Q4 2019 Earnings Call
And welcome to Canadian Pacific Fourth quarter, 2019 conference call.
The slides accompanying today's call are available at Www Dot CPR Dot CA.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
Yes. Good question simply press Star then the number one on your telephone keypad.
Actually withdraw your question press the pound key I'd now like to introduce Megan Albertsons.
VP Investor relations and pension to begin the call.
Thanks, Jack Good morning, everyone and thanks for joining us today before we begin I want to remind you that this presentation contains forward looking information and actual results may differ materially.
The risks and uncertainties and other factors that could implement our actual results or described on slide two in our press release and in the N. DNA filed with Canadian and U.S. regulators.
Our presentation also contains non-GAAP measures, which are outlined on slide three with me here today, It's Keith Creel, our president and Chief Executive Officer.
Deemed Lenny SVP, and Chief financial Officer, as well as John Brooks E D P and Chief marketing officer formal remarks, it will be followed by Q1 eight and the interest of time, we to ask if you could limit your questions to too. It's now my pleasure drink to introduce our CEO Keith Creel Alright, Thank you I'm, making and good morning got.
Thank you for joining us this morning to review, our fourth quarter results as well as.
Our view on what we see is another strong value, creating your head for shareholders, our customers that RCP family.
I can tell you is a leader smarter to represent the results were going to cover on behalf of RCP team, which I'm extremely proud of.
The quarter the team delivered.
Fourth quarter revenues of 2.1 billion operating ratio, 57% adjusted EPS.
Growth of 5% for the year I'm extremely proud to report financial records across the board for revenues up 7% set all time high 7.8 billion combined with an all time record operating ratio of 59.9.
Producing operating income grew 10%.
The 3.1 billion in adjusted EPS was $16.44 another.
Double digit year increase of 13%.
The strong results were driven by an industry, leading operating team as I advised on our last call Mark Red.
Yeah, we promoted to his new role as EVP operation started in September of last year in its first full quarter. In this role. The result serve I believe is a true Testament to what are true leader does leaders do not sustained performance they improved.
Mark in the 10 on a group of men and women. He leads Daly said, a number of operating metrics through.
Through the quarter terminal dwell down 9%.
Carbos per car day, CP record up 11% locomotive productivity up 5% and trip plan compliance as well and impressive 90% for the quarter.
All the get a testament to the power of executing with our proven operating model.
So special thank you at all those dedicated Railroaders, the mid and the women that serves CP across all of our departments.
Well the special unique thank you and words of recognition of the men and women that work at our winter pick terminal.
Their contributions to our success, which is obviously covered in these results are the distinctive terminal the year in 2019, which I look for Doddering at our upcoming see awards that have weeks.
Speaking to safety, which is foundational at all we do at CP I'm also proud to report a strong performance in the quarter with train accident stands at 31% personal injuries down 10% safety being Paramount to our success at CP precision railroading is it about cutting to the bone or sacrificing safety to achieve results it's absolutely.
Out, earning financial returns that enable reinvesting into the network to ensure a say physical plant that when combined with a culture of accountability carrying concern for each other it allows us all to go home safe everyday which is our fundamental objective.
That said I also want to recognize a few pockets of safety exports among many at CP, It's underbody, Ontario, we're running traits employees.
I've worked in excess of.
1150 days injury free as well as our locomotive shops in Vancouver Winnipeg for both have worked in excess of 900 days injury free. So thank you for sending example of excellence for all of us to follow.
I'm also happy to highlight a number of positive announcements this past quarter that will be benefiting a this franchise and our shareholders customers and fellow colleagues for years to come.
Namely in the same Q acquisition.
In November we announced that the acquisition of the Central Maine in Quebec Railroad.
This acquisition enables CP to extend that treats.
The Saint John on the East side East Coast, New Brunswick, an increase our presence in eastern U.S. with access.
To support and Cheers sport, Maine, we closed the transaction successfully at the end of December .
I was excited about the strategic value the network condition would enable woman purchased it but after spending time on the railroad the last few weeks.
I feel even more compelling convicted about the addition to RCP family franchise and the value. It represents the value proposition is simply compelling operationally.
Well work hard at bringing her expertise our safety record and our disciplined culture to the railroad as quickly as we possibly can.
Commercially the customers are extremely excited to have service alternatives, which they simply have not been afforded in over two decades.
We'll be able to offer the shortest routes.
For the mayor towns to bunch rail Atrotos, Chicago in Western Canada that will be truck like reliable and truck like compatible competitive.
On a service standpoint, it obviously much more compelling protocol standpoint, we're going to stick to our expertise, making a real acquisition, where our team has proven that we know how to create service solutions that enable compelling value for our customers for our shareholders. Both at the same time.
And then I wonder what truly gets me most excited about.
The topic of crude all his RDR you announcement.
John is going to speak to shortly in December Gibson, and U.S. develop but a great partners business barges to CP and they'll still be constructing an operating a deal when you went recovery unit.
Nearer.
Our rail terminal or will serve terminal Hardisty, Alberta. This is a game changer for crude and what is a unique and innovative development that will enable our franchise to enjoy sustainable crude by rail revenues that are safer more efficient to move for the long term, which is unique to see piece franchise in Canada.
And finally guidance as I stated in our press release, a we're targeting mid single digit RPM growth continued opportunity to improve margins and high single to low double digit earnings growth.
I can tell you I've never been more convicted her competent in this team's ability to deliver.
Oh, it our long term potential.
And our journey to produce contain continued sustainable profitable growth 2019, more at the second consecutive year with what the industry and indeed in industry in volume growth and as we enter into 2020, I certainly expect to continue that trend as we deliver another record setting year. So there's going to handed over to John to bring some color and.
The markets for named closes as he elaborates on the numbers and we opened up the discussion for questions.
All right. Thank you Keith and good morning, everyone. So total revenues were up 3% of quarter to a record 2.1 billion.
Rtms were down 3% FX was flat will fuel was a 1% headwind and pricing landed in our targeted range will mix was slightly positive.
The quarter was not without its challenges that you saw but you also saw the resiliency of the CP family that Keith just spoke about we steadily gained momentum across the quarter and across our book of business, we're carrying that momentum into January and into 2020.
On the or total revenues were up 7% and on an FX adjusted basis to a record 7.8 billion.
We'll take a look now at the fourth quarter revenue performance on the next slide I'll speak to the results on a currency adjusted basis.
The grain volumes were flat on the quarter, but revenues were up 4%. Despite a challenging Canadian grain harvest, we delivered our single largest quarter in the company's history with 7.9 million metric tons delivered to the market. This historic quarter capped off a 2019 at the largest Canadian grain group.
I mean product tonnage shipped in any single year over history.
This achievement is a true testament to the dedication of our employees our investment in the green industry in collaboration with our customers in driving the most efficient operating model.
I look ahead with the delayed harvest and more recently the extreme wet weather in Vancouver.
I expect.
Canadian grain shipment to the man to remain strong through the first half of 2020.
In the U.S. side volumes were up 3% largely as a result of increased soybean shipments to the P. NW. That's positive U.S. trying to trade settlement talks have helped rally spot grain movements in this export lane.
Now moving on to coal revenues were down 10% or volumes were down 8% Canadian coal volumes were down in the result of maintenance at the mine and again the weather challenges I spoke about in Vancouver.
Further low natural gas prices resulted in us coal volumes being down 17%.
All in all expect coal volumes to be slightly down in 2020.
On the potash, Brian volumes were down 29% in counted for nearly all of our total RPM decline in revenues decreased 26%.
Continued delay with international contract negotiations weighed on export volumes in the quarter. However, as expected we did see volumes begin to pick at pick up the back half of the quarter, It's India and other smaller export contract were resolved.
Based on our latest information, we're optimistic that the camteks contract to try and will be resolved toward the end of Q1.
Overall, our belief that the macro demand outlook for potash remains solid for 2020 and volume growth both camp attacks and K plus us we'll be weighted to the back half of the year.
The energy chemicals, and plastics portfolio saw revenue growth of 33%.
Q4 was the third consecutive quarter with record revenues in our bio fuels portfolio as our ethanol plants continue to be well positioned to compete in both the domestic and export markets.
This was also our largest crude by rail quarter in the company's history with over 36000 carloads.
We're expecting a similar run rate as we look out to Q1 and beyond.
I'm also extremely excited as Keith mentioned about the announcement to constructed deal you wouldn't recovery unit near Hardisty.
This innovative development creates us think sustainable and safer crude by rail shipping model to the U.S. golf.
When operational in 2021, Didier you process were removed. The do you went prior to loading the railcar hardesty, allowing for approximately 30% more crude to be loaded in each tank car, making crude by rail cost competitive with pipe.
Further by removing the deal you end the returns accrued for a more concentrated state and it's no longer classified as had his or her to hazardous commodity.
The capacity for this facility equates to two trains per day.
And a key said creates a long term revenue stream for crude by rail.
Moving on to forest products revenues were up 3% well in M.C. revenue declined 14% largely driven by lower steel prices and continued declines in our frac sand sand shipments to the Permian basin.
[noise] automotive revenues were up 12% and outstanding outcome, given the pressures on this sector. Our surgical approach to this market has driven growth through partnering with the right automakers and developing unique market solutions that cannot easily be replicated.
In 2020 will enjoy a full year of our Vancouver auto compound will welcome Globus to our franchise and we'll continue to look for those opportunities to open new auto compounds that will further enhance our value proposition in this sector.
Continue to see a path in 2020 to grow auto revenue at a significant paid.
Finally on the intermodal side quarterly volumes were up 4% and on a full year basis I'm extremely pleased with the strong growth we had in intermodal with volumes up 5%.
On the domestic intermodal front, we had a record quarter and our third consecutive record year I fully expect continued growth in 2020, as we leverage our demand management tools, our premium service in the market and continued to deliver over the road conversion.
On the international side, we extended Hmm to a long term contract and January Onest, we welcome Yang Ming aboard.
We will continue to leverage this business and the capacity brought on at Deltaport.
Grow with our customers through the port of Vancouver.
So let me just close by saying over the last couple of years and even back to our Investor Day I've talked about this team executing our strategic Playbooks.
And what you're seeing is exactly that playing out in the marketplace. We're doing what we said we're going to do.
We are leveraging our distinct advantages to grow revenues at a sustainable profitable manner.
And these are creating unique growth story for CP and I'm extremely proud of the result, this team has delivered delivering.
Oh look as I look ahead, there remains a very strong pipeline of opportunities to bring incremental volumes to this railroad at a price that reflects our service and this includes some very positive initial discussions as Keith spoke about for opportunities utilizing the cm Q network.
I'm excited about the opportunities in front of us for 2020 and beyond so with that I'll pass it to the Navy Thanks, John and good morning.
Before I start my prepared remarks, but the quarter in the year I just wanted to take a moment congratulate Megan all this than who was recently named as the best Investor Relations professional in all of Canada on the industrial sector by institutional Investor magazines algorithm Canadian survey, so congratulations Meg in a very well deserved honor.
Okay.
I'm extremely proud of the results. The team is delivering today through the back half of the year. This team has continued to demonstrate an ability to adapt to a dynamic volume environment exhibit the power of a true PSR railroad.
We adjusted and rationalize resources, effectively and are well positioned with the momentum we built through the fourth quarter and early into 2020.
Overall, the operating ratio increased 50 basis points to 57% driven by stock based comp headwind of $30 million as well as lapping a land sale from 2018.
Taking a closer look at a few key items on the expense side comp and benefits was up 5% for $18 million versus last year. The primary driver. The increase was the higher stock based comp I mentioned earlier, primarily as a result of the increase in the share price.
This was partially offset by decreased volumes and increased operating efficiencies.
Fuel expense decreased $20 million were 8%, primarily as a result of lower fuel prices lower volumes and a record fourth quarter fuel efficiency of 0.952 gallons per 1000 GTM.
Depreciation expense was 178 million a decrease of 1% as a result of asset retirements.
Purchased services was 294 million, an increase of 44 million or 18%. The main driver the increase was laughing.
2018 land sales of approximately $35 million.
Moving below the line.
Other components of net periodic benefit recovery were negatively impacted $10 million for 10%, primarily due to a lower discount rate applied to year end workers compensation valuations.
Interest expense decreased 2 million as a result of lower effective interest rate, resulting from our 2018 2019 debt refinancing.
Income tax expense increased 38 million or 20%, primarily as or as a result of a provision of an uncertain tax item of a prior period. This is being backed out of adjusted earnings.
Rounding out the income statement adjusted diluted EPS grew 5% in the quarter.
Turning to full year results on the next slide the fourth quarter performance Cup another record year for CP for the year revenues grew 5% and operating group income grew 9%.
Full year operating ratio was 59.9% 140 basis point improvement year over year as we continue to demonstrate our ability to improve margins in spite of a softer volume environment overall.
Adjusted income before income grew 10% and the continued disciplined approach towards share repurchase program helped us achieve adjusted diluted EPS growth 13%.
As Keith mentioned, our third consecutive year of double digit EPS growth.
Turning to our 2020 guidance in the release. This morning, we highlighted mid single digit volume growth.
Capex of 1.6 billion.
And high single digit to low double digit EPS growth.
We will be facing a pension headwind, both above and below the line of $30 million and $40 million respectively.
Largely as a result of lower discount rates at the end of the year and a reduction in our expected return on assets for our pension plan.
Depreciation is expected to increase of approximately $190 million a quarter as a result of a larger asset base.
Last year in Q1, we incurred was typically our full year of casualty expense, which is part of the purchase services and other line.
Moving on to free cash.
2019 cash from ops increased by 10% to a record of nearly 3 billion and free cash increased by 5% of 1.4 billion.
Shareholders continue to be rewarded took a brief pause following the completion of our NC I'd be in October in December we announced a new 3.5% share buyback program to repurchase up to 4.8 million shares over the next 12 months in 29 team. We returned over 1.5 billion to shareholders through share buybacks and dividends.
Our balance sheet remains strong with leverage of 2.4 times adjusted net debt to EBITDA.
Capex came in around the guided 1.6 billion, our disciplined approach a capital investment and there was strong returns we are generating are evidenced by an adjusted ROI see of 16.9%.
Compares to 10% Bakkens fall 2012, that's clearly demonstrating a prudent investment in the business.
As we go forward, we expect to remain at that $1.6 billion for the next two years in terms of capital investment.
And that's also inclusive of the capital we expect to be invested back into the cm Q to bring that asset up to CB standards.
That acquisition is one that we are increasingly excited about as we invest back into our core competency of railroads.
As we continue to grow earnings that remain disciplined on capital you can expect to see Cpms for free cash conversion improved both in 2020 and beyond.
Overall 2019 resolve those challenges, but in spite of that and marked the third consecutive year of double digit earnings growth and the third consecutive year of delivering on or exceeding our earnings guidance.
This is company built on a culture of accountability and delivering on what we say, we'll do we're going to continue to be an industry leader in 2020.
With that I'll turn the call back over to Q to wrap this up okay. Thanks, John thinks they deem for the color, but before I open it up to questions I too on the Echo your comments and congratulate Megan for such an auto honored achievement as well as congratulate you needing for being recognized as the best CFO in Canada and finally.
At our 13000 strong CP family.
For being recognized as the best overall company in 2019 in industrial space in Canada boats. The competence of our investors like this are deeply valued we don't taken for granted the receive with a high degree of responsibility to honor. The trust that you placed in us.
And we do that by producing future performance it meets or exceeds your expectations.
Thank you for that trust and with that said, we'll move to the questions.
Certainly if you'd like to ask a question. Please press star one on your telephone keypad to withdraw your question press the pound key please limit yourself to one question and one follow up.
Seldon Clarke with Deutsche Bank. Your line is open.
Hey, guys. Thanks, a question I notice is still somewhat of a developing situation, but as it relates to phase one of the U.S., China trade deal and China's agreement to start purchasing more goods from the U.S. or do you think this could present a risk to any of the exports at CP handles if China does indeed start relying on the U.S.
Products are met coal things like that.
You know shelving actually.
No I think frankly, and Weve started to see a little bit of upside as some of the more for positive outcomes of this trade deal emerge.
The Canadian ports continues to be.
Cost competitive relative to the U.S. side, so we've seen a nice surgery volumes.
Sorta offsetting some of that some of the trade disruption.
Volumes from Vancouver into the U.S. and then frankly, if we can start to see some of these AG products begin to.
Move I see upside potentially in our U.S. grain franchise as we move towards the end of the year.
Yeah, we actually take a view that this is a net positive for all wesco sports be they Canadian or you asked which again this franchise uniquely.
The benefit from.
Okay. That's helpful and then kind of a longer term and just high level question, but if you look at the revenue per RTL CP versus your Canadian counterpart that the discount that CP is earning is wider than it's ever been there wasn't 2019 and kind of has been steadily increasing for the last several years and.
You know, obviously, you're both impacted by things like fuel and currency, but can you just maybe talk about what you think is driving this divergence and whether this presents an opportunity for you guys to make some ground as it relates to pricing.
I think it's a reflection of length of haul and mix of business. So as we've grown our potash business as we've grown crude recently so forth that does have an impact on overall centsper Tam and impacts the overall.
Company reported sense for Tim So I think thats the major item.
Okay. So we shouldn't be reading too much into it as a theres. Some ground, we made up on the pricing side.
No I think you know not that the or as a reflection of everything but I think there's a good we're getting close to 10 point gap between hours in the company. This quarter. So I don't think pricing is really a reflection of anything I think it's just solid execution I think the most important number to pay attention to is double digit earnings.
Yeah, absolutely all right. Thanks for the question guys appreciate it.
Thanks.
Walter Spracklin with RBC capital markets. Your line is open thanks very much. So there's some news obviously on the tech side about having a gain some share the kamloops.
Neither up to ridley or over to Neptune can you quantify the impact that you said you expect on that I know, it's only one third of the whole for a portion of the business, but curious your your qualification of the the impact on that.
Well as Walter I'd say, the worst case scenario and this is assuming a worst case scenario assuming that we don't.
So let me that precious capacity that goes west to candidates into Vancouver.
And assuming we don't.
Improve the profitability on the existing book of business that remains with US both of which are not realistic expectations.
As a 1% headwind.
I'm not concerned obviously, we value our relationship with tech and we value.
Their business that said.
Convicted think advance with my 28 years of railroading experiencing quite a bit of that being in Canada running both railroads that.
Tech will value our service in a way they never have given.
Their overall experience to me as a PSR railroad I'm not one that sales complexity.
Not one that creates velocity and faster at CER asset turns by introducing it to the game as to to eliminate into minimize complexity to turn those assets faster. So right now what were seized with is making sure that.
We clearly worked closely with tech as well as Canadian national to ensure.
Net interchange location, which today state will not handle any mark movement or increase in volume.
Is able to handle it efficiently so it doesn't have an adverse impact.
Not only on techs business, but the balance of our book of business. So Thats what were seized with at the end of the day.
We're going to do our debt level best to make sure Tech succeeds given what we could control to move as much coal is they can will make a fair bucket doing it and enable tech to continue to succeed in the marketplace. That's that's what were seized with.
Not not seized are concerned with the 1% headwind or.
Okay.
Okay that makes sense I appreciate that color keep moving forward into DEMA.
Question here on operating leverage and volume cadence. So as your mid single digit volume plays itself out can you can you give a sense of whether this is something you're building into the back end or is this something that we can see sooner than rather than later and as that volume comes on you've always typically you indicated a 100 basis point roughly or improvement with.
500 basis points of volume does that does that hold here in this in this scenario as well as you as your efficiencies pile on on each other certainly gets a little harder to achieve but just wondering if that that's still holds for this year.
Thank you all right thanks to the softball, there Walter.
So if you recall last year Q1 was very difficult and challenging.
Quarter in terms of how the the impact of that tragic derailment had on our network and the impact that that had a very challenging winter throughout.
February time period, so we have very easy comps in Q1.
I I expect a very very strong Q1 report both from a.
[noise] revenue point of view volume point of view and a and expense point of view. So I think we're going to have a very strong start to the year. We were impacted in the spring last year with within with network outages from flooding in the Midwest and so forth. So.
Very.
Achievable kind of first half volume trends, we expect.
See continue to.
Year over year improvements in volumes, where it gets a bit a bit more challenging is in the second half just in terms of.
Where we see have line of sight to to volumes.
You know recall some of the pauses that we do have is in the Canadian grain space. So August September we had a very late start to the grain crop. So you should see some some benefits there and potash as well you had the.
You know impacts of a have a sudden 30%, 40% kind of drop in potash volumes, so that should be a very favorable.
Environment as well to report RCM. So overall I I think we have good line of sight to a very strong year, we've guided to that mid single digit Archie EM.
Growth and I don't think it's necessarily just front end loaded by any stretch I think it's going to be consistently strong.
From a in terms of our operating.
Our incremental margins and so forth in our operating leverage.
And do what we always do which is take of the volumes and bring it to the bottom line and.
And so I would expect a continued operating ratio improvements and and nothing less than that from our team.
Okay. Appreciate the time.
Okay. Thanks Walter.
Brandon Oglenski with Barclays. Your line is open.
Hey, good morning, everyone and thanks for taking my questions.
The deem I guess following on that answer there you did speak to a couple cost headwinds I think in 2020.
And more specifically you know if you could just re highlight those whereas some more specifically on purchase services because that did come in.
Maybe a little bit higher than we are thinking.
Yep pension was probably the the item that so we know is a isn't as a headwind in.
Both above the line in terms of our compensation benefits and then below the line given.
Discount rates and also as Weve.
Being a bit more conservative in terms of our expected return on.
So the pension plan.
The other item and be depreciation so you've had kind of record capex spending a lot.
Here and so as we have that higher asset base, we'll see depreciation trend up a little higher and then the other item that you know we faced is stock based comp.
No that's been a I think well received headwind by investors, but it's something that that we expect to phase again this year.
We don't have any sort of.
You know accruals from a from a bonus point of view that.
That we're going to phase and then sort of headwinds there we've been consistently performing consistently paying the the management team for or the efforts so that nothing on that front.
It was the back half of your question brand and again, but it was just about the right level purchased services.
Yes, I think overall.
We're not expecting much in the sense of land sales you know maybe you could see tend to $20 million that would be create a bit of noise between.
Quarter over quarter, but nothing that we'd call out in terms of volatility quarter to quarter on purchase services.
Okay, I didn't mean to minimize the IPO, which is pretty strong.
And I guess, Keith or in the deem is I asked this question of your competitor the other day, but theres clearly a trend at some U.S. railroads to think capex can be at 15% of revenue, but theres also a clear track record of not a lot of growth below the border either I mean can you guys talk to that divergence because obviously you are.
Well from your compare included have gotten better growth, but obviously better higher capex too that the right equation.
Yeah, I would say, it's just understanding two stories, obviously ever railroads at a different place in their implementation in progress with.
The operating model purses, and scheduled railroading, we enjoyed a capital holiday given.
The excess of surplus assets that are.
A natural outcome of implementing.
PSR, where PSR didn't exist.
If I look at our spend now.
We're still enjoying some of those tailwinds and locomotives, but we're also investing for growth.
So again, our absolute numbers, where we're at is where we expect to stay we're going to continue to invest invested our hopper cars, we're about halfway through it by the end of this year.
We're at 20 rough number 2200 cars will be around 3000 3200.
End of 20 with a view the finished that program into 22 and once we get there you will see free cash flow improve in a material way and you'll see our total dollars come down and again, if you get into the percentages, obviously, that's going to improve as well.
But we do both we've.
You should have a lower.
Call on capital call on cash when we run an effective and efficient railroad, but at the same time, we're making money. So we can invest money to grow and protect our physical plan and thats the formal.
Our.
Our scorecards, our return on invested capital, which.
Getting closer to 17% so.
That's always a good.
Basis.
See how how we're operating in terms of our capital.
A couple deployment.
All right I appreciate the construct the attention there.
[laughter] friend.
[noise] body shown with BMO capital markets. Your line is open.
Good morning.
You mentioned the C.M. Q.
And on the call I just wanted to.
If you can offer up little bit more [noise].
Kinda details about the opportunity you see there they don't need to model side.
And also the timing of data center, you that you see.
Well as this kind of 2020 2021 or beyond that.
Timeframe.
Well number one they are to the possible fatty in all fairness, we're still developing.
I can tell you I see opportunity in intermodal growth via domestic be at international.
See an opportunity and automotive growth.
The domestic.
Inbound product be it off the water inbound product.
I see opportunities in fuels I see opportunities in lumber just across the board you think about an environment.
And that's you know, yes, the paper industry has.
Walk through some very challenging years, yes, theres been a reduction in available shipments in eastern Canada.
But at the same time to strategic value that port in Saint John has not been unlocked. We've got a railroad now that is very efficient it's very safe.
And Saint John to Montreal option is the.
Short assistance in if you run your best day, the shortest distance versus a truck run at its best day are your competitor running its best stay at a longer distance I'd say, that's a compelling opportunity to open up.
Value for our customers as well as are obviously, our shareholders in our franchise.
So as far as timing.
Quantum or magnitude.
We're going to be working hard at that in 2020. The most important thing we're working on those body is investing in the physical plant to get it up to a SIFI standard.
Which we all that to ourselves and we know that to the communities that we now operate in in through so we'll do that in 2020 Wolf finished the year.
With a stronger physical plant with a more efficient we've already worked with.
The leaders at sea AMCU that are under trust.
Until the STB.
Gives us approval, we hope gives us approval and anticipate approval in may of this year.
To implement a more CP like operating plan.
Taking time out of the schedules with the existing physical plant, it's not that we're running trains faster per se. It's in totality. The transit time is reduced because we're handling the trains differently in the schedules differently in the philosophically it's differently.
So more to come I think 2021, you'll start to see the needle move in 21 and 22 for certain those are two key years for us the timing couldn't have been better as we prepare for those business opportunities and I look forward to celebrating some of those successes and share.
During more color on them as we go forward through 20 and into 21.
Okay. That's helpful. Keith Thank you the upgrade that physical footprint the need the capex required are.
Included in your guidance I would I.
I would assume right.
Yeah, it's absolutely.
Looked into it.
We've got a big chunk of it we're focusing on ties in rails in Dallas.
2020, we'll do the same thing and 21 it will come out.
Well the class three track.
Allows us to convert that short distance in a very safe and reliable fashion by the end of 2021 for certain.
Okay and a quick question to maybe on the labor cost line. So I'm I'm understanding that we should assume some inflation, obviously the pension expense increase above the line.
How about headcount yield got a big swing going on and 2019. You know you went up and then you went down and you ended the year. What are you started pretty much. So how should we think about 2020 with volume up mid single digit.
Well I you know the formula for Us as we always want to do more with less that's what the as we become better Railroaders and we invest in our physical plant and that's what we should be able to deal. We got to we all that to our shareholders. So actually a night team.
We finished down about 1% on flat our teams are actually just positive our TMZ.
We are proud super proud of that just positive because we're the only.
Railroad and the industry to be able to do it in a very challenging macro environment.
And I know what great efforts it took from our sales team and our operating team to produce that so that's where the price comes from but with that said if we look at 2020 on a mid single digit our TM guidance you can assume a low single digit head count increase.
Okay. Thank you.
Thank you thought excess.
[noise], Chris Wetherbee with Citi. Your line is open.
Hey, Thanks, Good morning, guys I wanted to touch on crude by rail. So I think you mentioned 36000 carloads in Fourq you wanted to get a sense of what do you think the capacity could be and maybe 2020 on a quarterly basis, assuming there is some potential demand growth there and then maybe as a second parts of that question.
How do we think about sort of the D. R U opportunity and sort of what that means in terms of what you might need to do.
That's how we might think about it relative to the 36000 carloads.
Last quarter, just trying to put some some numbers on some structure around the crude by rail opportunity in 2020 units 2021.
Hi, Chris I'll speak to the capacity piece and I'll, let John provide the color on on the run rates and what the potential upside Wendy capacity. It's a simple answer it's zero we have the people we had the assets.
This.
Growth.
We prepared for it we prepare for to 19 and 20, we worked in lock step with our partners in this business and the demand has been delayed.
So it's it's there we continue to ramp a shot invest in at a and there'll be no surge or peaking capacity needed to be able to handle and enjoy the current run rates that were at and with some potential upside.
Yeah, I mean, it's kinda Chris sits in a timeframe, where you could be able to see some of the pipe capacity come available. So it might actually acts as an insulator up I'm not quite a one for one replacement but.
As Keith said from a cut it passed the standpoint, there shouldn't be any issues there.
In terms of the run rate.
I'm kind of looking at at Q1, the to land probably in a similar space as we saw Q4.
I do think sort of market pending and as we know this the crude by rail market.
Can be pretty volatile, but if things hold in the Fred range that we see today I could see some acceleration as the government contract fully gets converted.
You'd see a little bit upside Q3.
Q2 Q3.
And probably that sort of a run rate continuing as we look to close out fourth quarter in the year.
Okay. Okay. That's very helpful. Appreciate the color and then.
Maybe bigger picture question, just around pricing and Theres been some.
Higher profile competition among for players in Canada, but it seems that pricing has remained.
A reasonable focus for both players just want to get a sense of how you think about the pricing dynamic in 2020 should there be meaningful variation from what we've seen over the course in the last 12 month.
Yeah, I don't I don't think so it.
I am extremely pleased with my team results on on pricing for the value of our service through 2019.
Just as a reminder, my teams a big part of their compensation is built around our pricing efforts and.
I think we're prudent and we'll compete because we have the low cost structure head to head, where we need to compete but we're also not going to go down to a level and grow for growth sake. If we spoke about so I expect that similar level of discipline as we move into 2020 and will be will be driving inflation plus.
For sure Chris.
Chris I would just add that in this environment were.
Both railroads can can see growth opportunities both in the short medium and long term I think that's very healthy for you know rational pricing.
Got it thank you very much.
Thanks, Chris.
Scott Group with Wolfe Research your line is open.
Hey, Thanks morning, guys. So more to do you mind a couple questions for you first just to help with the models. It CMQR gonna be in the weekly volume reports and if not maybe just how much revenue a quarter, we should be assuming and then first quarter. Just got so much noise can you just help us sort of think about our GM and.
No our for first quarter as you guys see it.
Sure.
So yes, the carloads are in the numbers.
The reminder, that so the Canadian component of the C.M. Q.
We've acquired but the U.S. assets are being held and trust until we get SCB approval. So the accounting of that will be an equity pickup for that until we actually.
Get approval, we're hopeful and by the middle part of this year, so theres a bit of noise in terms of where we see things. The first half of the year and then we'll fully get to the benefits of the full entity.
Going forward past midyear and at that point, then you'll see kind of the full revenue picture. So.
It's not meaningful in terms of the Akorn.
Incorporation of the revenues so we're talking.
40 million us kind of in total so we're getting a portion of that as we speak if that makes sense.
And as far as a Q1 last year we had.
About a 70 million dollar impact in Q1 year over year increase in.
In casualty or sorry, the quarter Q1 number was $70 million of casualty typically that would be closer to 20 million a quarter. So there's a pretty big year over year.
Improvement that we expect a for running the railroad is the way we should.
So that's certainly going to be beneficial to Q1 operating ratio I think we had the worst operating ratio in the industry last year kind of mid sixtys level.
You should see something closer to 60 level is probably a fair assumption.
So it should be a pretty meaningful improvement year over year, we always we're always cautious when we give our guidance a little bit at the beginning this year, given where northern railroad and given there's uncertainty around winter weather, we had a extremely cold environments, a week ago very challenging on the.
On the network, but our best operating team in the industry, which happened in BCP employees.
Got through it extremely well we entered that situation in a very good.
Good good state overall in terms of.
The network in terms of the terminals and we came out of it very well. So it's not something that we can't overcome it's not going to be impactful, you'll see the volumes recover very nicely through.
This week and through the February timeframe. So expect to have a very very strong Q1 report Scott.
Can I just here that you hurt you said around 60 for the first quarter.
Yeah.
Okay, Great and then can I was just one more Keith you talked earlier about the deal are you is being unique to your franchise can you just expand on that.
At this point.
The de argue it's been announced to be built in Hardisty. A single lines are solely served by CP. So there is a potential down the line.
To build one in Edmonton.
Some of the players have talked about doing that.
It may or may not happen I'm not sure. That's there does their decision to make but should it occur and have been 10 will benefit from that as well because we also serve that facility.
So hardesty at this point is the only one.
That is not a maybe they're moving forward.
Well under underway, we expected to be operational in 2021, and we will uniquely surface.
Thanks for the time guys.
Okay. Thanks, Scott.
[noise] Konark Gupta with Scotiabank Your line is open.
Thanks, and congrats on a deem and Megan for you achievements.
So just wanted to begin with the question on your guidance for U.P.S.. So Keith if I can ask you what is causing you to be conservative in defense that youre guiding high single digit EPS growth at the low and I'm like obviously, you have talked about low double digits before but there seems to be a little bit of caution here because of maybe some concept NBC.
Looking at the Kenny shared with us and what what is that that's causing you.
To sum it it's conservative to me, it's prudent hi, this team takes great pride in being a team that.
We got to what we believe is achievable.
And exceeded.
And in this case, that's exactly what this guidance as I have full conviction in line of sight.
Giving things.
Things I can't predict and things that I get pretty good feel for that this team can certainly.
Achieve that guidance and I'd be disappointed to sit here a year from now and not be in a position to congratulate our team for exceeding.
That guidance, so with that said I think prudent is the right approach.
We've worked hard during that reputation to meet or exceed and we don't take it likely in we could expect to continue to do that.
But rest assured that there's an opportunity.
To exceed didnt achieve in any of our.
Endeavors day to day. The end result is going to be earnings growth, we're going to do that with his team. It's a culture performance. It's a culture the pursues excellence.
We're blessed to work with the best team or Railroaders with the strong franchise with its own unique set of in many cases counterintuitive to the industry.
Growth opportunities that emboldened, our guidance and our conviction about being able to meet and again I think a keyword as exceed yeah 17, we raised <unk> 18, we raised the 19 were the only wanted to me so.
Our track record I think it's the.
As for itself.
Thanks for that and then secondly on a on the market share opportunity. Some degree obviously you heard about a few opportunities in a at your last Investor Day, and then clearly there's been some a contract announcements over the last couple of years.
With that if we can remind us.
Are there any more opportunities from those Ah from those kind of.
Intermodal and automotive opportunities you laid out before is there anything else that.
You are kind of looking at over the next 12 to 18 months or is there any new opportunity because that has opened up you mentioned about CMQR I know, but is there anything else, but in the existing CP franchise that you think case up for grabs thank you.
Absolutely, Yes, then I'll, let John speak to some of those exciting things that we've talked about and some things we haven't been able to speak to yet we see and hope to be able to to provide color on.
Yeah. So.
Look at our domestic intermodal franchise.
In particular, so just recently in the fourth quarter, we signed long term agreements with the bison and consolidated fast freight.
Two leaders in the trucking industry to leaders in the in the wholesale industry and we're creating solutions with them without needing to purchase them, we're providing solutions in the marketplace that'll drive new first mile last mile innovation that the industry hasn't seen.
On top of that.
There is an intense focus with that my team to drive over the road conversion.
We think 2020 and 21 present, a whole new opportunity in over the road conversion with again these two partners and others to bring that that business to our railroad. So look you combine that with.
On Onboarding Yang Ming.
Future growth at the Port of Vancouver, All the good thing we're doing on the auto side.
Hirji chemical and plastic side of our business in terms of our refined fuels growth in to the eastern market.
Our refined fuels growth into Vancouver for export and you begin to layer on the diversity that the CMO, who brings not only from a commodity and product and customer perspective, but one thing that keep didnt mentioned about see AMCU.
That I'm Super excited about as all the new gateway access to the short line partners that Weve never reach before as part of the cm Q and to the eastern carriers, creating new routes and new markets.
The level of interest from from that part of the northeast you asked in Eastern Canada has frankly been been overwhelming in the last 60 days and I can tell you my team and our leadership has been out on that property and talking to these folks and I don't I don't we'll see if it's a 2020 story, but.
Sure makes us excited about what 2021 could look like.
Okay. Thank you.
Thank you.
Tom Wadewitz with you Yes. Your line is open.
Yeah good morning.
Hi.
I, just I guess I'm fine point, maybe one for John .
The energy chemicals, and plastics line had very strong revenue per car I assume that's due to the.
Strengths in crude.
But I think we were like 40 860 per car is that something we ought to moderate going forward that that continues or how do we think about.
ARPU on that line in 2020.
Yeah. So we certainly we had a pretty good tailwind as it relates to the price in general we saw some some nice increases there we did benefit.
On the mix from also in that space and then last you're right.
A lot of it was driven by the crude I think you'd be you continued to see some of that into Q1, and then it sort of modern begin to moderate.
So it stays at that level, but the year over year moderates is that what you're saying.
You know I you could even see some acceleration as we as we move through Q1.
And then and then it begins to moderate Q2 and beyond.
Okay great.
I wanted a I don't know if I can I just I guess.
Quick one as well in the network.
You've got you mid single digits RPM very good growth outlook for this year you know your commentary positive.
Opportunity to keep growing how do we think about the kind of the network where.
If you have stretches a single line are citing spaced out or whatever where eventually you get into some potential line constraints is that something to consider or kind of bottlenecks in the network or are you pretty good in terms of line capacity on a multi year basis.
Yeah from a capacity standpoint time, there's no lines a constraint on the horizon at all.
Nothing that's material nothing thats concerning nothing that we couldn't address.
As far as increasing capacity in lock step with growth you know there's always have remained.
Keep my own Chicago, Chicago can always bubble up given the right conditions, albeit Chicago has never been in a better condition given.
The benefits of PSR that the other railroads are implementing as well as some of the infrastructure investments.
So I don't let my sense get to.
False sense of security in that space I pay attention to it.
But at this point.
Not concerned.
Overly concerned the other place I pay attention to Vancouver, obviously that port is critical to the commerce in Canada, it's critical to.
Our railway as well as our competitors railway so as much as we compete hard working in partnership to make sure. We protect the capacity to the benefit of everyone is something that I pay attention to and that's that's why I'm. So [noise].
Seized with focus on Kamloops.
I want to support tech as much as I can for them to realize.
Business success, because I know with their success comes CP success, and if that formula can do that I'm all for it I've just got to make sure that that formula doesn't destroy value or capacity on my network.
Especially given so close to being in the core door Vancouver, which we all depend upon both is railroads.
As well as commerce in a country.
So long answer to your question.
Well I capacity is not an issue that we can't manage and that we don't manage stay in a day out you can take a look at our business move ran at our highest levels. We never ran better faster more fluid Ah that's a testament to that process.
And you can expect that to continue and reminder, Tom when we at our analyst day in 2018, we guided to mid single digit RCM growth double digit EPS growth and if anything 19 2019 RPM growth was lower than expected. So you know we have our capital plan that was to support that.
Multiyear plan as was lock step into that mid single digit RPM growth. So if anything there's there's probably more capacity available than we expected back then.
Okay, great. Thank you appreciate it.
Thank you.
[noise] Ravi Shanker with Morgan Stanley Your line is open.
Hi, Good morning. This is sort of rice on for Robby, maybe just a couple of cleanup ones from me I guess just following on some of the CBR questions. We've had can you update us on your current timing expectations around the government contracting Alberta at this point.
Yeah. So I'd say generally we are in terms of our agreement.
With the highly likely party thatll be assigned to is completed.
That party is working with.
Their suppliers, there destination markets they'll sell into.
I would expect we may see some ramp up of that associated volume as we move into February here, though so fairly tight.
Got it understood and then maybe just taking step back could you refresh us on everything about capital allocation priorities here and good to see the CMQR announcement back in November and maybe just how you think about the M&A balance between short line and potentially other transportation modalities versus investing in the rail.
Yes, so we have a line insights and best our Capex of about $1.6 billion over the next several years you know.
A combination of investing in hopper cars as as a major project you know fundamentally investing back into the basic infrastructure, but 800 million 2 billion a year and then we have some locomotive modernization.
Matt.
To add some additional.
Modal power fuel.
Apart from that we will look at adding to the network, where theres opportunities. We're more focused on rail then than other types of supply chain opportunities. So.
It's just there's not a lot available out there. So you know the cm Q came at the right time at the right price and that was a maybe a unique opportunity.
Beyond that so we'll look at so continuing to increase or our dividend.
We have.
Guided to get that to the 20, 530% payout ratio.
Overtime and then we'll look at.
Turning cash through buybacks, which we've consistently done in that 3% to 4% kind of level, we we announced a new buyback program in December of three and half percent and so that'll be the other opportunity for capital allocation.
Got it I appreciate the Don.
Okay. Thank you.
[noise], Brian Ossenbeck with JP Morgan Your line is open.
Hey, good morning, Thanks for taking my question.
One more on.
But from the labor.
Active.
The headcount reductions elsewhere in industry look you're looking to grow and expand head count there.
It wasn't too long ago were.
More widespread shortage and obviously the labor market.
Looser I don't think so you just talk about how you do you perceive the tightness in the labor market and if there's anything.
You're doing sort of proactively to get ahead of what might be some some challenges in some of the specific areas.
Well it it CP I'll, let me start with right now we still have surplus.
Labour, We've got employees that we've invested in and trained and that Unfortunately, our business doesn't the business demand at this point doesn't warrant the need that are in furlough status. So we have that call upon.
As we bring on additional.
Incremental our Tam growth.
But with that said.
Even in a tight labor market, it's about value proposition and you've got a company that we pay well, we strive to treat or employees well, there's a tremendous amount of.
[noise] pride in working for this company and the success that we've created and we continue to succeed and success breeds success.
We've not had.
Any meaningful challenges.
Attracting and hiring and training employees and in fact, our retention rates. If you look at the last two years.
I'm, especially proud of have.
Have improved dramatically double digit improvements to to add industrial.
If not railway best.
So employees are coming.
They are enjoying their jobs are being paid well, they're contributing to an enjoying the success we're creating.
So at this point, we have not and I do not foresee any additional problems to be able to hire and train in lock step with our growth.
Hi, Thanks for all those details there Keith.
One for John if you can just talk about the capacity that they might be unlocked when the tech transition happens.
Your next year.
Is it too early to start to have those conversations with potential customers and what do you think that might do to the new role mix. It was previously going over that.
Segment as you start to transition something a little more diverse.
Okay.
Yeah, I don't know if there is a big mix change obviously, there is an ongoing opportunity to grow our green business.
You know, we've we've moved five or six trains and in the new GE three terminal here recently as they prepare and commission there silos to the open up.
Weve opened here in 2019, six new 8500 foot elevators.
That'll that'll primarily service that Vancouver market, there's additional coal opportunities that we're working that.
We expect to come on right around the right timing of this transition.
So you know it's definitely not too early we're having those discussions with customers today, but I think it's pretty diverse in terms of the up the opportunity.
Hi, Thanks.
Mhm.
[noise] been Wap Jorge with <unk> capital Management. Your line is open.
Yes, so congratulations for the good results.
Could you come back a little bit on the potential Fortunately these two to replace the a the tech business from Kamloops to Vancouver, and eventually how the E.
The potential to do come back with EPS accretion to do offset the a 1% dilution the.
Could be a again another scenario right now.
Okay, Let me.
If I could then let me say this.
To put it in its simplest terms.
The last of the Tech business ended up itself Standalone worst case scenario as I've said is about a 1%.
Earnings headwind.
But its margin accretive operating ratio improved as a result of that now that said the opportunity and John can provide a bit more color, but be it grain.
Yeah that everything that we move in that quarter or the capacity that's going to be unlocked in available to convert with improved service and faster asset times I see incremental growth across the book of business.
Beyond that incremental growth.
This discussion, which is advancing rapidly with this alternative met coal producer and Riversdale is real.
It's substantial if.
It's taking positive steps and to John's point.
I fully believe unexpected it can be aligned shortly after this call transitions to the switch or kamloops over to the Canadian National.
So again.
It's an opportunity that we fully intend to be accretive and do and to realize.
Leading up to and certainly after and through that transition. So John I don't know if you want to add anything I Miss but.
No I again, then why I think it really is a across a large piece of the book of business.
Our EVP team continues to add onto our energy train, we're only going to see I.
I think the refined fuels export market grow through Vancouver, and we've got the the best mouse trap in the industry to service that so its capacity like that it's the coal is future growth and in the intermodal sector and again don't underestimate.
The power of the operating model related to our 8500 foot Green model and what that's going to do.
In Vancouver.
Okay, that's really good color and with respect to crude by rail John as the you will move toward the the are you a neat bitumen.
How do you.
Exposure do need be Truman will be down the road and what about the a the pricing given it's a month as art. This is there are big discrepancy versus the typical crude by rail words about the same we should.
Forecast going forward.
Yeah, I don't know if I can give me a number than while relative to how we price.
You know sort of.
Standard crude reserves, but I can tell you. The if it is a it's a pay for commodity so we have looked at it differently.
In terms of how we get at the market in the partners Conoco Phillips that we're working with the market the product.
I don't know that Oh, I think I think it important piece that.
We can't really side of is the linked the fall is going to improve we're gonna be.
Interchange a large percentage of the crude that we move up for Kansas City as opposed to shorter gateways.
Given the tenure deal with partnership with the case, yes and in conical Philips.
Whereas today's model.
Much of that business that it's replacing.
His interchanged over a gateway that's much closer to the origin in Kansas City is.
Yeah that is a fair point it will depend on sort of how that mix roles in and out of our business at that time.
Okay. That's great color. Thank you very much weren't a time.
Justin long with Stephens Your line is open.
Thanks, and good morning, I wanted to ask about that trend and comp and benefits per employee and kind of what you're expecting on that front. This year relative to labor inflation and then keep you made the comment earlier on head count that you know with mid single digit.
Our Tam growth this year, we should see a low single digit increasing headcount is that a good way to think about the framework longer term as well.
Yes in general you know, it's all mix dependent if we were to drop all of our growth through <unk>.
80 foot 8500 foot.
Grain trains or.
152 cars that total trains or hundred 72 car.
[noise] potash trains there are limitations, obviously, we can't.
Incrementally make.
Monumental train link changes in those and those kinds of this but in general across the board. That's a good rule of thumb. It proved to be through last year in a proved to be true with our mix.
This year.
And I can tell you when it comes to our.
Cost per employee on an art T M basis, we have negotiated and ratified some pretty progressive agreements I talked to them.
Yes last year, probably don't talk a lot about it that effectively we tied our success in our growth to our employees. So we start with the base in many of our contracts on the.
Collective agreement solder Union contracts that have a base of 2% and incremental can grow up to 3% wage appreciation. If the growth is there as it was given flat RPM growth than in 2019, then obviously, we're going to realize a lower the lower side of that model as opposed to the higher side.
Out of that model.
No I'm, not saying that proudly I'd love.
To be able to give our employees the higher side to that model and we've set it up so that we can do that because they are key key contributors to our ability to be able to grow with the service. They provide a so I don't expect a headwind in that space in 2020, given the Archie I mean, it's all tied to the Rtms. That's why we always speak Rtms at CP, we get.
Paid by the RTL.
Not the carload, it's by the Rtms.
So again, hopefully that helps give some color to your question on the only other we've talked about the 30 million dollar headwind in pension under comp benefit that you should that your model and.
That's equal each quarter. So you can add an extra some the half million each quarter's a comp and benefits and then whatever you think the stock based comp will be in terms of.
Our performance that's always the variable it was it was a big headwind in 2019, and we fully expected to be a big headwind in 2020.
Thanks, that's helpful and maybe one other big bigger picture question around the Omar obviously had a lot has kind of changed in the last year with how the economy's progress the freight markets progress do you mentioned some of the contract announcements and we've seen the headlines on that when yet when you put it all to.
Get or how are you thinking about the right framework for allar improvement going forward, if it's still something around that 100 basis points of annual improvement if were growing rtms mid single digit therapy is there an.
Updated way to be thinking about that.
Yeah, Justin I mean, and good question, we don't necessarily look at the or for the sake of all our it's just it's a it's a product of of doing everything else well and if it's a bit of a score card. So John and his team that have been very successful and leading the industry and growth continue to do that.
That's going to be sustainable profitable growth, it's not gonna be growth for growth sake, and you know pricing to the the service than the value we give our shippers that's gonna be beneficial to the or the operating team executing safely and executing in.
In a controlled fashion in terms of from a cost control point of view the operating leverage we should get you know some of the investments that we're making in terms of.
Assets and infrastructure and terminals.
That will allow productivity improvements to to be achieved.
All of that goes into the Blender and you know you should naturally see a benefit to the or.
You know, we put up some some very strong numbers in the back half of 29 team and there's no reason you know outside of of stock based comp, which I mentioned again is is we expect to be a headwind outside of that and we should see continued improvement in the O R and and I'm bullish on what we can achieve relative.
For the industry.
Okay I'll leave it at that thanks for the time.
Thanks, Justin.
David Vernon with Bernstein. Your line is open.
Hey, good morning, Thanks for the time.
So Keith I wanted to ask you a little bit about the decision to extend the network a little bit with short line purchase obviously, it's a little bit of the switch from from prior rationalization. A short line is this a a shift in sort of philosophy in terms and looking for ways to to further enhance the value the network or was this just like a onetime opportunities it seemed like a good fit in.
The network.
Well, we've we've always to embrace the philosophy that we're we're continually looking for value accretive opportunities to grow our network and the certainly was a compelling one.
You know I look at.
You know this railroad some people do were no. There's some people don't this is railroad our predecessor sold 25 years ago.
For the reasons that only they can explain or.
Properly give justice to a they made a decision to exit the market.
The world's changed in 25 years, the railroads changed it's evolved.
We've got a very very.
Compelling competitive service offering that we're able to produce that when you lay that over that geographic footprint. It represents strength and opportunities for long term sustainable profitable growth.
We're going to help those customers went in the marketplace. It just makes too much sense. It fits right in folds right ended the strategy that we've executed across this well railways. The last three years, when we shifted from our mandate to fix the strength in the stability in the long term sustainability the company.
To one of growth using the value and the capacity that we created by implementing a precision scheduled railroading.
So we'll continue to look to these I would suggest I don't see any.
Letters compelling that it made themselves available, but we've got dry powder, we'd get the balance sheet to actively certainly has the expertise within this company to convert it. So we'll continue to look again, nothing I see an immediate future, but our eyes are wide open.
And maybe just as you think about integrating it into the business will there be some time for to kind of get up to the return level you'd expect I'd imagine there might be some some capex you need to put in the labor, maybe coming over and a little bit Isle a higher rate, if you're going to be.
You know, bringing those employees into the existing contracts how should we think about the return profile on the on the on that extension of the networks you to be a little bit more backend loaded or will it be well it will start from day one.
Yeah, I mean, you'll see some some small accretion kind of day, one but nothing that is going to move the needle in anyway. So you know some of the growth opportunities we talked about to your point in terms of getting the network backup this to the levels of capital condition that we expect it will take some time so.
It will be more backend loaded it is a strategic opportunity that you know, we're not going to rush, we're gonna do it right.
Hi, Thanks, guys.
Great. Thank you.
Ken Hoexter with Bank of America. Your line is open.
Hey, great good afternoon.
[laughter], making and deemed congrats on the awards and Keith.
We should the comments to counter earlier about your conservative as in your outlook, but just really quickly I just want a follow up on that I would you be more surprised on the volume side, meaning you're more concerned about the revenue outlook or is this more cost returning that nadeam talked about just because you've been so adamant about kind of double digit growth in 1920, and 21, so just a little bit of conservatism.
Wondering what what where you're leaning the revenues or cost side.
[noise] you know what a from a prudent view can.
If I knew what winter was going to do in the fourth in this first quarter.
And I knew that.
All of this uncertainty in this trade space was going to be resolved.
And I knew that.
The ground moisture was gonna be favorable and we don't have the same wet weather, we had really harvest our crops as last year.
You could take me for conservatism I, just don't know that yet I see an opportunity.
Two firmly achieved that the guidance that we've issued a which we pride ourselves in that we know that to you and and our other.
Partners in this business.
But likely again I'll be surprised if we don't exceed.
Given some good fortune given the hard work and the potential this team represents and these opportunities I see opportunity to be didn't exceed on the cost side as well as to meet and exceed on the revenue side, all which leads to meeting and exceeding only earnings that's truly with the bottom line is.
Truly fair I, just wanted to see where if you were throwing it and I'm one bucket versus another in terms of why you're adding that a little bit more conservative that's helpful.
And then I guess, just lastly from me your your peer talks a lot about this there's potential growth of of Halifax opening up the eastern is that when you talk about shim kyu and the port Maine is that what you're you're or Saint John is that what you're looking out or is there is that kind of minor portion of what you can do in Montreal or or elsewhere, just want to one out kind of gauge when you talk about.
At this this feature is that kind of your opening up the east.
Additional capacity.
Yeah, I see it is a competitive.
Option a direct competitive.
Option for the existing business that.
The currently calls owner or is served in the Maritimes to Halifax, obviously, but I see it is opening the door and being competitive to trucks and creating new solutions that don't call on the Maritimes now from an inbound standpoint in the John's point, we can't really provide the color yet because the devils in the detail.
And we're going to do this right, but we're having some very encouraging discussions with customers about existing moves as well as new news to the rail industry in providing solutions that frankly, even though the geographic advantage was there the service.
Proposition wasn't there given that you go from some of these lanes would've been a three railroad move to all a too.
And in some cases, one and we believe in partnership with the short line that does the find them all into Saint John what will feel like and it looked like a in the experience will be like a single line sort of railroad.
From East Coast West Coast in Canada, and certainly compelling into with speed into the.
Mid Western markets I mean, you think about Saint John to Montreal, and a day, that's pretty darn.
Compelling, especially when it's reliable that's truck like reliability with the railroad did not says it but does it.
And from a service standpoint, if that speed matters, that's compelling and you think about.
Saint John to Chicago in three days.
Consistently reliably these are products that havent been put in the marketplace that are still got to be tested.
By the customers and once they do and they see the value of those that sign up early are going to realize the value early and those.
That are little bit late to the party to compete I just truly believe it's too compelling for them to north.
[noise] really appreciate the time and the team looking forward to that 60 in first quarter. That's that's great stuff I appreciate the time guys. Thanks.
Thank you then.
[noise] Allison Landry with credit Suisse. Your line is open.
Thanks for sneaking me I'll, just ask one but just following up on on that discussion with the the C.M. Caitlin and Eastern Canada is there anything that specific.
May relate specifically to de to their Brookfield transaction I've I've Genesee <unk> Wyoming is.
Is there anything in that portfolio that you think maybe an opportunity to further extend connectivity to either eastern Canada or are there northeast U.S. and that just any comments on your willingness to take up leverage for M&A.
Allison the question there on specific to the Genesee <unk>, Wyoming transaction I would say maybe.
So it just depends obviously.
There's a piece that network again, it's sorta is reflective of to see in Q story.
Railroad that we use stone that went to Quebec city.
That just to pay as it may or may not.
Come into play, but it could represent compelling value.
Just depends on the willingness to sell it and what the numbers aren't if we can make it work.
So with that said, that's an opportunity and the other way I look at this and think about this I think about in simple terms.
How important and critical Vancouver is to our network and how it you know it's it's the book can or the starting point or the ending point at the strength of our franchise with the shortest routes to the key markets in Canada. The major Metropolis centers in Canada, as well as to the Midwest.
I'll be America.
If I go to the east and I look at Saint John to me the are to the possible there is Saint John could be the Vancouver.
It could be the Vancouver in the east.
They can get you to those same key routes in the Midwest.
So a franchise that has a vancouver in the west and its sister brother in the East I think that's pretty compelling and again, it's the are to the possible, but whats impossible is if you don't have that network you can't create that vision, we think we can do that.
Okay, great. Thank you guys.
Thanks Allison.
This ends the time allotted for our Q and a recession I would now like to turn the call back over to Mr. crew for final remarks.
Okay well. Thank you again for your time in for your vote of confidence as I've said it we don't take unlikely at this company, we're going to work hard to meet or exceed your expectations into reward you for the trust you put in us.
As we reward our customers with our service so they can win in their end markets in our employees that make this all possible for their sacrifices and in their contributions we look for a too.
Leading again and discussing again, what we anticipate to be strong results for the first quarter of 2020 have safe and productive today.
This concludes today's conference call. We thank you for attending can see Deans Pacifics fourth quarter 2019 conference call you may now disconnect.