Rail Renaissance: Returns, Capital & Capacity. AB HATCH Sao Paulo, Brasil! November 5, 2008 ::

Transcription

1 Rail Renaissance: Returns, Capital & Capacity AB HATCH Sao Paulo, Brasil! November 5, 2008 ::

2 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

3 Railroad Performance Class I Railroads 300 Index 1981 = Productivity Volume Revenue 50 Price Source: Railroad Facts, AAR (Based on a design by R. Gallamore)

4 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?

5 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)

6 Simple Math Rates Returns Capital Expenditures Capacity Service ARE ALL CONNECTED! Virtuous Circle ( 03-07) or Disinvestment?

7 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?)

8 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)

9 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?

10 Railroad Stock Prices January 2001 through April Index Jan 2001 = Jan 01- July 02- Jan 02- July 03- Jan 03- July 04- Jan 04- July 05- Jan 05- July 06- Jan 06- July 07- Jan 07- July 08- Jan S&P500 BNI CSX NSC UNP CNI CP Sources: MSN and CSI, Inc.

11 Railroad Daily Stock Prices January 2, 2008 through September 16, Index Jan 2, 2008 = /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 Sources: Yahoo Finance (adjusted for dividends and splits)

12 Railroad Daily Stock Prices September 2, 2008 through September 16, Index Sept. 2, 2008 = /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 Source: Yahoo Finance (adjusted for dividends and splits)

13 S&P 500 and Railroads Monthly Data January 1980 April 2007 Index Jan = S&P500 Railroads 0 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Sources: MSN and CSI, Inc.

14 Railroad Return on Equity Class I Railroads 14% 12% 10% 8% 6% 4% 2% 0% n.m n.m. = not meaningful (negative value) Source: Railroad Facts, AAR

15 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% p 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.

16 Railroad Intermodal Revenue Growth Over 5% - Long Live the New King! - Billion $14 $12 $10 $8 $6 $4 $2 $ Coal Intermodal Source: Carload Waybill Statistics (includes non-class I railroads)

17 26% 25% 24% 23% 22% 21% 20% 19% 18% 17% Intermodal is the Top Source of U.S. Freight Rail Revenue Intermodal and Coal as a % of Revenue* Coal Intermodal *Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports

18 Intermodal Growth Drivers Domestic and International Globalization Trade Railroad Cost Advantages Share Recovery From Highway Truckload Issues

19 Future Demand for Freight Transportation Will Continue to Grow Billions of Tons of Freight Transported in the U.S p p U.S. DOT projection

20 Intermodal s Enduring Questions Lots of moving parts The improved ROIC of RR Intermodal 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?

21 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?

22 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

23 What Are Railroads Doing to Increase Capacity? New operating plans Cooperative alliances Working with customers Technology Massive equipment and infrastructure investment Additional employees

24 170, , , , , , , , , , ,000 Rail Employment is Up for the First Time in Decades Total Class I Employment: Jan Jul Source: Surface Transportation Board

25 Railroad Capital Expenditures Class I Railroads and so far 2008 looks to be a paradigm shift! Billions $10 $8 $6 $4 $2 $ Source: Railroad Facts, AAR

26 RRs and Investment Is growth affordable? Capex up 10% in 07/FLAT in 2008!! What will 2009 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?

27 % Growth in Trains Per Day From 2005 to 2035 by Primary Rail Corridor

28 Future Corridor Volumes Compared to Current Corridor Capacity 2035 without improvements Below capacity Near capacity At capacity Above capacity

29 Future Train Volumes Compared to Future Train Capacity 2035 with improvements Below capacity Near capacity At capacity Above capacity

30 Class I Railroad Capital Spending vs. Net Income $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 -$1 (Current Dollars) Capital Spending Net Income '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 Source: Association of American Railroads

31 Tax Incentives to Leverage Capacity Expansion 25% tax credit for projects that expand rail capacity Expense other infrastructure capital expenditures Leverage private investment

32 Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile another (related) New Paradigm Cents Constant $: Down 54% since 1980 Current $: Down 1% since 1980 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 Source: Railroad Facts, AAR

33 Railroad Employee Productivity Class I Railroads, Ton-Miles Per Freight Service Employee Millions Source: Railroad Facts, AAR

34 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

35 Rail Regulatory Risk Biggest Uncertainty Entering 08 Safety Bill Competition Bill ( M-A-D ) Cost of Capital Revision Mandated STB, CTA Reviews AAR/RAC/ASLRRA have great D but hard to score on defense

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