CPKC – Looking back (earnings/Webcast) & Looking Ahead

Train

Greetings;

 

First, apologies to anyone impacted by my ongoing IT issues - recently upgraded to "problems".  If you are not getting these (and you are supposed to) please let me know).  Thanks - onto aril "bidness."

Canadian Pacific’s Q4/21 earnings/outlook webcast was a strange call, only because of the circumstances, entering what will be a strange but eventful year.  Both managements, CP and the in-trust KCS were on the call, though the latter only responded to questions and most of their data o their own website.  Both produced good information on their respective quarterly performances (pressured and pretty good, also respectively) and gave some outlook to the year.  But, really, who cares?  Now that’s a gross exaggeration but with the overwhelming odds favoring STB approval later this year (their guess) or early 2023 (mine), what were are left to do is look at the pretty tiles and try to guess the outcome of the CPKC mosaic.  There was – of course – no formal guidance given. 

This is, even more than what I wrote before (about NSC) a transition year; in addition, I don’t need to cite these two carriers for my “Talking the Talk” criteria – they have already made “the pivot” to the Walk years before.  Transition means the near-term results can be viewed only as cluesCP did face a question in 2022 OR in any case!  That said, those shiny tiles did offer some revelations….First, the cut-glass from CPKC discussion, then the results, briefly:

CPKC discussions with “interested parties” will be intriguing (but perhaps hidden). Going back to their initial, standalone bid, they “expected everybody to come to the table asking for certain things”.   In the Q&A CEO Keith Creel noted the pro-competitive and end-to-end nature of the proposed system (for the best discussion see both their slides and my report from MARS in mid-January).  When asked specifically about some Class One commentary or proposals to the STB, Creel gave both the CN and NS the full Heisman (for those of you up North, that’s a euphemism for “dramatic stiff-arm”, or a “hard NO”).  He disputed the facts, the timing, and in some cases the contractual rights – and basically said he is willing to stick to his story and have the STB decide.

  1. CP’s earnings were a bit lower than expected (and off 6% YOY – adj), impacted by the BC mainline outages and the decimated Canadian grain crop, of course. And the OR went up 360bps, to a still impressive 57.5%.  But given the momentous events of the year and to come, who cares?  (One answer might be the formerly embattled folks at CN who faced similar conditions and produced, for the quarter, better results). 
    1. It was a tough end to the year financially – but only so far as this is the investment and they’ll get the return (KCS) soon(ish).  They took a loss of $141mm in KSU (reflecting the transaction costs offset by only 18 days of their results) and a 12% increase in interest expense as the debut grew by ~$8.8B (which will create a much bigger impact of course in FY22 as annual interest payments will jump over $200mm), though CFO Nadeem Velani forecast a rather quick pay-down).  Their ROIC went from a by-far industry-leading 16.7% for 2020 to what is likely the industry trailing 8.2% for ’21
    2. Revenues eked out a 1% gain in the face of a 10% volume decline (in units; RTMs were down 11%).  Grain, coal, and autos were down 12%, 14% 1nd 18% in revenues, respectively.    Expectations are for a solid, demand-driven year, albeit one even more back-half loaded than most given the hope for a normal crop in the Prairie Provinces showing up in Q4/22.
    3. Operationally CP did fine in the face of the challenges.  They scored 4-1-1 in positive Q4/21 improvements in their key KPIs – including a 2% improvement in train speed.  On the negative side, dwell was 12% worse YOY, not so bad relatively – but train accident rate was 47% worse (likely the full cause of the 15% annual deterioration).  On the other hand, personal injury rates improved 36% and 17%.

 

  1. Kansas City Southern’s Q4/21 performance was actually quite solid it seems (see the slide deck on their website – obviously “earnings” were not mentioned).  Units were flat, revenues up 8%, and the adjusted OR improved by a mere 10bps – but improved.
    1. Operationally the performance stood out, and CEO Pat Ottensmeyer and COO John Orr would have been taking big bows under former circumstances.  Train velocity and dwell busked the industry-wide trend by improving rather dramatically (145 and 23%, respectively, reversing prior – and FY – trends).  In fact, they showed declines in 3/9 of their reported KPIs, and two were headcount additions in T&E – hardly a black mark given the industry’s issues (and reliance on) the Great Resignation).
    2. Intermodal showed a 1% increase in volumes, but then again the Lazaro Cardenas turnaround and comparables were the biggest reason (volumes up fully 69% and revenues 81%).  Obviously, blockades don’t help rail service.
    3. AMLO – careful readers (thank you both) will recall that I have been, er, “concerned” about the Mexican leader and his approach to business, international (i.e.; “foreign” or FDI) business – and energy specifically – for some time (see “Top 10” from last month). 
  • In Q3/21 came the hints from KCS that all was not right – inspections of refined products in merchandise trains, shutting down some rail terminals, etc – driving share to truck.  Then Pemex bought a refinery in Texas.  Well, in Q4/21 the refined products hit the fan – “energy reform volumes” plummeted 49% and related revenues 49%.  The writing was on the wall, but it wasn’t as discussed as much as they let on.  In any event, that drove overall revenues in that category down 14% (otherwise flat).  But this was the growth market of the last few years….
  • KSU CFO Mike Upchurch stated that the situation was stabilizing – that’s good news because the opportunity remains vast (Pemex produces only about 1/3 of the national demand) but “stable” is hardly the attribute one could place on the nation’s leadership.

 

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 
[email protected]
Twitter @ABHatch18