Slight KSU Earnings Miss Soon to-be Forgotten

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Greetings;

From the Tweet (translated back into English):

Commtrex and SEARS presentations are available On/Demand; retired Senator  Dorgan’s letter in support of the CP+KSU deal (attached, again) is a BIG plus (as is the clarifying letter from the largest rail union, SMART – formerly the UTU; also attached and the earlier discussed letter of support from 2001 STB Commissioner Clyburn). Dorgan (and others) raise a Big Question or Issue: STB approval of the deal under “new STB rules” (i.e.; without the KSU exemption) can actually create a blueprint for future M&A under “enhanced competition/pubic interest” criteria, ending the current ambiguity, rather than add to RR stability as I believe the rest of the deal does (see earlier notes: 2+2+2 major railroads (and N/S in an E/W world), Creel keeps his current job, KSU removed from being a flashpoint, smallest two railroads combine to still be #6)….

 

KSU earnings were a slight disappointment, reflecting the impact of the Polar Vortex but also continued congestion and a slower Lazaro Cardenas recovery.  But, really, who cares?  There was nothing systemic in the numbers.  KSU even reiterated their 2021 Guidance, suggesting a stronger than earlier forecast remainder of the year.  And even this is almost in the “who cares?” category….Before that, KSU made a positive, major personnel announcement, in combination:

  • Jeff Songer is moving to the Merger Planning bubble, under an STB-allowed planning/integration role, essentially being their “Deal QB1” in the biggest game of their lives….
  • The new COO (sigh….under KSU-speak, EVP-Operations) is old friend John Orr, who had been consulting with KSU down south for a couple of months, and was CTO at the “Mothership”, CN

 

Earnings were a few cents below expectations (and down ~3% in EPS, adjusted), mostly, it seems, coming from the revenue side, which makes the expected ramp=up back to Guidance levels seem likely.  Adjusted for FX/Fuel Surcharges, revenues were down “only” 1% or so, and the OR up by “only” 170bps (to 61.4%).  It was a tale of 3 months, apparently, by which KSU’s CFO Mike Upchurch stated that the first and third months of the quarter were on plan, but February was weather-hit, the impact is exacerbated by ongoing congestion issues (costing ~110bps in margin).  These are rapidly being mitigated, it seems, by PSR (“Phase 3”), service to beget growth, the end of Mexico’s “Red Stage” C19 rules (Covid cost KSU $3mm in the Q, mostly down south), and incenting management on service issues (commendable).  So, for now, we’ll overlook the velocity (-19%) and dwell (+, ummm, 35%) metrics….

 

Once again, there was a lot going on….FX, Fuel (Surcharges - ~90bps margin “hit”), Congestion, Weather – and chip shortages impacted both auto (units -18%) and IM (units down 1%).  Cross Border IM volumes were still up 7% (revenues were flat, however) but Lazaro Cardenas, expected to recover faster from the cessation of the blockades, still showed a 42% decline.  I will say this for Mexico – when things go down, they don’t do it halfway….Auto dealer inventory is roughly half of normal, so there is a real reason to expect a snapback.

 

Some other thoughts:

  • The February weather impact in Texas for KSU (impacting 60% of their business) has implications for the performances and  the impacts on UNP (& BNSF); noteworthy was a big drag in plastics
  • We hope for some frank discussion on the deal impacts in those rails (well, the former, anyway) when it reports earnings on 4/22 (and perhaps on Investor Day May 4) s well as from CNI on 4/26 - CP’s Q1/21 webcast (and also their AGM) is on April 21
  • The upcoming (late this month or early May) CP+KSU proxy statement will answer many questions on the deal, such as when did (this round) of discussions begin (late 2020); KSU was rather more forthcoming than I expected in their call, but they were nonetheless asked a lot of questions they felt they shouldn’t answer (despite stating that upfront; the usual “silly near term OR question” didn’t come till halfway through the webcast)
  • They seem convinced that the upper midwest to Mexico is a bog post-deal growth opportunity; like the state of KSU’s HQ, I will remain Missourian on this….
  • PSR pushback – one of my go-to “smaht guys” * objected – and, upon reflection, perhaps correctly to my dismissal of some of the rail service issues being PSR issues, centered on my discussion of CSX’s Alabama crew shortages & hiring (etc).  He* states that PSR often removes RnR – resiliency & redundancy – and only really works when trains are maxed out etc.  I don’t fully buy into this, but it also requires some “show me” data….
  • The 15% increase in CAPEX is purely anecdotal, but as the growth is in capacity increases, it plays to the Voting Trust (favorable) argument, as does the reiterated guidance and the ongoing PSR (“Phase 3”) efforts under Orr and Sameh Fahmy.  They mentioned the proposed Trustee (ex-KSU CEO) Dave Starling, but I would be chanting those words (Dave….Starling!) constantly, like a “Hail Mary”….
  • Minor “Mea Culpa” – thanks to Mike McBride for pointing out that the STB is an independent entity, no longer part of the DOT (but also not – ever – beholden to the DOJ)

 

*that’s a hint

 

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