Q1 2021 Kansas City Southern Earnings Call
Thank you, Rocco. Good morning. And thank you for joining Kansas City Southern first quarter 2021 earnings call before we begin. I want to remind you that this presentation contains forward-looking statements within the meaning of the Securities Exchange act as amended actual results could materially differ from those anticipated by such forward-looking statements as a result of a number of factors or combination of factors, including but not limited to the risk identified in our annual report on form 10-K for the year ended December 31st, 2020 and then other reports filed by us with these Securities and Exchange Commission, forward-looking statements reflect of information only as of the date on which they are made KCs does not undertake any obligation to update any forward-looking statements to reflect future events developments or other information. And with that it has now been a pleasure to introduce Kansas City Southern president and CEO ottensmeyer.
Thank you, Ashley. And good morning. Everyone Welcome to our first quarter earnings call. I'll start on slide for you'll see this quarter. We're going to shorten the prepared comments at least that's our intention and and and and leave a bit more time for for Q&A given the the situation that that we're in right now. I would like to draw attention to the participants on the Q&A and specifically introduced John or you may have seen a a press release that we issued yesterday after the market closed announcing that John had joined our executive team as a Executive Vice President of Operations. John many of you probably know John spent twenty plus years that Canadian national just a wealth of experience in in transportation terrific leadership position wage.
Safety and environmental and in other aspects of operations John's been working with us for the past two months as an executive consultant. So he's had an opportunity just really see what we're all about. And and we've had a chance to see how John operates and I can tell you it's just been a tremendous fit John has jumped in with both feet and and really suck helped us in the in the two months. He's been here and just delighted that that he's here and available to to move into this position and welcome John to the team and and congratulate John on this and this appointment Sammy will continue as you have seen Sammy for the past two plus years leading RPS. Our initiative is particularly as we head into this important phase three focusing on the customer touchpoints and and and service sustainability and then Jeff song.
we'll continue on as an executive and
Member of our executive team and and and really dedicate his Focus to strategic merger planning. As you know, we have been granted a protective order by the stb wage allows small group of of of individuals Executives from both companies to go into the the zone of confidentiality and begin to share information to develop our merger case and our merger application including network-wide operating plans safety integration environmental impact among many other things. I can tell you it is a massive amount of work and we want to put someone in that position as as Canadian Pacific to really build the the strongest case that that we possibly can as quickly as we can and Jeff is really ideally suited to fit into that role given his experience and and knowledge of the month.
Not only operations but really all aspects of our company. So congratulations is Jeff on moving into this role, which is arguably the most significant strategic projects. We've ever faced and welcome and congratulate John or two to the executive team at KCs with that. I'll move to to believe slide five months before I get into the quarter. I'll just spend a few minutes talking about the the merger process and updating you all on on where things stand. I will refer to this slide in these statements in the in the Q&A. There's really only so much we can say at this point about the whole process and the process leading up to this point as well as the process going forward. I'll give some additional disclaimers here in a second but dead.
Everyone knows on on March 21st this year. We announced an agreement to merge with Canadian Pacific in a stock and cash transaction representing an Enterprise Value. She approximately $29 billion dollars for KCs. We will close into the plan as we will close into a voting truss where common shareholders KCs will receive Point 489 shares of Canadian Pacific and $90 in cash for each KCs common shares at home because this consideration includes both cash and stock in addition to receiving an immediate cash payment KSU shareholders will be able to continue to participate in the upside of this very exciting combination going forward with some powerful and compelling synergies and and we think an opera
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Superior shareholder returns well into the future as a result of the exchange ratio and the consideration, uh, this part of this transaction KSU current came to shareholders collectively will represent about 25% ownership in the in the new combined company. This is really a very exciting historic and transformative combination. You've seen a lot of the material that we've made available publicly, but this will create the first rail network connecting the United States Canada and Mexico and is expected to provide enhanced competitive alternatives to existing rail service resulting in improved service options expanded service options to all of our customers and and potential customers as a result of this combination.
We will remain the smallest of the of the 6 class 1 railroads measured by Revenue. The combined company will have a larger and more competitive network service options that don't exist today and operate approximately 20000 miles of rail employee close to twenty thousand people and generate combined revenues of nearly nine billion dollars. There has been tremendous shipper and customer support for this transaction. And this combination is evidenced by more than 375 letters of support from shippers Partners, um ports transload facilities other other business partners of both Kansas City Southern and I'm Canadian Pacific finally speaking for the the KCs side a very excited about this combination and what it provides for our employee wage.
And and our presence here in Kansas City as you have heard the our corporate headquarters is in in Kansas City Canadian Pacific obviously in college, but as part of this announcement, we have also announced that the US headquarters will remain in Kansas City for the combined company. We know whether there will be a lot of questions about about processed, um, which we really cannot answer because we don't have the answers to those questions. I asked for the process that led us to this point. We we will simply refer those to the proxy statement that we expect to have available within a matter of a couple of weeks. And so, uh just be warned that if there are questions in the Q&A section about how we got here. I will refer to the proxy statement wage.
That will be available in in.
And two to three weeks as for the stb process again, the next step in this process is is up to the board to decide the path the way the old rules versus new rules and take a position on the KCs waiver. You've seen a lot of of testimony and and statements and objections and responses that have been provided publicly and and that's really all we will have to say about this. I will refer you to a couple of I think very powerful statement that I'm sure most of you have seen many of you have reported on and those statements from William Clyburn former Vice chair of the stb at the time of the new merger rules and the and the KCs exemption and then former Senator and Congressman Byron dorgan. Also provided a very powerful statement is dead.
Support of the the process that we have laid out and the and the transaction shown on this slide also is a website that we have created that has a massive amount of information. I'm sure many of you have spent time there. But um you if probably refer some questions to the website where we have a lot of detail including access to all of the shipper support letters and the two letters that I mentioned from former stb, vice-chair William Clyburn and wage Senator Byron dorgan. So with that I will move on to the subject of the call here, which is our first quarter results will get into more detail. He took over the next few minutes, but you can see revenues fell by 4%
During the quarter do to lower volume volume down about 1% Fuel and foreign-exchange adjustments account for three percentage points off line in Revenue. So adjusting for fuel and foreign exchange. Our revenues would have been down 1% in volume down 1% as well. The first quarter operating ratio, I'll focus on the adjusted operating ratio of 61.4 was 170 basis points higher than last year for reasons that many of you well know including some service disruptions caused by severe winter weather polar vortex weather in much of our service territory during the first quarter as well as COVID-19 related labor shortages particularly in Mexico.
Result of the Mexican Government Health decree and the impact that had on the availability of crew labor during the quarter. Our first quarter adjusted earnings per share of the dollar. Ninety one is about 3% lower than last year in the case of operating ratio and and earnings-per-share. The major adjustment is for the transaction related expenses of about $19 and Mike Upchurch will cover that in Greater detail in a few minutes. I will take a minute to talk about our commitment to ESG specifically fuel safety and service on this slide through PSR and investment in fuel-saving technology. We continue to focus on improving fuel efficiency and partnering with our customers to limit supply chain emissions.
As an update we are well.
Out of our Target to reduce greenhouse gas emission intensity of at least twelve percent by the year twenty twenty-five. Additionally we've committed to a more challenging science-based Tom in support of the goal of limiting global warming to well below 2° Centigrade above pre-industrial levels. We realize ESG as much hotter than emission reduction and take pride in our holistic approach to we hope that you take the opportunity to review our latest sustainability report when it is published later. This spring is it will showcase many of the actions that we've taken over the last year and expect to take going forward additionally in 2021. We are adding safety and service specifically trip planned compliance measures to our annual incentive plan for management employees and and and specifically birth.
Safety and trip plan compliance for the executive management team and operations management to further drive safety and customer service accountability throughout the organization moving on to slide seven. I won't spend a lot of time here, but despite the first quarter challenges. We are confident wage rating our multi-year Outlook including the guidance that we provided for the full year of 2021 back in January this obviously implies some upside throughout the rest of the year off. We feel very good about our volume Outlook and the economic recovery appears to be in full swing and our Network Remains the beneficiary of several unique growth opportunities wage driven largely by refined products exports from the US Gulf Coast into Mexico, Mike, Nance. We'll talk about that both the uh, yep.
Great growth levels in in our outlook for that business in a few minutes.
Finally, we we don't show it here on this slide, but we are committed to improving customer service. As I mentioned. We are including customer service metrics in our general incentive plan targets for 20 21 for executive and operations and other employees throughout the company will talk more about that in in in the in the in the coming minutes. I'll close with slide eight key operating metrics just as you can see from the chart here. It's a bit of a mixed bag for the quarter dwelling velocity. We're both materially worse year-over-year as lingering Network congestion exacerbated by The Vortex and COVID-19 related crew issues, especially in Mexico impact that are trained operations during the quarter you can see active locomotives are now UPS log.
we are over a year as
We have uh, consistently been removing locomotives from Storage to assist with our service recovery effort and get back to a network performance that that we are compatible with and despite weather impacts. You can see we are still maintaining the increased train links that we gained during PSR phase II last year off. This allows has allowed us to move roughly the same amount of gtm's with 12% fewer crew starts than the previous year as we continue our PS are phase three efforts in 2021. Our primary focus will be regaining the service improvements made during PSR phase one while maintaining the train link games that we met during BSR phase II last year. The end result will be more fluid and more cost-effective Network that we can use to drive Revenue growth as we continue to focus. Yep.
Our industry-leading volume and revenue growth with that. I will turn the presentation over to Mike Vance.
Good morning, everyone. Thank you Pat. I will begin my comments on page ten with an update on our first quarter volumes of Revenue performance as Pat mentioned our overall Revenue was down on a 1% decline in value holding FX and people price constant revenues would have been down only 1% on a year-over-year basis. If you feel pretty good about this considering that we had some winds, uh During the period including February's polar vortex the global semiconductor chip shortage Network congestion and then a slower recovery at Lazaro Cardenas in a corporation and contract renewals or similar to previous quarters. We continue to maintain a disciplined pricing strategy. We are targeting inflation or better price increases right now the same pricing environment appears to be very healthy.
Looking at the business segments.
Chemicals in petroleum revenues Rose a very nice 16% in the quarter. This was primarily driven by tremendous growth in our refined product shipment as you will see your may have noted in your appendix Mexico energy-related business posted a 47% year-over-year volume increased
Refined products volumes grew at 56% with manifest traffic leading the way in March refined product volumes were up 69% on a year-over-year basis.
Wrote on the segments that was partially offset by lower plastic volumes as the polar vortex affected Gulf Coast manufacturing operations.
Industrial and consumer business segment experienced a 16% year-over-year Revenue decline is volumes Ross 13% weakness in demand and changes in sourcing patterns creates a significant shortfall in our Metals business. We continue to see lower demand for oil and gas drilling pipe Metals used and automobile manufacturing due to the chip shortage and for Metals products used it infrastructure infrastructure projects particularly in Mexico.
a forest
Business underperformed as tight inventories the polar vortex and network congestion caused shippers to temporarily change Transportation modes Appliance business remains on the admin side of things Revenue was down 8% on a 4% decrease in carloads weather and resulting Network congestion caused slower cycle times, which is the primary contributor for the shortfall demand does remain strong and we expect the business to bounce back is fluidity returns to the network the energy business actually benefited from the Colder Weather and we did see an increase in demand for utility coal in the near-term. We expect that the demand for utility cold will be favorable as utilities rebuild their stock piles, of course crude oil was down due to weak demand.
Looking at the Intermodal segment, we encountered a bit of a mixed bag volumes were effectively flat us domestic carloads, grew 13% and our cross-border franchise business grew up 7% This growth was fully offset by declines and the Intermodal Auto Parts movement, which was again driven by the trip shortage and lower year-over-year down volume, which have been Florida rebound Following last quarter's teachers protest. The good news is that business continues to sequentially improve and we are actively working with our shippers to regain volumes.
You changes in mixed or driving to change in our Revenue per unit in this segment adjusting for the auto parts and Lazaro impacts volume and revenue would have been up 10% We do see a rebounding economy that you Commerce growth and tight truck capacity as favoring this sector.
Lastly because of the semiconductor shortage which resulted in a number of plant shutdowns in Mexico are automotive volumes and revenues were down 18% respectively. Although the semiconductor shorted remains a bit of a concern some previously closed plants had begun to reopen
Turn to page eleven. You'll find our 2021 Outlook again as Pat mentioned despite the slower first quarter start. We are confirming the double-digit growth guidance. We provided in January, and our last earnings call. You may remember we provided a bridge which supported are 11:00 to 14% growth on an fx and fuel surcharge constant basis.
Favorable COVID-19, particularly comparing the second and third quarters aided by a favorable macroeconomic environment should provide provide another 68% year-over-year lift.
Well, the Knicks has changed a bit. We continue to believe our unique Road drivers will contribute another four to five percent to overall growth. And lastly. We noted favorable lateral comp which are expected to provide a little bit of a bump in the fourth quarter.
Looking at the business units, we reiterate growth and all but one of our business segments Ag and Min demand is strong and we have an opportunity to benefit from carryover catch up as cycle times improved the automotive sector continues to see strong consumer demand and low vehicle inventories. And we believe the oems will look to recover production, which was locked due to the semiconductor shortage in a second half of the year.
refined products remain
The nice unique growth driver for KCs and it continues to exceed our growth projections with respect to the energy business unit. Utility cold is expected to provide some near-term upside down its customers replenished their stockpiles with respect to our Port Arthur project for Arthur drubit opportunity continues on schedule for the 3rd quarter of and this will drive strong crude oil growth in our energy sector
these positive drivers are somewhat offset by the industrial consumer segment where in addition to weather events were experiencing some sourcing shift and delays and metal plant openings.
Which are causing us to reduce our volume Outlook?
Finally our Intermodal Outlook is largely consistent with prior plans and we continue to be bullish on our us domestic and cross-border growth opportunities in summary and looking for it remained. Very optimistic about twenty Twenty-One the combination of our Revenue opportunities paired with an increased service focused as a result of TSR phase 3, we should drive an impressive growth here for Casey M. And that concludes my comments with that. I'll turn things over to our CFO Mike Upchurch. Thanks Mike and good morning everyone. I'm going to start with our first quarter results as Mike indicated carloads and revenue declined 1% and 4% respectively fuel price and that fax did negatively impact Revenue by three percentage points off our reported operating ratio of 64.2% includes 19.3 million of merger costs that we incur during the first quarter primarily wage.
Banking and and legal fees are adjusted operating ratio of 61.4 was up 170 basis points year-over-year and that didn't put a $90 negative impact headwind from fuel surcharge lag and 110 basis point headwind from congestion and weather during the quarter off rapidly escalating fuel prices during the quarter created an 11 million dollar fuel lag headwind from Q4 twenty twenty-two Q1:21 a.m. We saw a fuel prices increased fifty cents per gallon or 29% and given more stable Highway diesel prices recently. We would expect some reversal of this page of leg to begin been benefiting us going forward.
A reported diluted earnings per share were dollar sixty-eight dollars adjusted for FX and the merger costs. I mentioned previously adjusted EPS diluted EPS was a dollar and ninety thousand one down 3% from the prior-year. So let me put our first quarter into perspective and and provide a little bit of color why we continue to believe we're on track to meet our guidance for the year is Mike discussed the polar vortex certainly depressed the revenue in February and the auto chip shortage wait on automotive and Auto Parts volumes throughout the first quarter of offsetting those impacts were strong chemical shipments particularly the refined product into Mexico. And while the quarter didn't measure up to our expectations down both financially and operationally, if you look at the three months during the quarter, I think this is important january-march were essentially in line with our financial expectations dead.
We dealt with an incredibly.
Google weather conditions in February then in many ways were far worse than some of the most severe hurricanes that I've lived through over the years here at KCs off because about 60% of our business navigates through the state of Texas that Dell was substantial weather challenges and we're talking about a geography here that isn't accustomed to the kind of took their winter weather. So we saw a really disproportionate impact including dealing with significant power outages throughout much of the state.
Operationally we need to improve on the level of service. Our customers are expecting us to deliver and it's certainly shown in our operating metrics namely velocity dwell and Triple-A compliance. However that said we are beginning to see daylight as months-long congestion is beginning to ease at key locations such as the border at Laredo and in Sanchez and Monterey yards with yard inventory down in some locations about fifty percent since the end of February, certainly this this quarter created less than a fluid Network resulting in incremental costs during the quarter, but that should begin to ease as we progress throughout the year. We're bringing back more employees and locomotives took handle what we continue to believe will be outsized volume growth this year coupled with capacity improvements throughout our Network and Border operations process and program.
Lance are moving us closer to a windowless environment. We think we're on the right path to meet our long-standing PS our goal of service begets growth.
Moving to operating expenses on the next slide despite the previously mentioned increase in operating expenses resulting from congestion. And whether we remain focused on strong cost management across the business, we saw decreases and expenses from a fax fuel consumption as a result of lower volumes in GTM lower us fuel price and better fuel efficiency, despite the congestion in weather events increases in expenses included six million jobs in higher wage and benefit inflation, three million and higher depreciation and three million of expenses related to COVID-19 which is Pat mentioned earlier in part driven by the Mexico having returned to read status for a portion of the first quarter which allowed at risk employees to stay home while being paid on
In February 19th, Mexico removed the red light status in in much of our service area allowing us to fully restore availability to our crew base wage and looking forward as as long as COVID-19 cases continued to Trend in the right direction. We would expect COVID-19 related expenses to decline relative to the q1 level. We experienced the remainder of our expenses equipment purchase services and material and other were essentially flat year-over-year. So let me move to the next slide and come back and and benefits and then fuel expense from a comp and benefits standpoint. We saw a decline of 2% in the first quarter driven by seven million in lower head and work hours three million in lower incentive comp and a million benefit from a fax those declines were offset by six million in, Georgia.
for wage and benefit inflation
And the two million in COVID-19 related expenses largely from the decree in Mexico, the seven million decline in comp and benefits that we experienced is the result of 7% lower headcount and fewer work hours from lower volumes on our Network. We continued our train consolidations driving fewer crew starts and reduced hours worked equating to an approximately 10% labor efficiency in our teeny Crews.
For 20 21, we continue to expect our headcount growth to be muted and be well below volume increases as we continue to lengthen trains creating further south of operating leverage fuel expense declined 5% in the quarter driven by slightly lower fuel price better efficiency and lower consumption off the full year. We continue to believe fuel efficiency will be a ripe opportunity for us as we continue to improve our cost structure.
And then turning the capital allocation free cash flow was up 18% $212 million in the quarter. However, excluding the $75 of locomotive lease buyouts executed in 1q twenty-twenty are free cash flow was down 35% year-over-year. However, despite a challenging quarter. We continue to believe we're on track to meet our Outlook of seven hundred million of free cash flow for the year one cute cat box came in at a hundred million bucks. This is up 15% year-over-year primarily due to the critical Investments that we're making in capacity to handle significant cross-border growth that we're experiencing.
Finally as communicated on our March 21st merger call with Canadian Pacific. We have terminated our share repurchase program in anticipation of our closing into voting trust during the quarter. We did report seventy-five million of share repurchases. However, that was the true up from The Accelerated share repurchase program that we announced in November of 2020 until we close into voting trust and ceased to trade as a separate stock. We remain committed to our dividend fifteen cents per share. And with that. I'll turn the call back over to Pat. Okay. Thanks Mike. I I think we accomplished a shorter presentation now we didn't I didn't talk a lot about operations or RPS are but don't don't take that as any indication that we're any less committed to continue our focus on on Thursday.
Phase three Sammy's on the on the phone here to answer any questions. And and then again, I I just noticed a a come across a a Post article from Bill van to do at Railway age picking up on the announcement about Jeff and John or and was reminded that John participate in a series of podcast about us are too. So that that was a nice reminder that we really if anything strengthen our our Focus here not only with Sammy continuing on in his capacity, but with John and his experience and I think Mike put a a lot of really good perspective on the quarter really a tough quarter, but I think we managed very well and very pleased that we still feel very confident in our guidance for the for the full year just log.
Reminder is we open it up for Q&A?
Please don't ask many questions about how we got here through the through the the process that will all be disclosed in great detail in the proxy statement off. And as far as the stb process, we're just not going to be in a position to say much about that beyond what I said in my opening comments. So with that let's go ahead and open up the page for questions. Thank you. We will now begin the question-and-answer session to ask you a question. You may press star one on your touch-tone phone. You're using a speakerphone. We ask that you please pick up your handset before pressing keys supercharger question, please press star to do the number of participants on this morning's call management limit your questions the one
Arthur question today with Allison Landry was fed and Suites, please go ahead.
Thanks, good morning. Maybe if you could talk about the opportunities post-merger approval in terms of cross-border Intermodal specifically what are some of the key Lanes or corridors where you think you could share would you expect any impact on the the franchise business with the BS?
Yeah, I'll take a first shot at that. I think the you know, the the most obvious opportunity for us for for really extraordinary growth in Intermodal would be the the route between Mexico and and the Upper Midwest Chicago Detroit Toronto Minneapolis, the the combination an obviously creates new service lines that are in addition to those that are available today. That is a huge Freight corridors a huge truck market and and we know that there's opportunities to to to convert and this is one example where the page the the the the the single line service option in premium service sensitive business like Intermodal
Is a is a real factor in making that that opportunity become a reality. There will be investment required and again off the the safety the environmental benefits of of rail versus truck the size of that market. The opportunity for conversion is is is a very exciting opportunity for the the combined CPK see but we'll have to work through a lot of details to put more more detail and more substance to that plan.
Okay, and if I could just sneak out another quick one in you know, you mentioned the trip plan compliance metrics that are not part of the think you said Daniel incentive comp. What are the specific targets or or fresh home that are that you guys need to meet?
We're we're basing this on an improvement Allison year over year Improvement that that I think will certainly move us in in the direction that we need to be from a customer satisfaction standpoint. And we haven't we haven't specifically disclosed those but the targets will be based on year-over-year improvements. Okay. Thank you guys.
Super my question today comes from Jason seidl with Talent, please go ahead.
Thank you operator patent team. Good morning. Everybody Pat. You guys have a lot of support obviously from the from the whole shipping and and railroad Community for this merger has has found any of that supports surprised you and then when you look at the potential Revenue synergies down the road, since you guys have announced this transaction has there been anything that popped up that was expected that could be a potential bonus for investors.
In terms of support for the transaction. Yeah, I think I think just the the the number of of shippers and and others that have come out very quickly. I'm very supportive and and and we we add to some of the uh, uh, the the association's you know, I think it validates what we believe to be a the case is we were getting to this point which is this is a a a combination unlike a lot of combinations in the past Thursday enhance Rail options. And as we said, there's not a there's not a single Market or a single customer that experience has a reduction in Rail options we have today. There's no 3 to 2 or 2 to 1 and I think you know given the corridors and the markets that we connect with this combined Network and birth.
And the amount of of traffic and Freight that's available for you know going back to the Intermodal Story the truck to rail conversion. I think this this is going to be very attractive to you shippers and that's reflected in the in the the number of support letters that we've gotten and and the quickness of the response as far as synergies. I'm probably not going to comment on that and in terms of anything specific we'll we'll have we'll have time to get into more detail about that at at a at a future time.
Okay, that was my one appreciate the time. Thank you. And our next question today comes from Chris Wetherbee with Citigroup, please go ahead morning. Thanks for calling guys. Yeah, maybe a question about this year and I guess I just kind of curious about some of the variable opportunities you might have to catch up on the guidance after what was obviously a pretty challenging, you know, for sure from an operating standpoint. Can you talk a little bit about sort of maybe some of the levers you can pull on the cost side and or it may be is it more driven by the potential for revenues to accrue at a faster Pace that your sort of lapping is very easy, over the course of the next several months, but just kind of curious how you go from so that challenge of the first quarter maybe pick up some steam As you move forward towards those guidance points for this year.
Yeah Chris, this is Mike. I'll I'll take a crack at that. You know twenty Twenty-One I think is always been more about our our growth than necessary.
Cost reduction and you know as I mentioned during my prepared comments, January and March were basically on our expectations. We we dealt with the rough, you know month of February for the reasons. Mike Ness talked about we do believe in the auto sector. You're going to see a strong catch up the Tsar numbers continue to be very very positive dealer inventories down to 38 days which you know is down from from an average of like eighty to eighty five days. So the the oems are are telling us we're going to catch up that that loss production, you know refined product continues to perform quite well, you know production with within the country of Mexico continues to decline and that's giving us a great opportunity to move product from the US Gulf Coast into Mexico. We've got the drubit facility that that's coming on line off.
Here in third-quarter that that's going to be a nice boost. We've got a major new steel plant in Mexico that that will be available to us. So we feel really really good about the growth. We're getting our mojo back on on service, you know, just another most recent data point even that just this morning. I hate to react to one data point but the few has tailed trains. I've seen them in the last quarter or so. I I mentioned yard inventory being down 50% and some of the key locations. I mean, I think there was a lot of optimism the economy looks really solid to us including in in Mexico. We we talk frequently about the to cycle economy, you know, the domestic economy that are may not be performing quite as well. But when you look at manufacturing and and IP with you know, roughly 80% of the goods being manufactured moving into the United States that that business is going extremely well.
And we continue to you know, see strong cross-border growth. So we we still feel very good about where where we're headed here. And April's off to you know, just an amazing start realize that's that's the start of easy comps but my role all that together. I know that was a lengthy answer but but hopefully gives you a sense for the excitement you have for the opportunity ahead of us. Yeah, that sounds like an interesting opportunity. Perfect. Thanks very much. Appreciate it.
And our next question today comes from Tom wadewitz with UBS, please go ahead. Yeah. Good morning. Yeah, good morning. Wanted to see if she could offer some thoughts on the the voting trust and you know, obviously there's some debate around, you know Department of Justice said that you know shouldn't use it but they don't make the call stb does so long. Is that something that you think is really important to the transaction going forward or would you say that's not necessarily, you know, the the relationship and the deal is with strong that uh, you know, that's not necessarily imperative to to the deal. You know, I guess if it doesn't happen and maybe KFC would have additional options potential, but just wanted to see if you could offer some thoughts about you know, how much did we focus on voting trust approval?
but
I think the voting trust obviously is is the plan to to close into voting trust so that the the shareholders get the consideration as soon as possible I can say is that we have done everything we and and and Canadian Pacific really has done everything possible to to create not only a plain phone no squeaky-clean trust structure that that should there just should be no basis to who object particularly from an independent standpoint. I think uh one very strong powerful evidence of that is the selection of Dave Sterling is the trustee, you know, Dave has no prior relationship with CP Dave ran KCs has a public independent public company with a lot of success for many years. And and I think that was just one indicator that we just wage.
They just want to do everything possible here to create the cleanest trust structure and and just make it uh, very easy for for that month option to proceed on that basis.
Do you have a sense of when you'll find out? I know it's tough to say precisely. But what's your kind of best guess of timing to find out from stb on voting for us? We really aren't going comment on that. That's you know, that's that's out of our control of we we we believe the stb wants to move quickly, but we we don't we don't have specifics on the timing.
Okay. Thanks for the time. You're welcome.
Yeah, thanks for taking my questions was hoping you could update us on the total revenue on your entire network. That is that is interchange with other partners any fresh thoughts on the merger between those partners with that interchange and and and maybe an update now that we're approaching a month removed from the merger announcement, you know any discussions on interchange Partnerships jv's that sort of thing and and how they're reacting to the news. Thank you. I'm sorry, you know just no comment on that on on this call right now. I'm sorry. I'm going to I'm going to fall back to my my statement that you know, we're happy to talk about the quarter the Outlook and and things that that that we we can control and respond to but Thursday, we're we're not going to address those those questions on the call.
I mean, can you share historically how much of your Revenue has been interchanged?
You know, I don't I don't honestly don't have that in my finger trips for an earnings call.
It it's about eighty percent in in the US as is interchanged.
Thank you.
Hello. Next question today comes from Justin long would Stevens, please go ahead. Thanks and good morning, obviously a lot of discussion around different growth opportunities and the merger will help expedite growth in the network. I wanted to ask about locomotives needs going forward in in light of this growth. If you could comment on what you're expecting for locomotive needs the next let's call it three to five years and similar question on technology and the the level of investment you expect their pro forma wage.
Yeah, I again I'm I'm going to be stubborn about this. We're not going to talk about asset needs after the time of the merger. So we're happy to answer questions about a locomotive outlook for for KCs, you know going forward but we're really just not going to talk about our Capital needs Beyond completion of the merger. So I don't know. Yeah Jeff for Sammy if you want to go like you were to say well I was just going to say adjusted our guidance on Thursday at baxa's Seventeen percent of Revenue. We we still think you know, a stand-alone basis. That's a a good number for us that would include any kind of equipment needs. We need in including locomotives. So there's certainly nothing. I see sitting here today that that would change that equation for us, you know, maybe maybe what I can add this is Sammy dead.
We still have a long way to go on our locomotive utilization. You know, we are at about a hundred and fifty gtm's for available horse power in the US wage a lot about ninety GTM for available horsepower in Mexico. And and you know other class ones. I have been associated with their life 200gt Emperor available horsepower. So we still have a long way to go on increasing utilization for locomotives and that goes hand-in-hand with the velocity of the network, you know, you have trains, you know stranded or setting or held and like Mike Upchurch mentioned a few minutes ago. We had the lowest number of trains held in a very long time showing up on the report this morning, but when these strains sit they said was locomotives on them, you know, which obviously you know is not a good use of the assets. The other thing is on the birth.
We we you know, our velocity is really being improved now with significant significant change in processes and John, you know, he came in and and he is bringing in, you know, a lot of fresh ideas and a lot of intensity and scrutiny, you know trained by train, you know, why is it waiting and all the rest and we changed from 6 our Windows two for our Windows this week, which is something we have been working on for two years. So a lot of this is is coming together and they you are coming down all that does is improve the locomotive utilization and and as a result, you know, we we we have we still have a lot of work to do.
Thanks, and and Mike you said some locomotives would be coming out of storage this year. Is there a way you could help us quantify that and what it would leave you with in terms of a surge Fleet pro forma.
Well, I think the slide that you know pad had in in his section gives you a sense of what we brought back out and and what the active Fleet is 9:15 and off, you know, 6% higher. We we still have some ability to to bring some locomotives back. But again, remember, you know throughout this whole journey, we're we're still down about I think close to 20% from when we began our RPS our journey and as we lengthened trains and you know become more fuel-efficient wage Sammy talked about the available or the goes 10 miles per per available HP. We're going to continue to lean into this and and gain some efficiencies there. So hopefully we can, you know keep our future locomotive needs at a minimum.
Okay, great. Thanks for the time.
Thank you.
Good morning. Thank you. I'll just keep my one question on pricing. I think you mentioned. It just seems like the pricing environment kind of everywhere. You're looking in the transport complex is is kind of inflicting pretty hard and I just want to understand if you're seeing Federal pricing opportunities in life. And then maybe what you were envisioning when you provided the guidance back in January and and my my Upchurch, I think when you first gave that guidance of $9 and Twenty-One of eps, I think about it in that was kind of a mid-sixties incremental margin and if you're seeing Federal pricing opportunities, I wonder if there's just a little bit of conservatism in there in terms of what the incremental margins could be if some of that upside down revenues driven by prices. Thank you.
So I I with respect to the pricing environment. I think we would agree with you. The pricing environment is very healthy. We're certainly seeing you're seeing it across many modes of transportation. You're seeing the Oceanside. You're seeing it on the truck load side. You're seeing it on the small parcel side your your ceiling seeing it on the LTL side of the business. So to the extent that that pricing remains elevated that certainly provides us with with opportunities to to be a little bit more aggressive on that front. So we continue to optimize pricing for yield and we will continue to do that as we move forward. And as for the EPS in our guidance was $9 or better off so you can assume in that that number that we we had a little bit of breathing space. I I don't disagree with your comments around incremental margins continuing to be wage.
strong certainly is
We carry on throughout the rest of the year, but the one thing that I would remind everyone we we certainly had a certain amount of share repurchases built into our plan that we will not be pursuing and models would would need to be adjusted for that downward but we're still comfortable with the $9 or better. Yeah, that's a good point and just one quick one for me just on the trip plan compliance. Is it 70% 80% I don't know how you do it on a solid basis or maybe by commodity just be helpful to understand what the starting point is to see what the opportunity is. Is that can get approved for the service. Yeah. We're we're going to stay away from the specific number. We we've actually tried to Buck Mark across the other carriers and everybody defines it a little bit differently. We we've got some fairly tight definitions particularly around Intermodal and and so our numbers aren't going to be Thursday.
For all the others, but it's Pat indicated. We we do have incentive compensation tied to AAA in compliance and and it does require an improvement off for us to get paid. So I think we're going to leave it at that.
Okay. Thank you. Have a good weekend everybody. Appreciate it. Thank you, too.
An honest question today comes from Scott group from Wolf research, please go ahead.
Thanks. Good morning. Good morning. I just want to clarify one of Tom's questions. And then I had a fundamental question. So the CP filings suggest that this deal may not happen without the voting trust. I wasn't sure if your answer do you do you share that same view?
well, refer to the CP filings
Okay, and then just fundamentally so you talked about returning to prior service levels, but maintaining train line not adding back much much headcount. I guess how often do you get back to those prior service levels without adding stuff back and and does it require much ongoing cost to get there? But I I can answer this. This is Sammy. We are doing very structural changes. Now, you know to our Network that go far beyond what we have done in Phase One and phase two of PSR and all that while you are very focused on customer service and triple and compliance that we talked about and and percentages of spots pod and pulling and first my last night. So, uh, we you know, the service is is a huge emphasis at the same time the velocity and well and like Mike Upchurch mentioned wage.
We have significant improvements in Monterey that that there was a team that spent at least two weeks in Monterey going through the switching operations and how to be more effective, you know in our switching and and as a result was the same headcount, you know to answer your question same head count which is already in our accounts are 9 to 10% below. What day were three pandemic, you know, we're doing a lot more switching in the yard and and we are servicing, you know about 500 cars to our customers every day, you know spotting them and the inventory levels have come down from something like three thousand to eighteen hundred, you know on a typical day at the same time send shares, you know, which is another dog is very very much impacted by Monterey. You know, it used to have something like a thousand five hundred cars waiting to go to Monterey now. It's about 300 cars off.
No, waiting to go to Monterey. So there is
It's structured Home Improvement in all to the way of our yards are running and the same is true of Shreveport where we have made some design changes Shreveport is in New Jersey. Now, we made some adjustments, you know to balance, you know, fine-tune, you know, the the requirement for train lengths with the requirement for velocity and well and you know fine-tuning it's a bit because you know during the pandemic our whole effort was increasing the train lengths to the maximum. Okay by about 14% now now you can dial it down by only 1% or 30% you know until we got the infrastructure in place to support it and what I mean by infrastructure is at the tracks in the art have to be long enough to support these long trains, you know, otherwise every time she comes into the yard, you have to split it on into we call it doubling over, you know, two tracks and that kind of thing. So so we are doing a lot of process changes particular. Yep.
On the Border area things as simple as Customs papers we're finding that a lot of trains are coming to Laredo yard, you know, especially from the refined product which has served by like 60% seventy percent is always in raised from the Houston area and it goes to Monterey exactly the area of the network which is most sensitive to traffic and when it rain comes in and it has four or five or some cars that have not don't have the proper paperwork for Customs guess what happens, you know in in in the yard now you have to take out these cars from the train and you slow down the whole operation. So this is a simple process correction that can work on with the customers and and improve the fluidity of our Network. So you have the process changes at the same time. You have the infrastructure investment that we have been working on. Now for many many months, you know to increase, you know, the trim lead length in the yard so that you know while you are while you are putting a cup of God.
In the yard, you don't block the main line because everything now is longer. So you increase the you know, the length of that track and we are doing that and essentially as we are doing it at San Luis Potosi you are doing it at Laredo. So you have the infrastructure improvements that are ongoing you have at the same time, you know, this process Improvement the way you know, you do the work itself without any dollar of investment. These are two big buckets and then Sharon and not not the lease is fuel efficiency and there is still a lot of room in fuel efficiency. You know, we are at about 1.8 to I think 1.26 gallons per kgtm. We want to be at one point sixteen gallons per kgtm and now we are doing experimentation with strains where we stripping them of one locomotive, you know, so instead of four locomotives you run was three or instead of five you run was for by increasing the rating of each locomotive and making sure that the puncture creating a, New Jersey
Is the train actually would make it and it does.
Make it and when you do that you save locomotives and you have a huge Improvement in fuel efficiency. So we have a couple of trains where we had 34% Improvement in fuel efficiency, 15% improve fuel efficiency. Obviously, we cannot do that those old trains, but you can just imagine the you know the room that we have here on fuel efficiency. So all these things are beginning to happen and we are really going to see wage second six months of the year, but some of them are going to be in Q2 and that's that's the structure on, you know, cost efficiency combined with service that will bring in a lot of Revenue and that's that's Space 3
Thank you guys. Next question today comes from Brian ossenbeck with JPMorgan, please go ahead morning. Thanks. Good morning. Thanks for taking the question. If you can just give us a quick update on political landscape in Mexico. I know we've seen a few headlines. Maybe you can help fill in the blanks energy reform clearly, very strong easier comps coming up but um, there's another bill looking like it's going to put the private sector at least a little bit behind public. You know last time we saw that and utility land it was challenged in the courts immediately assuming that that will happen here. I didn't know if that affected sentiment in any shape or form and then lastly on the on the Outsourcing bill. It looks like there's at least some negotiation on the private sector cuz that does seem not coming back. You can share your thoughts thoughts on that and potential offsets. That would be helpful. Thank you.
Yeah, I Brian I'll go ahead and take the the labor Outsourcing. Yeah, you're right. There's some momentum forward on that with a bill in Mexico, you know, once we see the the final bill and and it's been approved they have 30 days to to then provide, you know, all the details behind that bill detailed regulations Thursday. We still have a little bit of time. But before we kind of get a good assessment of that but at least what we've seen so far heard so far with would suggest this is going to have a choice or impact to us than than what we might have initially thought. We we don't believe this is going to have a material impact, uh, predominantly because of the concept around with cap that's been proposed here and and that that cap in light of what we're already paying in in p t u and prod
During we believe what will not be a material increase in our our labor expense.
With respect to the the energy reform question. I think the way you are characterized. It's probably pretty straightforward. Yes. There was some changes that pass through the lounge house and in Mexico those have to go through the Senate there is some belief that that will continue it could put additional pressure on some of the smaller manifest type shippers. Who do I have the storage capacity available to meet the the government requirements on that front to that extent. It may favorable some of the larger players which would frankly just woke up our unit train business. I think this is really a function of supply and demand and you know, Mexico has the demand wage pemex is unable to meet all of that demand. And so we continue to believe that the fuel is going to continue to be imported into into Mexico into the foreseeable.
Future might there be a chance.
To this like there was with the the electricity side of things. Yes quite possibly. Um, and like I said, I believe that your characterization is is accurate. But again, I'd focus on supply and demand, right? All right and Brian just just to emphasize again. I mean production continues to age Klein, right 10% you know, the demand environment hasn't fully recovered, but we would expect that to to begin Crossing that break-even point here in all the stay-at-home orders a year ago. And when you look at importation by Third parties that that's up dramatically which plays, you know, extremely well to our business office. So we we continue have a very positive outlook on that business.
All right. Thanks very helpful.
For next question today comes from panda. Bear with Bank of America Merrill Lynch, please. Go ahead great. Good morning. Can you talk a little bit about the North American supply chain flew flew? He's given the the timing of your return of velocity and and well post the storms and then given those PSR games. You mentioned the the locals you took out a storage. Would you look to put those back into storage if you improve fluidity, and and I guess your thoughts on the employee reductions and just the overall North American Network congestion. Thanks.
North American supply chain fluidity. I'm not I'm not sure exactly what you're looking for Ken but you know, I mean just look across the board and and my touch down on it, uh free capacity is tight everywhere certainly ocean Trucking rail of we're not the only railroad that's experiencing a capacity issues and service issues and but you know, I think uh believe that a lot of this is a function of just the divorce option the shock to the system of in our case, you know, really go back to fourth quarter of last year with with hurricanes. I know that's it's ancient history, but as we were recovering and and kind of getting back on our feet and we got hit with the the COVID-19 related labor issues in Mexico the Red Dead
Bill Green status, which really, you know, cause a lot of stress on our crew base and Mexico and then of course the polar vortex but you know, just speaking for ourselves. I think, you know, we we talked about this that we can see Trends and indicators that we measure that they give us a lot of confidence that at a high level. We're seeing improved congestion in yards and and other measures that we look at every day show that we are we are getting better and we're seeing seeing Improvement in those Trends. We need to see that in customer touching and customer-facing metrics to a greater extent. So that's that's really the primary focus here. We've we've brought back resources. We brought back locomotives and and Crews were were hiring new Cruze. So just looking at what we control in our own network we're dead.
for bringing back resources to
To really get the network performing the way we we want it to and we and we know it needs to because we also know that we've got growth opportunities that we we want to be able to to go after and to pursue. Um, I don't know if that's the kind of answer that you were looking for. But, you know really more focused on our own situation then the broader North American issues. Yeah. Can I keep seeing over the last year? I I mean twenty-five thirty percent reduction in volumes and a $50 balance back. We we've I think done a pretty solid job of of scaling down resources, whether it's labor or equipment then bringing it back clearly unprecedented kind of downward turn and and bounce back that that we saw that that that's made things a little bit challenging but we're we're going to continue to you know, do the right thing from both the labor.
And an equipment standpoint to make sure we can meet our customers expectations and and if things level off will put equipment back into storage, so it will be very adaptable.
Yep. Thanks, Mike and Pat. I guess the only I guess maybe more detail or follow-up would be just is there a timing when you think you get to that fluidly, you know, is it you know just on these Trends would it be back half that you'd expect to be brought back to your your operating levels that you could pull out some of those extra locomotives or or employee reductions any thoughts on on that as soon as possible about that. We got a couple more in Q what? Why don't we try to get
All right. Thanks. Everyone on next question today comes from David. Zazula with Barclays, please. Go ahead and more name is question for Mike Nance just on the phone. That's the only consumer Outlook. Wonder if you could provide a little more color on the sourcing shifts and delays and planned opening and kind of the the relative impact of those and wasn't the sourcing shifts are more transitory or structural. Thanks.
Sure. So down in Mexico, there was a couple of Steel operators one of which provided slab to another provider on the North End of Mexico. So that length of haul has changed as the consumer of the slab has changed their source that we no longer have that sort of long length of home from the south west portion of Mexico into the Northeast portion of Mexico.
With respect to other metals manufacturing a number of facilities or new lines that were supposed to open up at these plans have been delayed as a result of COVID-19. So the the manufacturing of new products or expanded products is going to be delayed along with that.
I don't question today comes from Jeff Kaufmann with vertical research Partners, please go ahead. Thank you very much and congratulations a lot of exciting things going on. I actually question for John or John, you know, I'd love to get your perspective as someone coming in from the outside and then looking at the operating fluidity, you know, Kansas City and and you can't even a very interesting time but you know relative to what you're seeing going on giving your prior experience. Is there anything that surprised you in terms of of the life of the Railway? And can you give us an idea for maybe some of the ideas you might have that might be new and different from the way things are going on.
Thank you for the question and thank you for for bringing me into the conversation first. I have to thank Pat and the team for bringing me on it is such a wonderful opportunity wage.
And you know, I think there what you'll expect for me is continuity from my friend and colleague Sammy family and and the energy and the month and the complimentary strategic views that Jeff has brought the table as far as capital investment people development and customer service and focus off. The one thing. I'll tell you I am so impressed with is that the team and the entrepreneurial values and perspectives they have and I'm really looking forward to building value.
And doing it safely and doing it with the focus of customers and the health of the Railway. So for me, I love to get granular and meet with trainmaster meet with locomotive Foreman meet with engineering folks showed on the leads building tracks because like I completely respect the contribution. Yeah and people who work night and day to to run the railway. It might just make it as simple and predictable as as I can for them and Thursday, it's predictable and valuable for our customers. So comparing things. I I think this is a world-class operation. I the people in in Mexico, I spent the first four weeks of the 6th. I've been on on the team in Mexico are just talked to her and that goes with with the Dead.
And the process is in the infrastructure that I've seen in the United States as well. So I I I'm impressed. I'm in Humble and encouraged by how valuable and how much contribution this company can make to the North American economy.
Okay. Thank you and best of luck. I'll keep it short cuz I know the calls going on. Thanks, everyone.
General Motors concluded your question answer session. I'd like to turn the conference back over to mr. Ottensmeyer for any closing remarks. Okay. Thank you all for your time and attention and you're good questions. I just summary obviously a tough quarter. You'll hear that probably across the entire sector we feel great and still very confident about the Outlook the opportunity for growth. We've got the great best got a great team. We got the focus. I think we're we're very confident and optimistic that that we are moving in the right direction in terms of service metrics focus on PSR continues to be very high in and obviously with with Sammy continuing in in in in his capacity on coming on board. I think you'll see see us deliver continued benefits on that front and we know there are Revenue opportunities and growth opportunity job.
Out there for us and very pleased to see Mike Upchurch dust off the service begets growth motto that is alive and well, and and we we believe that'll put us in great great position in the in the quarters ahead. So thank you again, and we'll look forward to seeing you in about 90 days. If not sooner. Thank you. Thank you, sir. This includes today's conference call. We thank you all for attending today's presentation. You may not have snacks your lines another wonderful day.