers (millions)
0
1
2
3
4
5
6
7
8
9
10
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
U.S. Railroad TOFC Units U.S. Railroad COFC Units
Source: Association of American Railroads’ Railroad Facts
![Page 19: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/19.jpg)
Intermodal Growth DriversDomestic and International
Globalization
Trade
Railroad Cost
Advantages
Share Recovery
From Highway
Truckload Issues
![Page 20: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/20.jpg)
0 10 20 30 40
2035p
2002
Future Demand for Freight Transportation Will Continue to Grow
p – U.S. DOT projection
Billions of Tons of Freight Transported in the U.S.
![Page 21: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/21.jpg)
Intermodal’s Enduring Questions
Lots of moving parts
The improved ROIC of RR Intermodal ’03-’06 is the
essence of the Railroad Renaissance
Long term volume growth rate of 5-7%
Long term pricing growth rate 3-4%
True International drives the train
Will “True” Domestic join the party?
![Page 22: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/22.jpg)
Truckload Issues
TL surplus – “perfect (ugh) storm” in the short term
Driver shortages – permanent?
Tight capacity – a secular issue
Q4/Q1 capacity and rates a temporary/cyclical issue (isn’t it??)
Transload increase to absorb some capacity?
Stubbornly high fuel prices – growing price gap to intermodal
Insurance costs
Traffic congestion
Net: better switch than fight?
![Page 23: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/23.jpg)
Coal and Ag – Bulk Comeback
New growth mode? Emissions and environmental issues Oil prices and coal Politics and coal; and grain/rereg Ethanol Exports Feed
![Page 24: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/24.jpg)
New operating plans
Cooperative alliances
Working with customers
Technology
Massive equipment and infrastructure investment
Additional employees
What Are Railroads Doing to Increase Capacity?
![Page 25: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/25.jpg)
150,000
152,000
154,000
156,000
158,000
160,000
162,000
164,000
166,000
168,000
170,000
2001 2002 2003 2004 2005 2006 2007 2008
Total Class I Employment: Jan. 2001-Mar. 2008
Rail Employment is Up for the First Time in Decades
Source: Surface Transportation Board
![Page 26: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/26.jpg)
Railroad Capital ExpendituresClass I Railroads – and so far 2008 looks to be a paradigm shift!
$0
$2
$4
$6
$8
$10
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Billions
Source: Railroad Facts, AAR
![Page 27: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/27.jpg)
RRs and Investment
Is growth affordable? Capex up 10% in ’07? One rail cuts, 2 increase capex during ’07 What will 2008 look like? (long term growth v
short term weakness) Is additional capacity necessary? Desirable? Can the intermodal model extend to carload? Wall Street’s constrictive role (“fighting the last
war”) – is it changing? Is this disconnect between the Renaissance and
the Street the opportunity of a lifetime?
![Page 28: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/28.jpg)
% Growth in Trains Per Day From 2005 to 2035 by Primary Rail Corridor
![Page 29: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/29.jpg)
Future Corridor Volumes Compared to Current Corridor Capacity
2035 without improvements
Below capacity
Near capacity
At capacity
Above capacity
![Page 30: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/30.jpg)
Future Train Volumes Compared to Future Train Capacity
2035 with improvements
Below capacity
Near capacity
At capacity
Above capacity
![Page 31: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/31.jpg)
-$1$0$1$2$3$4$5$6$7$8$9
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06
Source: Association of American Railroads
Net Income
Capital Spending
Class I Railroad Capital Spending vs. Net Income
(Current Dollars)
![Page 32: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/32.jpg)
25% tax credit for projects that expand rail capacity
Expense other infrastructure capital expenditures
Leverage private investment
Tax Incentives to Leverage Capacity Expansion
![Page 33: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/33.jpg)
Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm
01234567
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07
Cents
Source: Railroad Facts, AAR
Current $: Down 1% since 1980
Constant $: Down 54% since 1980
![Page 34: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/34.jpg)
Railroad Employee ProductivityClass I Railroads, Ton-Miles Per Freight Service Employee
0
2
4
6
8
10
12
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Railroad Facts, AAR
Millions
![Page 35: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/35.jpg)
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…
![Page 36: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/36.jpg)
Rail Regulatory Risk
Biggest Uncertainty Entering ’08Safety Bill“Competition” Bill (“M-A-D”)Cost of Capital RevisionMandated STB, CTA “Reviews”AAR/RAC/ASLRRA have great “D” but
hard to score on defense
![Page 37: Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::](https://reader034.vdocuments.us/reader034/viewer/2022051819/55145cc8550346284e8b56ca/html5/thumbnails/37.jpg)
ABH ConsultingAnthony B. Hatch155 W. 68th StreetNew York, NY 10023(212) [email protected]