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Basch Report
Jax Daily Record Monday, Jan. 22, 201806:30 AM EST

Foote sees support at CSX despite job cuts

Railroad eliminated 4,700 positions in 2017 with another 2,000 expected this year.
by: Mark Basch Contributing Writer

More job cuts are coming at CSX Corp. this year, but new CEO James Foote says employees are supporting management’s efforts to reform the Jacksonville-based railroad.

CSX reduced staff by about 3,000 last year and during last week’s quarterly conference call, Foote said when paid consultants are added in, the total number of job cuts was about 4,700.

Foote projected an additional 2,000 jobs will be lost this year through attrition and the elimination of contractor positions.

However, in response to an analyst’s question about morale among the rank-and-file employees, Foote said it’s good.

“The feedback that I’ve gotten from the unsolicited emails from some employees all over the network is that they wanted to let me know they support me and they’re welcoming me to the company, whether it’s mechanical people in Pennsylvania to just people in the hallways here in the headquarters office,” he said.

Previous CEO Hunter Harrison said at a November investor conference that “I got my feelings hurt a little bit” because there was “no red carpet” to welcome him when he joined CSX.

Foote said CSX’s workforce, spread through much of the eastern U.S., consists of “great railroaders” and “hard workers” who are looking for guidance.

“Everybody in life wants to be a success and this model, the scheduled railroad model, is the way to turn CSX around and make it, as I keep telling everyone, the best-run railroad in North America,” he said.

“I have a high degree of confidence that the people here are bought in to what it is we’re trying to accomplish.”

Precision scheduled railroading is an operating model implemented by Harrison, who joined CSX as chief executive officer in March 2017 but died in December.

Foote, who Harrison brought in as chief operating officer in late October, succeeded Harrison as CEO and pledged to continue his operating plan.

Although he wasn’t around at the beginning of Harrison’s tenure, Foote understands that his predecessor ruffled feathers with his rapid changes to operations.

“It wasn’t that long ago there was a lot of chaos going on around here,” Foote said.

“I can only imagine the pace of change and how chaotic that was for the team here. Since that point in time, everybody has been focused on what it is that needs to be accomplished.”

CSX says wait until March on forecasts

Foote said the expected 2,000 job cuts this year may include about 1,400 employees, largely through attrition. But he told analysts to wait until CSX’s upcoming investor conference March 1 for more details of the mix of employee and contractor cuts this year.

That was a recurring theme of Foote’s first conference call as CEO. He said the company is waiting for the investor meeting in New York before providing more financial details on the company’s outlook.

That left analysts and investors guessing.

“Tonight’s call offered something for both bulls (margin upside, capex downside) and bears (less detailed disclosures, no hard guidance for 2018 margins or EPS), and we don’t foresee a shift in sentiment before CSX reveals their mid-term plan at the March 1 investor day,” Susquehanna Financial analyst Bascome Majors said in a research note.

The only forecast Foote made about revenue was that it will be “up slightly” in 2018.

“CSX got some pushback during the call as slight top line growth along with what is generally viewed by the market as an upward trend in core price, and perhaps a point of growth from fuel surcharges, could imply 2018 volumes that are down,” Credit Suisse analyst Allison Landry said in her research note.

Foote indicated service disruptions at CSX as it implemented its new operating plan last year has driven some freight customers away, Landry said.

“CSX is already starting to see some business trickle back and as the service product continues to improve, the company expects to be successful in growing both its intermodal and merchandise franchises — although this may take until the second half of 2018 to really begin to materialize,” she said.

Analysts continue to look at trends in CSX’s operating ratio, which is operating expenses divided by revenue. The ratio, which fell from 67 percent in 2016 to 64.8 percent last year, is an indicator of the company’s efficiency as it cuts costs.

Foote said he expects the ratio to continue falling for the next three years, but he again did not get more specific.

“We sense that CSX started 2018 with significant momentum on the operating improvement side,” BMO Capital Markets analyst Fadi Chamoun said in his research note.

“Management is expected to unveil medium-term financial targets on March 1, which we expect will target a low 60 percent operating ratio or better and potential EPS in excess of $4/share (versus $2.30 in 2017) by 2020,” he said.

Another Fidelity-related spinoff

The wheels keep spinning at Fidelity National Financial Inc. and companies affiliated with it.

Or, we should say, the spinoffs keep spinning.

Cannae Holdings Inc. last week announced a planned initial public offering of Ceridian HCM Holding Inc. This came two months after title insurance company Fidelity spun off investment subsidiary Cannae as an independent public company.

Ceridian is a human resources technology company headquartered in Minneapolis. Fidelity was the lead investor of a group that acquired Ceridian in 2007, and Cannae now owns 33 percent of the company.

Cannae continues to be run by top executives of Jacksonville-based Fidelity, but the investment company’s headquarters is in Las Vegas, home of Fidelity Chairman Bill Foley.

Cannae said Ceridian filed a registration statement for the IPO confidentially with the Securities and Exchange Commission. The filing was not available in the SEC database last week.

Another Fidelity-connected IPO

Speaking of Fidelity-connected spinoffs, an Atlanta-based company called Cardlytics Inc. also filed for an IPO.

Cardlytics is an analytics company that collects data from financial institutions on consumer spending.

The connection to Fidelity National Financial is that Fidelity National Information Services Inc., or FIS, owns more than 5 percent of Cardlytics stock before the IPO. The SEC filing does not specify FIS’ exact stake.

Jacksonville-based bank technology company FIS was spun off from Fidelity National Financial in 2006.

SPAR Group Inc. buys majority stake in Resource Plus

SPAR Group Inc. last week said it acquired a majority stake in Resource Plus Inc., a Jacksonville-based supplier of professional fixture installation and product merchandising services.

Resource Plus will operate as a subsidiary of SPAR, with CEO Richard Justus continuing to run the business.

SPAR is a publicly traded company based in White Plains, New York, which provides merchandising and marketing services. The company reported revenue of $131 million in the first nine months of last year.

“The skills, expertise and services added by Resource Plus align well with the evolving needs of the retail landscape, particularly those retailers that are adding new concepts and formats to revitalize the overall shopper experience,” SPAR Chief Executive Chris Oliver said in a news release.

SPAR said in an SEC filing it acquired 51 percent of the company by paying $3 million to Resource Plus founder Joseph Paulk and $150,000 to Justus.

Analyst upgrades to ‘buy’ Group Inc.’s stock rose just 3 percent last year, lagging well behind other internet stocks.

But SunTrust Robinson Humphrey analyst Naved Khan expects better things in 2018. He upgraded the Jacksonville-based provider of website services for businesses from “hold” to “buy.”

In a research report, Khan said should benefit from new value-added services (VAS) offered to clients.

“We believe that over the past year has made good progress on improving/extending its VAS offering while optimizing the legacy domains and do-it-yourself businesses for profitability,” he said.

“Given the trend in the underlying metrics (average revenue per user, retention), we believe that business is on track to return to modest organic growth in revenue/EBITDA in 2018, with a healthy growth in VAS more than offsetting a modest decline in the legacy business.”

Khan set a $28 price target for the stock, which was trading at $22.90 at the time of his report.

“While we risk being early with upgrade (with 2018 potentially turning into another transition year), we find the trends in underlying fundamentals favorable to our thesis and the stock’s risk/reward attractive at about 12 times 2018 free cash flow,” he said.

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