CSX Transportation management turnover gives analysts reason for concern

Out of seven vice presidents who gave talks to railroad investors in March 2018, only three remain 
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JACKSONVILLE, Fla. — One of the things CSX Transportation aimed to accomplish at its investor day a year ago was to showcase its next generation of leadership and calm investor concerns after the death of CEO E. Hunter Harrison.

Wall Street analysts reacted positively to the seven vice presidents and senior vice presidents who talked about the railroad’s Precision Scheduled Railroading strategy, cultural changes, operations, and marketing efforts during a March 1, 2018 investor day.

Since then, four of those seven executives have left the railroad. One of their replacements has departed, too, which raises questions with at least two railroad analysts about the depth of the CSX management team.

“More than any other Class I railroad, succession planning and the depth of the bench became top of mind for CSX investors when a 72-year-old Hunter Harrison joined as CEO in 2017. And with Jim Foote and Ed Harris taking the reins from Hunter in their mid-to-late 60s, the next generation of CSX leadership remains top of mind for investors today, particularly as many shareholders consider shifting capital to Class I’s … that aren’t as far along in their implementation of Precision Scheduled Railroading principles,” says Bascome Majors, an analyst with Susquehanna Financial Group.

Foote joined CSX as chief operating officer in October 2017 amid the departure of the railroad’s top operating, marketing, and legal officers. He was named CEO a week after Harrison died in December 2017. Harris was named executive vice president of operations in January 2018.

“To be clear, CSX’s service metrics and financial results show the railroad is running really well, and turnover doesn’t seem to have impacted operations in any visible way,” Majors says. “But we do believe investors would like to see a clearer vision from the board on CSX’s longer-term leadership team sometime in 2019.”

The vice presidents who presented at the March 2018 investor day included Jamie Boychuk, vice president of Precision Scheduled Railroading implementation; Jermaine Swafford, senior vice president and chief transportation officer; Bob Frulla, senior vice president of network operations; Amy Rice, vice president of strategic planning; Michael Rutherford, vice president of merchandise sales and marketing; Dean Piacente, vice president of intermodal sales and marketing; and Russ Epting, vice president of coal sales and marketing. (Epting’s replacement, Shon Yates, has left CSX, too.)

Sources indicate that Rutherford departed CSX in August 2018, while Swafford and Yates departed the railroad sometime in autumn. Rice departed in February this year.

Of the seven, only Boychuk, Frulla, and Piacente remain at CSX. Boychuk is now senior vice president of network operations. Frulla is now senior vice president of operations — East. And Piacente last week was named vice president of industrial products as CSX reorganized its sales and marketing leadership.

Independent analyst Anthony B. Hatch was among those impressed by what they saw at investor day.

“CSX accomplished the most important thing they set out to do yesterday at their big, long-anticipated Investor & Analyst Conference … They revealed management depth and competence and commitment to PSR and beyond,” Hatch wrote last year.

Hatch agreed with a longtime investor who said the operations presentations from rising stars Boychuk, Rice, and Swafford were the best he had seen in a decade of following the railroad.

Rice was vice president of intermodal and coal operations when she left CSX this year.

“After all of the praise heaped on her by her superiors, this is a shock,” Hatch tells Trains. “There will likely be some more clarification on succession issues in CSX ops soon.”

Hatch says that succession issues are important and that the “fairly high turnover” at CSX, while not unusual for a railroad still undergoing a transition to Precision Scheduled Railroading, “bears watching for sure.”

CSX says the turnover is not unusual and that it has proper succession plans in place.

“It is normal for an organization to experience turnover. As a responsible company, we work hard to identify and develop talented leaders and work diligently with the board to have comprehensive succession plans in place for all key roles in our organization,” CSX said in a statement. “At CSX, we are proud of the depth of talent in our management ranks. The fact that we continue to outperform our industry peers operationally and financially validates the confidence we have in our leaders and is a result of the wealth of talent we have throughout the organization.”

A CSX spokesman also pointed to analyst reports that expressed confidence in the railroad’s management team.

UBS analyst Thomas Wadewitz, for example, had no significant concern with turnover because the railroad “has a number of talented managers in operations.”

“Management turnover at a fast moving organization is not entirely surprising and we believe that the changes are unlikely to affect the strong momentum in CSX’s operating and financial performance,” Wadewitz wrote in a Dec. 18 note.

Deutsche Bank analyst Amit Mehrotra wrote about Swafford’s departure in a Dec. 17 note.
“While this can be perceived as a negative for CSX, we don’t see much implications for shares given the significant bench of operating talent behind CEO Foote,” he wrote.

And Atlantic Equities analyst Stephen White wrote in a Jan. 8 note that CSX has “an unmatched team when it comes to PSR experience in U.S. railroading.”

But each of the reports was published before Rice’s departure from the railroad was known.

During the CSX earnings call in January, Foote was asked about turnover in the senior operations team and when the railroad might name a chief operating officer to succeed Harris, 68.

Foote said CSX does not have a specific schedule in mind to replace Harris, but hinted that a decision could be made this year. One of Harris’s responsibilities when he joined CSX, Foote noted, was to identify a new chief operating officer.

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