Q2 2020 Canadian Pacific Railway Ltd Earnings Call
Scheduled to begin momentarily until that time your loans will once again be placed on the whole. Thank you for your patience.
[music].
At this time I would like to welcome everyone to Canadian Pacific Second quarter 2020 conference call. The slides accompanying today's call are available at Www Dot C. P. R C.
All lines have been placed on mute to prevent any background.
After the speaker's remarks, there will be a question and answer session. If you would like to ask your question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound Gee I would now like to introduce Megan almost.
VP Investor relations and pension to begin the comfort.
Thank you Jason Good morning, everyone and thank you for joining us today before we begin I want to remind you that today's 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 our press release and in the Mdna file the Canadian and U.S. regulators.
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 any executive Vice President and Chief Financial Officer, and John Brooks Executive Vice President and Chief Marketing Officer.
The formal remarks will be followed by Q anyway, and then the interest of time, we'd appreciate if you could limit your questions to one and the Investor Relations Department would be happy to follow up with you. Afterwards is for any follow up question. It's now my pleasure to introduce Mr., Keith Creel, It takes making that good morning.
Well they in Calgary.
Let me start first and foremost I'd be remiss not to begin my comments.
Oh, I applaud again, continuing to think for CP family 12, aldosterone. They continue to serve communities throughout.
Canada, the U.S. with a tremendous amount of pride in its that pride in its our culture of accountability performance.
We continue to feel this unique performance that we produced at CP for our customers.
It for our shareholders I can tell you. It's a leader it's minor to be able to serve with each of these men and women that make up.
Or CP family everyday these employees or the true heroes that.
It may support.
And ensuring supplies that people are dependent upon or deliver rest assure that his responsibilities that none of us take lightly and.
And I'm grateful to your poison the union leaders for their continued strength the commitment to delivering for the North American economy, especially during this extra ordinary time with Nate.
Although the God God, it's in the results I.
I can tell you we've consistently said.
The PSR as an operating model that works both on the upside in on the downside.
I'm sure that you would agree that today's results were strong testament to that.
In spite of the rapid change your bottom in volumes Mark in the operating team.
Most of the challenge throughout the quarter that they remain nimble they adjusted resources in lockstep with our demand.
From the beginning to then this is what has enabled our strong operating performance across the board train weights and links all time record levels up seven and 8% respectively.
Locomotive productivity again at an all time best level up 2% versus last year full efficiency a Q2.
Records in the second best quarter record for the company at <unk> 0.92.
Gallons per thousand GTM, all of which enable.
A record Q2 operating ratio, 57% and as John will tell you is he provides color.
Into the markets.
This performance enabled us to set a number of new records for grain in our potash customers that we're extremely proud of.
You also note or a press release today that we provided.
Updated guidance due to the strong performance today Weve.
Got it to positive earnings growth for the year. We're following through on our commitment also that we made on her last earnings call restarting, our buyback and increasing our dividend.
And as I sit on a last call. We assured you the CP would emerge this pandemic a stronger company and we went in and that's exactly what's happening.
It's not just the operating team that's moving the trains day in and Dale.
The folks that are working at home as well the full team.
The 14, but then at the men and women working from their homes have not been resting on their laurels rest assured they've been keeping construct attention throughout the entire organization. The challenge calibre people, especially those that are working home to find new had more into these innovative ways to work focus on people, we focused or leadership development at market.
Element a challenge John in the marketing team.
Sales team to get closer to the customer demand for opportunities to drive additional volumes to the railroad to be a problem solver, a transportation transportation solution.
Enabler for customers and these tough times, we challenge the executive leadership team get out of the off the skin on the network get on the ground, there's never been a better time to spend time with our people the men and women to heroes that are moving this traffic day in day out not only learn about the business, but let him know how much. We appreciate what they're doing day in day out when they come to work.
To protect the livelihood of others.
Collectively also we doubled down on leadership development Ah that's a legacy that I certainly intend to leave at this company in order for this company to cut you didn't improve our leaders have to improve it is the leaders improve the company gets stronger and that's the key to sustainability, that's the key to continuing its sustaining this.
Very unique and special culture of Accountability This culture performance.
It feels these results into delivers afraid to our customers day in day out.
It's the key to it and we'll continue to develop those leaders to the training the investment in each individual so they can realize their best potential when CP can realize its best potential.
So the teams getting stronger.
Getting close to our customer developing stronger leaders and we're becoming better railroaders.
It's fair to say, we've been only offense not all the defense through these challenging turbulent times.
So with that said now I'm going to turn it over.
John to provide a bit more color.
On the markets.
Alright, Thank you Keith and good morning, everyone. So total revenues were down 9% this quarter to 1.8 billion.
Our teams were down 10%.
Fax was up 2% will fuel is down 3%.
I'll briefly highlight our second quarter performance and provide you guys. Some color on our major lines of business.
I'll speak to the results on a currency adjusted basis, so starting with grain volumes were up 8% on the quarter revenues up 3%.
Let's start by echoing Keith comments, and once again congratulating the CP team and our grain customers for delivering another tonnage record for Canadian grain at 8.4 million metric tons.
Beat our previous all time record in Q4, 2019 by 500000 tons and marks a third consecutive record quarter for Canadian grain.
The results are a testament to the benefit of our cover Hopper investment.
And the partnerships with our customers who are also investing hundreds of millions of dollars on the CP grain franchise through expansions and new developments to enable our unique 8500 foot high efficiency train product.
The proof is in the incremental 2.5 million metric tons. The grain we have moved this crop year, all while leveraging existing cruise train starts and network capacity.
We're excited about recent announcements by terrorists work on the south shore at the port of Vancouver to enhance our terminal.
Along with the recent announcement of a new Greenfield high throughput elevator exclusive on CP and roster Manitoba.
Both of which will be capable of handling or 8500 foot trains.
I'm also extremely pleased with the performance at alliance grain terminal.
And their decision to move to a 24 seven operation on the Vancouver South shore.
We simply served by CP.
And the service this export terminal Patterson grainy pioneer alert 8500 foot model will be undergoing three more expansions edits elevators to support this new terminal throughput capacity.
Now looking ahead, we expect grain to be busy the remainder of the year.
Carry out from this crop is expected to be close to average.
And the 2021 crop is maturing well and our customers are expecting it to be greater than 70 million metric tons.
On the potash front volumes and revenues were up 5%.
The strength, we expected in potash materialized in the quarter.
On the export side continued strong collaboration and execution with the Canpotex team.
Including increasing train lengths to 188 cars to their Portland terminal supported a record performance in Q2.
On the domestic side after consecutive poor application season due to weather, we had excellent conditions. This spring and delivered strong service for our shepherds.
The outlook for potash remains positive and I expect double digit growth as demand remains high and back half comps are favorable.
We continue to see strong resiliency of the commodities across our agricultural franchise that make up greater than 30% of our book.
I expect momentum to continue that we've seen year to date to continue into the back half of the year.
Moving on to coal revenues were down 24% will volumes are down 21% on the quarter.
Canadian coal volumes declined as a result of softer demand related to co bid.
Production challenges that the mines and limited port capacity due to the ongoing expansion at the Neptune terminal.
We expect 2020 tonnage to be lower than 2019.
Neptune is expected to be shut down through the end of September.
The energy chemicals plastics portfolio saw revenue decline of 3% well volumes declined 35%.
The significant difference between revenue and volume is driven by crude liquidated damages.
These contracts did exactly what we told you and design them to do they protected CP from the inherent volatility in crude by rail volumes.
Crude volumes fell through Q2, two approximately 8000 carloads down about 70% year over year.
Our guidance assumes minimal crude volumes through the back half of the year.
The continued volatility in the crude market only strengthens our conviction in the stability offered by the do you wouldn't recovery unit located exclusively on CP and Hardisty, Alberta.
Construction is well underway and we expect completion by mid year 21.
Now turning to M.M.C. revenues declined 37% and volumes are down 35%.
This is all driven by Frac sand as it was a big decline or in the quarter as a result of crude market decline.
And resulting shut in production.
Steel aggregates other construction inputs, but for all certainly challenged by the pandemic are expected to gradually recovered through Q3 as industrial and construction sectors reopened.
Automotive revenues were down 68% well volumes were down 70% on the quarter due to the North American manufacturing shutdown.
Since the restart restocking effort and vehicle sales have outpaced our partners expectations.
We have a lot of positive momentum right now in our auto space as we move into Q3 as we welcome to new customers aboard we welcome F.C.A.
And our Calgary and Vancouver auto compounds beginning July 1st.
And blow this comes onboard beginning September 1st.
We continue to utilize our unique land holdings to provide strategic purpose built compounds for our partners through the execution of our automotive playbook, we have launched four new compounds across our network, giving CP customers more optionality and unmatched local market.
Assets.
Finally, moving on to intermodal.
Quarterly volumes were down 7% as a result of overall softer consumer demand across North America.
And the domestic intermodal front, we performed well in the quarter and are moving up the central goods and our refrigerator demand has since returned to pre pandemic levels.
From our trough point to the last week in June we've seen a 43% increase in rtms from our temperature controlled temp pro product.
On the retail side of our business, we've had strong performances from our leading retail partners as we move through the quarter with a nearly 50% surgeon rtms since our trough.
On the international franchise. It remained resilient, we did not see the expected volume a blank sailings, which helped us stay close to flat year over year.
Now looking forward I am extremely excited about our new access through the C.M. Q to the Port Saint John.
This port has the potential to be the crown jewel of Eastern Atlantic ports.
Through our strong partnerships with DP world.
New Brunswick, and the business partners throughout that region.
The port Saint John offers a low cost existing capacity.
Is undergoing over a 200 million dollar modernization project.
This project combined with CP shortest and route and faster service to the West offers our customers a new compelling competitive eastern Canadian option.
So let me close by saying as Keith said, the sales and marketing team and this company have not been resting on our laurels.
We've had the team out cold, calling sales lifting territories on our network building, new relationships and finding outlets for our customers.
That's the P.S., our culture that we have in the sales and marketing team.
I'm pleased with how the team has adapted and.
And we have a strong pipeline abroad base opportunities for years to come.
So look the next several weeks will present challenges as it relates to comps given our strong industry, leading performance last year.
But the volume environment continues to improve.
As we look forward. We continue we will continue with our disciplined approach to picking our partner executing our playbooks, enabling us to outperform the industry.
With that I'll pass it over Canadian.
Great. Thanks, John and good morning.
Keith and John mentioned this has been a challenging quarter. This team of Railroaders once again rose to the challenge as demonstrated by our industry leading operating results.
As with Q1, a surprise people with the commitments was sub 60 or what are exceptional team went out and managed to exceed my high expectations. Once again overall, the operating ratio decreased 140 basis points to 57%, which is a new CP second quarter record.
Being in this industry for 22 years and this quarter's a significant milestones.
When you can work was 57% operating ratio in a quarter claims down this significant.
Give me a high level of confidence to eventually achieving a mid Fiftys a war on an annual basis and continue to widen the gap with our Canadian peer.
Moving onto a few of them more notable items on the expense side I'll be speaking to the operating results on an FX adjusted basis.
Comp and benefits expense was down 11% or 41 million versus last year [noise].
The primary drivers of the decrease.
Were 10% lower headcount as we furloughed employees and significant efficiency gains from lower crew starts an increase train lengths.
Cost control Youre seeing is truly structural stock based comp wasn't a material headwind on an on an annual basis at approximately $40 million definitely weighed on expense.
We continue to deal with the pension headwind of $8 million a quarter as well as continue to accrue incentive compensation based on our strong results year to date.
Fuel expense decreased 112 million as a result of about 38% decrease in the price paid year over year.
Lower volume and the benefit from a 13 million dollar lag in our fuel surcharge program in Q2, which we do not expect to replicate in Q3.
A record Q2 Q2 fuel efficiency also played a big rule. This also marked our second best ever quarterly fuel efficiency.
Our investment in modernizing locomotives field trip optimizer, and the 8500 foot Green model continued drive our fuel efficiency, 14% better than the class one average.
Since 1990, CP has reduced its locomotive greenhouse gas intensity by 42%.
Avoiding over 31 million metric tons of carbon.
Depreciation expense was 195 million an increase of 6% as a result of a higher asset base.
Purchased services was up 266 million relatively flat on the quarter. Despite lapping a 17 meli million dollar headwind from a land sale in 2019, and approximately $10 million and higher casualty costs year over year.
The team effectively controlled spending adapted to the current volume environment.
As a testament to what a true PSR railroad is mark Red and the operation operating team work closely with Johns team, Mike Foreign and the asset management team and my finance team to achieve these results. This has not happened by accident.
Moving below the line the components of net periodic benefit recovery were negatively impacted $12 million or 12%, primarily due to a lower discount rate.
Interest expense was up 5% as a result of foreign exchange on U.S. dollar debt.
Income tax expense increased 65 million were 52%, primarily driven by a recovery in Q2 2019 related to changes in the Alberta corporate tax rate.
We now expect an effective tax rate approximately 24.8% for the year.
Rounding out the income statement adjusted diluted EPS declined 5% in the quarter.
Moving onto the free cash statement.
Cash from operations increased 17% on the quarter. We can we are continuing to adapt in real time as volumes change and the economy moves forward, you're stretching our capital dollars.
Through greater efficiencies in fact, we experienced all time highs for engineering efficiency as measured by block time availability.
This quarter, our engineering crews had only six zero block days, which are days, where they could not access the track as compared to 30 zero block days in Q2 2019.
This shows our engineering teams are efficiently able to complete their work and trains were able to run on schedule year to date or capital efficiency has improved 19%.
So it's a huge credit to the operating teams and the engineering teams are working collaboratively to enable us to achieve significant capital efficiencies.
Right right, we remain committed to our $1.6 billion of capital spend for the year and are managing the capital envelope for the long term benefit of the company.
Rest assured we continue to maintain discipline on capital deployment.
Evidenced by our adjusted return on invested capital 17.1%.
The final note, we continue to be in a position of strength from a liquidity perspective.
As of June Thirtyth, our 1.3 billion U.S. revolver was on drawn and we had no commercial paper outstanding.
We are proactively managing liquidity and feel confident in our decision to increase the dividend by approximately 15%, which we announced yesterday.
On our path to an adjusted payout ratio of 25% to 30%.
Since 2015, we have led the industry and dividend growth the compound annual growth rate of 17%.
We will continue to balance our shareholder returns and have restarted the buyback program, which is about 40% complete.
We remain opportunistic and discipline on the buyback as key spoke to our strong performance year to date and our increased clarity on the back half of the year have given us the confidence to increase our guidance EPS growth.
To EPS growth for the year.
The gives our model is one that's really works in any environment.
I can't think of any better proof point than our performance this quarter.
I'm confident that in 2020 will be our fourth consecutive year, leading the industry and train accident ratio EPS growth and return on invested capital.
With that I'll turn it back over to keep throughout this stuff.
Okay. Thank you and they deem and John for the color and I think we'll see the balance of our time doing turn it over the operator to open up for questions.
Did the discussion.
At this time.
If you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound Turkey as previously highlighted please limit your questions to want.
There will be a brief pause will we compile the culinary roster.
Your first question comes from a line of Jon Chappell from Evercore ISI. Your line is open.
Thank you good morning, everyone.
Good morning done on John I wanted to ask you about some of the commentary you made on the intermodal and the auto side clearly inventories in North America, or very low doubling sailings are much lower if not reversing.
The auto plants are kind of cranking when you speak to your customers how much of the restocking seems to be a threeq you event only and how do they feel about the duration of potentially the entire second half of the year on both of those business segments.
Yeah, So maybe a couple comments on that John.
Look like everybody else, we're we're continuing to navigate this uncertainty so the auto manufacturers the retailers it's.
If you know the answer of what this pandemic looks like over the next six months.
You know, we're all sort of estimating in guessing based on that now that being said.
We have definitely seen those areas ramp up and I think our expectation is.
We're going to continue to see that.
Stabilize probably Q through Q3, and then maintain that sort of pace or or that Rick gentle recovery as we move into Q4.
It certainly in the auto space right now, we're seeing an initial surge and that probably doesn't continue but.
Don't forget we are going to see a nice bump the back half of this quarter as we see globus join our auto franchise, which is going to be a significant tailwind for us.
Huh.
That's great. Thank you for the feedback.
Your next question comes from the line of Tom Wadewitz from Yes. Your line is open.
Hi, good good morning, and congratulations on a really strong performance in the quarter.
Wanted to see if you could offer some thought.
Perhaps key.
Schedule changes that you made in order to achieve 8% increase in training length.
And how you would think about operating leverage given that you've already expanded train lengths to you.
That number to keep going up as volumes come back.
Any thoughts about kind of volumes coming back unit train versus carload, how do we think about that operating leverage given that you did so well in the quarter with expanding train lengths.
Well listen let me start with the probably a pretty known fact.
At least in my company, our company I'm, a pretty demanding person and I've got pretty high expectations and got a lot of competence and mark in the team.
They were challenged.
Well.
Take our plan, which obviously was built for a different demand level and adjusted and tweak. It as you do that you consolidate you get an opportunity to realize some of these synergies.
So that did help with train weights that did help train lengths. So.
So as the business comes back.
You will adjust some of those things, but you won't see a monumental change I mean, you might see one or 2%.
But the expectations aren't going to change we've become smarter as we go through these processes and we go through these challenges.
Some of the things that will offset even maybe that degradation is is getting a full impact to some of the operational changes we made prior to the pandemic and I'll speak specifically to potash this time last year.
Or in 2019 be moved a lot of potash.
For Canpotex when I say a lot the tonnage that we moved we moved it differently. We were running 172 car trains to Vancouver, right and 130 car trains to Portland.
Well, we flip that model upside down we've taken a next alper running 200 car trains to Vancouver today.
Any partnership with U.P., we're running 180 car trains to Portland, So those incremental gains from productivity gives me the confidence that you might see a little tweaking, but you're not going to see much degradation, Tom because of the fundamental changes we've made in the network and that's just one story I could get into a lot more detail, but just rest assured.
Do you look at our track record.
We challenge ourselves to get smarter every year.
This is a process of continual improvement.
Were eight years into PSR. This didn't need us we understand what we're doing its woven into our DNA, we know our pinch points are.
And as we attack those issues and we become better leaders and better Railroaders.
We sustained maintain it continues to improve.
Your next question comes from Milan of Steve Hansen from Raymond James Your line is open.
Yeah. Good morning, guys I'm just a quick question for you maybe John on the potash outlook. I think you described double digit through the back half year <unk>. Some of the larger Exporters' had signed contracts through October I'm. Just curious if you have any visibility right through the end of year when the comps really do start getting easier or just any context around.
With that cadence as to how that will continue to flow be great. Thanks.
Yes, Steve So if you think back to last year, we saw a little bit of decline started to take place in an August and September you saw pretty dramatic falloff. So.
I'm confident we're going to see.
A pretty big Spike is the hit September and certainly October now discussions with with Canpotex.
I think they remain very bullish on the marketplace you're right. There are some contract extensions they have to work through that.
We'll cover off the very back half of the year.
You know like like anything I think they've been resilient as they've worked through that those negotiations with China, they've opened up new markets and and strengthen relationships into other areas such as India and.
So I think they remained quite optimistic that this thing is going to remain strong rates through the end of the year Steve.
I appreciate guys great quarter. Thanks.
Your next question comes from a line of Ravi Shanker from Morgan Stanley. Your line is open.
Thanks Marni anyone.
Keeping dean.
Quarter, though if I had offered you already were down 5% this quarter I suspect that have taken that with both hands.
So if we take a step back here and kind of look at us perform and into context of what has to come I mean do we do we think of this as you guys just performing on a remarkably relatively limited downside an extremely challenging quarter or do we see now hated did a 57 award a quarter like this.
Which means if the ER the cadence of the volume recovery that we saw in the second half of June.
Continues through Threeq, you for Q, and 21 that mid fiftys or something that can be achievable as early as next year.
Well I think it was a phenomenal quarter I think it's there was nothing unique about it. This is I mean, when Keith built this team.
And he took over as CEO I mean this has been a longtime come in this wasn't just an overnight kinda.
Kind of fix this is building the team building beyond the people that you know, we all have strong benches behind us with the best team in the industry and so we'll take what the environment gives and I think we're very proactive and very collaborative and can adjust obviously as you saw this.
Quarter to.
What's the volume environment is but when we look at what we have ahead of us I.
I mean, we're we're probably.
John would say as bullish around our revenue outlook over the next two years as we've ever been.
And from a cost point of view.
Why I say this is a bit of a milestone quarter is.
When our operating team and our.
Markets asset management team and our finance team and so forth can can put together a.
Adjusted the ore and adjust our expenses to overcome this kind of headwind in a down side scenarios. We saw to your point on the operating leverage on the upside.
It creates kind of a new environment and new perspective on what you can deliver now do I think we can hit a fifth mid fiftys or next year.
I don't want to say that right now in the middle of a pandemic in July of 2020, but I certainly have a lot of confidence that we will continue to improve our war love the best or in the industry. This year, we have the potential to continuing to improve and 21 in 2022, and so I feel good about I feel great.
New story I feel very good about our costs story I feel excellent about our free cash conversion story, our return on invested capital. So I think every bucket that when I look at the performance of what this outlook of this company can deliver is extremely positive.
Your next question comes from the line of Fadi Chamoun from BMO. Your line is open.
Yes. Thank you good morning, everyone. So.
Just a question on the comment give me that long term, John and the opportunity there.
I mean, you you're you're kind of leaning on same John your competitor is leaning on a different east, but just wanted to kind of understand from your perspective, and what did you see supply chain look like for you.
[noise] coming troops and John Mcdonough, where where did the remaining market that would be using trend drawn and where would that traffic be going and what do you think this opportunity to kind of materializing from a revenue perspective well.
This is 2021 to 2020 twoq on outputs and maybe that you see it.
Let me, let me say a couple of things probably at a high level, then I'll turn it over to John to provide some color.
But if I'm going to lean on reports to Tidewater.
Going to lead on the one that is closest to market Theres, a 200 mile route advantage.
You take a railroad that gets you there line of sight as a CRO flies faster on our best day.
Service is unparalleled.
And we'll create the market with service so it's going to come from all commodities.
If I look forward over 21 and 22.
They'll competent saying based on what we know now and the opportunities that are in developed but these art conceptual ideas. These are sustainable.
Steps that are being taken business, it's been one business, that's being planned infrastructure that's being invested.
Collaborating with the Port Saint John collaborating with the profits on New Brunswick, collaborating with our customers. We've got a space out there that had one I guess too.
Two competitive options you had our competitor or you had the truck.
And I can tell you theres a lot of trucks on the road and when you get to something Thats truck like competitive from a service standpoint and time.
And he has a track record of reliability. This team has established.
Customers will step into those solutions with you.
So it's across the board.
This time next year or by the end of 2021.
I'm convicted and I'd be extremely disappointed if we wouldn't be celebrating a steamship line. That's got to fly flying in support of thing John I will tell you I'd be disappointed given the things that are developing if we don't have automobiles that are moving.
From a domestic destination in the Puerto say John.
I would tell you I would be disappointed if we're not moving a whole lot more forest products.
In LPG and fuels, it's just across the board opportunity you're Interjecting a best in class railway.
Competition.
And great transportation solutions that get our customers products to the market faster and allow them to compete the win more market share and that's a powerful recipe for success.
So I hope you since my conviction when we say we're going to do something we're going to do it at this company and I'm not saying it because we think it can happen I say it because we believe it and we're working toward it and we'll execute him by the end of 2022.
A little $40 million railroad that we bought is going to be.
Well north of 100 million, an annual revenue in us dollars, it's CP margins.
John.
You know, what Betty Keith that well.
I might add that.
We're excited about the prospects of seeing manufacturing in of consumer goods shift more and more to places like southeast Asia in India, and South America, and and potentially even near shoring opportunities for Centseight jobs sets us up well for I think all those categories.
And let's not forget the cm Q also gives us access into Sears Port main a second part over there that I frankly believe we havent scratched the surface in terms of what those opportunities will look like in the as you know and I've talked about in the past.
We've built a lot of hit a lot of singles and doubles over these last two three years with our short line partners in that part of the US opens up a whole new category of opportunities in that bucket that that the merchandise Dean Colby bolstered and his team our.
Attacking vigorously so beyond all the things keep spoke about.
The fee that we're bullish on that opportunity is an understatement.
Your next question comes from a line of Cowen are good though from Scotiabank. Your line is open.
Good morning, everybody. Thanks for taking my question.
Just wanted to understand some key assumptions behind you.
Guidance water EPS growth for the full year, especially for operating ratio I guess, you have some relatively tougher comps the in the back half here and then the volumes that are obviously still kind of downwards since last year, what kind of volume environment do you expect in the second, especially for a crude by rail and then and Frac sand assumptions.
So I think as John mentioned Theres not a lot of.
Oh look on crude by rail that we've baked into our guidance. So it's a very minimal volumes.
We've kept our our guidance on our Cmes down 5%.
Certainly we have very difficult comps in.
The first half of Q3, which youre seeing were down about 10, 11%, which is as expected as actually performing a bit stronger so far in Q3 than than we originally thought.
So it's really around it the cost side I mean, we're performing exceptionally well on our operating performance led by Mark and his team and the cost take out opportunities are very strong and that's what's driving the upside on the EPS.
Your next question comes from a line of Chris Wetherbee from Citi. Please go ahead.
Thanks, Good morning.
Maybe you could hit on peak season intermodal.
Obviously, we've seen some of those numbers.
Better, but I guess, it's a little difficult to tell sort of where inventories are in sort of what the confidence level is in consumer demand as we go through the rest of the year. So any kind of color you can kind of.
In terms of what are your customers.
Setting up for later this year on intermodal.
On the domestic side Chris.
International.
National Okay.
Yes so.
[music].
I think right now.
We are seeing.
The the blank sailings that have been laid out for July August and in a little bit into September we're seeing our steamship lines sort of methodically pull those back.
I was looking at coming weeks. The next two weeks scheduled what's on the water.
I'd say overall volumes look look strong and encouraging.
Look I still think there's a lotta uncertainty.
In this space.
Sorta, depending to your point exactly what the consumer does and how this pandemic either we continue to push forward with with the opening of of the retails and all the sectors the across North America.
But.
I think our forecast right now is we continued to see.
I would say a little bit of a surge here continue in Q3, and then maybe a little bit of normalization as you move back and into Q4, but.
Thats going to all be dependent on and what we see happened with this endemic.
Your next question comes from the line of Walter Spracklin from RBC Capital markets. Please go ahead and thanks very much. Good morning, everyone. So I guess my question for John here on yields going into next year.
Obviously, you have a lot of moving parts here with some of your your line items. So just wanted to make sure I'm getting getting the yield right and perhaps if I could frame the question relative to your core price.
Do you expect yield to be.
Above or below corp, or attitude or negative on core price.
Referring here to you've got the grain minimal revenue cap, that's coming down for you.
You've got your tech volumes switching over you've got liquidated damages that might come off next year, maybe the year later, so all those moving parts. So just looking to see if you see yield is enhancing or detrimental to your core price for next year.
Well I mean, a core strategy has been sort of picking our partners and maximizing those.
The leverage of whether key spoke to train lengths are our capacity on existing trains so I think.
Walter initial responses, we continue to see that margin opportunity out there I can tell you on the pricing front I've been.
I've been very pleased with how we perform the first half of this year.
Despite all the uncertainty and and Trust me, it's been tough discussions in some cases with customers given the challenges they've been facing but.
I remind you don't my sales team is a large part of their compensation is tied to price discipline and we've been able to deliver.
Now I'll I'll go on to say this.
Look to the back half of.
I'm I'm actually pushing for price acceleration from were at and I think is trucking capacity continues to maybe tightened in some of these lanes in areas.
With recovery also I think we're seeing discipline across the rail sector and and certainly maybe some challenges as other roads try to ramp back up the volume.
I think leads to an opportunity on that front and Walter Nadeam I'd just add if you think about next year, we have a very bullish outlook as far as our automotive volumes, which is going to be beneficial to overall yield.
Some of the tech revenues roll off that's going to be beneficial to yield so net net.
Thank you know with a long way from now, but certainly I don't see too much detrimental impact on on yield to your question.
Your next question comes from the line of kind of extra from Bank of America. Please go ahead.
Great Good morning, and congrats on the great operating performance really great to see.
Impressive just maybe talk about the structural change out of your downturn.
You're talking about closing some yards or or facilities through this downturn just want to see if you've done any anything like that and really thinking of this is a capex question. I guess is there room to increase free cash flow further given the improvement in train lengths and weights are you still moving to upgrade sidings is that is that you know capex still.
And any thoughts on on that given the near 20% of revenues.
Can't let me I'll say at a very high level part of what we do pandemic or non pandemic. It had been doing at this company is always rationalizing and driving for productivity improvements so as far as any quantum changing changes shedding.
Structural yards down.
We will we've gone through that several years ago, but what we do today and what mark in the team has done.
When you respond like we've responded as you consolidate traffic you bring it into terminals where its best.
Served at your lowest cost you're most productive facilities. So in case in point here in Calgary, We've spent a lot of money.
Over the last I guess it just came online in 2019 actually redoing our yard so that was a hump yard that was closed down back when we first started our PSR journey in 2012, we may do with what we had because we had other larger priorities.
Optimizes the network that we came back to Calgary said listen Calgary is the place to switch cars, it's not.
Do all this extensive switching.
And outside satellite locations list consolidate listen Vassilis create a very productive facility, which is what we've done in which is what mark has been optimizing in 2020 through this pandemic. So that's been a blessing for us a structurally that's a change.
That will retain.
And again, we're becoming better as we evolve and Lee increase train lengths like even to the question I was asked early I think about our green program that structural for this company. We led that innovation in this industry in the Canadian space striving to an 8500 foot operating model Gthree. The terminal that was built was built the buses.
We'll take that on the north shore, we've got 15% of our elevators now they can launch 8500 foot grain trains we've got a fleet that's being modernized.
Were up by the end of this year will be in excess of 3000 of those best in class cars that are coming out of Hamilton, Ontario that allow us to haul more green per car shorter length of cars.
The drive productivity. So the structural changes that you see in our performance will continue and be baked in and we'll realize full year and get more of a mix as we go forward on this 8500 foot Green program will be 30%, a very elevators by the into this year in the work continues their.
And the increases in capacity on the south shore to match that as well as GE three on the north shore I'm, just very bullish about our opportunities to make these margins to make these efficiency stick.
So again.
Hi, expectation strong conviction based on our fundamentals that we're not perfect.
But we're darn sure pretty educated and pretty efficient it what we do and we'll continue to do that and do it well.
Yes, and Ken I'm, just say on the Capex side. We're we're extremely pleased with what we've been able to deliver on take advantage of subtract time to be much more efficient as I mentioned in my in my commentary and so we're taking this unique opportunity with volumes down that we haven't seen volumes down like this and in many years.
We can.
Look to build up a network that is very resilient look to build a network that can support some of the initiatives that you spoke to around our our 8500 foot model and so forth initiatives that will increase the capacity in the safety of our network and so this is something that's going to I'll say, it's going to push.
Forward some of those expense or capital dollars from future years, and it's going to set us up extremely well for the rebound in the economy over the next call. It 12 18 months and we can take advantage of these.
Significant revenue opportunities that pieces and John talked about so.
It's a bit but different model, but but we tend to be a bit different.
Thank you.
Thank you Ken.
Your next question comes from Milan have been while poisoning from does your debt capital markets. Your line is open.
Thank you very much I'm congratulations for the very strong performance.
You talk a little bit about the potential for further M&A on top of Q and may be very quick question for Nadeem. If you could quantify the fuel lag in Q2 that would be great. Thank you very much.
Quantify fuel ULAE fuel and like I believe yes, I think fuel lag was about 13 million in the quarter.
That that will you won't see a benefit of in Q3.
Yeah, and as far as been law M&A or M&A.
Lets a write down we're focused on optimizing the same Q, that's going to keep us busy for a little while certainly I don't want to dilute our efforts there, but we always have a kenai. If there is something that the complements our network, we stick to our core fundamental strengths, which is running railroads.
I don't see anything immediate that's out there, but rest assured we're going to maintain a strong balance sheet, we're going to maintain a best in class.
Operating team to be able to realize the potential of our network in any other network that we might couple alone to this thing, but right now theres nothing immediate but our eyes are always open.
It if it makes sense will not hesitate to move.
Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks morning, guys, So warning Scott deem.
The demon any chance you can give us some just directional color on the magnitude of earnings growth, you're expecting I think first half's up 20% second quarter, the worst of it only down five so so maybe just some thoughts there and then any thoughts on the ability to improve margins again in the third quarter be great. Thanks.
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No I don't want to get incident.
Quarterly guidance necessarily we do have as I mentioned, the first half of Q3, there's a bit of.
Tougher comps, but then it eases pretty.
Significantly with with Green coming on.
You know, assuming a decent grain crop, which we do assume.
And given that it's a very wet crop last year, you don't grain didnt start moving for some time, we have very easy comps for for potash as well in in Q4.
This is where we were a year ago, and so I think you're going to see.
Q4 being stronger than Q3, just assuming what we know now with a with how the pandemics being.
You know being reacting and how they are the economies have been.
Coming back so beyond that as far as given.
Operating ratio kind of below our guidance I'd say I'd point to the same things I just mentioned right. So.
You can see a better or in Q4 than in Q3 for this this exact reasons I think a lot better volume performance in Q4 than Q3.
And.
So you know I've I pushed the team as far as though they can deliver and they continue to surprise me. So is there potential to continue to improve the or yes, I'm not going to.
I'm not going to deny that and then I'll just leave it at that Scott. So you could probably can dig they deem as a being conservative nature, which which is healthy.
We certainly see line of sight Scott ended the year for margin improvement versus last year, we're not doing our job. If we don't get there there's there's opportunity there yet.
Your next question comes from a line of Sheldon Clark from Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for the question.
Can you just talk about how some of the productivity initiatives that Keith highlighted have maybe trended in July as it relates to train weights in lengths and fuel efficiency, you know as certain volume categories start to come back like autos is there a point, where maybe mix becomes a little bit more challenging in terms.
Adding certain cars to mix manifest trains or anything along those lines.
Well I can tell you this.
It's a gift that keeps on giving so similar.
Metrics in July versus second quarter, I took a quick look at them. This morning.
Our teams down 10 point.
Effectively 10 points versus last year as of this morning.
Crew starts down almost 17%.
People starts down almost 18% train miles down almost 18% train linked up another 8% train weight up 7%.
When you run the business this way and you control.
Your assets in Lockstep your demand. This is what you should expect.
So as we bring back business on in these auto start to come on we've already got to plan. We know what's the plan looks like so there'll be some transition to the plan, but you're never going to expect to see this company around a short trains were going to look for a way to tweak you constantly you make a plan you execute the plan you tweak the plan you communicate.
With their customers you satisfy you do it you said you're going to do and this is just the the outcome of it you are going to get a low operating margin.
You are going to get a high service offering and when you can produce a great service at a low cost that as a compelling competitive advantage in the marketplace.
That drives earnings growth.
Consistently and that's what this form was all about its not complicated.
The complexity in the necessity comes that having the right cultured executed and at this company we have it we're not perfect, but we're getting stronger everyday you could expect to see continued operational.
Margin improvement as well as operational performance improvement in all of our metrics, we're not going to set steel you set steel you get passed by.
That's not going to happen at this company.
Okay.
Your next question comes from a line of David Vernon from Bernstein. Your line is open.
Yes.
Hey, John or on the Dean could you give us it sounds for how much liquidated damages actually in the plan here for 2020, and then as we think about maybe that crude volumes.
Docker not coming back in 2021.
What does that due to the set up for the contribution from that that fee revenue the recording this year.
So David I'm, not going to give a specific number on a on the liquidated damages.
What I would say is.
I think what you've seen over the prior quarters, if we're not moving the crude by rail.
You are going to continue to see that run rate in that and that moves into 2021, obviously in 2021, though.
There will be from natural Comparables.
Given that we're collecting liquidated damages. This here now, but but also in that equation. David don't forget we've got to be are you that we expect the start up mid year and that's going to be.
Significant opportunity for us as we look to the future and in the bottom line is in an all my competitor said this and we continue to say that I'd much rather be moving that freight.
So our energy team is working closely with all the crude shippers and looking for that window of opportunity and when it's going to be.
So we can work with Mark Red and his team to the resource up to be able to handle it.
In the back half than the error in early 2021, and David I would just add if.
We don't see this as a a onetime benefit we saw it as a one time benefit we wouldn't expect margin improvement year over year to continue.
Your next question comes from the line.
Brian Ossenbeck from JP Morgan. Please go ahead.
Hey, good morning, Thanks for taking the question.
Just a quick one on cruise given the outlook for the back half a year and on the volume on the train size and weight can you give us some expectation for how you see bringing back crews from from from I know you though.
Through those lightly.
I'm curious to see what the availability in the.
The call back has been given that you and the rest industry were pretty flexible and making sure folks are taking care of and exchange are able to get some shorter call back time. So just some thoughts on the crew outlook and the recall rate in the back half here. Thank you.
Let me the crew outlook overall, we ended up I think at the peak we were.
About system why this is Canada in U.S.
Fortunately, we had about 1200 running traits employees that were furloughed.
We've called some of those back obviously, we'll do that in lock step it depends where the businesses.
But if I just sort of bottom line at if we're going to be.
Down mid single digits.
You should expect the same on head count standpoint, its into the year will retain some of this productivity, obviously, we're not going to calling back we anyone back we don't need but we're working hard.
To increase and drive businesses. This railroad. So we can get our employees back to work we hired them.
They are part of our family I take no pride.
In great responsibility in the fact.
That we need to get those folks back to work and what we did I think again unique to CP and appropriate for CP.
We decided.
That the most important thing through this is the stick bars employees.
We have a responsibility.
To do as much as we possibly can to help mitigate this impact that this crisis is creating for those that are that are laid off.
So I can't get into all the details, but I can tell you with each individual union, we've worked and created.
Incentives, whether it be a top up to their unemployment insurance or whether it be a mechanism to maintain.
There are actual medical insurance that they otherwise wouldn't have in exchange for that not only.
Do we get increased commitment because our employees that we care about them.
They've also committed to come back.
Earlier than they would otherwise in our collective agreements have required. So for instance in Canada running traits employ the collective agreement gives them up to 15 days to come back the largest percentage of those employees have committed.
In lockstep with those increased benefits that we've given them.
To come back and 72 hours.
So listen this is this is a partnership we're in this thing together.
What I'm most proud of in all honesty, you think about the culture in this company you think about maybe.
Some of the bridges that were burned and we've talked about this in the past and we didn't get everything right. We drove fast tar change to turn this company around and restore its financial strength.
Did the first four years of our turnaround, but the last three years as much as we've been focused on growth. We've been focused on rebuilding relationships and I can tell you. This crisis is brought our employee base together.
We have relationships and established relationships a trust with our union leaders with our employees.
That is quite frankly, my 28 years of railroading I've never never.
Seem the depth in that respect in the pride in the levels of.
Growth that Weve came in that space now, we're not done and again, we're not perfect and there's still a lot more we have to do.
But rest assured if you go out now in our property you talked to our employees. The efforts that we've gone to protect their lives as they protect the livelihood for their families and communities. We operate in through we spared no expense we spared no effort. We're in this with them and they are in it with us.
So I just.
We're going to respond the business comes back our people are ready to go to work and I'm ready to get him back as quickly as we can our customers will see no different we're going to do we said we're going to do we're going to lease for the customer we're going to produce for the shareholder and we're going to take care of our employees.
Your next question comes from the line of Justin Long from Stephens. Please go ahead.
Thanks, Good morning, and congrats on the quarter.
So I wanted to ask about incremental margins. If we go back to the Investor Day, you had talked about 75% income incremental margins or so but.
If we kind of look at the business pro forma for for this year given the cost outs that we've seen some of which are structural some of which are temporary how should we be thinking about incremental margins now under recovery scenario looking over a multiyear period.
Sure. Good question, just and then I'd say when it depends how quick the volumes come back and and where the volumes come back and how.
How we react so I think we're in a good spot to be able to.
Zorba volumes on the way out you know as Keith mentioned, we've done on a unique things on the labor side.
We have the the assets in place we we've got a number of initiatives that will allow us to take on.
Step function volumes as they come on.
Certainly on the bulk side.
As I've mentioned in the past, 75% incremental margins ex depreciation and stock based comp and fuel surcharge and I would stick with that today and so all else being equal I don't see why why that would change going forward.
Your next question comes from the line of Allison Landry from Credit Suisse. Please go ahead.
Thanks, Good morning.
So I'd say it goes without saying that that the whole energy complex. It is under pressure, but sounds like the some interesting dynamics going on the back end with the risk of pipeline shutdown capacity constraints out.
Have you had any conversations with producers are into your intermediaries and you think theres the potential opportunity to start moving crude out of the Bakken again to the extent that at these dynamics play out. Thank you.
Yeah, Alex and I think certainly there there is.
Now as you know the the courts have stayed the shutdown of the DAPL, but.
The customers I would say are generally pretty active in those discussions we are moving some volumes out of the Bakken right now that we expect to continue to move through Q3 in into Q4.
And then I would just say the dialogues ongoing.
In terms of our ability to ramp those up any greater.
I would also just say.
We don't have a lot built into our second half plan at all as it relates to Frac sand either.
But if there is one area that I have seen a little bit of green shoot in terms of some movements over the last few weeks is our frac sand into into the Bakken region. So thats the both watch areas that.
Aren't built in but certainly could present some upside.
Your next question comes from the line David just from Barclays. Please go ahead.
Hi, Thanks for taking my question.
Did you touched on it a little earlier, but maybe.
For John just talk a little bit about how you contrast.
Total or consumer versus industrial end markets.
That might play into either.
Gross dollar Capex change given the strength.
Consumer we've seen.
Or.
Changing the composition of how you're thinking about capital.
Well I'll I'll, let nadeem comment on the latter.
Look at the consumer market generally are.
Fairly strong right now as I said, what the bounce back of of retail in our movement of our refrigerated products.
Central goods the reduction of the blank sailings that weve spoke to.
I think we remain pretty optimistic on on that recovery through Q3 and into into Q4, the industrial market.
Yes.
I would say across the board are certainly a little slower to recovery.
To recover.
We'll see you know, our steel and well and frankly the building project products actually have been pretty strong driven by the you why I.
Sorta movement that this pandemic is created but but those industrial side that would say are certainly a little slower and it's going to be a gradual recovery as we move through the year.
I would just Eric our capital outlook hasn't changed from what we've talked about before if anything we probably pull forward given our capital efficiencies some of our.
20 to 20, even some bit of 21 capital into 20, and so if anything we've talked about once we get through the Hopper car investment that that's a pretty significant investment for us a $600 million with 5900 cars and so as as we.
Finished that over the next call. It two years, you'll see our capex moderate closer to that 1.51, 0.4 or 5 billion. So it's it's a bit heightened as we speak today, but for good reason.
We are now at a time I'll turn the call back over to Mr. Korean for closing remarks.
Okay, well listen I'll. Thank you for your time today listen if you took anything away from this call other than the outstanding results.
Should be conviction about what PSR is to this company, it's woven into our DNA, it's something we live in breed everyday it's unique.
It's a model that works that were dedicated to its producing these results. This is a team that is not afraid to set targets.
We work to made him we exceed what we say we're going to do.
We pivoted to grow three years ago.
We said Dan what we're going to do we said then how we're going to take our unique network and create innovative solutions for our customers that drive growth.
Control that a low cost is going to drive earnings and it's going to be sticking to this railroad. We've innovated. We've led the industry. The last several years in growth and we'll do the same this year and we said line of sight.
To fully expect and be able to do that.
In 21 and 22, that's what you should expect from this team is a unique investment story, it's a unique story within.
The PSR world.
And we're proud of it and we are proud that we're able to reward our shareholders that the trust us.
To do that as we reward our employees in as we reward our customers to partner with us.
It's a responsibility we take seriously and you should fully expect it will continue to do that.
So thank you very time, everyone stay healthy and we look forward to sharing our third quarter results.
When the times appropriate.
Take care.
That concludes today's conference call you may now disconnect.
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