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Speaker 1: Hi everyone, this is Lee Klaskal and we're Talking Transports.

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Speaker 1: Welcome to Bloomberg Intelligence Talking Transports podcast. I'm your host,

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Speaker 1: Lee Klaskal, Senior Freight transportation logistics analysts at Bloomberg Intelligence,

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Speaker 1: Bloomberg's in house research arm, made up of almost five

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Speaker 1: hundred analysts and strategists around the globe. Before diving in

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Speaker 1: little public service announcement, Your support is instrumental to keep

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Speaker 1: bringing a great guest and conversations to you are listeners,

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Speaker 1: so please if you enjoyed this podcast, share it, like

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Speaker 1: it and leave a comment, And if you have any

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Speaker 1: ideas for future episodes or just want to talk transports,

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Speaker 1: hit me up on the Bloomberg terminal, on LinkedIn or

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Speaker 1: on Twitter at Logistics Lee. Now onto our episode. Today,

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Speaker 1: we're doing something a little different. This is a bonus

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Speaker 1: episode and our guest is me. That's right. I'll be

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Speaker 1: previewing what to expect from the first quarter earning season

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Speaker 1: for the trucking and railroad industries, which kick off with

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Speaker 1: JB Hunt on April sixteenth. Let's start with the rails.

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Speaker 1: Severe weather's impact on volumes and costs, coupled with higher

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Speaker 1: fuel prices may weigh on the Bloomberg Intelligence Class one

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Speaker 1: rail peer group's first quarter results and could bring downside

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Speaker 1: risk to consensus adjusted EPs for mid single digit growth.

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Speaker 1: Longer term, President Donald Trump's trade policies may strain demand

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Speaker 1: and earnings for railroads. Progress on productivity and cost cutting

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Speaker 1: initiatives are crucial to mitigate any headwinds. Consensus projects adjusted

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Speaker 1: EPs growth of four point five percent in the first

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Speaker 1: quarter for the BI Class one rail peer group, which

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Speaker 1: we believe may need to be moved lower. Total rail

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Speaker 1: traffic growth is trending below first quarter estimates for four

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Speaker 1: out of the five public Class one rails based on

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Speaker 1: the Association of American Railroads weekly data up This is

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Speaker 1: largely due to severe weather that strained volumes and operations.

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Speaker 1: Looking further ahead, President Trump's protectionist trade policies could be inflationary,

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Speaker 1: weighing on consumer demand and industrial activity, which would pressure

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Speaker 1: volumes and earnings for the rest of the year. North

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Speaker 1: America commodity carloads are down one point five percent year

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Speaker 1: to date through March twenty second, according to data from.

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Speaker 2: AAR Metals led the group lower, which were down nine

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Speaker 2: point three percent, followed by automotive, forest product and mineral

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Speaker 2: Agriculture carloads were one of the few bright spots, and

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Speaker 2: they were up around one point seven percent during the

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Speaker 2: time frame. North American intermodial volumes were up six point

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Speaker 2: six percent year to date through March twenty second, according

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Speaker 2: to data from AAR. Western Railroads, Union Pacific and Burlington

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Speaker 2: Northern are leading their peers higher fueled in part from

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Speaker 2: pull forward to demand ahead of any taris. Canadian National

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Speaker 2: is the only Class one railroad that declines an intermodal

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Speaker 2: from severe winter weather, flooding, and an earthquake which impacted

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Speaker 2: its operations. Successful implementation of cost cutting and productivity initiatives

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Speaker 2: will be critical to mitigate uncertain conditions. Management at Norfolk

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Speaker 2: Southern expects to realize one hundred and fifty million dollars

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Speaker 2: in productivity savings this year, which equates to around fifty

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Speaker 2: one cents a share consensuses one Q rail margins relatively

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Speaker 2: unchained from last year, projecting a median adjusted operating ratio

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Speaker 2: to improve by only five basis points from last year,

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Speaker 2: though volume and operational challenges from severe weather might spurred

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Speaker 2: downside to these estimates. Norfolk Southern could lead margin improvement

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Speaker 2: this quarter at around three hundred and fifty basis points,

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Speaker 2: according to.

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Speaker 1: Consensus, as it continues to execute on its cost management efforts.

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Speaker 1: Norfolk Southern expects one hundred to one hundred and fifty

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Speaker 1: basis points an annual margin improvement over the long run

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Speaker 1: from its efficiency push. CSX may be the only rail

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Speaker 1: to see margins deterioration in the first quarter, with Consensus

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Speaker 1: projecting three hundred and fifty basis points as whether lower

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Speaker 1: call demand and lost income related to two construction projects

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Speaker 1: weigh on results. Railroads recoup about eighty five percent of

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Speaker 1: fuel costs through search charges. The climbs in fuel prices

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Speaker 1: post a head window fuel search charge revenues. Diesel prices

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Speaker 1: are eight percent lower on average in the first quarter

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Speaker 1: from last year, which could pressure revenue growth in the quarter.

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Speaker 1: Fuel prices are four percent higher on average from the

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Speaker 1: end of the fourth quarter, which could create a slight

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Speaker 1: headwindter margins given the search charge lag relative to the

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Speaker 1: spot market by up to sixty days. Lower oil prices

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Speaker 1: can reduce rails competitiveness versus trucking by shrinking the saving

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Speaker 1: shippers get from using rails, especially for shorter hauls. The

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Speaker 1: US Energy Information Administration forecasts diesel fuel prices full three

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Speaker 1: point six percent and twenty twenty five, following the eleven

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Speaker 1: percent drop from last year. Despite these challenges, railroad shares

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Speaker 1: are outperforming the broader markets as well as their truckload

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Speaker 1: and less than truckload piers. The BI Class one railroad

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Speaker 1: peer group is down only point five percent year to

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Speaker 1: date through March thirty first, compared with the S and

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Speaker 1: P five hundreds four point seven percent slump. However, there

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Speaker 1: are some variations within the group. CSX has the largest decline,

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Speaker 1: down nine percent, due to inclement weather and construction expenses.

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Speaker 1: Canadian National has the second biggest drop, down four percent,

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Speaker 1: also due to severe weather, flooding, and earthquakes. On the

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Speaker 1: other hand, Pacific has gained the most of this year,

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Speaker 1: up four percent, on strong intermodal growth and its efficiency gains.

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Speaker 1: Let's turn our attention to the LTL carriers. This year

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Speaker 1: may not start strong for North American lesson truckload carriers,

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Speaker 1: with EPs set to drop a median eighteen percent cent

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Speaker 1: for the BILTL peer group based on consensus. Severe winter weather,

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Speaker 1: a week manufacturing backdrop, and uncertainty around tariffs could pressure

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Speaker 1: LTL carriers earnings. Among the greatest risks to demand outlook

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Speaker 1: are the effects of US tariffs and the softening industrial economy.

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Speaker 1: The ISM Manufacturing Index, a good proxy for LTL demand,

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Speaker 1: went back into contraction territory in March, where it has

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Speaker 1: been in twenty seven of the last twenty nine months.

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Speaker 1: Tonnage LTL tonage, that is, has been strained for most

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Speaker 1: carriers in the first quarter so far. Old Dominion had

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Speaker 1: a seven point one percent decline through February, while XPO

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Speaker 1: deteriorated eight point three percent. Both of these performances are

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Speaker 1: trending below consensus. That being said, March can make or

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Speaker 1: break a carrier's quarter, since January and February typically are

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Speaker 1: the weakest months of the year for LTL demand. The

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Speaker 1: tougher volume backdrop could also weigh on margins from the

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Speaker 1: operational deleveraging effect. The group's media and adjusted operating ratio

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Speaker 1: may deteriorate two hundred and sixty five basis points in

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Speaker 1: the first quarter based on consensus. Discipline pricing might not

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Speaker 1: be enough to mitigate the effects of lower volume on

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Speaker 1: the top line, with revenue for the top LTL carriers

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Speaker 1: poise to fall a median one point eight percent based

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Speaker 1: on consensus old Dominions revenue per hundredweight excluding fuel search

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Speaker 1: charges was up four point three percent through February. We

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Speaker 1: believe LTL carriers can still generate mid single digit rate

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Speaker 1: growth despite the challenging demand backdrop. The industry is consolidated

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Speaker 1: and the players have shown pricing discipline through the cycle.

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Speaker 1: Carriers are extremely leveraged to pricing, as it takes about

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Speaker 1: three hundred basis points of tonnage growth to offset one

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Speaker 1: hundred basis points and rate declines. The effects of severe

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Speaker 1: winter weather on volumes and operations may also hurt profitability

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Speaker 1: during the quarter. Our noted that it had the greatest

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Speaker 1: number of service center closings in January and eleven years

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Speaker 1: because of the inclimate weather. Now let's shift gears and

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Speaker 1: talk about the truckload market. Truckload carriers might not be

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Speaker 1: able to escape revenue declines this quarter, though they could

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Speaker 1: keep earning steady, with consensus projecting only a one percent

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Speaker 1: decline in EPs from last year for the Bipure group.

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Speaker 1: A recovery and freight rates may take longer given the

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Speaker 1: impact tariffs could have on the overall economy. Truckload conditions

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Speaker 1: have had a bit of a mixed start to the year,

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Speaker 1: those spot rates are inching higher in the first quarter.

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Speaker 1: Contractual rates are off from last year. Average spot rates

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Speaker 1: excluding fuel search charges gained one point four percent in

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Speaker 1: the first quarter from last year based on truckstop data,

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Speaker 1: while contract rates declined one point six percent according to

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Speaker 1: data from eight Though FDR is forecasting one point six

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Speaker 1: percent growth in loads this year, there may be some

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Speaker 1: volatility from the impact of tariffs, which could be inflationary

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Speaker 1: in way on freight demand. Additional supply exits will be

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Speaker 1: critical for spot rates to continue to move higher. Public

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Speaker 1: carriers have very little exposure to the spot market, but

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Speaker 1: it's seen as a good indicator for where contractual rates

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Speaker 1: are heading. Reefer or temperature controlled rates are leading the weakness,

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Speaker 1: followed by flatbed and drive in. Contractual rates could come

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Speaker 1: under further pressure this year if the Trump administration's tariff

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Speaker 1: policies strains the volume outlook. Trump did say that the

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Speaker 1: US economy faces a period of transition that will likely

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Speaker 1: temper freight demand, which may derail the spot in contractual recovery.

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Speaker 1: The spot market has continued to tighten in the first quarter,

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Speaker 1: with with truck stops. Market Demand Index or the MDI

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Speaker 1: index twenty nine percent higher in the first quarter, the

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Speaker 1: fifth can senttive quarter of annual growth. This was driven

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Speaker 1: by a sixteen percent dropping capacity and a nine percent

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Speaker 1: increase in truckloads. Though supply may keep exiting steadily, demand

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Speaker 1: could be strained by impacts from US trade policies. The

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Speaker 1: University of Michigan's preliminary March consumer Sentiment index came in

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Speaker 1: at fifty seven point nine, twenty seven percent below a

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Speaker 1: year ago and eight point one percent worse than consensus.

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Speaker 1: Survey responded cited uncertainty regarding the economic policies as a

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Speaker 1: key factor for their reduced optimism. FDR forecast average truck

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Speaker 1: utilization rates to improve by two hundred and sixty basis

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Speaker 1: points to ninety five point five percent by December of

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Speaker 1: this year and reached ninety six point eight percent by

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Speaker 1: the end of next year. Both of these numbers are

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Speaker 1: well above the twenty year average of ninety one percent,

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Speaker 1: a good sign. Worsening economic conditions could result in some

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Speaker 1: downside to these expectations, Though revenue declines at truckload carrier

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Speaker 1: could continue in the first quarter, earnings may get some reprieve,

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Speaker 1: with EPs expected to be down only one percent from

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Speaker 1: last year for the bi acid based truckload group, US

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Speaker 1: truckloads might rise one point six percent in twenty twenty

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Speaker 1: five after a slight point two percent gain in twenty

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Speaker 1: twenty four based on FTR projections. It's worth noting the

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Speaker 1: one point six percent it's about forty basis points below

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Speaker 1: consensus for where US GDP growth is expected, which is

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Speaker 1: around two percent. Recent earnings commentary from key retailers such

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Speaker 1: as Coal's, Target and Macy's indicate that consumer spending has

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Speaker 1: already moderated due to economic uncertainty. The economic outlook will

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Speaker 1: be a large driver in truckload earnings growth. The probability

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Speaker 1: of a recession has increased thirty to thirty percent, according

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Speaker 1: to consensus on the Bloomberg Terminal, after reaching a low

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Speaker 1: of twenty percent in late December, Though analysts estimates call

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Speaker 1: for a medium of thirty eight percent growth and adjusted

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Speaker 1: EPs for the truckload group in twenty twenty five. That

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Speaker 1: may move lower if the freight recovery is pushed further out.

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Speaker 1: Truckload carriers also face rising labor and insurance expenses, which

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Speaker 1: will strain margins. Carriers are up against higher insurance premiums

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Speaker 1: and costs per claims for accidents involving their trucks. That's

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Speaker 1: our preview for the earnings for railroads and trucking companies.

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Speaker 1: That's all for this episode, and I hope you learned

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Speaker 1: a little bit of what to expect for first quarter

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Speaker 1: earnings for the trucking and railroad industries. This is Lee

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Speaker 1: Clasical and thanks for talking transports with me until next time.

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Speaker 1: By now