KCS Q2-20 - Facing Up To C19 and Trade Issues

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Greetings;

 

“We have a lot of runway to have a successful run as an independent stand-alone publicly-traded company….creating terrific shareholder value….”
/KSU CEO Pat Ottensmeyer, responding to rumors that flared up about acquisitions (emphasis mine)

 

KSU Friday, CNI today, then three more this week!  Also some zooms, IANA and Ag, and Commtrex’ “Ask the ‘Experts’”….

Please use the MindSpring account to reach me, and follow me on twitter (no politics, little baseball, very rail-centric).

 

3 Rail Zooms I will be on: Also this week, the virtual (Minnesotan) Midwest Short Line & Regional Railway conference is going virtual from 3-5 real (Eastern) time, competing (oddly) in the end with CN’s webcast but with 3 good speakers – the FRA Administrator Batory, O&W’s Doctor Doom Rod Case, and the ASLRRA head Chuck (Chuckles) Baker;  copy the bit all the way at the bottom with your name, email address below and get on the Zoom.  In addition, there is an interesting webinar topic from Freightwaves Wednesday at 2 pm, Managing Supply Chain Disruption Through Greater Visibility – no greater topic for rails in the post-C19 world. 

 

Green shoots?  Before KC Southern – IANA released its June/YTD intermodal info (a more inclusive data group than the AAR’s rail-only).  YTD numbers were as expected – down 9% overall (Domestic down 5%, international – that’s C19 plus tariffs) down 13%.  But – June….overall -5% and international -15% - but domestic up 7%  (broken down to trailers +5% and containers +7%).  Now that’s green shoot!

 

Speaking of green, the Ag world was encouraged (if not spectacularly so) by recent buys from China.  In fact, on Thursday there was the largest one-day purchase of corn by the PRC ever (1.7mm mt).  The grain markets didn’t react much because a) as reported on “American Farm Report”/RFD, it didn’t change the overall oversupply situation (which isn’t really a direct RR concern); so far overall growing conditions have been very good 9and it always strikes me as odd when a Midwestern Agronomist is unhappy about that!) and b) although grain exports are up ~17% YTD, that’s been priced in and still suggests that China might not meet its purchase “commitments”.   There are rumors of a Chinese wheat purchase, although they just made a large buy from Australia.  Two other thoughts form the weekly round-up (oops – not a great term for discussing Ag):

  • The CFAP (Coronavirus Food Assistance Program, the USDA program to help out Midwestern voters – sorry, “farmers”) has paid out $5.9B
  • But none of that to wheat farmers (who also vote) – leading one panelist to say that the US wheat sector will be “pushed to Canada” in the next 10 years

  

OK, to earnings….Note that I use KSU (the ticker symbol) and KCS (rail-talk) interchangeably….

  

KSU beat earnings expectations for Q2/20 and I repeat – so what?  (See attached - and note that CNI just did so as well, see next note).  Not – at all – to belittle KC Southern’s achievement, especially in terms of PSR and operations adjustments in BOTH directions, which was very impressive.  KSU management had suspended guidance as the whole group had done in Q1/20 (surprisingly only ~40% of companies have done so – what crystal ball do they have?).  Despite that, the first and last questions to management concerned Q3 OR!  (The first from a smart analyst who usually does better).  Of greater importance was the discussion of how much KCS’ operating changes (crew starts/train length, etc) were likely to be permanent, and how fast the recovery was in certain key areas (intermodal/autos and refined products).  However, I was disappointed that KCS didn’t really talk about the post-C19 world, as CNI did already a few weeks back, from an external, market viewpoint, aside from stating that C19 was likely delaying any near-shoring investment.  Today, however, KCS issued a press release scheduling a “Deep Dive Webcast” (2 pm 8/4) with the irrepressible Sameh Fahmy, EVP-PSR.  That will be great – but I would (also) like a “deep dive” from Mike Naatz CMO & Brian Hancock Chief Innovation Officer (with no offense meant to Pat  Ottensmeyer & Mike Upchurch, CEO & CFO, respectively).  If you all need a host….Towards the longer term they did state that the fears of the possibility of Mexico granting access on their network is not something they are concerned with (it would be trackage rights, to approved concessionaries and not “open access”); I believe it.  I also believe Pat’s “we don’t discuss rumors but OK I will” comments, at the top of this piece!

 

KSU earnings were down 30% for the quarter, beating Street consensus (and including an 8c restructuring charge for the management headcount reductions) on a 21% drop in volumes; the adjusted OR increased only 150bps to 65.2%.  KSU said its cash flow target (~$500mm) and Capex numbers (adjusted downward in Q1 to $425mm).  On the latter, given the success they are seeing in train lengths and the opportunity for more (see below) combined with fewer train starts/longer MoW windows (and lower materials prices) might one wonder why they don’t increase their network budget this year?

  • Operations were the star, of course – with improvements in velocity, train length and fuel efficiency (the latter has room for more; much more despite the recovery from the May troughs – KCS had to manage the way down and the surprisingly rapid way back up
    • At present, carloads are ~6% below pre-C19 levels but crew starts are down 29% (and fuel efficiency is 9% better, helped by the active loco fleet being down 20% thereby also being younger after the purchases last year); “foreign” cars are down 12% (saving on lease and per diem expense).
    • Transportation operating expense was down 29% (on the 21% volume drop).
    • Train length is up 21% - sidings are being extended from ~5800’ to 7200’ with a goal of ~12,000’ (again – why not now?) .
    • Headcount was down 5% but Comp & Benefits was down 19% (Mexican work rules don’t allow for furloughs but provide variability nonetheless).
    • “On Track to deliver $95mm in PSR savings in 2020”- bringing, if accomplished, the 2-year number to $150mm.
  • Revenues were down 23%, worse than the volumes, due in large part to FX and Fuel price – which are offset, of course.    The big story in volumes was autos (-73%!), followed by (related) IM (-22%); Ag was down “only” 7%
    • That’s a V - Volumes are running up fully 39% from the early May trough – X-Border by 55%, Autos/IM by 86% - and Mexico Energy Reform by fully 210%
    • CMO Naatz allowed that while the auto-recovery was dramatic from the shut-down, it “may take 18 months or so (for auto demand) to recover….”
    • CEO Ottensmeyer felt comfortable enough to bring back the “Service Begets growth” mantra – shame on me, I didn’t know that it had been temporarily retired

 

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com  
abh18@mindspring.com
Twitter @ABHatch18