The legacy of Hunter Harrison lives on for CSX Corp. investors.
The efficiency gains rammed through by the late turnaround artist are paying some of their biggest dividends yet since he died unexpectedly in December following a nine-month whirlwind of activity that transformed the railroad.
Harrison shut down switching yards, closed diesel shops and angered shippers by forcing schedules on them to even out the flow of cargo throughout the week. He also brought in Jim Foote, who took the reins after Harrison’s death and extended the overhaul. In the second quarter, their efforts yielded a record efficiency level for a U.S. railroad and profit that blew through Wall Street’s expectations.
“When I first got here last fall, I was less than convinced about what it is we were going to be able to accomplish,” Foote said in an interview on July 16. “From the big structural changes, Hunter had done a tremendous amount of that work. I was amazed how much work Hunter had gotten done.”
Harrison teamed up with activist investor Paul Hilal early last year to overhaul CSX, echoing his earlier push with Pershing Square Capital Management’s Bill Ackman to shake up Canadian Pacific Railway Ltd.
CSX hired Harrison as CEO in March 2017 to turn around what at the time was the least efficient freight railroad in North America. Investors were enthusiastic enough about Harrison that they endorsed an $84 million payout to cover what he relinquished when he left Canadian Pacific.
Impatient with the reluctance of CSX’s top management to embrace his strategy, Harrison cleaned house in the fall and brought in Foote as COO in late October. Harrison’s abrupt changes and hard-charging style upset customers and many CSX employees. But for shareholders, the results are hard to dispute.
Expenses dropped 7.9% to $1.82 billion, while revenue climbed 5.8% to $3.1 billion amid robust demand for consumer freight, coal and forest products. That gave the company an operating ratio, a railroad efficiency yardstick in which a lower number is better, of 58.6% -- down almost five percentage points from a year earlier.
The only North American railroads to have posted better operating results are Canadian National Railway Co., where Foote previously worked with Harrison, and Canadian Pacific.
Harrison also led those companies during his 54-year career, in which he developed his “precision scheduled railroading” model of distributing freight pickup and delivery more evenly. The goal is to enable a railroad to use fewer railcars, locomotives and crews to carry the same amount of freight.
“The benefits of precision railroading have a tendency to stick within the culture of an organization long after Mr. Harrison is gone,” said Daniel Sherman, an analyst with Edward Jones in a July 17 note to clients. “We assume that much the same will happen at CSX, with the network transformation continuing under Jim Foote’s leadership.”
Adjusted earnings almost doubled to $1.01 a share in the second quarter, boosted in part by the U.S. tax cut. That surpassed analysts’ estimates by 14 cents. Foote increased the 2018 revenue outlook to growth in the “mid-single digits” from an earlier estimate of “up slightly.”
Not all the tailwinds from the second quarter are likely to last, Foote cautioned. For example, CSX had better-than-expected volume for export coal, which jumped to 11 million tons from 8 million a year earlier. That trend won’t necessarily extend into next year.
But the Jacksonville, Fla.-based railroad is likely to continue benefiting from robust pricing. Trucking capacity is tightening because of a driver shortage and a government mandate to log driver hours on tamper-proof electronic devices.
The railroad is also revamping its container-car business, known as intermodal, which is holding back CSX right now from taking more business from trucks, Foote said. CSX needs to make the major changes to intermodal before peak cargo season hits leading up to the year-end holidays, he said.
“It’s a process of weeding out and getting the network down to something that is what it should be and then selling the heck out of it,” he said.
By Thomas Black