Thursday, December 14, 2017

Harrison on medical leave, CSX names Foote Acting CEO

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E. Hunter Harrison E. Hunter Harrison

CSX Corp. said that Chief Executive Officer and President E. Hunter Harrison is on medical leave due to unexpected complications from a recent illness.

The Board of Directors has named Chief Operating Officer James M. Foote as Acting CEO of the Jacksonville-based company, and at the same time emphasized that it is well on the way to following through on Harrison’s Precision Scheduled Railroading operating plan.

The company did not offer further details on Harrison’s condition. He has been suffering from emphysema and requires supplemental oxygen.

“On behalf of the Board and the entire CSX family, I want to express that our thoughts are with Mr. Harrison and his family,” said CSX Chairman Edward J. Kelly III, in a statement.

“Hunter is a good friend and has been a colleague of mine for many years. He is an icon in the industry and we pray for his speedy recovery,” said Foote. “I have been following the CSX story very closely since January, but did not realize just how much progress Hunter and CSX’s able team have made replicating the transformation we effected at Canadian National some years ago.

“I believe that the battleship has turned, the Precision Scheduled Railroading framework has been put into place, and the company has amassed the critical talent – through education of the internal team and supplementation with a complement of strong PSR operating veterans and a strongly supportive Board – sufficient to follow through and execute on the PSR operating plan. Because the team has implemented a foundation consistent with Hunter’s vision, I do not see any reason to diminish our expectations concerning the pace and magnitude of our future progress.”

CSX stock plunged 10%—about $6 billion in market capitalization—in opening trading on Wall Street, following the announcement of Harrison's departure and an early-morning conference call that offered little new information, save for assurances from Jim Foote that the changes Harrison began implementing as soon as he arrived early this year would continue.

The investment community’s take on Harrison’s departure is largely skeptical. “Uncertainty will remain for months,” says Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “As a result of Harrison's medical condition, we think there will be a prolonged period of heightened uncertainty around the stock. The company's near- and long-term outlooks are unclear, in our view. We are unsure if Harrison will return to run the company. The once-delayed investor day is still scheduled for March.”

As far as the recently hired Jim Foote is concerned, “while he is a capable leader, we do not view this as a long-term solution for the company and expect the Board to start looking inside and outside the organization for a long-term successor to Harrison,” Seidl says. “Regardless of whether or not insiders believe Harrison can return to the company as CEO, we think a plan will need to be put in place immediately. The departure of Cindy Sanborn (former Chief Operating Officer) and Fred Eliasson (former Chief Marketing Officer) reduced the management bench. Full details of the company’s longer-term operating plans will likely be addressed at CSX’s delayed [from October) Investor Day to be held in March. While investors will have to wait a few months for details of the long-term financial and operating plans, we would not be surprised to see the railroad announce additional layoffs and divestitures early in the new year.”

“We’re still bullish on Norfolk Southern,” Seidl notes. “Investment dollars could shift to NSC ($140.86, Outperform) or even Union Pacific ($129.17, Market Perform), given the run CSX has had since speculation of Harrison’s move to the company began to circulate in January 2017. CSX was up nearly 60% prior to today's announcement. We expect NS to continue taking market share at attractive prices and do not think CSX is at full implementation of Precision Scheduled Railroading.”

Among concerns for investors, “What the senior management team will look like five years from now is very hard to predict,” Seidl tells Railway Age. “And as far as the stock price drop goes, I’m surprised it wasn’t more. It’s under pressure, and no one really knows what will happen between now and the end of this year.” CSX closed at $52.93 on Dec. 15, down 7.67%.

A few observations from around the industry:

• “With most of the pre-Harrison CSX guard gone (Sanborn, Eliasson, etc.), one wonders who will direct the operations. Who is the replacement senior management team at CSX now, after Harrison let so many senior people go? Are there people who will know how to run things when the winter hits? I would guess the Board had no choice but to appoint Foote as CEO since he will presumably try to continue the Hunter techniques, and the only other person around is Frank Lonegro. The issue of course is that Foote is not an operating person.”

• “No surprise that CSX dropped $6 billion this morning. I wonder if anyone will take the Board to task for hiring Harrison, knowing his medical issues. It was just a matter of time.”

• “I wish we had Fred and Cindy back” (a shipper).

Perhaps the biggest question that remains to be answered is what Mantle Ridge, the Paul Hilal-led hedge fund that installed Harrison as CEO, is going to do, now that Harrison is, for all intents and purposes, out of commission, possibly permanently?

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