Greetings;
The cooler air and better operations from Canada are refreshing! Looking back we see better numbers and serious optimism coming from the two Canadian Class Ones, who have been able to mostly side-step labor issues, lower ORs (remember it’s a process!), improve, for the most part, operating metrics, and beat Street estimates….Both are looking to the future and so are we – to CPKC, to playing out the early stages of the Tracy Robinson regime (and an Investor Day, much needed, in May). 2022 Guidance was re-affirmed. The big (normal+) Canadian harvest is much anticipated by both (as is the raised revenue cap, still so retrograde to have in place).
But the short answer on the North is that in so many ways they were the mirror image of the US, as they were before the pandemic and before US-PSR. Of course, this was only one quarter – they like their American cousins, continue to look to a strong H2/22 to lead them into next year. And like the US rails but even more so, they see “no weakness at all in any of” their markets (CN’s CMO Doug MacDonald). And it bears repeating – the Canadians for the most part seem to be avoiding US labor issues (and in fact, some of their operating metric issues come from interlining with US carriers).
Canadian National really blew past Bay and Wall Street expectations as we get to know Ms. Robinson. First, they reported a 260bps reduction in OR to 59% - the best in Canada! - hopefully, that’s enough, for now, to hold off the Cult’s bitter-enders. Volumes were flat (units, my preference; +2% in RTMs) which beat the US. And in their reiterated guidance was a call for 15% ROIC this year – and they got a question on it! Hopefully, that’s light at the end of the tunnel for true re-evaluation of CNI, and of the group. Two interesting things – CN had a tailwind overall from fuel (not just an RPU distortion) and their Q2 strike impact was, according to CFO Ghislain Houle, “minimal to zero”. OK, three – they also reported $22mm (Loonies) in Casualties/Other from shareholder advisory fees. Hmmm….They priced above inflation
- I still need to know about the curated revenues bit – did CP “curate” away the CMA contract or did it go, as even Keith Creel seemed to suggest, where it made the most sense? What was the weakness in international intermodal all about? There were few questions because that’s been the industry/supply chain norm for 4-5 quarters, but not so, I would think, in BC (nor at CP)
- CN made an interesting case for a form of curating, however, - filling up the under-utilized eastern half of the network, an old song reprised now that SEA growth could lead Suez traffic toward Halifax (or, St John – below). Halifax is expanding and is only running at ~50% capacity; CN added another train or half-train west-bound
- Operations was a star – velocity up (2%0 dwell down (6%), June on-time departures running at 91%, and connections up to 78%. The accident rate was 24% better (good) but the P?I rate was 43% worse (I know, I know, quarterly fluctuations can be meaningless). Ed Harris signed (back) on as an advisor, which, like spotting a Kardashian in LA, got many folks all a-twitter….
- One thing that did flatter CN costs was the big H2/21 management headcount reduction plan, un-lapped (average headcount was down ~5%, labor expense was 3% favorable
- Tracy R on CPKC: “We are playing our own game”!
Canadian Pacific shows improvement, prepares for the “Tale of the 2nd Half” – and thinks about the next three years. They produced an OR of 59.7% on a slight volume decline (1%); RTMs (-2%) would have been “high single digits” but for Canadian grain (6/9 categories overall were up YOY). Unlike CN intermodal (-4% about in line with the NA industry), CP’s volumes increased 14% and they expect that rate to more or less continue (Keith to Street: Curate this!). Potash, with serious wind at its back, grew RTMs 10% and revenues 21%, and that, too, is expected to continue. They also priced above inflation (achieving renewals in the +6% range).
- Operations were better than the US, second best in-nation on a YOY basis – velocity flat, dwell up 12%. Sequential numbers showed improvement. They too had unusual safety numbers – but the opposite of their neighbors: Train Accidents +136% (!), FRA Personal Injury rate -18%. Weird….
- “You got your Halifax, I’ll see you our St John!” Not sure the cards are actually even, but one has to play them as they lay. CP looks to CMA, Hapag Lloyd, and capacity growth plans from 300K TEU to 800K to look to play in the SEA-East Coast game that (may) develop, taking business from the US
- Mergers helped – CMQ not only is the link to St John, of course but is some $200mm in revenues ahead of plan.
- Mergers helping, part 2: KCS produced a solid quarter, flat margins, real (3%) carload growth, with revenues up 13% led by autos (+34%) and Cross-Border Intermodal, +49% - and despite still trouble in refined products exports to Mexico, the subject of the first big USMCA action (by the US and Canada against Mexico/AMLO). Also:
- It’s worth reiterating that at very little cost KCSM got its concession extended to 2037
- CPKC expects deal resolution by Q1/23 (perhaps a tad optimistic) and this will get approved!
- Creel gave a shout-out to KCS and COO John Orr for the capacity work already being done (“an additional 15,16 sidings” pre-consolidation) before the ~30 sidings, $275mm (eagles) Capex post-approval
- CP and KCS as still independent operators continue to test-run trains from Lazaro to Chicago (up to about 7 now) and even in reverse….still a Missourian here, but we’ll see….
Also:
- Yet another reason we’ll miss KCS (continued): Info! Data! Real slides! CN had 8, mostly pictures. CP had really six, though 10 if you count the useful appendix
- Fighting the last war? Hearing continued questions about downside protection (ie; “flexing down costs”) in a recession; the answers have been mixed after UP’s first attempt but I hope that – in this political environment and with so much at stake in terms of the future share opportunity, changing JIC world, etc – rails do not get pressured into chasing short term success in headcount in a downturn (again – no one of the rails is seeing or predicting a recession but all are “studying” the data, etc)
- Let’s nip this one in the bud, shall we? It’s funny to hear managements and the financial community parrot each other in the webcasts, often using the latest buzzwords or phrases from the business school/hedge fund/consulting worlds. We have lived through “color”, “cadence” and bad they don’t bear others so painful to the ear they don’t bear repeating. Can we add “lean in” to the discard pile? Please?
- Why we need info and clarity – if even seasoned analysts can ask Keith Creel about the nature of Class One commitment to (and the viability of) PSR after the announcement by NC & UP about re-opening hump yards is reason enough for every carrier to provide more clarity of intention, from things such as what’s really different about TOP/PSG to what does it mean when you bring back employees and locomotives? Etc. Keith’s defense was more than solid….
- If you follow the Canadian examples – and you should – and even CSX going into 2020, the pattern of resuming T&E and network/asset growth to support the pivot was already there
- Doesn’t anyone remember that in 2018 UNP, NSC (and KSU) took on PSR as a solution to existing stalled service improvement metrics, not (just) as an offering to the Cult of the OR? (I mean, how bad is the collective memory that we can’t recall stalled rail improvements in 2015-17 or the actual improvements by YE’19?)
- Now, we wait on Warren.....
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
anthonybhatch@gmail.com
Twitter @ABHatch18