1 00:00:08,000 --> 00:00:11,360 Speaker 1: Hi everyone, and welcome to the Bloomberg Intelligence Talking Transports podcast. 2 00:00:11,480 --> 00:00:15,240 Speaker 1: I'm your host, Lee Klasgaw, Senior Freight transportation logistics analysts 3 00:00:15,320 --> 00:00:19,360 Speaker 1: at Bloomberg Intelligence, Bloomberg's in house research arm. Before diving 4 00:00:19,360 --> 00:00:22,360 Speaker 1: in a little public service announcement, your support is instrumental 5 00:00:22,400 --> 00:00:24,560 Speaker 1: in our ability to keep bringing on great guests and 6 00:00:24,600 --> 00:00:27,720 Speaker 1: great content to you each week. If you haven't already, 7 00:00:27,800 --> 00:00:30,960 Speaker 1: please do take a moment and follow, rate and share 8 00:00:31,080 --> 00:00:34,000 Speaker 1: the podcast. We appreciate all the support that we've been 9 00:00:34,040 --> 00:00:36,920 Speaker 1: getting and any future support that you might be able 10 00:00:36,920 --> 00:00:40,560 Speaker 1: to give. Today, we're excited to have Brandon o'glinsky, Senior 11 00:00:40,600 --> 00:00:44,000 Speaker 1: analyst and Director of Airline and Transportation Research at Barclays. 12 00:00:44,440 --> 00:00:47,479 Speaker 1: Brandon joined Barclays in September two thousand and eight and 13 00:00:47,520 --> 00:00:52,720 Speaker 1: as a director of equity research covering North American airlines 14 00:00:52,760 --> 00:00:56,880 Speaker 1: and transportation. Prior to joining Barclays, Brandon worked at Lehman Brothers, 15 00:00:56,920 --> 00:00:59,800 Speaker 1: where he joined the US Airlines and Transportation equity research 16 00:00:59,800 --> 00:01:02,639 Speaker 1: team in two thousand and six. Prior to that and 17 00:01:02,800 --> 00:01:06,560 Speaker 1: being on the South Side, Brandon spent two years with 18 00:01:06,680 --> 00:01:11,120 Speaker 1: the strategic advisory firm Merge Global in Arlington, Virginia, where 19 00:01:11,120 --> 00:01:15,240 Speaker 1: he worked on numerous client engagements within the air freight, airline, 20 00:01:15,319 --> 00:01:19,399 Speaker 1: and small package industries. He graduated from Georgia State University 21 00:01:19,440 --> 00:01:22,800 Speaker 1: with a BS and Urban Policy and a concentration Aviation 22 00:01:22,920 --> 00:01:26,399 Speaker 1: and transportation management. So I guess go panthers and he 23 00:01:26,520 --> 00:01:31,119 Speaker 1: also holds an FAA commercial pilot license. Welcome to Talking 24 00:01:31,120 --> 00:01:32,480 Speaker 1: Transports podcast. 25 00:01:32,160 --> 00:01:37,160 Speaker 2: Brandon Lee. Thank you so much and appreciate going through 26 00:01:37,200 --> 00:01:40,080 Speaker 2: the bio there. I can't believe I've been almost eighteen 27 00:01:40,120 --> 00:01:43,240 Speaker 2: years now covering transport and airlines. Thoughts on the cell side, 28 00:01:43,280 --> 00:01:46,080 Speaker 2: but great, great to do this chat, and thank you 29 00:01:46,120 --> 00:01:48,320 Speaker 2: to everyone at Bloomberg too for putting this together. I 30 00:01:48,360 --> 00:01:51,600 Speaker 2: think it's a wonderful podcast that you guys have going. 31 00:01:52,200 --> 00:01:53,040 Speaker 3: We appreciate that. 32 00:01:53,280 --> 00:01:55,400 Speaker 1: Make sure you tell your all your family and friends 33 00:01:55,400 --> 00:01:56,880 Speaker 1: about it. 34 00:01:56,680 --> 00:01:58,000 Speaker 3: So I have to ask, So. 35 00:01:57,960 --> 00:01:59,960 Speaker 1: You have a pilot license, So I guess you have 36 00:02:00,160 --> 00:02:02,200 Speaker 1: a couple of Gulf Streams parked somewhere. 37 00:02:02,240 --> 00:02:06,320 Speaker 2: Is that I really wish? Lee. Unfortunately, I haven't flown 38 00:02:07,440 --> 00:02:10,160 Speaker 2: probably since my oldest daughter was born, so I'd spend 39 00:02:10,200 --> 00:02:13,160 Speaker 2: about twelve or fourteen years. But yes, I once in 40 00:02:13,200 --> 00:02:16,200 Speaker 2: a long time ago I did flyplanes and I thought 41 00:02:16,200 --> 00:02:17,800 Speaker 2: that was going to be my career. So it's kind 42 00:02:17,840 --> 00:02:21,240 Speaker 2: of an end around to now cover airlines on Wall Street. 43 00:02:21,280 --> 00:02:23,720 Speaker 1: All right, Well, from a risk standpoint, now that you 44 00:02:23,760 --> 00:02:25,960 Speaker 1: have kids, it's probably a good thing to stay on 45 00:02:26,000 --> 00:02:31,840 Speaker 1: the ground for sure. Okay, So we're coming up on earnings. 46 00:02:31,919 --> 00:02:34,880 Speaker 1: There's a lot to talk about. You cover pretty much 47 00:02:34,919 --> 00:02:37,399 Speaker 1: a very wide swath of transports. 48 00:02:37,120 --> 00:02:38,480 Speaker 3: You're kind of. 49 00:02:39,760 --> 00:02:41,800 Speaker 1: You know, different amongst a lot of your seull side 50 00:02:41,800 --> 00:02:44,280 Speaker 1: peers because you also, in addition to cover the freight markets, 51 00:02:44,280 --> 00:02:48,359 Speaker 1: you cover the airlines. Which sub segment are you kind 52 00:02:48,360 --> 00:02:51,640 Speaker 1: of most interested going into first quarter earning season? 53 00:02:52,200 --> 00:02:54,560 Speaker 2: Oh? Lee that it's a fantastic question. I'm going to 54 00:02:54,680 --> 00:02:57,960 Speaker 2: answer it within a little bit long form here. There's 55 00:02:58,040 --> 00:03:00,600 Speaker 2: always something going on intersector and it's never a dull 56 00:03:00,639 --> 00:03:04,640 Speaker 2: moment covering either transports or airlines. And you know, maybe 57 00:03:04,639 --> 00:03:06,200 Speaker 2: we'll come back to airlines at the end here, but 58 00:03:06,320 --> 00:03:09,679 Speaker 2: twenty going on between going delivery delays and read the 59 00:03:09,720 --> 00:03:12,640 Speaker 2: young Geared turbofan Engine groundings. But I you know, given 60 00:03:12,600 --> 00:03:15,120 Speaker 2: the fact that this is more a transport focus podcast, 61 00:03:16,080 --> 00:03:18,079 Speaker 2: I think it's really relevant to come on here and 62 00:03:18,160 --> 00:03:21,960 Speaker 2: chat with you, especially going into first quarter earnings. We've 63 00:03:22,000 --> 00:03:25,000 Speaker 2: gone through what I thought, or what we perceived as 64 00:03:25,040 --> 00:03:28,440 Speaker 2: a very deep freight recession, let's call it mid twenty 65 00:03:28,600 --> 00:03:31,639 Speaker 2: twenty two to about fall of last year. In twenty 66 00:03:31,680 --> 00:03:34,160 Speaker 2: twenty three, we marked the end of the freight recession 67 00:03:34,440 --> 00:03:37,640 Speaker 2: actually around September or October of twenty twenty three. But 68 00:03:37,720 --> 00:03:40,920 Speaker 2: I know some of our coverage companies, such as some 69 00:03:40,960 --> 00:03:44,320 Speaker 2: of the truckers and jab Hunt might say otherwise right now, 70 00:03:44,720 --> 00:03:48,080 Speaker 2: But regardless, we just we went through this whole whipsaw 71 00:03:48,200 --> 00:03:52,400 Speaker 2: behavior in the supply chain really driven by retailers. And 72 00:03:52,480 --> 00:03:54,360 Speaker 2: if I could just you know, back up for a second, 73 00:03:54,840 --> 00:03:56,680 Speaker 2: we go back to the pandemic when a lot of 74 00:03:56,720 --> 00:03:59,360 Speaker 2: people are getting paid to stay home, you're getting stimulus 75 00:03:59,440 --> 00:04:03,040 Speaker 2: and buying things on Amazon instead of traveling on Delta. 76 00:04:03,160 --> 00:04:06,920 Speaker 2: A lot of retailers extrapolated that level of purchasing and 77 00:04:06,960 --> 00:04:10,200 Speaker 2: that level of sales out and you know, well into 78 00:04:10,240 --> 00:04:14,320 Speaker 2: the future. And unfortunately, when people got back to work 79 00:04:14,800 --> 00:04:18,599 Speaker 2: and got back to traveling, we saw that magically spending 80 00:04:18,640 --> 00:04:21,840 Speaker 2: shifted back to services, and so the retailers were really 81 00:04:21,960 --> 00:04:25,320 Speaker 2: left with a pretty big glut of inventory. And you know, 82 00:04:25,400 --> 00:04:27,719 Speaker 2: someone in the logistics space told me, Brandon if you 83 00:04:27,760 --> 00:04:30,280 Speaker 2: really look closely, because if you go back to like 84 00:04:30,400 --> 00:04:32,640 Speaker 2: the peak season of twenty twenty one, when no one 85 00:04:32,640 --> 00:04:36,200 Speaker 2: could get a container booking out of Asia into the US, 86 00:04:37,000 --> 00:04:40,400 Speaker 2: folks like Walmart were actually chartering their own vessels, and 87 00:04:40,440 --> 00:04:43,120 Speaker 2: so the thought process back then was like, my goodness, 88 00:04:43,600 --> 00:04:45,800 Speaker 2: they don't need this much capacity, and they're actually over 89 00:04:45,960 --> 00:04:48,000 Speaker 2: ordering just to fill it, and so it is going 90 00:04:48,040 --> 00:04:50,640 Speaker 2: to create a problem. And loll and behold, we saw 91 00:04:50,680 --> 00:04:53,960 Speaker 2: the problem. So imports into the US went from like 92 00:04:54,120 --> 00:04:57,039 Speaker 2: up ten or fifteen percent in that time period to 93 00:04:57,120 --> 00:05:00,360 Speaker 2: down fifteen to twenty percent, and so much so that 94 00:05:00,440 --> 00:05:05,040 Speaker 2: imported freight really drives the incremental activity in the supply 95 00:05:05,160 --> 00:05:07,400 Speaker 2: chain in the US and in North America. So we 96 00:05:07,440 --> 00:05:11,440 Speaker 2: saw it negatively impact rail volumes. We almost immediately saw 97 00:05:11,839 --> 00:05:14,760 Speaker 2: truck spot rates, you know that almost doubled or tripled 98 00:05:14,760 --> 00:05:18,279 Speaker 2: in some circumstances, fall way back down. And it's just 99 00:05:18,320 --> 00:05:24,960 Speaker 2: been this prolonged period of really weak freight demand, weak pricing, 100 00:05:25,120 --> 00:05:27,240 Speaker 2: margins down for a lot of the companies that we cover, 101 00:05:27,839 --> 00:05:32,200 Speaker 2: even though GDP has been positive and historically you just 102 00:05:32,320 --> 00:05:35,440 Speaker 2: normally don't see this because transport, for better or words, 103 00:05:35,880 --> 00:05:39,800 Speaker 2: is generally a GDP type growth business. But the pandemic 104 00:05:39,880 --> 00:05:43,080 Speaker 2: just threw this out of cycle, out of sync with 105 00:05:43,240 --> 00:05:45,520 Speaker 2: normal economic periods, right. 106 00:05:45,720 --> 00:05:47,720 Speaker 1: And what I would say for the listeners out there, 107 00:05:47,760 --> 00:05:49,280 Speaker 1: if you're not driving, if you want to play a 108 00:05:49,279 --> 00:05:52,600 Speaker 1: little drinking game, every time Brandon or I say normalization, 109 00:05:52,800 --> 00:05:55,400 Speaker 1: you have to take a drink because I think that's 110 00:05:55,400 --> 00:05:57,400 Speaker 1: a probably I think that's what you're getting at. 111 00:05:57,760 --> 00:05:59,839 Speaker 3: It's a big theme going into the first quarter. 112 00:06:00,320 --> 00:06:02,760 Speaker 2: What I think my associates might have found my bottle 113 00:06:02,800 --> 00:06:05,880 Speaker 2: scotch in my office here, but say after that lead. 114 00:06:05,920 --> 00:06:12,719 Speaker 2: But yes, it's been a huge up and down roller 115 00:06:12,720 --> 00:06:15,080 Speaker 2: coaster that we've seen in the transport market. I know 116 00:06:15,120 --> 00:06:17,200 Speaker 2: a lot of our CEOs that we cover here would 117 00:06:17,200 --> 00:06:19,080 Speaker 2: just love to put this in the rear view mirror 118 00:06:19,440 --> 00:06:22,680 Speaker 2: and get back to quote unquote a more normalized environment. 119 00:06:22,760 --> 00:06:25,600 Speaker 2: But I think that's what we've actually started to see. 120 00:06:25,680 --> 00:06:29,640 Speaker 2: Now we'll talk about why trucking maybe doesn't feel like 121 00:06:29,760 --> 00:06:33,640 Speaker 2: we're in a good environment. But again, as we came 122 00:06:33,680 --> 00:06:36,800 Speaker 2: into the fall and the quote unquote peak shipping season 123 00:06:36,880 --> 00:06:39,599 Speaker 2: last year, what we saw was pretty encouraging because the 124 00:06:39,640 --> 00:06:43,400 Speaker 2: retailers actually got their inventory to sales ratios back down 125 00:06:43,440 --> 00:06:46,960 Speaker 2: to places that were much more manageable, and then began 126 00:06:47,240 --> 00:06:50,719 Speaker 2: a normal ordering process coming in from Asia. Because again, 127 00:06:50,920 --> 00:06:53,880 Speaker 2: real consumption never really contracted. We have not been through 128 00:06:54,000 --> 00:06:58,200 Speaker 2: an actual recession of consumption. It's just been a freight 129 00:06:58,240 --> 00:07:03,159 Speaker 2: recession driven by inventory restocking and de stocking. So as 130 00:07:03,160 --> 00:07:05,680 Speaker 2: we've seen that volume come back, and this really hit 131 00:07:05,839 --> 00:07:08,279 Speaker 2: La Long Beach, the West Coast port saw at first, 132 00:07:08,600 --> 00:07:10,720 Speaker 2: this was back in August or September of last year, 133 00:07:11,240 --> 00:07:14,880 Speaker 2: and like magic, rail volume turn from negative to positive, 134 00:07:14,920 --> 00:07:17,800 Speaker 2: I believe in September or October, and we've been running 135 00:07:17,800 --> 00:07:21,480 Speaker 2: positive since then. And so we've definitely seen that intermodal 136 00:07:21,560 --> 00:07:24,800 Speaker 2: volume turn a negative for the rail industry into a positive. 137 00:07:25,440 --> 00:07:27,800 Speaker 2: And this is so important and I really think from 138 00:07:27,800 --> 00:07:30,760 Speaker 2: a transport perspective from trying to pick stocks, which is 139 00:07:31,000 --> 00:07:34,760 Speaker 2: really difficult profession, by the way, but I think this 140 00:07:34,800 --> 00:07:38,160 Speaker 2: is the year of the railroad if you're an industrial investor, 141 00:07:38,160 --> 00:07:41,840 Speaker 2: more importantly a transport investor. We went through again, you know, 142 00:07:41,880 --> 00:07:46,200 Speaker 2: eighteen months of contraction. Not to mention, I'm sure you remember, 143 00:07:46,360 --> 00:07:49,360 Speaker 2: and we'll recall that we had a labor negotiation going 144 00:07:49,400 --> 00:07:52,280 Speaker 2: on with the railroads back in late twenty twenty two, 145 00:07:52,640 --> 00:07:55,120 Speaker 2: where we had a new labor agreement across the industry 146 00:07:55,160 --> 00:07:58,559 Speaker 2: in the US, which drove a lot of upfront labor 147 00:07:58,600 --> 00:08:03,080 Speaker 2: costs inflation in an environment where volumes were contracting, and 148 00:08:03,160 --> 00:08:06,280 Speaker 2: in an environment where we were just hiring folks after 149 00:08:06,280 --> 00:08:08,400 Speaker 2: the pandemic because it was so hard for railroads or 150 00:08:08,400 --> 00:08:11,480 Speaker 2: truckers or even airlines to get people back on the payrolls. 151 00:08:12,000 --> 00:08:14,040 Speaker 2: So it was kind of a confluence of all these 152 00:08:14,080 --> 00:08:17,119 Speaker 2: bad things happening. Volumes down, we had a new labor 153 00:08:17,120 --> 00:08:20,680 Speaker 2: contract with very high labor inflation, and we finally had 154 00:08:20,720 --> 00:08:24,120 Speaker 2: some headcounts, so we got inefficient as that volume came off, 155 00:08:24,760 --> 00:08:28,080 Speaker 2: and every railroad saw their margin contracts pretty materially in 156 00:08:28,160 --> 00:08:32,360 Speaker 2: twenty twenty three. So why is it important for first 157 00:08:32,440 --> 00:08:34,680 Speaker 2: quarter earnings? Well, we kind of got a preview of 158 00:08:34,679 --> 00:08:37,760 Speaker 2: this in fourth quarter results in January. It was the 159 00:08:37,760 --> 00:08:40,960 Speaker 2: first three months that the railroads could print positive volumes. 160 00:08:41,360 --> 00:08:44,240 Speaker 2: I think estimates finally were kind of in line with 161 00:08:44,320 --> 00:08:46,720 Speaker 2: where the street initially thought they would be. And I 162 00:08:46,800 --> 00:08:49,240 Speaker 2: just see even more of that coming through in the 163 00:08:49,280 --> 00:08:53,720 Speaker 2: first quarter. We had weather January was difficult for everyone. 164 00:08:54,080 --> 00:08:56,800 Speaker 2: Margins and costs will be hit on the first quarter 165 00:08:56,840 --> 00:08:59,720 Speaker 2: because of that. But the trends on demand and the 166 00:08:59,840 --> 00:09:02,040 Speaker 2: like cost leverse that we're going to see going into 167 00:09:02,080 --> 00:09:05,080 Speaker 2: the all important you know, summer months here for the railroads, 168 00:09:05,440 --> 00:09:08,760 Speaker 2: I think it's gonna give investors some confidence that there's 169 00:09:08,760 --> 00:09:12,120 Speaker 2: some margin upside. And that's even before and I'm sure 170 00:09:12,120 --> 00:09:14,120 Speaker 2: you'll ask me some questions. I'll stop talking here, but 171 00:09:14,640 --> 00:09:17,840 Speaker 2: Union Pacific has a new CEO. We have activism and 172 00:09:17,880 --> 00:09:21,199 Speaker 2: a proxy fight up coming at Norfolk Southern. CSX is 173 00:09:21,320 --> 00:09:25,240 Speaker 2: leveraging best in class service. You have CP finalizing or 174 00:09:25,280 --> 00:09:28,360 Speaker 2: finalize the merger with Kansas City Southern now really reaping 175 00:09:28,400 --> 00:09:31,319 Speaker 2: the benefit of that network combination. So I just think 176 00:09:31,320 --> 00:09:34,160 Speaker 2: there's so many exciting things going on for the railroads 177 00:09:34,240 --> 00:09:34,640 Speaker 2: right now. 178 00:09:35,600 --> 00:09:38,480 Speaker 1: And so, you know, you mentioned three individual company stories 179 00:09:38,760 --> 00:09:41,920 Speaker 1: that are working against a backdrop of more positive volumes. 180 00:09:41,920 --> 00:09:45,600 Speaker 1: Intermodal as up around eight percent year to date, which is, 181 00:09:46,880 --> 00:09:50,280 Speaker 1: you know, fantastic for the rail industry. Is there a 182 00:09:50,320 --> 00:09:53,440 Speaker 1: specific story that you're kind of focused on that you 183 00:09:53,520 --> 00:09:57,360 Speaker 1: think is going to drive out performance amongst its peers 184 00:09:57,400 --> 00:10:00,000 Speaker 1: within the rail industry, Well, Lee. 185 00:10:00,080 --> 00:10:03,360 Speaker 2: And I guess let's talk about four of them. If 186 00:10:03,400 --> 00:10:06,400 Speaker 2: you don't mind, and we'll just start with Canadian four 187 00:10:06,400 --> 00:10:11,079 Speaker 2: out of five, we have by recommendations on four of 188 00:10:11,200 --> 00:10:15,720 Speaker 2: the five railroads, but we'll start with Canadian Pacific Kansas 189 00:10:15,760 --> 00:10:18,520 Speaker 2: City just because I think this is such a compelling 190 00:10:18,960 --> 00:10:23,960 Speaker 2: railroad story right now with CEO Keith Kreole really driving 191 00:10:24,040 --> 00:10:29,440 Speaker 2: efficiencies and service outcomes on the combined CPKC network. And 192 00:10:30,240 --> 00:10:32,440 Speaker 2: I'm sure you've had plenty of guests on here talking 193 00:10:32,480 --> 00:10:37,880 Speaker 2: about reshoring and moving manufacturing into North America. I mean, Lee, 194 00:10:38,000 --> 00:10:40,680 Speaker 2: we've been doing this. I would argue since probably the 195 00:10:40,720 --> 00:10:44,400 Speaker 2: two thousand and nine recession, the trade growth rate between 196 00:10:44,559 --> 00:10:48,240 Speaker 2: Mexico and the US has been I think two x 197 00:10:48,520 --> 00:10:51,600 Speaker 2: the growth rate that we've seen with Chinese volumes coming 198 00:10:51,600 --> 00:10:54,480 Speaker 2: into the US in that same time period. So this 199 00:10:54,559 --> 00:10:56,719 Speaker 2: is not necessarily a news story, but I think one 200 00:10:56,760 --> 00:11:00,600 Speaker 2: that is actually accelerating this decade. And what you have 201 00:11:00,720 --> 00:11:04,280 Speaker 2: now is Keith Crele and team taking over what is 202 00:11:04,280 --> 00:11:07,160 Speaker 2: a pretty good asset in Kansas City Southern and really 203 00:11:07,200 --> 00:11:11,880 Speaker 2: applying a much more rigorous and focus to operating model, 204 00:11:12,240 --> 00:11:16,640 Speaker 2: really focused on delivering consistent service to customers. And I'm 205 00:11:16,679 --> 00:11:19,960 Speaker 2: sure that's going to be a consistent theme with all 206 00:11:19,960 --> 00:11:23,960 Speaker 2: of our railroad recommendations here, but we really are believers 207 00:11:24,080 --> 00:11:26,360 Speaker 2: and maybe we drink the industry cool a too much 208 00:11:27,000 --> 00:11:30,840 Speaker 2: that if you can just deliver cars to a shipper 209 00:11:30,880 --> 00:11:33,360 Speaker 2: when you say you will, there's a lot of freight 210 00:11:33,400 --> 00:11:37,480 Speaker 2: that can be converted from trucking from barge. There's a 211 00:11:37,520 --> 00:11:40,280 Speaker 2: lot of other modes that move freight that could move 212 00:11:40,320 --> 00:11:43,480 Speaker 2: on the railroads and arguably overland from point A to 213 00:11:43,520 --> 00:11:46,000 Speaker 2: B if you can overlap with the railroad, it is 214 00:11:46,040 --> 00:11:47,800 Speaker 2: a cheaper way to move it. So it's all about 215 00:11:47,840 --> 00:11:50,840 Speaker 2: consistency of service, and that's why we're so excited what 216 00:11:50,960 --> 00:11:54,080 Speaker 2: Keith and team can do with CPKC. I think there's 217 00:11:54,120 --> 00:11:59,080 Speaker 2: a tremendous opportunity in cross border intermodal coming north from 218 00:11:59,160 --> 00:12:03,360 Speaker 2: Mexico and automotive supply chains and energy supply chains that 219 00:12:03,360 --> 00:12:06,400 Speaker 2: they're connecting, and I think we're just starting to see 220 00:12:06,440 --> 00:12:09,880 Speaker 2: some of the benefits of this merger. I think CPS 221 00:12:09,920 --> 00:12:12,000 Speaker 2: our teams were maybe up one or two percent in 222 00:12:12,040 --> 00:12:14,360 Speaker 2: the first quarter, but we expect that's going to accelerate 223 00:12:14,480 --> 00:12:16,800 Speaker 2: as the year progresses. So I just think there's a 224 00:12:16,840 --> 00:12:19,880 Speaker 2: lot more to come. If you believe that management team 225 00:12:19,920 --> 00:12:24,640 Speaker 2: they think they can roughly double their EPs I think 226 00:12:24,679 --> 00:12:27,840 Speaker 2: by twenty twenty eight. So you know, I know the 227 00:12:27,840 --> 00:12:31,000 Speaker 2: stock is a little bit of expensive on standard valuation 228 00:12:31,120 --> 00:12:33,640 Speaker 2: metrics right now, but we're really playing for the longer 229 00:12:33,720 --> 00:12:35,480 Speaker 2: term upside of that network combination. 230 00:12:36,480 --> 00:12:38,080 Speaker 1: Yeah, they just seem to have a lot of growth 231 00:12:38,080 --> 00:12:41,040 Speaker 1: in Keith Crele is probably one of the more dynamic 232 00:12:41,160 --> 00:12:46,120 Speaker 1: CEOs within all of freight transportation logistics in my humble opinion. 233 00:12:47,040 --> 00:12:49,760 Speaker 1: When I was on the sales side issues when he 234 00:12:49,840 --> 00:12:51,839 Speaker 1: was first came out, I think it was I called 235 00:12:51,920 --> 00:12:55,719 Speaker 1: him the Tony Robbins of railroading. So we just very 236 00:12:55,720 --> 00:13:01,160 Speaker 1: inspirational leader and very much a focus operator. You know, 237 00:13:01,360 --> 00:13:03,320 Speaker 1: he's done great things at CP and and and I 238 00:13:03,360 --> 00:13:05,440 Speaker 1: agree with you that you know now that they're going 239 00:13:05,520 --> 00:13:09,160 Speaker 1: to be working on Kansas City Southern, especially that Mexican operation. Uh, 240 00:13:09,280 --> 00:13:11,040 Speaker 1: there's there's a lot that they can do there. 241 00:13:12,280 --> 00:13:15,280 Speaker 2: I completely agree, and that's why we're so excited, uh 242 00:13:15,760 --> 00:13:16,480 Speaker 2: for that stock. 243 00:13:17,360 --> 00:13:20,640 Speaker 1: And then you know you mentioned the activists activity at 244 00:13:20,640 --> 00:13:24,440 Speaker 1: Norfolk Southern. You know, for those that don't know, an 245 00:13:24,440 --> 00:13:27,640 Speaker 1: activists got involved looking to make a management change. They 246 00:13:27,640 --> 00:13:30,480 Speaker 1: wanted to bring in their own slate of managers that 247 00:13:30,520 --> 00:13:34,240 Speaker 1: are steeped in precision scheduling railroading or PSR, which is 248 00:13:34,280 --> 00:13:36,520 Speaker 1: pretty much six sigma for the railroad industry. 249 00:13:37,880 --> 00:13:39,880 Speaker 3: You know, what do you what are your thoughts there? 250 00:13:39,920 --> 00:13:42,480 Speaker 1: Do you have you gone out with a probability of 251 00:13:42,480 --> 00:13:44,960 Speaker 1: who do you think is gonna win? I mean, obviously 252 00:13:45,240 --> 00:13:48,839 Speaker 1: they've affected change in management with uh you know war 253 00:13:48,960 --> 00:13:51,400 Speaker 1: coming in from from from Canadian National. 254 00:13:52,679 --> 00:13:57,000 Speaker 2: Yeah, well, this is a very interesting topic and obviously 255 00:13:58,280 --> 00:14:01,439 Speaker 2: somewhat of a controversial time if you're a railroad investor 256 00:14:01,520 --> 00:14:04,120 Speaker 2: right now, or a potential management team or an I 257 00:14:04,200 --> 00:14:07,600 Speaker 2: management nominee, and we are going to go to I 258 00:14:07,640 --> 00:14:10,880 Speaker 2: believe a proxy vote late in April or early May 259 00:14:11,880 --> 00:14:13,880 Speaker 2: at the Norfolk annual meeting, So then we'll get some 260 00:14:13,920 --> 00:14:16,960 Speaker 2: resolution on which path forward investors want to take. But 261 00:14:17,000 --> 00:14:22,000 Speaker 2: I think context is important here. By no means are 262 00:14:22,000 --> 00:14:24,600 Speaker 2: we trying to be disrespectful to the current in Norfolk 263 00:14:24,640 --> 00:14:29,720 Speaker 2: Southern leadership team. But objectively, if we're looking at operating 264 00:14:29,840 --> 00:14:34,280 Speaker 2: margins or system velocity or trip plan compliance between the 265 00:14:34,320 --> 00:14:40,200 Speaker 2: network railroads here in North America, Unfortunately, Norfolk generally screens 266 00:14:40,760 --> 00:14:43,160 Speaker 2: last and a lot of these financial metrics or even 267 00:14:43,200 --> 00:14:49,280 Speaker 2: service metrics, and so as shareholders have seen this over 268 00:14:49,280 --> 00:14:51,000 Speaker 2: the years, and I've been through a few of these, 269 00:14:51,280 --> 00:14:54,000 Speaker 2: because we saw activism at cpback in twenty twelve and 270 00:14:54,040 --> 00:14:57,280 Speaker 2: twenty thirteen when Bill Ackman brought Hunter Harrison and later 271 00:14:57,360 --> 00:15:01,120 Speaker 2: Keith Crele to run that network and it was amazing 272 00:15:01,160 --> 00:15:05,120 Speaker 2: because CP probably had about half the operating profitability of 273 00:15:05,200 --> 00:15:08,720 Speaker 2: Canadian National back then, and in a trench management team 274 00:15:08,760 --> 00:15:11,920 Speaker 2: that said, hey, there's some structural differences between us, we 275 00:15:12,000 --> 00:15:15,480 Speaker 2: can't really achieve what they're doing. And probably within about 276 00:15:15,480 --> 00:15:18,120 Speaker 2: a year's time, and I'm sure you remember this, CP 277 00:15:18,360 --> 00:15:22,760 Speaker 2: was at or even operating better than Canadian National. And 278 00:15:22,800 --> 00:15:27,040 Speaker 2: we saw that effectively repeat process in twenty seventeen at 279 00:15:27,120 --> 00:15:32,560 Speaker 2: CSX when Hunter came over from CP and very quickly 280 00:15:32,760 --> 00:15:35,760 Speaker 2: got CSX to best in class operating margins. I mean 281 00:15:35,840 --> 00:15:40,200 Speaker 2: some people would argue maybe too fast, but nonetheless I 282 00:15:40,240 --> 00:15:44,520 Speaker 2: think there's no structural impediment. Almost every railroad, we would argue, 283 00:15:44,800 --> 00:15:47,520 Speaker 2: should be running around a sixty operating ratio, which is 284 00:15:47,600 --> 00:15:50,560 Speaker 2: just the inverse of about a forty percent operating margin, 285 00:15:50,600 --> 00:15:54,400 Speaker 2: which is pretty good for an old industrial business in 286 00:15:54,440 --> 00:15:59,400 Speaker 2: North America. And it really comes down to a cultural 287 00:15:59,440 --> 00:16:03,440 Speaker 2: attitude side the rail carrier that holds folks accountable. It 288 00:16:03,440 --> 00:16:07,160 Speaker 2: pushes decision making to your operational leaders as opposed to 289 00:16:07,280 --> 00:16:10,480 Speaker 2: having this bureaucratic committee based system, which I think will 290 00:16:10,480 --> 00:16:12,960 Speaker 2: a lot of the railroads used to rely on. And 291 00:16:13,000 --> 00:16:15,200 Speaker 2: you know, we can talk about Union Pacific soon and 292 00:16:15,240 --> 00:16:17,720 Speaker 2: what Jim Vina is doing there. But I think when 293 00:16:17,760 --> 00:16:22,520 Speaker 2: you allow the franchise to really operate and focus on 294 00:16:22,640 --> 00:16:26,000 Speaker 2: running trains on time and not necessarily running the longest trains, 295 00:16:26,040 --> 00:16:28,080 Speaker 2: but getting the car to the shipper when you say 296 00:16:28,080 --> 00:16:31,040 Speaker 2: you'll get it there, and focusing on that above all else, 297 00:16:31,400 --> 00:16:34,360 Speaker 2: then you can actually get rid of train starts and 298 00:16:34,480 --> 00:16:36,520 Speaker 2: get rid of cars in your terminals. You can free 299 00:16:36,600 --> 00:16:39,400 Speaker 2: up a lot of capacity to run your trains faster. 300 00:16:39,880 --> 00:16:41,880 Speaker 2: And what I think a lot of folks forget is 301 00:16:41,920 --> 00:16:45,200 Speaker 2: that capacity is actually your customer's capacity. It's the shipper's capacity. 302 00:16:45,600 --> 00:16:48,119 Speaker 2: Most of the cars online are owned by the customers. 303 00:16:48,400 --> 00:16:51,320 Speaker 2: So if you can do this with fewer assets, yeah, 304 00:16:51,360 --> 00:16:53,840 Speaker 2: the customer is going to be really excited and incrementally 305 00:16:53,880 --> 00:16:57,720 Speaker 2: give you more volumes. So Alin Shawan team, I know 306 00:16:57,800 --> 00:17:01,680 Speaker 2: that they just hired John Orr from cp K. John Orr, 307 00:17:02,040 --> 00:17:06,560 Speaker 2: I believe was Chief Transformation officer for CPKC. He was 308 00:17:06,680 --> 00:17:11,440 Speaker 2: running their service and operations down in Mexico, trying to 309 00:17:11,480 --> 00:17:13,480 Speaker 2: clean up that operation in the past year, which I 310 00:17:13,520 --> 00:17:17,000 Speaker 2: think he was very successful at doing. I believe that 311 00:17:17,119 --> 00:17:19,800 Speaker 2: he was on the path to retirement at that company, 312 00:17:20,240 --> 00:17:24,239 Speaker 2: So it's interesting that Norfolk would then poach him to 313 00:17:24,280 --> 00:17:26,800 Speaker 2: replace Paul Duncan, who Alan Shaw had just hired a 314 00:17:26,920 --> 00:17:29,480 Speaker 2: COO I think maybe a year and a half ago. 315 00:17:30,600 --> 00:17:33,000 Speaker 2: And I think given the operational challenges that they had, 316 00:17:33,320 --> 00:17:36,880 Speaker 2: the unfortunate derailment East Palestine and then you know, lagging 317 00:17:37,000 --> 00:17:40,439 Speaker 2: significantly an operating profitability and all these service metrics, change 318 00:17:40,560 --> 00:17:44,560 Speaker 2: was needed at that role. But again my concern would 319 00:17:44,560 --> 00:17:47,760 Speaker 2: be that when we've seen these wholesale cultural changes, it 320 00:17:47,800 --> 00:17:50,320 Speaker 2: really starts at the top, and I think you need 321 00:17:50,359 --> 00:17:53,639 Speaker 2: to set that mandate and that urgency from the CEO position, 322 00:17:53,760 --> 00:17:56,600 Speaker 2: arguably even from the board. So I can see the 323 00:17:56,680 --> 00:18:00,000 Speaker 2: compelling offer that Incora. This is the activist investor involved. 324 00:18:00,600 --> 00:18:03,600 Speaker 2: You know what their board slate and what their management 325 00:18:03,640 --> 00:18:06,280 Speaker 2: nominees could really bring to bear on this company. And 326 00:18:06,320 --> 00:18:08,080 Speaker 2: I think, you know, give it a year or two 327 00:18:08,160 --> 00:18:10,600 Speaker 2: under a new leadership team at Norfolk, you could see 328 00:18:10,640 --> 00:18:14,480 Speaker 2: significant improvement in the operating ratio, which I think would 329 00:18:14,840 --> 00:18:16,840 Speaker 2: drive significant improvement for share orders. 330 00:18:17,800 --> 00:18:19,680 Speaker 1: Yeah, and it's worth noting that Norfolk Southern used to 331 00:18:19,680 --> 00:18:23,320 Speaker 1: be the gold standard in the East before CSX adopted PSR, 332 00:18:25,200 --> 00:18:28,280 Speaker 1: you know, and CSX always lagged Norfolk Southern for a 333 00:18:28,320 --> 00:18:32,159 Speaker 1: number of years on the profitability side. So you know, 334 00:18:32,200 --> 00:18:38,080 Speaker 1: structurally Norfolk Southern could exceed CSX from a margin standpoint 335 00:18:38,119 --> 00:18:39,399 Speaker 1: and a profitability standpoint. 336 00:18:39,920 --> 00:18:44,119 Speaker 2: That's a great point. And you know, Norfolk branded themselves 337 00:18:44,200 --> 00:18:48,200 Speaker 2: the Thoroughbred, which was probably very applicable ten or twenty 338 00:18:48,280 --> 00:18:51,520 Speaker 2: years ago relative to other US carriers, but unfortunately that's 339 00:18:51,560 --> 00:18:54,160 Speaker 2: just not the case. And you know, again no offense 340 00:18:54,200 --> 00:18:56,679 Speaker 2: to Alan shawan team, but when you grow up in 341 00:18:56,680 --> 00:18:59,879 Speaker 2: an organization like that, it can be such insular and institutional. Now, 342 00:19:00,080 --> 00:19:01,920 Speaker 2: edge of here's how we run the railroad and why 343 00:19:01,960 --> 00:19:04,560 Speaker 2: we do it, and sometimes it just helps to bring 344 00:19:04,600 --> 00:19:07,800 Speaker 2: a breath of fresh air in from the top that says, no, actually, 345 00:19:07,800 --> 00:19:10,400 Speaker 2: there are different ways of running a railroad. You can 346 00:19:10,440 --> 00:19:13,120 Speaker 2: do it with a lot less assets, and really when 347 00:19:13,160 --> 00:19:15,640 Speaker 2: you do things with less assets, that's when you see 348 00:19:15,640 --> 00:19:19,240 Speaker 2: the improvement in the safety ratios. So I know, northfolks 349 00:19:19,320 --> 00:19:20,920 Speaker 2: trying to make the case that hey, if we have 350 00:19:21,040 --> 00:19:23,080 Speaker 2: a big shake up here and we change up the 351 00:19:23,080 --> 00:19:25,720 Speaker 2: board and bring in new leadership, that should be a 352 00:19:25,760 --> 00:19:29,679 Speaker 2: safety concern. But honestly, you know, we've seen three coos 353 00:19:29,720 --> 00:19:31,800 Speaker 2: in the seat under Allen Shaw's tenure a CEO, and 354 00:19:31,840 --> 00:19:34,360 Speaker 2: he's only been CEO, I want to say, since mid 355 00:19:34,400 --> 00:19:38,800 Speaker 2: twenty twenty two, so you know, I think bringing some consistency. 356 00:19:38,840 --> 00:19:43,080 Speaker 2: And Jamie Boychuk, who's the nominee for COO than Ancora 357 00:19:43,240 --> 00:19:46,639 Speaker 2: has provided. You know, he was most recently EVP of 358 00:19:46,680 --> 00:19:51,240 Speaker 2: Operations at CSX and was really pivotabal in driving them 359 00:19:51,560 --> 00:19:54,840 Speaker 2: to best in class profitability but maybe more importantly best 360 00:19:54,840 --> 00:19:57,359 Speaker 2: in class service outcomes. And it's just even in the 361 00:19:57,440 --> 00:20:01,280 Speaker 2: data today it's CSX is running heads above where the 362 00:20:01,280 --> 00:20:03,400 Speaker 2: Norfolk network is right. 363 00:20:04,000 --> 00:20:07,040 Speaker 1: And so do you want to quickly talk about you know, 364 00:20:07,080 --> 00:20:09,359 Speaker 1: where you're seeing unp going into the quarter. 365 00:20:09,720 --> 00:20:13,760 Speaker 2: Yeah, you know, again all railroads and really every transport 366 00:20:13,960 --> 00:20:16,600 Speaker 2: that there's gonna be a caveat here that the first 367 00:20:16,680 --> 00:20:21,280 Speaker 2: quarter was definitely impacted by significant winter weather in January, 368 00:20:21,320 --> 00:20:24,320 Speaker 2: and you know we have winter every year. All transports 369 00:20:24,359 --> 00:20:27,840 Speaker 2: is an outdoor sports, so We're not giving anyone, you know, 370 00:20:27,960 --> 00:20:31,000 Speaker 2: free pass on this, but outside of the first quarter, 371 00:20:31,040 --> 00:20:35,000 Speaker 2: we're pretty encouraged to see the service recovery that you 372 00:20:35,119 --> 00:20:38,000 Speaker 2: and P has seen since January, and this is looking 373 00:20:38,000 --> 00:20:41,520 Speaker 2: at like network Velocity and dwell. I think there are 374 00:20:41,560 --> 00:20:43,680 Speaker 2: car miles per day, which is something that Jim vinn 375 00:20:43,760 --> 00:20:46,679 Speaker 2: is really looking at hasn't quite fully recovered. But we 376 00:20:46,880 --> 00:20:48,800 Speaker 2: like the trajectory of service and I think it's going 377 00:20:48,880 --> 00:20:51,720 Speaker 2: to be interesting to hear him talk about how do 378 00:20:51,760 --> 00:20:55,960 Speaker 2: we leverage this network going forward in the future, especially 379 00:20:55,960 --> 00:20:58,200 Speaker 2: given all the freight that we're seeing pile up on 380 00:20:58,280 --> 00:21:01,159 Speaker 2: the West coast ports. How do we take a service 381 00:21:01,200 --> 00:21:04,199 Speaker 2: product and then leverage it with incremental volume. So I 382 00:21:04,200 --> 00:21:06,480 Speaker 2: think that's going to be really encouraging. One thing to 383 00:21:06,560 --> 00:21:08,640 Speaker 2: keep in mind for you and P though with I'm 384 00:21:08,680 --> 00:21:11,080 Speaker 2: looking at natural gas on my screen right now, trading 385 00:21:11,119 --> 00:21:15,880 Speaker 2: at about a buck seventy seven. That's pretty cheap gas. 386 00:21:15,880 --> 00:21:17,800 Speaker 3: I hope you're looking at on the Bloomberg termament. 387 00:21:17,640 --> 00:21:23,080 Speaker 2: Of course, right, I believe, but I think a delayed 388 00:21:23,160 --> 00:21:28,560 Speaker 2: quote nonetheless, So anything really blowed two or three dollars, 389 00:21:28,640 --> 00:21:32,320 Speaker 2: especially for Western coal, and coal is still I think 390 00:21:32,359 --> 00:21:34,960 Speaker 2: twelve or thirteen percent of the business for Union Pacific. 391 00:21:36,400 --> 00:21:39,000 Speaker 2: Gas just becomes that much more of an alternate fuel 392 00:21:39,040 --> 00:21:42,720 Speaker 2: to produce electricity in the Western States. So we're really 393 00:21:42,760 --> 00:21:45,800 Speaker 2: seeing coal volumes I think down twenty percent this quarter. 394 00:21:46,240 --> 00:21:49,879 Speaker 2: You know, it's things like chemicals and industrial intermodal. They 395 00:21:49,920 --> 00:21:52,800 Speaker 2: also have a cross border Mexico intermodal service that they're 396 00:21:52,840 --> 00:21:56,320 Speaker 2: running right now, connecting in with Pharaoh Mechs south of 397 00:21:56,359 --> 00:21:59,000 Speaker 2: the border in Canadian National up north. So I think 398 00:21:59,040 --> 00:22:02,040 Speaker 2: a lot of interesting things going on at Union Pacific 399 00:22:02,080 --> 00:22:04,440 Speaker 2: and and and you know, off the back of our 400 00:22:04,440 --> 00:22:07,560 Speaker 2: conversation about what's going on at Norfolk Southern, we've seen 401 00:22:07,600 --> 00:22:10,520 Speaker 2: that wholesale change from the top at Union Pacific. Jim 402 00:22:10,600 --> 00:22:14,960 Speaker 2: Vinna just came in as CEO last fall. You know, 403 00:22:15,119 --> 00:22:18,440 Speaker 2: he was COO of Canadian National for a while and 404 00:22:18,720 --> 00:22:20,520 Speaker 2: spent a lot of his time there working with Hunter 405 00:22:20,560 --> 00:22:23,480 Speaker 2: Harrison and Keith Creole and really just brought a new 406 00:22:23,600 --> 00:22:26,960 Speaker 2: operating rigor to Union Pacific. Again, we've seen the service change. 407 00:22:27,680 --> 00:22:29,320 Speaker 2: So I just think there's a lot more good to 408 00:22:29,359 --> 00:22:32,480 Speaker 2: come out of Union Pacific and what is generally viewed 409 00:22:32,800 --> 00:22:35,360 Speaker 2: as probably the best rail network in North America by 410 00:22:35,359 --> 00:22:36,879 Speaker 2: a lot of investors. 411 00:22:36,760 --> 00:22:40,359 Speaker 1: Right, because that that that that exposure to the West 412 00:22:40,400 --> 00:22:44,480 Speaker 1: coast sports, uh, to your to your point, the six 413 00:22:44,560 --> 00:22:48,320 Speaker 1: gateways that they have with Mexico, so a lot of 414 00:22:48,760 --> 00:22:51,440 Speaker 1: a lot of interesting stuff. And they do the coal 415 00:22:51,480 --> 00:22:55,399 Speaker 1: that they are hauling as low sofa calls, so it's 416 00:22:55,440 --> 00:22:58,920 Speaker 1: quote unquote cleaner than you know, coal that's mined in 417 00:22:58,960 --> 00:22:59,359 Speaker 1: the east. 418 00:22:59,520 --> 00:23:01,840 Speaker 2: Yep, that's right. So I want to. 419 00:23:01,840 --> 00:23:04,040 Speaker 1: Switch gears a little bit, just because we only have 420 00:23:04,160 --> 00:23:09,600 Speaker 1: so much time. You know, last week, there's been in 421 00:23:09,640 --> 00:23:11,679 Speaker 1: this week, there's been so much going on at the 422 00:23:11,720 --> 00:23:15,920 Speaker 1: parcel carriers like FedEx and UPS. What's your take on 423 00:23:16,440 --> 00:23:21,000 Speaker 1: FedEx losing the United States Postal Service contract and UPS 424 00:23:21,040 --> 00:23:21,959 Speaker 1: apparently getting it. 425 00:23:22,320 --> 00:23:28,200 Speaker 2: Oh and actually this is a great example maybe zoomed 426 00:23:28,240 --> 00:23:31,640 Speaker 2: in on the changes that are happening at FedEx, which 427 00:23:31,640 --> 00:23:34,919 Speaker 2: are really generational. So I'm glad you brought this up. 428 00:23:34,960 --> 00:23:37,360 Speaker 2: And for those that maybe haven't been paying that clues 429 00:23:37,440 --> 00:23:41,840 Speaker 2: of attention to the package company's FedEx or UPS. The 430 00:23:41,920 --> 00:23:44,800 Speaker 2: post office for a long time has actually been FedEx's 431 00:23:44,920 --> 00:23:48,159 Speaker 2: largest customer. And so anyone who's ever gone to a 432 00:23:48,200 --> 00:23:51,320 Speaker 2: post office and shipped something either express mail, which is 433 00:23:51,880 --> 00:23:56,240 Speaker 2: their next day Priority Package service or Priority Mail, which 434 00:23:56,240 --> 00:23:58,359 Speaker 2: is generally like a two to three day product and 435 00:23:58,480 --> 00:24:01,080 Speaker 2: it's a little bit cheaper price, more like UPS or 436 00:24:01,119 --> 00:24:05,080 Speaker 2: FedEx ground. Well, for the longest time, in order to 437 00:24:05,119 --> 00:24:08,560 Speaker 2: get those Priority Mail and express mail packages from point 438 00:24:08,560 --> 00:24:11,960 Speaker 2: A to point B, the Post Office actually outsourced almost 439 00:24:12,000 --> 00:24:16,439 Speaker 2: all the line haul of those packages to FedEx, and 440 00:24:16,720 --> 00:24:19,359 Speaker 2: for the most part, in the Priority Mail business is 441 00:24:19,400 --> 00:24:21,480 Speaker 2: actually the biggest part of that contract that we're talking 442 00:24:21,520 --> 00:24:23,760 Speaker 2: about here. We think it's probably over a billion dollars 443 00:24:23,760 --> 00:24:26,720 Speaker 2: in annual revenue right now, maybe a touch more than that. 444 00:24:26,720 --> 00:24:29,719 Speaker 2: That is going to go to UPS here starting in September. 445 00:24:30,280 --> 00:24:34,040 Speaker 2: But for the longest time, FedEx because of inefficiencies at 446 00:24:34,040 --> 00:24:36,000 Speaker 2: the Post Office, and we could go on and on 447 00:24:36,080 --> 00:24:38,800 Speaker 2: about this, but effectively, even for a two to three 448 00:24:38,880 --> 00:24:41,600 Speaker 2: day shipment going up and down the East Coast, historically 449 00:24:41,960 --> 00:24:45,520 Speaker 2: the Post Office was so inefficient at effectively putting that 450 00:24:45,600 --> 00:24:48,480 Speaker 2: package in a bag or in a container to hand 451 00:24:48,520 --> 00:24:50,760 Speaker 2: to FedEx that it would take them twelve hours at 452 00:24:50,760 --> 00:24:54,439 Speaker 2: the origin and effectively twelve hours to then deconstruct that 453 00:24:55,080 --> 00:24:58,800 Speaker 2: palette or bag at the destination. So even though it's 454 00:24:58,800 --> 00:25:00,720 Speaker 2: going two or three days over the East coast, which 455 00:25:00,720 --> 00:25:03,960 Speaker 2: can easily be trucked for most markets, they would really 456 00:25:04,000 --> 00:25:06,040 Speaker 2: only give FedEx about twenty four hours to get it 457 00:25:06,080 --> 00:25:09,440 Speaker 2: from A to B, which for most distances really does 458 00:25:09,560 --> 00:25:13,680 Speaker 2: require air transport. But FedEx, you know, years ago, said hey, 459 00:25:13,720 --> 00:25:16,479 Speaker 2: this actually kind of fits great with our network because 460 00:25:16,800 --> 00:25:20,720 Speaker 2: we fly these expensive planes every night for our express packages, 461 00:25:21,240 --> 00:25:23,359 Speaker 2: you know, into and out of Memphis, but efensively, we 462 00:25:23,440 --> 00:25:25,719 Speaker 2: get two flights a day on our aircraft and then 463 00:25:25,760 --> 00:25:28,360 Speaker 2: they sit around and do nothing for the other twenty 464 00:25:28,480 --> 00:25:31,359 Speaker 2: or you know, eighteen hours a day. And then our 465 00:25:31,400 --> 00:25:35,080 Speaker 2: big hub infrastructure in Memphis, Ada was only used three 466 00:25:35,160 --> 00:25:37,840 Speaker 2: or four hours a day. So this business actually fits 467 00:25:37,880 --> 00:25:39,720 Speaker 2: really well with us. You give us the packages early 468 00:25:39,760 --> 00:25:41,640 Speaker 2: in the morning, we give them to late at night, 469 00:25:41,720 --> 00:25:44,520 Speaker 2: and we fly a couple extra flights every day into 470 00:25:44,520 --> 00:25:48,920 Speaker 2: Memphis and dual utilize the assets in the hub. So hypothetically, 471 00:25:48,960 --> 00:25:51,399 Speaker 2: that sounds like a great business that the problem is 472 00:25:51,920 --> 00:25:54,600 Speaker 2: the Post Office didn't really pay them to utilize the 473 00:25:54,720 --> 00:25:57,520 Speaker 2: full capacity of that daytime network that they stood up 474 00:25:57,800 --> 00:26:00,480 Speaker 2: twenty years ago, and even today it's it's about one 475 00:26:00,560 --> 00:26:03,360 Speaker 2: hundred aircraft one hundred cities into and out of Memphis 476 00:26:03,720 --> 00:26:06,320 Speaker 2: in the daytime network, which runs about five days a week. 477 00:26:07,000 --> 00:26:10,000 Speaker 2: So FedEx is effectively now forced to go out and 478 00:26:10,080 --> 00:26:13,360 Speaker 2: sell roughly half, maybe more than half of that capacity 479 00:26:13,840 --> 00:26:18,119 Speaker 2: on a commercial basis into a market that again is 480 00:26:18,160 --> 00:26:21,399 Speaker 2: like a two to three day product that historically or 481 00:26:21,560 --> 00:26:24,480 Speaker 2: even twenty years ago started to move via FedEx Ground 482 00:26:24,560 --> 00:26:27,760 Speaker 2: or UPS ground. And if we're talking Palatize freight, I 483 00:26:27,760 --> 00:26:29,919 Speaker 2: mean we'll get into the LTL carriers, hopefully the old 484 00:26:29,960 --> 00:26:33,199 Speaker 2: dominion Saya FedEx freight. They've all kind of cornered that 485 00:26:33,240 --> 00:26:36,160 Speaker 2: market too. We can do this with trucks, which are 486 00:26:36,320 --> 00:26:39,760 Speaker 2: significantly less cost than planes. And so if you look 487 00:26:39,800 --> 00:26:43,439 Speaker 2: at the history of FedEx Express and FedEx Corporate, you 488 00:26:43,480 --> 00:26:47,280 Speaker 2: know they've really struggled, frankly ever to hit their ten 489 00:26:47,320 --> 00:26:50,320 Speaker 2: percent corporate margin goal or even to hit a double 490 00:26:50,320 --> 00:26:53,159 Speaker 2: digit margin in the express business. And I think the 491 00:26:53,160 --> 00:26:56,919 Speaker 2: post office contract is like a great example of what 492 00:26:57,040 --> 00:27:00,280 Speaker 2: has been wrong at FedEx and the reason we think 493 00:27:00,320 --> 00:27:03,359 Speaker 2: this is going to UPS. You know, the Postmaster General 494 00:27:04,400 --> 00:27:06,560 Speaker 2: effectively set out a couple of years ago said wow, 495 00:27:06,680 --> 00:27:09,360 Speaker 2: like the post Office is on a bad trajectory. We're 496 00:27:09,359 --> 00:27:12,000 Speaker 2: losing money. We need to figure out ways to cut costs. 497 00:27:12,040 --> 00:27:15,879 Speaker 2: I think he immediately identified that air transport of lower 498 00:27:15,960 --> 00:27:18,919 Speaker 2: VCUE packages like priority mail probably not the best use 499 00:27:19,000 --> 00:27:22,320 Speaker 2: of resources. And so we think UPS, because they run 500 00:27:22,359 --> 00:27:25,880 Speaker 2: an integrated ground and express network, was able to take 501 00:27:25,920 --> 00:27:28,880 Speaker 2: a lot of that volume that was traditionally flying. Help 502 00:27:29,040 --> 00:27:32,560 Speaker 2: UPS or the US Postal Office get more efficient and 503 00:27:32,640 --> 00:27:35,919 Speaker 2: tendering and receiving the volume such that they can truckle 504 00:27:35,960 --> 00:27:38,320 Speaker 2: lot of it. So we think that's why the contract moved, 505 00:27:38,320 --> 00:27:42,000 Speaker 2: because it's just a lower cost solution in the UPS network, 506 00:27:42,320 --> 00:27:46,800 Speaker 2: And unfortunately for FedEx and for their pilots, the bad 507 00:27:46,840 --> 00:27:48,720 Speaker 2: poison here is that we'll probably have to shrink some 508 00:27:48,760 --> 00:27:51,639 Speaker 2: of that air network capacity. But that ultimately should be 509 00:27:51,760 --> 00:27:55,040 Speaker 2: very good for operating margins at fed X, and it 510 00:27:55,080 --> 00:27:59,560 Speaker 2: should create a more consistent and sustainable business looking forward. 511 00:28:00,040 --> 00:28:02,760 Speaker 3: Going into the announcement. Ahead of the announcement, was. 512 00:28:02,720 --> 00:28:04,680 Speaker 1: Your thesis that they were going to lose it or 513 00:28:04,680 --> 00:28:06,879 Speaker 1: they were just like I think the consensus was like 514 00:28:07,520 --> 00:28:10,920 Speaker 1: FedEx might lose half of that business, not all of 515 00:28:10,960 --> 00:28:11,600 Speaker 1: that business. 516 00:28:12,960 --> 00:28:15,520 Speaker 2: I mean, I think FedEx set out from the outset 517 00:28:15,600 --> 00:28:18,920 Speaker 2: realizing this is not a sustainable outcome for either of us. 518 00:28:19,080 --> 00:28:21,400 Speaker 2: We need to make a change. We need to improve margins, 519 00:28:21,440 --> 00:28:24,200 Speaker 2: we need to get redundant costs out of the system, 520 00:28:24,560 --> 00:28:26,320 Speaker 2: and so I think they went in with the price 521 00:28:26,560 --> 00:28:30,640 Speaker 2: and probably a package that maybe was not as integrated 522 00:28:30,680 --> 00:28:33,760 Speaker 2: from a ground and express standpoint as what UPS could 523 00:28:33,760 --> 00:28:37,800 Speaker 2: initially offer. But I think that's importantly because what FedEx 524 00:28:37,880 --> 00:28:41,320 Speaker 2: is doing here more importantly even than the post Office contract. 525 00:28:41,560 --> 00:28:45,040 Speaker 2: They are merging their overlapping express and ground operations here 526 00:28:45,040 --> 00:28:49,280 Speaker 2: in the US. It's not happening this year. The financials 527 00:28:49,320 --> 00:28:50,920 Speaker 2: are going to merge. Unfortunately, we're going to lose a 528 00:28:50,960 --> 00:28:53,240 Speaker 2: little bit of disclosure at the company. But in the 529 00:28:53,280 --> 00:28:56,280 Speaker 2: long run, by calendar twenty five, this company's going to 530 00:28:56,400 --> 00:28:59,800 Speaker 2: endeavor to start merging ground and express facilities into one. 531 00:29:00,360 --> 00:29:03,360 Speaker 2: I think the ground delivery drivers will be doing a 532 00:29:03,360 --> 00:29:07,360 Speaker 2: lot more day definite express and ground package deliveries and 533 00:29:07,480 --> 00:29:10,560 Speaker 2: pickups in the afternoon. So it's gonna really transform the 534 00:29:10,600 --> 00:29:13,280 Speaker 2: way the network runs. I think it's gonna give the 535 00:29:13,320 --> 00:29:17,360 Speaker 2: company an opportunity to call probably billions of dollars of 536 00:29:17,360 --> 00:29:21,560 Speaker 2: redundant costs. And I think it's gonna answer the age 537 00:29:21,560 --> 00:29:24,160 Speaker 2: old question because whenever an investor lets at FedEx UPS, 538 00:29:24,200 --> 00:29:27,160 Speaker 2: they say, my goodness, isn't Amazon going to be a 539 00:29:27,200 --> 00:29:30,360 Speaker 2: one turned competitor here? And yeah, UPS can generate a 540 00:29:30,440 --> 00:29:33,120 Speaker 2: double digit margin, FedEx never can. So I'll put a 541 00:29:33,160 --> 00:29:36,560 Speaker 2: slightly higher valuation in the UPS, FedEx will put a 542 00:29:36,680 --> 00:29:39,360 Speaker 2: very low valuation on But I think ultimately there's no 543 00:29:39,480 --> 00:29:43,280 Speaker 2: structural reason why FedEx shouldn't at least be matching the 544 00:29:43,320 --> 00:29:46,320 Speaker 2: profitability of UPS, if not even exceeding it, because once 545 00:29:46,400 --> 00:29:49,920 Speaker 2: they merge these assets hopefully get to a similar service 546 00:29:49,920 --> 00:29:52,760 Speaker 2: product as UPS, They're going to be doing it without 547 00:29:52,800 --> 00:29:56,000 Speaker 2: a union contract. And I'm by no means negative on unions. 548 00:29:56,320 --> 00:29:58,920 Speaker 2: The only thing I'm observing is when you have union 549 00:29:59,000 --> 00:30:02,600 Speaker 2: versus non union trucking competition, which we've seen for a 550 00:30:02,600 --> 00:30:05,560 Speaker 2: couple of decades now between Old Dominion and Yellow and 551 00:30:05,600 --> 00:30:08,400 Speaker 2: we know the outcome of that, it becomes very challenging. 552 00:30:08,440 --> 00:30:11,760 Speaker 2: And FedEx is to match the asset proactivity of UPS, 553 00:30:11,800 --> 00:30:12,960 Speaker 2: but do it without a union. 554 00:30:13,600 --> 00:30:17,600 Speaker 1: Yeah no, I think, you know, watching how FedEx evolves 555 00:30:17,640 --> 00:30:19,040 Speaker 1: over the next couple of years is going to be 556 00:30:19,080 --> 00:30:21,640 Speaker 1: very interesting because you know, as you know, maybe our 557 00:30:21,680 --> 00:30:24,960 Speaker 1: listeners aren't really aware of, is you know, the people 558 00:30:24,960 --> 00:30:30,080 Speaker 1: that deliver your ground package are really not FedEx employees 559 00:30:30,160 --> 00:30:34,560 Speaker 1: or independent contractors. It's a similar model to what Amazon has, 560 00:30:34,600 --> 00:30:38,840 Speaker 1: where those Amazon vans aren't really Amazon employees, they're independent contractors. 561 00:30:39,680 --> 00:30:42,720 Speaker 1: So it will be interesting to see how the independent 562 00:30:42,760 --> 00:30:49,080 Speaker 1: contractors gel with the company employees on the Express side. 563 00:30:49,200 --> 00:30:52,120 Speaker 2: Yeah, Lean, I think you know. Investors were skeptical at 564 00:30:52,120 --> 00:30:55,320 Speaker 2: first when FedEx came out with this announcement about a 565 00:30:55,360 --> 00:30:57,400 Speaker 2: year ago that they are going to be merging the networks, 566 00:30:57,440 --> 00:30:59,920 Speaker 2: and they gave themselves, i want to say, a four 567 00:31:00,080 --> 00:31:04,200 Speaker 2: five year timeframe to find that solution. Some investors thought, oh, 568 00:31:04,200 --> 00:31:06,040 Speaker 2: they're just kicking the can down the road, given it 569 00:31:06,080 --> 00:31:09,600 Speaker 2: lip service, but are they really merging things? But I 570 00:31:09,640 --> 00:31:12,240 Speaker 2: agree you've hit on a really key subject here, which 571 00:31:12,320 --> 00:31:15,960 Speaker 2: is at Express, the delivery drivers in the Express trucks 572 00:31:15,960 --> 00:31:19,520 Speaker 2: are actually employees of FedEx Express. The ground drivers that 573 00:31:19,560 --> 00:31:22,480 Speaker 2: you see going through your neighborhood every day are actually employees, 574 00:31:22,520 --> 00:31:26,240 Speaker 2: most likely of a contractor that has a delivery contract 575 00:31:26,320 --> 00:31:30,760 Speaker 2: with FedEx for that territory. And emerging these two operations 576 00:31:30,800 --> 00:31:34,560 Speaker 2: are going to create some complications because the contractors are 577 00:31:34,560 --> 00:31:37,960 Speaker 2: not your employees, and the employees that the Express division 578 00:31:38,040 --> 00:31:40,520 Speaker 2: are not unionized, and I think FedEx would like to 579 00:31:40,600 --> 00:31:44,000 Speaker 2: keep a direct relationship with their employees. So it's going 580 00:31:44,040 --> 00:31:47,040 Speaker 2: to be I think a very thoughtful path forward where 581 00:31:47,080 --> 00:31:49,840 Speaker 2: you really don't utilize layouts, so it's more about attrition. 582 00:31:50,040 --> 00:31:53,640 Speaker 2: So as we go through merge operations and pick up 583 00:31:53,640 --> 00:31:56,880 Speaker 2: and delivery centers, then we identify I suspect what the 584 00:31:56,880 --> 00:31:59,560 Speaker 2: company will do is identify which pick up and delivery 585 00:31:59,640 --> 00:32:02,800 Speaker 2: roots actually need going forward, and then through things like 586 00:32:02,840 --> 00:32:06,520 Speaker 2: attrition or maybe new opportunities throughout the network, you know, 587 00:32:06,560 --> 00:32:09,480 Speaker 2: you manage head count to a more sustainable level. But 588 00:32:09,600 --> 00:32:11,760 Speaker 2: over a long period of time, I think is their goal? 589 00:32:13,160 --> 00:32:15,560 Speaker 3: Is there one you're more bullish on FedEx or UPS? 590 00:32:16,000 --> 00:32:19,880 Speaker 2: If you can't tell, we're very excited to see FedEx 591 00:32:19,920 --> 00:32:23,520 Speaker 2: emergencies networks. I mean we've been arguing this should have 592 00:32:23,560 --> 00:32:25,760 Speaker 2: been done probably over a decade ago. 593 00:32:26,680 --> 00:32:29,440 Speaker 1: And I remember you on earnings called arguing that with management. 594 00:32:29,960 --> 00:32:32,920 Speaker 2: Well, to be honest, we have the utmost respect for 595 00:32:33,000 --> 00:32:36,160 Speaker 2: Fred Smith, the founder and the prior fifty year CEO 596 00:32:36,200 --> 00:32:38,760 Speaker 2: of the company, and he's still executive chairman, So we 597 00:32:38,840 --> 00:32:42,640 Speaker 2: mean no disrespect to mister Smith. But I think just 598 00:32:42,720 --> 00:32:45,640 Speaker 2: given where the competition is and what UPS has been shown, 599 00:32:45,680 --> 00:32:48,640 Speaker 2: what you can do with an integrated network. It makes 600 00:32:48,680 --> 00:32:50,440 Speaker 2: a lot of sense to look at, you know, the 601 00:32:50,480 --> 00:32:54,120 Speaker 2: redundant capital and the redundant op X that exists between 602 00:32:54,160 --> 00:32:56,880 Speaker 2: these networks, and we've penciled it out. I mean, you know, 603 00:32:56,880 --> 00:32:59,920 Speaker 2: we're from the outside looking in, but with the public day, 604 00:33:00,760 --> 00:33:03,720 Speaker 2: best as we can tell, there's probably at least six 605 00:33:03,760 --> 00:33:06,520 Speaker 2: to eight billion dollars of redundant costs here that if 606 00:33:06,560 --> 00:33:10,120 Speaker 2: done right, we think ultimately, you know, again through attrition 607 00:33:10,240 --> 00:33:12,520 Speaker 2: and through a long process, you can probably get out 608 00:33:12,520 --> 00:33:16,479 Speaker 2: of the fedexp and L without significantly or impairing your 609 00:33:16,520 --> 00:33:18,160 Speaker 2: revenue generating potential. 610 00:33:19,240 --> 00:33:24,400 Speaker 1: So UPS had their analyst day last week. I had 611 00:33:24,400 --> 00:33:26,440 Speaker 1: to listen to it virtually because I was on vacation. 612 00:33:26,800 --> 00:33:29,080 Speaker 1: They always seemed to schedule these things when I on vacation. 613 00:33:30,920 --> 00:33:34,440 Speaker 1: The market didn't seem to love it, even though the 614 00:33:34,480 --> 00:33:37,440 Speaker 1: outlook was a lot more bullish than what the market had. 615 00:33:37,520 --> 00:33:39,600 Speaker 3: What did What did you make up? 616 00:33:39,920 --> 00:33:42,040 Speaker 1: I'm assuming you went down there, What did you make 617 00:33:42,120 --> 00:33:44,120 Speaker 1: of their analyst day? 618 00:33:44,640 --> 00:33:47,400 Speaker 2: I think if you look at the stock, it obviously 619 00:33:47,400 --> 00:33:49,800 Speaker 2: had a down day when they put out their three 620 00:33:49,920 --> 00:33:52,120 Speaker 2: year targets at their analyst meeting, And I think, what 621 00:33:52,960 --> 00:33:56,760 Speaker 2: the feedback we got from most investors that management's just 622 00:33:56,800 --> 00:34:03,760 Speaker 2: relying on a pretty aggressive time forecast that's been difficult 623 00:34:03,760 --> 00:34:06,760 Speaker 2: for them to achieve outside of the boom and packages 624 00:34:06,760 --> 00:34:10,799 Speaker 2: that we saw during the pandemic, and the reliance on 625 00:34:10,840 --> 00:34:13,120 Speaker 2: it is that, hey, the market growth rate is going 626 00:34:13,160 --> 00:34:16,400 Speaker 2: to step up. Therefore, us being a large share of 627 00:34:16,400 --> 00:34:19,960 Speaker 2: the market, we will see incremental packages and by the way, 628 00:34:19,960 --> 00:34:23,920 Speaker 2: we're going to see increased yields on those packages. But 629 00:34:24,000 --> 00:34:27,279 Speaker 2: that was preceded by a slide that their management team 630 00:34:27,360 --> 00:34:30,400 Speaker 2: showed that because of Amazon, and Amazon has stood up 631 00:34:30,400 --> 00:34:33,920 Speaker 2: a delivery network that probably rivals the size of scope 632 00:34:34,280 --> 00:34:38,000 Speaker 2: within UPS's network that said, oh, by the way, this cycle, 633 00:34:38,040 --> 00:34:40,279 Speaker 2: we're going to have more industry capacity than we have 634 00:34:40,400 --> 00:34:43,080 Speaker 2: in the past. But don't worry. We're going to achieve 635 00:34:43,200 --> 00:34:46,120 Speaker 2: a higher top line growth rate the next three years, 636 00:34:46,160 --> 00:34:48,680 Speaker 2: and it's going to be a combination of acceleration in 637 00:34:48,760 --> 00:34:52,160 Speaker 2: volumes and yields. So I think it was the combination 638 00:34:52,280 --> 00:34:55,960 Speaker 2: of those two things and the comments about industry over 639 00:34:56,040 --> 00:35:00,680 Speaker 2: capacity I think got people maybe a little bit disappointed, 640 00:35:00,840 --> 00:35:03,759 Speaker 2: especially going into the meeting. I think a few of 641 00:35:03,760 --> 00:35:06,560 Speaker 2: my comparers maybe have upgraded UPS or had mentioned this 642 00:35:06,600 --> 00:35:10,760 Speaker 2: as a pretty positive potential outcome for the company. UPS 643 00:35:10,880 --> 00:35:13,160 Speaker 2: right now is dealing with the first year of their 644 00:35:13,200 --> 00:35:16,680 Speaker 2: new labor agreement post pandemic, which went into place I 645 00:35:16,719 --> 00:35:18,959 Speaker 2: want to say, August versus July first of last year, 646 00:35:19,400 --> 00:35:21,560 Speaker 2: and it's all front end loaded, just like it was 647 00:35:21,600 --> 00:35:24,279 Speaker 2: for the railroad. So margins are down right now. That's 648 00:35:24,280 --> 00:35:27,480 Speaker 2: why the stock really underperformed late last year. As you 649 00:35:27,560 --> 00:35:30,759 Speaker 2: get out from under those first twelve months of inflation costs, 650 00:35:30,920 --> 00:35:33,520 Speaker 2: inflation will come way down and I think you know 651 00:35:33,560 --> 00:35:35,839 Speaker 2: the fact that we saw the post office contract now 652 00:35:35,920 --> 00:35:38,480 Speaker 2: go to UPS, that's going to be again probably over 653 00:35:38,520 --> 00:35:40,359 Speaker 2: a billion dollars in revenue. I think we'll give more 654 00:35:40,400 --> 00:35:43,120 Speaker 2: guidance on the next earnings call from UPS on this, 655 00:35:44,040 --> 00:35:46,560 Speaker 2: but that's probably one of the ways that they're looking 656 00:35:46,600 --> 00:35:50,560 Speaker 2: to drive a better volume Kagher looking forward. But for 657 00:35:50,600 --> 00:35:53,160 Speaker 2: me Lee, this is all relative. We have to be 658 00:35:53,200 --> 00:35:56,440 Speaker 2: relative in our world, and I mean no disrespect to UPS, 659 00:35:56,440 --> 00:35:59,920 Speaker 2: but incrementally, I just really like the margin to opportunity 660 00:36:00,160 --> 00:36:03,640 Speaker 2: FedEx and what they're doing from a cost perspective and 661 00:36:03,680 --> 00:36:06,160 Speaker 2: structurally where that one could be looking in the next 662 00:36:06,160 --> 00:36:09,799 Speaker 2: two to three years relative to what could be you know, 663 00:36:09,960 --> 00:36:12,600 Speaker 2: an okay top line outcome for UPS, but just keep 664 00:36:12,600 --> 00:36:16,480 Speaker 2: in mind Amazon is their largest customer. It's about twelve 665 00:36:16,520 --> 00:36:19,200 Speaker 2: percent of total revenue, I believe last year, and if 666 00:36:19,200 --> 00:36:21,719 Speaker 2: you extrapolate that to their domestic network, it's closer to 667 00:36:21,760 --> 00:36:24,800 Speaker 2: like twenty percent. So it's a very large customer of 668 00:36:24,840 --> 00:36:27,920 Speaker 2: their network. And I know, incrementally they said the Amazon 669 00:36:28,120 --> 00:36:30,520 Speaker 2: business which had been moving back to Amazon on their 670 00:36:30,560 --> 00:36:33,080 Speaker 2: own network, that's going to stop or take a pause 671 00:36:33,120 --> 00:36:35,440 Speaker 2: for a couple of years. But you run this longer 672 00:36:35,520 --> 00:36:38,279 Speaker 2: term risk that hey, one day maybe Amazon wants to 673 00:36:38,320 --> 00:36:41,280 Speaker 2: insource even more of that from UPS. 674 00:36:41,440 --> 00:36:45,040 Speaker 1: Right, So we're we're bumping up on time here, and 675 00:36:45,080 --> 00:36:47,240 Speaker 1: I want to hear what your thoughts on the trucking 676 00:36:47,280 --> 00:36:51,600 Speaker 1: market before we have to say it I do. What's 677 00:36:51,640 --> 00:36:54,000 Speaker 1: your favorite name going into earnings? Is it something on 678 00:36:54,040 --> 00:36:57,560 Speaker 1: the truckload side, lesson truckload side? 679 00:36:57,719 --> 00:37:00,880 Speaker 2: You know again, i'd come back to Canadian PACI and 680 00:37:00,960 --> 00:37:05,000 Speaker 2: then on for large cap rails and on the smidcap side, 681 00:37:05,440 --> 00:37:08,399 Speaker 2: we'd probably say it's between XPO ORSAIAH on the less 682 00:37:08,440 --> 00:37:12,520 Speaker 2: than truckload sector. And there's just such a dichotomy right 683 00:37:12,560 --> 00:37:18,560 Speaker 2: now in trucking. We recently unfortunately downgraded JB. Hunt, H, Robinson, 684 00:37:18,600 --> 00:37:23,360 Speaker 2: and Warner earlier this week, and really on the premise 685 00:37:23,480 --> 00:37:27,920 Speaker 2: that even though we're seeing recovery in transportation volumes, and 686 00:37:27,920 --> 00:37:30,480 Speaker 2: again we talked about how retailers are getting back to 687 00:37:30,600 --> 00:37:33,600 Speaker 2: more normalization of their supply chain, which is a good 688 00:37:33,600 --> 00:37:37,560 Speaker 2: thing for all these companies. Unfortunately, we just added so 689 00:37:37,760 --> 00:37:41,360 Speaker 2: many Class eight trucks to the fleet during the pandemic 690 00:37:41,440 --> 00:37:43,200 Speaker 2: in the last couple of years, and they just haven't 691 00:37:43,280 --> 00:37:47,000 Speaker 2: exited like we would see in a normal freight recession, 692 00:37:47,080 --> 00:37:50,799 Speaker 2: and so it's just leading to this prolonged period of 693 00:37:50,920 --> 00:37:55,200 Speaker 2: downturn in quote unquote spot rates for truckload, and truckload 694 00:37:55,560 --> 00:37:57,759 Speaker 2: is really what makes the whole supply chain go around here. 695 00:37:57,800 --> 00:38:01,040 Speaker 2: You know, the fifty three foot trailers that Walmart, Amazon, 696 00:38:01,200 --> 00:38:06,120 Speaker 2: Costco target, Everyone dispatches in their networks to move from 697 00:38:06,120 --> 00:38:10,919 Speaker 2: distribution facilities and from customers. So it's so important where 698 00:38:10,960 --> 00:38:13,759 Speaker 2: truckload rates are and that's what drives incremental margins for 699 00:38:13,800 --> 00:38:16,880 Speaker 2: a lot of these companies. And unfortunately, even though we 700 00:38:16,920 --> 00:38:19,279 Speaker 2: see a path to upside for railroads this year, and 701 00:38:19,400 --> 00:38:21,400 Speaker 2: like a FedEx, I think it's going to be that 702 00:38:21,560 --> 00:38:24,160 Speaker 2: much more challenged as we push out the rate recovery 703 00:38:24,560 --> 00:38:27,040 Speaker 2: on a lot of supply and trucking. But let's not 704 00:38:27,080 --> 00:38:29,799 Speaker 2: confuse that with less than truckload. Lesson truckload is a 705 00:38:29,840 --> 00:38:34,080 Speaker 2: networked business. It's moving palettes from A to B with 706 00:38:34,200 --> 00:38:37,680 Speaker 2: companies like FedEx Freight or Old Dominion or Saia XPO. 707 00:38:38,200 --> 00:38:41,000 Speaker 2: We really like SYA and XPO. And part of that 708 00:38:41,120 --> 00:38:44,560 Speaker 2: reason is because, like I mentioned earlier, you know, Yellow, 709 00:38:44,600 --> 00:38:47,680 Speaker 2: which was one of the last large unionized LTL carriers 710 00:38:47,680 --> 00:38:50,520 Speaker 2: in the US, unfortunately went out of business last summer 711 00:38:51,320 --> 00:38:53,759 Speaker 2: in that volume and they were about an eight or 712 00:38:53,840 --> 00:38:57,680 Speaker 2: nine percent market share player and LTL effectively shut down overnight. 713 00:38:58,080 --> 00:39:01,000 Speaker 2: And now you've seen that volume transition into the remaining 714 00:39:01,160 --> 00:39:04,680 Speaker 2: non union LTL carriers. So even though industry volumes are 715 00:39:04,719 --> 00:39:08,360 Speaker 2: still negative, it's been a great outcome for the individual carriers. 716 00:39:08,360 --> 00:39:11,279 Speaker 2: And we've seen pricing really buck the trend of what 717 00:39:11,320 --> 00:39:14,000 Speaker 2: we've seen in truckload. So I think for an XPO 718 00:39:14,160 --> 00:39:16,840 Speaker 2: or Sayah that there's a lot of upside on margins. 719 00:39:17,200 --> 00:39:22,120 Speaker 2: Old Dominion running pretty high operating profitability, so that there's 720 00:39:22,160 --> 00:39:25,239 Speaker 2: a lot of room for pricing upside for a carrier. Again, 721 00:39:25,320 --> 00:39:27,200 Speaker 2: like XPR Siah. 722 00:39:27,360 --> 00:39:27,560 Speaker 3: Yeah. 723 00:39:27,640 --> 00:39:30,400 Speaker 1: Yeah, so Yellow did shut overnight, but it was that 724 00:39:30,440 --> 00:39:32,320 Speaker 1: bankruptcy was like twenty years in the making. 725 00:39:32,760 --> 00:39:35,680 Speaker 2: I mean, I think three or four government bailouts and 726 00:39:36,960 --> 00:39:39,440 Speaker 2: it was a long drawn out process, and unfortunately, I 727 00:39:39,480 --> 00:39:42,359 Speaker 2: feel bad for the employees of Yellow for sure, but 728 00:39:42,480 --> 00:39:44,600 Speaker 2: I think this is just, you know, again, a reallocation 729 00:39:44,760 --> 00:39:48,920 Speaker 2: to more efficient networks, and I think, if anything, it 730 00:39:49,040 --> 00:39:51,640 Speaker 2: just makes the other LTL carriers that much more sustainable 731 00:39:51,680 --> 00:39:52,280 Speaker 2: looking forward. 732 00:39:52,960 --> 00:39:55,280 Speaker 1: So there is there a name in your coverage universe 733 00:39:55,480 --> 00:39:58,520 Speaker 1: going to first quarter where you think there's the most 734 00:39:59,000 --> 00:40:01,960 Speaker 1: risk on the downside in terms of missing expectations. 735 00:40:02,640 --> 00:40:04,880 Speaker 2: The first one would just be C. H. Robinson, you know, 736 00:40:04,880 --> 00:40:09,359 Speaker 2: on the truck brokerage side, and not that expectations are 737 00:40:09,400 --> 00:40:13,400 Speaker 2: super high, because I think folks have realized we've definitely 738 00:40:13,480 --> 00:40:17,680 Speaker 2: reset off of pandemic highs. And for those who don't know, S. H. 739 00:40:17,760 --> 00:40:21,839 Speaker 2: Robinson is North America's largest truckload broker, so they'll go 740 00:40:21,880 --> 00:40:24,080 Speaker 2: out and find the beneficial cargo owners and then match 741 00:40:24,160 --> 00:40:26,400 Speaker 2: them up with small truckers and try to make a 742 00:40:26,440 --> 00:40:30,120 Speaker 2: spread in between the business it has been challenged now 743 00:40:30,160 --> 00:40:32,399 Speaker 2: for the better part of a year, but we think 744 00:40:32,480 --> 00:40:35,640 Speaker 2: just given the prolonged nature of how much supply there 745 00:40:35,680 --> 00:40:38,200 Speaker 2: is and how low rates are going, margins are going 746 00:40:38,280 --> 00:40:41,200 Speaker 2: to get squeezed even further, and the weather disruptions. I 747 00:40:41,239 --> 00:40:43,920 Speaker 2: believe that we had January only serve I think to 748 00:40:43,960 --> 00:40:46,840 Speaker 2: squeeze brokerage earnings even more. I mean that's something that 749 00:40:46,840 --> 00:40:50,560 Speaker 2: we've heard across our universe as we've done our update 750 00:40:50,640 --> 00:40:53,800 Speaker 2: calls this quarter. So I'm just looking for core earnings 751 00:40:53,840 --> 00:40:56,120 Speaker 2: results to come in even weaker at H Robinson. And 752 00:40:56,160 --> 00:40:58,560 Speaker 2: they do have a new CEO, Dave Boseman, who came 753 00:40:58,560 --> 00:41:02,640 Speaker 2: from Ford and on logistics, so I do like his 754 00:41:02,680 --> 00:41:06,439 Speaker 2: strategy of cutting costs. But unfortunately, I think that may 755 00:41:06,600 --> 00:41:09,279 Speaker 2: have you know, got some folks inside SAT Robinson maybe 756 00:41:09,280 --> 00:41:11,160 Speaker 2: a little bit worked up. I think we've seen people 757 00:41:11,760 --> 00:41:13,680 Speaker 2: go to other firms, so we're a little bit concerned 758 00:41:13,719 --> 00:41:16,719 Speaker 2: that they have been losing share to more growth oriented 759 00:41:16,760 --> 00:41:19,120 Speaker 2: brokers over the last few years, and as they go 760 00:41:19,200 --> 00:41:22,080 Speaker 2: on this cost cutting endeavor, we're worried that maybe even 761 00:41:22,160 --> 00:41:26,840 Speaker 2: more talent leaves the companies. So look out for potentially 762 00:41:26,920 --> 00:41:29,600 Speaker 2: some negative revisions at SA Robinson. And then we'd also 763 00:41:29,719 --> 00:41:33,120 Speaker 2: call out JB. Hunt. You know, they're the largest intermodial 764 00:41:33,200 --> 00:41:36,600 Speaker 2: provider in the US. They work with an evergreen contract 765 00:41:36,640 --> 00:41:39,280 Speaker 2: with Burlington Northern, and they work very closely with Norfolk 766 00:41:39,280 --> 00:41:44,120 Speaker 2: Southern and the Eastern US as their rail carriers. But unfortunately, 767 00:41:44,200 --> 00:41:47,080 Speaker 2: because of how low the trucking rates have gone, we're 768 00:41:47,120 --> 00:41:49,640 Speaker 2: hearing from them that they're intermodal bids. They thought they 769 00:41:49,640 --> 00:41:51,160 Speaker 2: were going to get some volume, the share or some 770 00:41:51,280 --> 00:41:54,919 Speaker 2: incremental growth, but they're going to competitors at much lower rates. 771 00:41:54,960 --> 00:41:58,240 Speaker 2: So I think, you know, JB. Hunt doesn't provide any guidance, 772 00:41:58,280 --> 00:42:00,799 Speaker 2: and unfortunately we could be looking at a pretty big 773 00:42:00,880 --> 00:42:04,520 Speaker 2: dislocation to where the Street is modeling margins and earnings 774 00:42:04,560 --> 00:42:06,160 Speaker 2: in their core intermodal business issue. 775 00:42:08,080 --> 00:42:11,319 Speaker 3: All right, great, and just you know, real quick kind 776 00:42:11,360 --> 00:42:12,359 Speaker 3: of wrap things up. 777 00:42:12,920 --> 00:42:17,040 Speaker 1: So you know, I know you had like an aviation 778 00:42:17,320 --> 00:42:20,560 Speaker 1: kind of bent in your college career, like when you 779 00:42:20,760 --> 00:42:22,600 Speaker 1: got into when you moved made the. 780 00:42:22,640 --> 00:42:23,480 Speaker 3: Move to Wall Street. 781 00:42:23,560 --> 00:42:26,640 Speaker 1: Did you just automatically just want to be in transports 782 00:42:26,719 --> 00:42:28,160 Speaker 1: or that's kind of like where you happened. 783 00:42:28,239 --> 00:42:29,799 Speaker 3: It just was a coincidence. 784 00:42:30,400 --> 00:42:32,840 Speaker 2: Oh gosh, I came in the door at this office, 785 00:42:32,880 --> 00:42:35,160 Speaker 2: but when it was green and called the Lehman Brothers 786 00:42:35,600 --> 00:42:38,000 Speaker 2: and I wanted to join an airline research team, but 787 00:42:38,040 --> 00:42:40,399 Speaker 2: then I very quickly spent a lot of time going 788 00:42:40,440 --> 00:42:44,040 Speaker 2: through bankruptcy Reorg files and realized I'd rather cover these 789 00:42:44,120 --> 00:42:46,919 Speaker 2: things called railroads and trucking firms, which have something called 790 00:42:47,120 --> 00:42:50,520 Speaker 2: earnings and free cash flow and can do traditional valuation 791 00:42:50,680 --> 00:42:54,239 Speaker 2: work on. But for better or words, I've never really 792 00:42:54,280 --> 00:42:56,600 Speaker 2: shook the airline sector either, and it's near and dear 793 00:42:56,680 --> 00:42:58,320 Speaker 2: to my heart. I know we didn't really get to 794 00:42:58,320 --> 00:43:00,760 Speaker 2: talk about airlines, but for for any anyone who invests 795 00:43:00,800 --> 00:43:03,960 Speaker 2: in equities, just be very careful because airlines are very volatile. 796 00:43:04,600 --> 00:43:07,520 Speaker 2: But you do have stocks like Delta United trading at 797 00:43:07,680 --> 00:43:10,680 Speaker 2: single digit pees. I think United right now is like 798 00:43:10,719 --> 00:43:13,520 Speaker 2: a three and a half times enterprise valuation to Evada, 799 00:43:14,160 --> 00:43:15,440 Speaker 2: so you can think of that as like a three 800 00:43:15,520 --> 00:43:19,240 Speaker 2: to four year payback period in the equity. It's pretty 801 00:43:19,280 --> 00:43:21,879 Speaker 2: amazing how low those valuations are for what we think 802 00:43:22,160 --> 00:43:26,720 Speaker 2: are actually real long term businesses. It's unfortunate what happened 803 00:43:26,800 --> 00:43:29,560 Speaker 2: during the pandemic. I hope, you know, knock on wood, 804 00:43:29,600 --> 00:43:31,760 Speaker 2: that we never see something like that again in our lifetime. 805 00:43:32,680 --> 00:43:35,400 Speaker 2: But you know, going forward, I think even a normal 806 00:43:35,480 --> 00:43:38,560 Speaker 2: recession is very manageable for some of these airlines that 807 00:43:38,680 --> 00:43:41,680 Speaker 2: have I would argue very deep modes, especially for like 808 00:43:41,760 --> 00:43:45,080 Speaker 2: a Delta United. So definitely something worthwhile if you have 809 00:43:45,200 --> 00:43:48,320 Speaker 2: a very long term horizon in your equity portfolio and 810 00:43:48,360 --> 00:43:49,640 Speaker 2: can stomach some volatility. 811 00:43:51,040 --> 00:43:53,239 Speaker 1: All right, great man, I really appreciate you coming on 812 00:43:53,560 --> 00:43:54,080 Speaker 1: the podcast. 813 00:43:54,160 --> 00:43:54,399 Speaker 3: Brandon. 814 00:43:54,800 --> 00:43:56,880 Speaker 1: We could probably talk for another three hours, but my 815 00:43:57,960 --> 00:44:00,400 Speaker 1: editors would get pretty annoyed with me if if the 816 00:44:00,440 --> 00:44:04,320 Speaker 1: podcast went that long, so I just again, thanks for 817 00:44:04,360 --> 00:44:04,719 Speaker 1: your time. 818 00:44:04,880 --> 00:44:07,080 Speaker 2: All right, Thanks Lee, We really appreciate it coming on. 819 00:44:07,600 --> 00:44:09,640 Speaker 3: All right, great, and thanks for tuning in. 820 00:44:09,760 --> 00:44:12,240 Speaker 1: If you liked the episode, please subscribe and leave a review. 821 00:44:12,600 --> 00:44:15,840 Speaker 1: We've lined up a great number of guests for the podcast, 822 00:44:15,920 --> 00:44:20,280 Speaker 1: so check back to hear conversations with C suite executive, shippers, regulators, 823 00:44:20,320 --> 00:44:23,600 Speaker 1: and decision makers within the freight transportation markets. Also, if 824 00:44:23,600 --> 00:44:25,520 Speaker 1: you have an idea for a future episode, hit me 825 00:44:25,600 --> 00:44:28,600 Speaker 1: up on the Bloomberg terminal or on Twitter at logistics Lee. 826 00:44:28,840 --> 00:44:29,920 Speaker 3: Thanks everyone, Take care,