Q1 2020 Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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My name is Christina and I'll be your conference operator today at this time I would like to welcome everyone to the Canadian Pacific first quarter 2020 conference call. The slides accompanying today's call are available at Www Dot CP, our thoughts CK all lines have been placed him you direct any background noise.
After the speaker's remarks, so to your question answer session, if you'd like to ask a question simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound key I would now like to introduce Megan Albertsons, a VP investor relations and pension to begin the conference.
Thank you Christine.
Hi, good afternoon, everyone and thanks for joining us today, our sincere apologies for the delayed release and start to our earnings call. We ran into a few technical difficulties, but those are now behind us. So we appreciate your your patience in understanding.
Before we begin I want to remind you did this presentation contains forward looking information and that actual results may differ materially.
The risks uncertainties and other factors that could influence actual results are described on slide two in the press release and in the ambient either filed with Canadian and U.S. regulators.
His presentation also contains non-GAAP measures, which are outlined on slide three.
With me here today, it's Keith Creel, our president and CEO medieval Lanny, CFO and John Burns, our Chief marketing officer. The formal remarks today will be followed by Q and eight.
The interest of time, instead that we can get to as many analysts as possible. We'd appreciate if you could limit your question to one.
It's now my pleasure to introduce Mr. Keith Creel.
Right. Thanks, So make and then let me start about taking all that who joined US today during what are certainly unprecedented times.
In fact, better said I would say the right extraordinary times, which happen we'll continue to require extraordinary efforts and sacrifices to endure this battle there were all facing.
I've said before.
For your review our results I would say thank you.
Thank you to our 13th Stroll TP family, that's not only enabled these results.
The Irrs sacrificing day to day out ensuring the central services, we provide continue for something bigger than anyone of us and that's where the health and wellbeing of society.
Picture is worth a thousand words, which is exactly why we shared the picture that said our deck today. It was taken trucks out in a material last week erected by someone in that community. The thanks, the true heroes CP that a risk in their lives day in a day out.
Sure.
Well, thank and recognize the first responders health care professionals and all other frontline providers for their own dedication to sacrifice.
In the scope of 19 crisis.
I can tell you is a leader in being I'm extremely proud of RCP family.
Professional railroaders for the body of critical work that they're doing right now for the Canadians and Americans alike.
To protect our lives in our livelihood.
Shipped in my comments star results, which speak for themselves I'm gonna be shorter my comments.
Going to spend.
More time speaking to them to highlight what this PSR model is truly capable of.
In a quarter, where our other railroads experienced negative volume CP grew our teams by 9%.
For the first time and see piece history, we produced a sub six deal on the first quarter enable us to grow warnings about 58%.
Rest assured the same operating model that produce these results.
It's just is resilient heading to the challenging times, if we're facing it's a model that team that's proven its ability to adapt our resources and our cost in a rapidly changing volume environment.
And respect or updated got its recognizing there won't be volume headwinds ahead, we're now expecting arcade games to be down mid single digits for the year that said given the buffer that we built through the first quarter, we felt comfortable guiding to flat earnings.
Not only can we weathered the storm I can pick that based on the strength of the steam in the power. This operating model, we won't come out of their decided a stronger more resilient company.
We're entering the surface hotels with the strong balance sheet and ample liquidity. The management team is battle tested we're ready to weather. The storm, we're not panic, we're not distracted for prepare for engaged more agile. There's certainly no playbook for times like this but as a leader I know this is where a culture and a discipline.
That strong comedies and things apart from the rest we certainly recognize they're gonna be challenging times ahead that said I've never been more confident or companies that our team's ability to succeed in spite of this environment. We're all facing to me answer unique opportunity, where they need this and the potential of our team and uniqueness of our storage.
People, Sean the broadest for our investors our customers in our employees.
So to wrap my comments up I'll leave you with this at CP, we continue to invest in our network, we're going to continue to invest or people.
Continue to look for ways to support and grow closer to our customers. That's what strong companies do and what strong leaderships do we turn our challenges into opportunities will grow stronger will create or on your big success, CP, but that said I'm it turned out when they deem as John.
To cover the balance of our numbers as well as our customer opportunities.
Alright, Thank you Keith and good afternoon, everyone. So total revenues were up 16% this quarter to a Q1 record of 2 billion.
Our teams as Keith said were up 9%.
FX was up 1% will fuel was flat.
Pricing remains stable landing in our targeted range will mix looks positive.
As we moved lower volumes of Colin potash.
Obviously as Keith said, a lot has changed in a short amount of time.
That's a shirt my team is continuing to work closely with the operating team and our customers.
To ensure we stay aligned during these challenging times.
I will now briefly highlight our first quarter performance and provide some color on our outlook for our major lines of business.
I'll speak to the results on a currency adjusted basis.
Starting with grain grain volumes were up 8% on the quarter with revenues up 10%.
I want to start by congratulating, the CP team and our grain customers for delivering an all time Q1 tonnage record for Canadian grain and grain products at approximately 6.4 million metric tons.
Our 8500 foot grain train operating model is enabling new capacity on existing train starts.
And our covered Hopper fleet investment is giving customers the ability to load more grain per car.
In fact, our high capacity cars alone enabled the movement of an additional 100000 metric tons of grain in Q1.
He TPN or green partners are delivering greater productivity reliability and sustainability into the grain supply chain.
As I look ahead grain will remain a bright spot.
Our Canadian grain market share is approaching 54%.
And with strong demand of both Vancouver, and Thunder Bay, I expect ongoing momentum.
On the potash front volumes were down 10% and revenues decreased 2%.
For export potash, we delivered a strong Q1 for our partners despite market challenges.
And tonnage projections remains solid as I look ahead to Q2 and for full year 2020.
On the domestic side with consecutive poor application seasons due to flooding in cold wet weather, we see upside in the North American markets as the industry looks to replenish nutrients during the spring application season.
So bottom line I remain optimistic about the demand outlook for both domestic and export potash.
In fertilizers and sulfur revenues and volumes were up 21%.
Similar to our domestic potash story, we're seeing strong demand for nitrogen and phosphate from our retail and wholesale outlets across our fertilizer distribution network.
So overall with our bulk sector, making up over 40% of our book I expect our grain coal and fertilizer to provide a level of resiliency looking forward.
The energy chemicals, and plastics portfolio saw revenue growth of 55% well volumes grew 39% with growth across many of our commodities in this area.
And record crude by rail volumes.
Now looking forward.
We feed demand pressures across all these commodities and markets crude volumes are rapidly slowing given the steep decline in demand, resulting from covert 19.
And the impact of oversupply from the Saudi Arabia, Russia production dispute.
As we've seen in the recent days with all the volatility.
We are expecting low demand environment in North America, and globally until recovery starts to ramp back up.
As a reminder, we have structured our contracts to provide protection in times like these.
All of our crude contracts are multiyear and have minimum volume commitments and liquidated damages associated with them to help offset some of these declines.
Moving on to forest products were up 8% well on M.C. volumes improved 13% to.
The growth in these lines of business were largely driven by strong pulp demand.
Steel and Frac sand shipments to the Bakken.
Looking forward, although segments, such as pulp will continue to be strong.
We are seeing softening across many of the industrial sectors.
Additionally, frac sand volumes have declined on are expected to remain challenged due to the pressures on the energy markets that I've already spoken too.
In automotive.
Revenues were up 13% well volumes are down 3%.
And outstanding outcome, given the pressures on this sector.
The near term outlook for automotive business remains uncertain, given the temporary plant closures.
However, we are staying close to our automakers mdss possible startup timing.
When things do start to ramp back up there are some positives to look forward to in this sector.
Recently, we have entered into a new five year contract with Fiat's Chrysler as they will join for Ford starting in July as a long term partner at our Vancouver auto compound.
Additionally, this agreement with FCTA will expand our partnership with CP is earning new lanes into Calgary Chicago in Minneapolis.
So despite the challenges across the auto industry, the startup of Chrysler and Globus later this year, we expect this new business to help offset industry declines as we continue to leverage our network developments and our strong service model.
Finally on the intermodal side quarterly volumes were up 10% as a result of another record quarter in domestic and double digit growth in international.
On the domestic intermodal front CP is a key partner in the supply chain for a central goods for North America.
And we're working closely with customers such as Loblaw Canadian tire Nestle and others to fill the critical needs of consumers.
International we have successfully on boarded Yang Ming in Q1.
We closed the quarter with a record March for revenue.
So while we are seeing blank sailings in variability in volumes and spec. This to continue as we move through Q2, so far our partners have been less impacted than others.
In this space.
So let me close by saying as the environment has rapidly changed.
We have been closely aligned with our ops and finance teams to ensure that our resources adapt quickly and in lock step.
We have an excellent team of sales professionals that are proven that are working closely with our customers to understand their current needs change then demand and maybe most importantly.
How are we can help customers be successful well we move into recovery.
So although we are all navigating through uncertainty.
Competent that this team's proven record and our surgical growth strategy will continue to position us to lead as we emerged from these unprecedented times.
So with that I'll pass it over to Nadeem.
Thanks, John and good afternoon, I'm extremely proud of the record results and team is delivering today, we carried that momentum from 2019 into the first quarter 2020, I know it surprised some of you with the 60% or comment I made in January but our team made up of the best Railroad railroaders than the industry went out in May.
As to exceed my high expectations.
Overall, the operating ratio decreased 1010 basis points.
59.2.
This is a new CP record in the first time, you've gone sub 60 in the first quarter.
Simply outstanding performance by the women and men are CP.
Some of the more notable items on the expense side comp and benefits expense was down 2% or 9 million versus last year. The primary driver. The decrease was lower stock based compensation of 30 million, primarily as a result of the decrease in the share price.
This was partially offset by increased incentive compensation accruals versus Q1 2019.
Fuel expense increased $1 million as a result of higher volumes, partially offset by 4% price decrease and record Q1 fuel efficiency.
Depreciation expense was 192 million an increase of 19% as a result of an adjustment in 2019 and a higher asset base.
Purchase services 312 million, a decrease of $47 million or 13%. The main driver of the decrease was lapping that normally high Q1 2019 casualty expense.
Moving below the line other components of net periodic benefit recovery were negatively impacted 12 million or 12%, primarily due to a lower discount rate.
Interest expense was flat as a result of the lower effective interest rate offset by higher commercial paper outstanding in Q1 2020.
Income tax expense increased 46 million with 33% primarily as a result of higher taxable income.
Rounding out the income statement adjusted diluted EPS grew 50% in the quarter.
The same discipline and construct attention that enabled these results will enable us to adapt in the weeks and months ahead as Keith noted as powerful as the PSR model is in good times performed even better better in the challenging time in fact bite of record Gtlds and our teams in Q1, we are parking locomotives and have been.
Thats the adapting resources real time, I've noted that often noted how collaborative our finance asset management marketing and operations teams or when they look at demand capacity.
Our team's ability to align our resources.
Yes in the industry and are very proactive that becomes particularly evident in times like these.
We turned to the next slide on free cash cash from operations increased 18% on the quarter.
Free cash is down quarter over quarter as a result increased capex capital expenditures in the first quarter.
We're going to continue to reinvest reinvest in the network and remain committed to our Capex guidance of 1.6 billion.
We plan to proactively take advantage of additional track time to do necessary maintenance to be in a position to capitalize when demand normalizes.
Sounds like the can provide opportunity to stretch capital dollars further in terms of attractive material costs and production will often.
We have a pipeline of high return projects, including the covered Hopper investment and we had our absorbing the headwinds from higher FX in our capital combo.
We will continue to evaluate economic conditions, but our disciplined approach and commitment to investing in the business is evident in our in our adjusted ROI C, 17.4% and industry best.
Turning to the next slide and a comment on the environment, we find ourselves in today.
The cobot 19 situation continues to evolve however, I'm confident that we are very well position to navigate this uncertain time.
From a standpoint, we are in a strong liquidity position.
We had two highly successful debt issuances in Q1 with record low coupon rates that enabled us to pay down the majority of our short term debt.
We don't have any debt maturing until Q2 of 2021.
As of yesterday, our 1.3 billion units revolving line of credit this fully undrawn.
Additionally, the facility can be expanded by an additional 1 billion us should we need to do so.
As previously mentioned in the balance sheet remains strong with leverage within our guided range of two to two and a half times adjusted net debt to adjusted EBITDA.
On the shareholder return front, we have been prudent in the near term to protect the strength of our balance sheet in March we temporarily Paul our share buyback program, which is about 40% complete.
We wanted to get clear greater clarity on economic impact of Cobot, 19, and how that would impact our customers and volumes.
We also delayed our dividend increase for the same reason.
So although in the short term, we're sitting on about $400 million in cash once we have comfort around the economy restarting in North America, we plan to revisit both the buyback program and the dividend. We just believe this is the right thing to do given these unprecedented times and our shareholders of being fully supportive of this conservative approach.
We earn an enviable position to whether these uncertain times and we'll continue to proactively manage our liquidity, we're taking proactive action to control costs in a way that for Texas protect us when the volumes return.
With that I'll turn it back over to keep the wrap things up.
Alright, thanks, netting John for that color and I think we'll say the balance part time for the questions. So let's open it up now for Cuban it. Thank you. If you would like to ask a question simply press Star then the number one and your telephone keypad. If you would like to withdraw your question press the pound key as previously highlighted.
Please limit yourself to two questions there'll be a brief pause we compile acumen a roster.
Your first question comes from line of a Chris Wetherbee from Citi.
Your line is open.
Great. Thanks, Good morning, good afternoon guys.
I wanted to just maybe ask about the guidance and I appreciate you, giving us a stab at guidance given the uncertainty that's out there as I look at the RPM guidance versus EPS guidance looks like you're maybe thinking about.
Kind of low double digit declines you're around 10% declines in our teams for the rest of the year and then EPS guidance for the rest of the year would suggest something down maybe a little bit more than that so can you just sort of walk us through some of the puts and takes things you're doing with the network to try to offset some of the potential negative operating leverage obviously you guys did a great job in the first quarter kind of want to understand some.
Those puts and takes what May drive earnings down more than Rtms up that's ultimately what happens here for the next next three quarters.
That's a Chris let me, let me provide a couple of high level comments and I'll, let may deem that any color that.
I'm not cover so.
I think it's important for everyone to understand and I think the numbers speak for themselves. It CP. This is unique story in this industry has been the last two years. It continues to be sort of macro level. We've got some uniqueness, we've got a unique business mix 40%.
Of our business base, our revenues, obviously, both driven and these are areas that even in spite of these challenging times their underlying strengths and we're capitalizing we're executing in those marketplaces. So our guidance is influenced by that and the same Tom its influenced in tempered by the same things that you're seeing I'm seeing were all here.
So its phased in demand thats coming back mid may certainly going to be down in the second quarter in a major way.
It's going to start to ramp up it's going to be a bit stronger in the third quarter, it's going to be stronger in the fourth quarter and I'd suggest it's probably first quarter of 2021 before normalizes, but again, what you see external.
Overall for the industry CP is getting index based on that because of our business mix because at the team because of our ability to adjust and control costs were eight years into PSR. This isn't something we've just start so we've been adjusting controlling and tempering our cost in lockstep with our demand. It's it's in our DNA as part of how we do what we do.
So again, we're going to continue to do in play to our strengths in this franchise, we're going to play to the strength in our business mix and we're going to adjust our asset base your cost to match in lock step the demand that we see to protect our margins and to protect our earnings as best as we can't this storm and at the same.
Time.
Position ourselves to exit strongly we're doing unique things not only.
Controlling costs, but with our employee base as well and I've talked about this in the past listen into the day. This is a people business.
And we're all having to sacrifice, we all have things I'd.
About the I know, but one thing I do know and I believe firmly this economy is going to come back. The strength is there. This business mix. The strength is there and when it comes back we need our people their minds and their hearts and their commitment. So we're doing things above and beyond for our employees.
To make sure that when we come back into the business bounces back that they're they're they're available and they're ready to return to work, giving them and sending them and paying them in ways that contractually, we don't have too, but it's the right thing to do number one and number two it's going to submit and let them know how much they mean to us.
And how much they need to our business.
So that we can't appropriate response, when the business bounced back so I know thats a long answer to your question, but I think to understand the cold on the context is important name, let me turn it over to you. If you want to fill in any of the colors relative specific numbers there anything I missed.
Yes, Chris I'd, just say in Q2 likely you'll see more.
More pronounced kind of.
You know negative operating leverage versus Q3 in Q4, which should be a.
We will be better position and that's just given the rapid decline in volumes that John mentioned, so I think we'll see as the economy restart so whether that later in may or june or or beyond that.
We'll be in a better position, but but certainly when you have a significant drop just in Q2 no matter how proactive we've we've been.
You're going to have certain kind of fixed costs like like depreciation year over year that are going to be headwinds and so forth but.
But for the most part the expectation for the year still assumes that we're going to be able to improve our operating ratio, which I think it's a testament to how we can protect earnings even with.
Negative volumes.
Got it that's very helpful. Thanks for the time appreciate it.
Thanks, Chris Thanks for it.
Your next question comes from lineup Allison Landry from Credit Suisse. Your line is open. Please go ahead.
Thanks, Good afternoon.
I've asked about the capital allocation I know you reiterated the 1.6 billion Capex this year, but how much room, if any do you have to scale back if the environment just acetate.
And then.
If you need to preserve cash would you prioritize delaying some of the funding or over just have a dividend.
I will tell us and I'll, let may deem fill in the numbers, but I can tell you.
From our approach we're protecting this capital because this is long term game. This is a marathon, it's not a spread.
This business is going to come back the money that we're spending.
Surgically going strategically it so that we can accommodate growth and protect our margins and protect our fluidity and protect sort of the magic that's in our operating model.
Asset turns matter safety matters velocity matters, all those things. So when this business comes back given that we're investing in offers that make us more efficient more reliable it plays to our margins. It plays to our capacity given that we're investing strategically in our track and the spaces that we need infrastructure to make sure that.
We can protect our fluidity as business comes back and in fact improve not not slip back.
I'm not one that says we need to cut our capital I think about this from an opportunity standpoint.
We have the ability we have the need we had the business case to invest in the business.
We havent ability now with demand down with business down to actually do more with less to take that capital spent and put in more ties morrell more ballast more surfacing more grinding all those things that into the Dave in the business comes back when you need the capacity. The most not only is what we had.
There.
It's increased so to me the last thing to do right now unless financially we need to to protect the strength of the company, which uniquely we adult im not going to cut back on our capital expenses that said, we do have an envelope of if necessary, we can but we're not anywhere close to getting to that point.
And then name I don't know if you want to add to that but that philosophically and fundamentally hunk addicted thats, where we stand in this company.
Yeah, and I, just I would just add that you know between John and his team on the sales and marketing side, leading the industry in growth the last several years.
Having no short kind of construction season that we have up north.
You have less of a window to do some of the work and so you you are not as productive as you'd like to be so on one hand, we don't like seeing negative volumes, but it but it does create for us and opportunity to to be a lot more productive inefficient as Keith highlighted and so it's an opportunity for us and certainly.
Lee.
We look at this is as you know being able to pull forward even some some work from from 2021, if we can be more productive and do it more efficiently and cost effective then we're going to do that from a financial position. Yeah. I mean, we we still see free cash flow in excess of billion dollars.
Bill plan on completing our share buyback, we still plan on on revisiting the dividend and an increasing that we've talked about a payout ratio closer to 25, 30% range. So I don't think any of that is at risk given.
The financial strength that I mentioned in terms of our balance sheet. The fact that we have $400 million cash on hand.
We're just being prudent in how we return cash to shareholders in the near term now I will also say we've done effectively 40% of the program that we announced December Twentyth. So we're ahead of pace on the buyback, it's not like where we're we're slowing it down materially in anyway.
Okay that was not helpful guys. Thank you so much.
Thanks Al.
Your next question comes from buying Walter Spracklin from RBC capital markets. Please go ahead.
Good afternoon, everyone.
Just wanted to focus on your mid single digit decline volume guidance wondering if you could decompose that a little bit. John you you certainly indicated and suggested that bulk is doing well and is likely going to continue to do well. So perhaps just to put it simply or are you expecting bulk.
In the balance of this year.
To see your growth in that segment.
Yeah, I think there is the opportunity out there Walter in the bulk space.
Given away. This this Canadian grain crop has set up itself.
I think our expectation sees that potential through Q2 in and all expectations are.
You know certainly another strong crop coming out of Canada towards the back half for the year. So I think that presents an opportunity.
Potash is.
That an interesting one camp attacks on the export side has done a really good job of to some extent deleveraging China.
As part of their book now, it's not it's not perfect and it's not certainly complete.
But we think given soft compares that we had the back half of last year in the potash front end.
And you know what our expectations are with them for potential movements, there presents itself an opportunity there.
The end in beyond potash as as I said the other fertilizers.
North American in particular has been.
Quite depressed in terms of returning those nutrients in the soil and.
I think our teams pretty excited about what we're seeing on that front.
Hi Tech, we'll see I think theres and in some of the coal theirs.
Probably a likelihood we see a little decline year over year in that space, but I can tell you right right now as it is it stands with Theres been some challenges through Q1, we got some makeup to do I think in that space as we look forward. So.
I'm not counting that went out either Walter.
Okay. That's why one thanks very much.
Mhm Thanks Wally.
Next question comes from line of Steve Hansen from Raymond James.
Please go ahead.
Oh, Yeah, Hey, guys. Thanks for the time.
Just curious about your new five year contract with the FDA It sounds like a solid when the way you described it I'm just wondering perhaps if you give us some sort of sense of magnitude.
First part and second part it just curious if this is really it sounds like this is a broader extension of the land strategy you laid out a couple of years back now I believe at least 18 at Investor Day, I'm trying to understand what inning were in that broader strategy as it relates to new contract wins in opportunities you see as you roll this out thanks.
I think you nailed it Steve it absolutely is part of the broader strategy.
I think we were pretty clear from day, one week, we were confident that Vancouver auto compound was going to be a home run in terms of bringing customers to Canadian Pacific. It just makes too much sense in that marketplace.
And in certainly we've got at full forward in FCTA are are going to be long term partners.
At that terminal.
You know that that contract.
I think we could expect 40 50 million.
But you don't you add globe assigned to that.
In in that almost doubles that type of number so there's a pretty significant chunk of business.
That's going to layer into our franchise in the auto sector as we move into the second half for the year that that we're also excited about.
My other common as around round the the network development.
We've been pretty clear that it's it is what makes you need or a Canadian pacifics growth strategy unique in the industry.
As you go across our network.
Via the ability to take the land holdings, we have in convert those with our partners into these types of opportunities is unmatched.
And so you saw it in Vancouver, we've got some exciting things in the auto space under development in the Chicago land.
But it's not it's not just the auto sector. It's what we've been able to do and our inner trans load space those volumes for Q1 and for our Trans load business enabled revenue were up 30%. We set an all time record for our Transload business, we're just scratching the surface there.
We've got the new facility, that's going to be opening up in Montreal here in the in the coming months, and we think theres an opportunity to put that data on the map and replicate it at a few places across our network again utilizing existing land existing terminals.
That would come redundant and frankly, a lot of them I've sat vacant for years.
And it's it's the strength of the marketing team.
Understanding what those opportunities look like and in combining it with the strength of our service model Steve.
That has created with what I consider just again unmatchable.
Growth opportunities.
For this property.
Let me if I could add a bit of.
Steve Let me add will a couple of that's everything that John said you take that.
And you add on.
The CMP property. It just enhances it now we've got reach to the East coast. If we didn't have before that transaction.
For us strategically made tons of sense to give us east coast access and now as we approach the STB approval, we anticipate an approval we should hear something may the fourth we take control that railroad completely during the fourth now we've got a route from.
Tidewater on the east coast into Montreal, Toronto, the Midwest into feeding those facilities, where we have capacity, that's 200 miles shorter than our competition.
That's better than truck that struck by competitive in truck like reliable you had that on top and it's a powerful powerful unique differentiator that allows us to grow that's a 40 million US revenue railroad that were taken over that has the potential and we see lot of side within 24 to 36 months I've taken 40 million revenue.
In making that a 100 plus you asked with CP like margins, that's a needle mover.
Okay.
Very helpful. Thanks.
Your next question comes from line of Brandon Oglenski from Barclays. Please go ahead.
Hey, Thanks, Good afternoon, everyone I appreciate the question here.
John So can you talk to us a little bit about what has changed though on the negative side than the forecast I mean, you did mention the auto compound mean autos are in a pretty difficult because this right now and I think energy when we think about crude and frac sand makes up a pretty big share of your book of business. So what's the outlook for maybe some of these more challenged segments through too.
20.
Yeah, Brandon certain certainly like we're not insulated in in some of those industrial and LNG markets for sure.
As you stated we set a record for crude by rail volumes in Q1 over 36000 carloads, but.
You know frankly in this is built into our our guidance.
Not inconceivable given the volatility we're seeing that [noise].
That can move to zero.
You couple that with I think some of the downstream pressures related to the fuel markets Diluents. The just the once the LPG.
And you know obviously, we're not seeing equal type of crude by rail pressures on those markets, but but certainly.
Down down double digits for sure.
The Frac sand business, we've done a good job of of diversifying our book as we've talked about in the past away from from the Texas markets into the Bakken.
We've seen a certainly again, a nice quarter in in those movements, but but those pressures that are on the energy markets or are certainly putting.
A lot of pressure on on those volumes also.
No.
The industrial sectors, just like you're seeing the scrap and steel.
Products.
Certainly non essential domestic intermodal.
Products.
We're seeing the blank sailings.
As others are in the international space and as I said that that's going to continue.
Now I think our international carriers that we partnered with our our lease so far to date or are outperforming maybe maybe some of their competitors in the marketplace. So that's given us a little bit of a tailwind.
And then let me just close on one more comment around this.
I've talked a lot about over the past couple of years the power of picking your partners in this in this business in the surgical approach on how we want to grow and the right partners in the up markets certainly.
To provide a lot of tailwind in and look good but.
Equally or may be more importance picking the right partners in the down markets.
Our partners are resilient.
The customers in the auto space.
Our the vehicles that that consumers want to buy.
In the food space is to grocery stores that consumers want to go too.
So so look good there's no doubt you can read the news the biofuels and the Ethanols and and all these products, there's going to be a ton of pressure on them over the coming months.
But but I do take a fair amount of solace in the fact that I think we have the right partners, they're going to outperform in the down and then when this thing comes back we're going to we're going to go right back to the top of the heap.
With those partners.
Appreciate the thorough response, thank you yep.
Your next question comes from line of fatty tremendously from BMO capital markets. Please go ahead.
Yes, hi, Thank you for taking my question so.
John if you can.
[noise] dig into little bit more into crude by rail loved the volume.
Next quarter or what do you expect the quarter going out through the year and can you also give us some indication on the penalties and kind of the minimum volume does this to roll into 2021, as well and if not how should we think about kind of 2021 from up from up.
Kind of.
Liquidated damages, a little longer commitment that you're on that that business.
Okay.
Yeah. So very we were were over 36000 loads of crude by rail in Q1.
And then just being really honest with the I, it's hard to tell what that that goes to as I think I said.
It's not inconceivable as we see we're seeing it ramp down through through Q2 here.
We you know I think we probably could end the year in.
If things don't improve I don't know 40 to 50000 carloads total and we did 36 in Q1.
To give you the give you that order of magnitude I think what we you've seen in Q4, you've seen in Q1 in terms of other revenues.
I think that's a pretty good guide for Ya IZEA. If you look forward to the balance of this year.
What to expect in terms of liquidated damages.
If you look in to 2021.
I'd have to look fatty exactly around but.
Pretty sure in competent, saying that most of those crude by rail contracts extend all into 2021, So youd expect similar types of.
Performance clauses as we move out of 20.
Great. Thank you.
Mhm.
Your next question comes from the line of Tom Wadewitz from you would be.
Please go ahead.
Yes, good afternoon.
I guess, it's kind of sticking with the same topic John.
We can the crude by rail volumes have been exposed to the comments on that it's pretty helpful. How do you think about how broad the exposure is to kind of.
I didn't know if you want to say Calgary economy, Western you know Calgary Edmonton.
To me in Western Canada sensitivity to energy because it's no. The direct is fairly straightforward, but I guess, it's a little trickier to say well how much your book is kinda.
Dick to the pressure in energy markets is it.
20% or how do you think about that kind of broader question on just a negative impact from really low oil prices that that could last for awhile.
So I mean, let's look at it let's maybe back.
Into it.
You know 40 plus percent of our book is bulk so so no non energy and I've talked about that actually I feel quite good about it.
You've got.
20% to 30% as you look at our automotive and in intermodal business and and again, yeah. There's we're gonna go through the ride like everybody else in that space when it bounces back.
No doubt, we we continue in along the path of of of the sex success, we've had in domestic intermodal and in the international space and growing that business in the growth we've talked about in the automotive space.
Our crude by rail book is in Megan Vac check me on this but 6% roughly.
So so you know look that.
That will be impacted no doubt, our sep business above and beyond that.
I do think you know there is a a pressured tail on all those types of refined products that we're going to continue experience.
Don't know does that make take the 6% in crude in a at another six maybe 8% in that space is probably a rough order of magnitude but [noise].
Look those demands for those products.
Link pretty closely to consumer recovery.
And in in Yes, I guess right now it's anybody's guess as you think about diesel and jet fuel and when people are going to start flying again.
The good news is I think weve positioned our franchise in that space to be a successful.
Winter as we talk about export diesel with with Suncor and those terminals we've built.
The IPO plastics facility, which which is moving forward.
So.
So what.
We're going to we're gonna take that that energy hit.
In the near term, but but I think in those types of.
Products related to two that space.
No I think we'd expect the bounced back pretty quickly along with the recovery in those areas.
And I hope that's helpful.
And Tom I'll, just say.
Yes.
Relevant to say, Alberta consumers.
Very much.
Feedstock.
North American economy and.
US in broader Canadian demand as opposed to localize philbert or Calgary Robinson.
Okay. So it sounds like we ought to think about it more as kind of economy comes back in the products come back and just kind of think about crude by rail a bit separately.
Yes, it Tom I think that's the right way to look at it yes.
Right. Okay. Thank you appreciate it.
Yep Yep.
Your next question comes from line of Konark Gupta from Scotiabank. Please go ahead.
Thanks, and good afternoon I just have one question on as you as you said Keith you you anticipate the conditions to do start returning to normal from under 2020. So just trying to understand what actions have you taken so far to protect margins in the current don't done and then how do you plan for the market recovery comes.
Getting some parts of the economy could gradually view from the in the next few months. Thank you.
Okay, let's say, it's hard to adjusting and taken actions than we do.
On a daily in on a weekly basis again adjusting.
Our assets to demand be at people the at locomotives to be an equipment.
First quarter strength is what it is but if I look at April month to date numbers I'll just give you a couple of proof points here.
No.
If the business is down and we measure business in terms of Rtms revenue ton miles and Gtlds in generally they're pretty similarly aligned.
But look at April month to date numbers, our teams are down.
Rough number 10%.
Which again compared to maybe the industry is unique in in of itself.
But our crude costs are down and similar numbers, if I look at year to date.
Overall, you see that are our teams that are volumes are up their positive.
Our crude cost for GTM.
Now more than double digits.
Train starts down more than double digits I'm looking at month to date, our train starts are down 15%.
Our yard crew starts are down almost 18%.
Our train speed is up 6.5%. So if you put all those numbers in the next and you start to use the measures that we use day to day out.
To lead us to the right actions to take to make sure we adjust our resources. That's how you protect margins Theres no secret recipe get staying on top of your business.
Keeping your finger on the Paul So the operation day in and they are using the measures that we live and die by to lead us to the right actions. That's in the DNA of this company and that's how we'll continue to protect our margins be it today be it next month. The at later I can't control ultimately what the macro economy.
Yes.
Uniquely benefits just benefited by micro business mix, that's unique to this industry.
And we are uniquely beneficial by an operating model in a team that knows how to use it to respond to what the economy gets.
And that's what allows us to protect our margins and that's what allows us to protect our unique earnings in this.
Troubled times, we're facing today and allows us to position ourselves to bounce out of it in a very responsive.
An impressive and rewarding way for our shareholders.
Yes.
Okay.
Your next question comes from line of Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So you typically give us some thoughts on how to think about current quarter Rtms and margins, maybe it's tougher right now, but if you have any thoughts on how to think about second quarter that'd be great and then just separately the commentary on pricing stable in the first quarter do you.
I think that that can continue in a softer volume environment.
Thank you.
So Scott.
Yes, we're not going to go to Q2 guidance on on this one you know I gave you Q1, I'm not going to get a cocky here.
It is unprecedented times than it.
I would just say that.
You know.
I expected to fully lead the industry and operating ratio for the year.
And and I did 0.2 for the year that will will be sub 60.
Beyond that.
The say.
You see the weekly or.
Leading the industry and I think we separated or so.
Yet again from from.
Both the Canadian railroads and the U.S. roads in terms of.
Where we are rolled since a year over year volumes and I expect that to continue as well.
So I'll give you relative numbers.
That's fine and any thoughts on the pricing environment.
You know what I'm not going to give any numbers, but my expectation is as we've stated is inflation plus and the team is set up.
And.
To continue to sort of driving that approach Theres no doubt were.
As some capacity certainly loosens across the industry and maybe truckers are arrests less apt to go cross border and maybe that puts a little.
Pressure in domestic Canada space that there's there's pressure there, but it doesn't change our approach on.
And state inflation plus.
Thank you guys.
Yep.
Your next question comes from line of Seldon Clarke from Deutsche Bank. Please go ahead.
Hey, guys. Thanks for your question.
Just following up on the last question, if I could just as in a different way.
You guys at mid single digit RPM declines for the year, but how should we think about the general cadence of the declines and maybe what sort of.
Extends to what sort of decline are you considering.
In your downside scenario or side of worst worst quarter scenario.
Mid single digit decline for the year.
Yeah, I think we booked to that a little bit earlier that we'll see much steeper declines in Q2.
And if you know listened to what the some of the government responses have been been North America of.
Slowly starting to ramp up the economy and call. It mid may type of timeframe beyond and beyond.
You should expect Q2 to be the bottom from a volume decline point of view and then gradually improve starting in Q3.
The Q4 timeframe, you know and all that.
I will say you know this thing you don't get secondary waves and impacts from from co. Good 19 that can can have a false starts for the economy and then you know take a step back so so that would be.
The whole other scenario.
That were not currently building into our guidance.
But what we know today based on kind of the our current macroeconomic view.
Based on.
Some of the guidance that we're seeing given by by government entities around how to phase and we started the economy.
Q2 will certainly be the worst of the.
We're worst and volume environment.
Okay I appreciate the time thanks as.
Your next question comes from line, Brian Ossenbeck from JP Morgan. Please go ahead.
Hi, Thanks for taking my question.
Maybe in can you give some color on we're expecting on cost inflation.
You gave some commentary on DNA earlier, and how that's going up crew starts stream starts obviously.
More operational driven volume volume variable, but we see him on the inflation side.
These are there opportunities taxi.
Good cost down a little bit like you're doing with the Capex program and doing a little bit more for the block hours a more favorable any context on that would be helpful. Thanks.
Yes, I mean, obviously fuel energy as a has its own story outside of that I mean, you will see some opportunities from a you'll probably.
Overall cost of a cost you'll have that decline.
One thing we do you do battle on the expense side and is also currency. So a lot of our U.S. dollar denominated expenses.
The a bit of increase given the depreciation of the Canadian dollar, but I mean overall I think if inflation has been in that two 2.1% you know you're probably looking closer to 1.5% types of level, we put in some labor agreements a several several years back.
It had.
Some level of a high into our organic growth.
So, we'll see that not necessarily payout and an increase in.
2020 based on the based on the guidance we've given you.
We're hopeful and we want to those buildings.
We means that are cans are going well. So those are the kind of key areas I'd I'd point to you know.
Are there opportunities from a procurement point of view, absolutely, but right now with it's really around you know the focus is around consolidating strings are increasing your trailing way.
Greetings and train length, the and then the density of what's moving.
And really focused on the health and safety of our of our employees.
Okay. Thanks for the context appreciate it.
Your next question comes from line of can extract from Bank of America. Please go ahead.
Hey, good afternoon.
Great job on the on the first quarter.
Keith maybe you can talk a little bit about your thoughts on Furloughing employees, you know given your your expectation of a rapid bounce back in your talk on on resource allocation before is that something you try to stay away from it and feel the pain in the second quarter, but then be prepared for when those when that faster ramp up comes in in the back half if.
It comes back as strong as as you went dissipate.
No Ken.
Let me say that number one we don't take those decisions like.
Again to my point.
Yes.
But it's not anything we can afford to stay away from.
I believe in transparency I believe it communicating and letting our employees understand what we're facing.
So we've been very transparent with the beginning we understand them. We recognize we're in a store we've always made adjustments here. So it's not new news our employees certainly understand them respect that and as long as we communicate.
The greater need to do that at the end of the day. That's the best we can do and that's exactly what we're doing now what we're doing unique to our adjustments you know look at our numbers now.
Order of magnitude.
As of next week with with the reductions or the adjustments were making now as we tweak down.
Running trades wise.
We're down around 800 employees.
That's a big now and Thats, a big impact, but at the same time, we've got.
12200, other employees that we Oh.
At appropriate response to to make sure we protect the health of the company and those 800 I went back as quickly as we can so what we've done proactively.
Again.
To ensure that they understand how much they mean to us we're doing things.
On our own aggressively.
To give them benefits to make sure that we ensure they continue to get their insurance to make sure that they have benefits above and beyond what unemployment insurance gives them.
And in response, our employees it given thats commitment to come back sooner than they would have otherwise typically in these agreements, especially with the running traits employees.
Standard is normally this thing they call back times.
We step for an extended ourselves for our employees at our employees in turn working with our Union leaders.
They've committed to us if they're going to come back in many cases in 72 hours or less so that we can bounce back. So again, if you give and take situation, it's not a situation or decision that we take lightly, but we feel compelled and obligated to make sure. We continue to adjust and lock step with our demand. That's what we have done. This book will continue to do.
So these changes things tweaks are not shocking its something thats expected and in fact as tough as it is and I think its respective our overall employment base.
So can you just so I understand when when they go on furlough when you call them back Theres no delay of any.
Licensing or anything else that has to be done they come right back in and step right back in those engineers conductors you don't lose any timeframe and reinvestment right.
That's correct seven two hours, we should happen back on the property ready to pull freight for our customers.
All right great. Thanks for that.
Your next question comes from line Dorgan Algea from Goldman Sachs. Please go ahead.
Yes, hi.
For you I'm, sorry, I know there's lot of puts and takes volumes. The can you talk a little bit about.
Mix effects since you sort of taking into consideration, obviously yields or revenue per ton mile were up six or 7% in the first quarter I.
How do you think about that various volumes that you're looking at for the balance of the year. Thank you.
Well I think you see.
Maybe what.
Similarly, what we faced in Q1, depending on potash coal and crude volumes. All those are long long haul you'd probably see slightly Myles.
Positive mix.
As you move into.
Q2 in Q3 again, we'll continue to see.
Positive other revenues along sort of the.
The similar.
Run rate that we saw in Q4 in Q1, but I'd say so slightly positive.
Thank you.
Yep.
Your next question comes from the line drawn Chapelle from Evercore ISI. Please go ahead.
Thank you good afternoon.
John You mentioned partnering with the right customers is that you're bringing on on boarding these key customers. Both in the early part of this year in the back half. This year is there enough shifts to the way that talked about the equipment necessary to meet their commitments.
And any other commentary from its customers on whether there's kind of where we see mode until there is work transparency on the economy or any signs of optimism maybe going into the end of second quarter.
Yeah. So look those those as you can imagine those customer discussions over the past six eight weeks have been pretty dynamic.
And really honestly our focus on the front end of this has been around Rightsizing, our assets working close with names team and the operating team and those customers to try to get that is right as possible.
Certainly I think those customers in the energy space that maybe control their assets.
Our thinking about that differently and trying to understand what their their future demands are.
But there's no magic rubik cube in terms of figuring this out this is.
I think as Keith said its diameter dynamic its day to day. It's a it's critical that we're we're communicating in staying in lock step that the I think the positive is a again, we believe with the right partners in the right level of of relationships and transparency that you create.
You said given taken in trying to create that.
Perfect model. So we can we can run their business in the downtime and then be prepared they have the resources back as needed as the volumes continue to ramp up.
Your next question comes from lineup David Byrne from Bernstein. Please go ahead.
Hi, Thanks for the time, so John just kind of took a little bit more to couple of the commodities.
You mentioned the bulk is going to be pretty resilient I'm. Just wondering if you could talk little bit about the export coal I look what's your maybe hearing from tech.
And whether you see.
Any sort of policy changes on the Canadian government side.
Maybe to help.
The Canadian economy, a couple of quick or whether it's obviously down the road interest rate cuts, but even maybe I'm looking at at that pricing approach to it so the regulated product like green.
When you think that the economic situation severe enough so to consider to its I think that theres. Some outside risks that you made maybe haven't seen before coming down the road.
Yeah. So it on unpack I'll just a you know I think we're modeling in the.
23 million metric ton range for 2020 right now.
It has not provided any any formal guidance that's our number.
It's slightly down.
As a is they said earlier, we saw some challenges what's the supply chain in in Q1, and actually think Theres. Some some opportunity to do sort of build up and do some recovery as we move into Q2 and forward.
You know what.
It's hard to speculate in terms of stimulus I think.
Obviously, the in the U.S. theres been a lot done I think anything that can be done.
In Canada, the Canadian government, I'm, not going to speculate, but but could only help.
I think the number one thing my team and we can do right now they have it is is.
To work with these customers to understand what we can do to get them positioned right for recovery and that means aggressively working with them to understand what they're moving on truck that means working with them to understand if there's opportunities that.
That that we can leverage our advantage franchise to to help them ramp back up quicker.
I can tell you I've got my team laser focused on that.
Type of discussion and it's a shift it's a it's a shift as this thing was that merging it was understanding you know frankly, how we right size our assets with them and now it's a shift to what we can do in the marketplace to as this does recover.
That that we're positioned to.
To to lead the way with them in their recovery.
Right. Thank you.
[laughter].
Our last question comes from line Bascome majors from Susquehanna. Please go ahead.
Bascom Research. Your line is open. Please go ahead.
Yeah. Thanks for taking my question you can you comment it and see if you guys should but I've heard any request from customers on relaxing payment terms and maybe just generally how you're assessing credit risk both within and beyond the energy markets, where customers may have been disproportionately impacted by what's happening today.
Thanks.
Sure.
So yes, I mean, we have had some requests which as you would expect in this kind of environment I think our team.
That said that manages our credit terms and so forth with a with our customer service facility in Winnipeg does an excellent job of.
Onboarding customers.
Right ways to setting the right payment terms, that's associated with their risk now as things evolve we do monitor.
Payments on an ongoing basis and to make sure we're not so taken on undue risk.
So uncomfortable we're comfortable at this point in terms of where we are how were.
Managing through that how we're keeping an eye and communicating with customers. So I don't see material risk whatsoever.
There are could be opportunities even to help customers that are in need I think the two one of the previous questions.
David Vernon have interest around what's the government doing the government is doing something to to support customers and their their credit and ER, which I think directly does support us as well and and helped out that relationship with.
With our customers. So I think it's something that we're managing and we're watching closely.
Thank you.
Thanks Buck.
We are out of time and I will turn the call back over to Mr. Keith Yeah.
Okay, well, let me.
Let me finish with where I started thinking good second time to spend with us today. It during these unprecedented times.
Let me say this.
It CP, we're realistic we understand we're in for a bumpy ride we're in the store and we're not denying that.
But at the same time.
We think it's our responsibility to provide.
The most transparency in the best insight that we can we've got a unique business mix.
We've got unique opportunities.
Not only with a mix, but with our self help initiatives that we've been working on for many years leading into this didnt just start today.
Benefited by very unique first quarter result in this industry.
Fueling our unique audits.
We want to thank our investors for the competition the trustee putting us.
Through this storm before and after we certainly intend to reward you for that confidence.
We look forward to sharing of results after the next quarter.
One of wish everyone. The best stay healthy and we'll talk soon thank you.
This concludes today's conference call you may now disconnect.
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