The Blanchard Company--Week in Review 7/10/99

The Railroad Week in Review:
Week Ending July 10, 1999

On the Conrail merger front, both CSX and Norfolk Southern report steady progress, and, if you look at the yard dwell times posted on the websites, there have been some major improvements. However, problem spots are still moving around so neither system reports much change overall. In the Shared Areas both Oak Island and Pavonia (Camden) were greatly improved.

NS reports that the number of cars on line is still high. It should be noted however that the number includes many empty auto/parts and coal cars temporarily stored on line, and that the stock of cars is "fresher," that is, fewer ping pong cars and others tendered in the early days of the integration. NS says speeds are up, trains held for power and crews are down, and yards have been cleaned up, but there are still information technology problems interfacing with the old Conrail car management system, and too many cars that have to be sent to an additional yard and causing congestion.

CSX says it had a good weekend, but service is still not satisfactory. Although its crew availability was lower than the benchmark 80 percent for the weekend, the situation appears to be on the mend. CSX has received substantial traffic from western carriers, and its goal now is to move the empties back west. CSX also reports no terminals congested.

Getting behind the numbers is another thing, and it tends to the generally disdained "anecdotal" evidence. If Allentown sends a "mine run" of cars to an outlying yard for classification and brings' em back for putting in trains, does that drop the dwell time for the cars in question? One customer reports loads bouncing back and forth between Harrisburg and Conway. Obviously those cars go off the clock at each end to help dwell time inch down. And in upstate NY another shipper can look out the window and see his cars sitting in Syracuse for three and four days. Obvoulsly these cars aren't in Selkirk's count. (For what it's worth, the Pennsylvania ping pong cars were bound for a point mid-state. A shortline snagged them mid-route, making delivery a few hours later.)

To be sure, much of the problem remains data-related. A reader writes, "I am curious if anyone else has been experiencing problems through CSXT and NS' use of the old Conrail TRIMS System that doled out the local switching work and so on. We have experienced repeated delays due to a formatting problem between the [origin road] system and TRIMS that causes about half the information on [Form] 417 manifests to be lost in transmission."

When this happens my correspondent says the origin road thinks they have delivered the cars and the Conrail successors say they "cannot take them because of incomplete information." Some of my client shortlines have remarked on TRIMS generally, though not on this problem specifically. It would be a great help to know what opportunities the readership sees to improve data links among originating roads, NS/CSX, and their lines respectively. Responses will be posted in this forum next week.

Kansas City Southern has placed a $100 mm order for 50 of GE's most advanced AC locomotives with delivery this November and December of this year. The order provides for service expertise and performance guarantees for the 18-year life of the locomotives. To maintain the new power GE will build a new maintenance facility on KCS property adjacent to its KC (MO) rail yard. KCS mechanical employees, in consultation with GE technicians, will perform all maintenance work.

The new power will be Erie-built and each unit will deliver 4,400 horsepower. The AC-traction motors are to be mounted on high-adhesion steerable trucks. The efficiencies are such that three of the new AC4400 locomotives can do the work of five 3000 horsepower DC units. The new locomotives also feature dynamic braking systems. By using the traction motors to control speed, the braking systems help reduce push-and-pull forces on the train contributing to safer handling and smooth freight movement. Other features of the units include high fuel efficiency and lower emissions.

Genesee & Wyoming reports that its Mexican subsidiary, Compania de Ferrocarriles de Chiapas-Mayab, SA de CV ("CFCM") has been awarded the thousand-mile Chiapas-Mayab railway concession by the state-owned rail company Ferronales. CFCM's bid was for approximately $US15 mm. In addition CFCM has committed to purchase locomotives, freight cars, and other assets used on the lines, and to complete significant track rehabilitation on one of the lines. The transaction is expected to close approximately August 17, 1999 with CFCM starting operations on September 1, 1999. Principal commodities include cement, silica sand and various agricultural products.

Wisconsin Central's Ed Burkhardt will resign as Chairman, President and CEO effective August 31. Burkhardt was one of the Company's founders, and has served as its President and CEO for the past 12 years. During his tenure, the Company grew from a start-up regional railroad in the upper Midwest to a global transportation holding company with interests in the UK, Canada, New Zealand and Australia. Tom Power will become President and CEO.

This is entirely fitting as Power was also one of the founders of the Company and has served as its Executive Vice President and Chief Financial Officer for the past 12 years. Mr. Power is a member of the Board of Directors of English Welsh & Scottish Railway Holdings Limited, Tranz Rail Holdings Limited, and Australian Transport Network Limited. Meanwhile, Reilly McCarren will be promoted to President and CEO of WC's North American operating subsidiaries, succeeding Mr. Burkhardt in those roles.

RailAmerica has received the approval of the Ministry of Industry under the Investment Canada Act for its offer to purchase all the issued and outstanding common shares, and associated rights, of RaiLink Ltd. The offer was made through RL Acquisition Corp., a wholly owned RailAmerica subsidiary on May 28, 1999 in accordance with an acquisition agreement between RaiLink Ltd. and RailAmerica, Inc. Under the offer, RL Acquisition Corp. is offering $C8.75 for each RaiLink share. The board of directors of RaiLink has unanimously recommended that RaiLink's shareholders accept the offer. HSBC Securities, financial advisor to RaiLink, has delivered an opinion that the offer price of $C8.75 is fair, from a financial point of view, to RaiLink shareholders.

Last week ABC Rail was featured here as one of the potentially more interesting plays in the railroad vendor field. We wrote, "The Street estimate for FY 2000 (July) is $1.64, up 160% from this year's $0.63. The long-term anticipated growth rate is 15%. That's 500 basis points ahead of the best of the class 1s." To begin, the merger with NACO was finalized in Feb 1999, so we're looking at pro formas of the combined newly named ABC-NACO.

Pro forma YTY sales for the period ending 4/30 were up 10.1% while gross margins decreased to 13.5% from 14.1%. Net income after merger costs fell to a $6.2 mm loss from a positive $15.1 mm a year ago. (For the quarter ABCR earned $2.4 mm before merger costs.) Margins are thin, decreasing to minus 1.2% from a plus 3.3% YTY. Diluted shares decreased 2.3% YTY, so that's a plus. The pro forma balance sheet shows $221 mm in LTD against $82mm equity, making this is a pretty well leveraged outfit. The current ratio is 1.5, so it's got the money to pay its bills. However interest expense for 9 months was $12.4 mm, up 32% from the previous period.

That being said, the six brokerage houses following ABCR give it a BUY by a 2-to-1 margin citing the strong earnings growth noted above. In its statement accompanying the quarterly results the company said it expects to realize $30 mm in merger-related savings in the present FY. A broader context may be garnered from the S&P industry report which cites a neutral outlook for the rails near term and improving longer term as the railroads achieve greater efficiencies through technology. Smarter, more efficient vendors are a major part of that picture.

--Roy Blanchard

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