Greetings….from the epicenter of Lockdown, USA; and thanks once again, as always, to clients & subscribers.
Well, events are moving too fast to fully keep up. CN and CP have helped by both appearing on “virtual fireside chats” in lieu of live conference presentations (and CN has announced another for April 2 – Bien joue!); KCS also did one recently (see next note). The others should too – yes, in 3 weeks or so we’ll begin the Q1/20 earnings calls, but this is, to say the least, an unusual situation.
On the virus, a few things to point out:
- The White House has dropped its consideration of sending US troops to the border. To the northern border. As the Canadian Deputy PM said: “we don’t think this is the right way to treat a trusted friend and a military ally”. The administration also walked back plans to “reopen the country” by Easter.
- Railroad workers (and logistics workers in general) were classified, of course, as “essential”.
- The corporate stock “buyback binge” has ended, it seems, though individual inside buying has increased (see Keith Creel, below).
- Amazon has begun prioritizing deliveries and dialing back its Prime delivery promises, leading some to question what might come out of this “apres la Guerre” – a battle, an academic noted, between efficient and responsive” supply chains”….
- US Census forms began arriving in mailboxes; here’s hoping that they don’t need to do it again.
- The FT’s China Economic Activity Index was seemingly stuck at 60% at the end of last week.
- Slowly, in many things, from economic recovery to sports folks are beginning to whisper “2021”….
- Both the NARS and ASLRRA events are still in limbo but most assuredly will not go on in May; I am hearing that the former might simply be canceled with an eye to ’21 and the latter is still looking for a fall date. Those are two of the most important meetings of the rail year….
- Transports got some wins in the Stimulus package
- Amtrak, soon under a new CEO (Bill Flynn, the super-sharp former CEO of Atlas Air but before that at CSX and Sea-Land), got its requested $1B.
- OEM/Auto loans may come with a pushback of NAFTA 2.0 (USMCA) – for rails that’s fine as the original NAFTA 1.0 was just fine….the delay would come due to risks of the changes in auto labor rules in the crisis.
- US Railway workers got expedited/enhanced unemployment benefits (they are covered separately form all other workers under the Rail Retirement Board, etc).
- Farmers got (a further) $48B.
- More scary news for rail volumes? Are plastics under siege? I keep getting a sinking feeling that plastics will be the next coal, in terms of consumer environmental focus. Here in NYS, the regulations banning plastic straws and plastic bags were relaxed “for the duration”, but for plastics, if we can't declare that winter is coming, well, it is getting a bit chillier. See Frontline on PBS tomorrow (Tuesday 3/31) “Plastic Wars”.
My last trip before the lockdown was to Montreal, where I met with some good rail folks, got a tour of the port, etc. I got a good dose of Canadian pessimism at the time as well – there was talk of “peak Canada” even, and the National Post had a page one business headline declaring “Let’s Kill the Canadian” – but that turned out to be about the money-losing transcon VIA passenger train. The cause for the recent bout of gloom was a combination of called-off business investments – in the oil sands by Teck (pundits called it a watershed moment) and by Buffett pulling out of a $9B (Loonie) LNG project in Quebec. And both of those decisions were caused by or made easier by (take your pick) to the nation being brought to its knees by the First Peoples’ rail blockade. That same NP said, “Canada is now an untenable political risk”. Canada!
Now that may be going too far….but to an American, the efforts by the hereditary leaders (as opposed to the elected leaders) of the “Wet su Wet’en” tribe, backed by other sympathetic tribes (notably Mohawks in Ontario) and college students everywhere, revealed a problem of parliamentary vs centralized government – in the US the power of the Interstate Commerce Act would have prevented that type of occurrence (or certainly its duration), while in Canada it wasn’t always clear whose jurisdiction (Provincial or Federal) took precedence. However, it can be argued that our federal powers haven’t been shown to best advantage in the pandemic, but that’s another story (and of course subject to personal opinion). The impact on CN, especially, as “collateral damage”, and their shippers, was severe (~1400 trains). But that’s now over – on March 3 CN put out a press release stating it was calling back the furloughed workers in the east (note – far from the area of dispute) and was “Ready for Recovery”….if only!
“If it weren’t for bad luck, they’d have no luck at all” – So, I have to give credit to Bill Stephens for labeling the past few months “CN’s terrible, horrible, no good, very bad start to the year” – I had wondered in my Q4 wrap-ups if they were “Born Under a Bad Sign” And to be fair, the bad luck stretch really began at the end of last year – to wit:
- The GM strike
- US-initiated trade wars
- The CN strike
- Winter (including washouts impacting BC)
- Slow running mandates following two CP CBR derailments 2/6016
Now, it must be said that those events impacted CP, too – even the CN strike, by added unusual movements, etc. And in fact, it was, to be fair, CP’s actions that led to the 10 days of network slowdowns. Finally, the blockades affected them in some form directly, and more so indirectly *(directed running, etc). It was clear that tensions between the two carriers were rising, even with all of their historic close personal relationships. But last week, as a reminder, both railways showed us that they were “on it”, and were built to last. The fact that the National Post (last reference) put out its list of “Canada’s Most Admired Corporate Cultures for 2019” while I was in-country and neither railway was on it was astounding – either I should stop reading the NP, or Canada has some really, really good corporate cultures.
What the Canadian rail leaders (certainly admired by their investors) both said, and this is important:
- These two railroads are among “the better companies in the world to go through this (C-19 crisis)” – as Ghislain Houle, CN’s CFO, stated. I would add this is essentially true for the industry, but these are the pace-setters.
- They are well known strong cash flow generators and are in excellent financial condition (here seems a good time to point out that not all Canadian business observers miss their mark – CP’s Nadeem Velani was naked Canada’s CFO of the Year. As all three rails (I am including KCS here) have stressed, they have ample liquidity.
- This is a long term business (“a marathon, not a sprint” – CN CEO JJ Ruest) in terms of Capex, layoffs, etc – and have long-lasting assets, most importantly their irreplaceable networks.
- They have proven downside management cost reduction expertise (“PSR is in our blood” – CP CEO Creel).
- Railroading, operationally, is well-suited for the social distancing requirements, etc.
- The railroads are still moving.
- Both have instituted C19 plans (CN on 3/9).
- Both are running well and fluidly; the final completion of (this round of) Vancouver’s Deltaport expansion and the big Capex spend by (especially) CN – as well as the reduced volume stress – have all played a role. CP actually still is running units about 9% up YTD/QTD (CN’s -7% represents a summing of all of their recent very bad/horrible luck, and is therefore beyond “normal analysis”). KCS by the way, is also up QTD – maybe that’s why these three that decided to be so forthcoming?
- Both see upside numbers in Ag; they both see pent-up demand in fertilizers; CP says March was its strongest ever in Domestic Intermodal.
- Both have take-or-pay protection in CBR (which is, of course, being hit by a double-whammy)
- CN has the advantage of receiving good market intelligence form its Shanghai freight forwarding operations….
- Both managements remain confident; though guidance is always the first casualty of a crisis, they are both planning long term to take advantage of their growth opportunities and continuing to pursue expansion plans (CP in autos, CN in eastern port business, etc).
- They resisted analyst efforts to get them to describe a “decremental” (ugh! To the penalty box!) impacts on their business.
- CP’s Creel announced he was buying up his shares, even as they will be less aggressive in buying in shares.
- Both railroads remain committed to creating long term shareholder (and stakeholder) value. For CP, BTW, the best evidence can be accumulated through their absolutely excellent Investor Fact Book, with its detailed descriptions (and fold-out maps) of their “Room to Grow” initiatives, and detailed look at their lines of business (10 pages on Ag!).
- And as such both railroads remain committed to solid (above industry per-capita levels) Capex, subject to some tweaking.
- This too shall pass!
Anthony B. Hatch