Canadian Pacific Railway Limited (NYSE:CP)
Q1 2017 Results Earnings Conference Call
April 19, 2017, 04:30 PM ET
Maeghan Albiston – AVP, IR
Keith Creel – President and CEO
Nadeem Velani – CFO
John Brooks – Chief Marketing Officer
Scott Group – Wolfe Research
Fadi Chamoun – BMO Capital Markets
Chris Wetherbee – Citi Group
Walter Spracklin – RBC
Ravi Shanker – Morgan Stanley
Tom Wadewitz – UBS
Brandon Oglenski – Barclays
Allison Landry – Credit Suisse
Turan Quettawala – Scotiabank
David Vernon – Bernstein
Brian Ossenbeck – JPMorgan
Benoit Poirier – Desjardins Capital Markets
Konark Gupta – Macquarie
Justin Long – Stephens
Matt Troy – Wells Fargo
Ken Hoexter – Merrill Lynch
Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific’s First Quarter 2017 Conference Call. The slides accompanying today’s call are available at www.cpr.ca. [Operator Instructions]
I would now like to introduce Maeghan Albiston, AVP, Investor Relations, to begin the conference.
Thank you, Mike. Good afternoon everyone, and thank you for joining us today.
Before we begin, I want to remind you that this presentation contains forward-looking information and actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on Slide 3.
With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Chief Financial Officer; and John Brooks our Chief Marketing Officer
The formal remarks will be followed by Q&A and in interest of time we’d ask that you limit your questions to two.
It is now my pleasure to introduce Mr. Keith Creel.
Good afternoon. Thank you, Meaghan, appreciate those comments. Let me start by saying this. Results that we share this afternoon that everyone is taking a look at now in accessing reflect a very solid quarter performance for this team as we kicked off 2017.
I’m extremely proud of the team. The outstanding efforts, extraordinary efforts that we had to deploy in this first quarter. We actually had a win this year, a much more challenging operating environment versus last year which provided some headwinds relative to service, relative to cost, as well as I would say revenue as well.
So, in spite of that this team has produced a very solid quarter performance. I’m very encouraged as we transition into a second quarter March, the weather start clearing up, we had some positive. Our team growth about 3.5% as we closed the quarter out, which carried over the momentum quarter-to-date we are up 6% for the second quarter from an RTM standpoint.
Of course we also went to the leadership transition that’s up, and I’m happy to say but not surprised. We were not distracted. We are prepared for this, with the claim for this transition for the last four years as we built a very solid bench which we were able to implement as soon as the transition took over.
So part of that transition is Maeghan mentioned John us with us today giving his first call as a newly appointed Chief Marketing Officer. When I became the CEO, I could spend the same amount of time with the marketing group so I had the previous couple of years. So by creating John’s position, I’ve got somewhat 100% focused on the markets and drawing our top line opportunities.
John is similar and he’s got 23 years of commercial experience in this industry. Deep experience starting with UP, DM&E, the CP and then of course when we came to CP that’s when I indentified John and have been working with him.
For the last couple of years, he let half of the business units along with Tommy Browning. When we created this position that also allowed us to grab in and seek in recruiting some additional talent. So we’ve got two very talented individuals, one in Tommy Browning, as well as Jonathan Wahba who has joined the team with the transition as well that are reporting to John focusing on generating sustainable profitable top line growth.
In addition to that, we made one another small tweak to the staff. We created the VP market strategy and asset management was Mike Foran. Mike has been for the previous six months part of this transition out on the railroad. He became full-time, developing his knowledge of the network environment, his knowledge of assets and knowledge of the ops center. He has hit the ground road as well. So very, very pleased with the strength of the bench there.
With that said, let me – I’m going to do little different today instead of me going to all the numbers, I’m going to let Nadeem and John speak to the numbers and let me spend my last few minutes before I turn it over to John and Nadeem to tell you what we’ve focused on for the past 90 days.
This company we’ve driven a tremendous amount of change over the last four years sticks in the engine. This is the way I would put it. So we’ve restored our credibility in the marketplace, we’ve restored financial health, we’ve fixed the engine, we’ve got great service, we’ve got low cost which are two very compelling market competitors when you put them together go out and compete for business and we’ve retained more credibility with customers.
So taking that out of the market, taking it to the street is exactly what we’ve been focused on doing but at the same time over the last four years we’ve had some feathers that has been ruffle. So part of my focus has been to reconnect with employees and also to reconnect with our labor relations, with our labor unions to ensure that the things that we may do we didn’t get right in the past, if we can get right as we go forward trying to cap into that CP pride and trying to engage and enable more and more employees doing what they can do instead of just what they must do.
So I have done a series of town halls across the property, 7 port centers, major work centers, west coast, east coast and both in the U.S. Just concluded those last week, last two on the U.S. properties and I can tell you that this team and I’d say team, I’m not talking about just the officers, I’m talking about the craft employees that makeup this railroad day-in and day-out are engaged and ready to move forward into the future.
The pride is there, they are looking forward to the growth. So with John and his focus for their ability to grow the top line as we’ve said we’re going to do that’s exactly what we will do. I feel very optimistic about what I see in the marketplace going forward. It is going to get out we’re going to remain hopeful, do our jobs, engage our employees, engage with our customers, focus on our strategies on the marketing side as you’re going to see some top line growth come from this company.
So with that said to provide some color, I’m going to turn it over to John and eventually Nadeem and then we’ll take in questions when we cover after comments.
All right, thank you Keith, and good afternoon to everyone. As Keith said it is my first call, so it’s my pleasure to be joining you all today.
As mentioned in our press release as you’ll seen, revenue came in at 1.6 billion up 1% on the quarter and in line with our expectations and considering the challenging comps and the weather conditions Keith spoke about, overall feel pretty good about our revenue results.
RTMs as Keith mentioned were essentially flat but if you take crude out of that, there were up about 3% on the quarter. Foreign exchange of course a little bit of headwinds with a weaker Canadian dollar in 2016 but higher diesel fuel prices played a little bit of tailwind for us helping to offset some of that affects.
Our fuel surcharge revenues were 53 million this year compared to 26 million last year. On the pricing side we continue to achieve inflation plus. That puts us roughly in the 2.5% to 3% range and that was partially offset by some headwinds we had with strong potash, and also some weaker volumes in our fertilizer and our auto franchise.
I’ll take a few minutes now to kind of walk you through the revenue drivers in each in our commodity areas. So let’s start with grains. Revenues up 9%, carload is up 7%. In spite of the challenges we had in our western corridors, and particularly challenges we had with some of our connecting railroad partners, I’m really pleased with how our grain franchise came in at Q1.
In fact, this Q1 2017 was the best Q1 we’ve had in the last five years including the big bumper crop Canada had in 2013, 2014. So our dedicated train is working, the velocity is building and has built through the quarter and I’m pleased to report that last week we had a single largest empty grains body week at CP. So although I think our U.S. grain franchise is starting to slow a little bit with the opening with Thunder Bay and the recovery of the U.S. roads we expect a strong Q2.
On the coal side, revenues were up a modest 3%. The Canadian coal supply chain has definitely a tougher year. That being said, March velocity has really ticked up with our coal sets. We continue to see that in April and is setting us up well for Q2 in coal.
On potash we had a very impressive 23% tailwind driven by our strong exports. We believe this trend will remain as we get into Q2 and particularly given we have some easier comps in that Canpotex was still working on contract with China and India last year. As we head into the back half of the year, I’ll remind you that we’ve got the K+S mine coming online also.
In the fertilizers area, it reflected a outage in slower than expected recovery bringing our numbers down about 25%. This combined with a market dynamics where we saw a greater fertilizer inventories in the country caused the shortfall. We are gaining some momentum and I expect Q2 run rate to improve.
In the energy chemicals and plastics area, our revenues were down about 11%. This resulted – that’s a result of crude being down close to 40% year-over-year. Now that said, our crude volumes did outperform as we helped our customers fulfill a number of contract obligations that they had in the marketplace.
So while we are off to a good start Q1 improved. I think the future still remains a little uncertain there. But rest assured if the demand materializes, we will work with our customers to mobilize and provide service.
In the metals, minerals and consumer products area, we performed very well driven not only by our lumber, steel but primarily our frac sand. It moved approximately 17,000 cars of frac sand this quarter and these are levels we haven’t seen since 2014.
The industry on CP appears bullish and we’ve got a number of industrial development and capital investment projects underway. We remain optimistic at the frac sand run rate. We’ll continue into Q2 and Q3.
On the intermodal front, I’m extremely proud. Revenues are up 5% led particularly by our domestic franchise. I couldn’t be more pleased with the team that we’ve assembled on the intermodal side as they are committed to drive the results we need in this area.
On the domestic side, our spring inventory levels were strong as customers build their inventories. We also capitalized and share gains on strong service in Canada and our cross-border business.
On the international side excluding some contract headwinds, volumes are up based on the strength of our partnerships and growing with our existing customer base. Now looking forward to Q2 I think we are set up well. Prudent weather comps are behind us, the bulk environment continues to look stable, I am here to tell we’ve got strong road strategies in place for our carload customers.
We’ve guided to site volume revenue growth – site volume growth for the year. The first quarter came in within those expectations and I’m very confident we’ll continue to deliver to that plan.
With that, I’ll pass it over to Nadeem.
Thanks John, good afternoon. I’m pleased to walk you through our first quarter financial results. I’ll be speaking to the results on a exchange adjusted basis which is shown on the far right column of the table slide.
It was our expectations at the onset of 2017, that we would be facing difficult comps in Q1 given an exceptionally mild winter last year, a weaker Canadian dollar that benefited operating income in 2016, as well as benefits from landfills last year. This led to a record Q1 operating ratio for the company at the time.
Given these headwinds, echoing Keith I’m with the delivered to start the year. Revenue turned positive this quarter and although it’s still early in the year, we’re encouraged by the recent inflection in volumes and the operating leverage it will provide going forward.
From an expense point of view, total operating expenses were up 1% on an exchange adjusted basis. However this includes $51 million in cost recovery, in comp and benefits from the retirement of Hunter Harrison as the CEO which we announced in January. Excluding this recovery as a one-time item, our FX adjusted total expenses were up 7%.
Getting into the expense details, comp and benefits excluding the benefit I just referenced improved by 14%. This was largely due to a smaller workforce and increased pension income. Labor inflation acted as a partial offset. Our workforce is now approximately 11,800 with seasonal engineering crews and growing demand, workforce will increased sequentially with full year average workforce is still expected to remain flat compared to last year.
Fuel expense was the largest driver of increased total expenses. Fuel was up 39% year-over-year as a result of higher fuel prices. Also to note, the year ago we benefited from a fuel surcharge lag. We cycled against that impact this year which combined with the higher fuel prices, caused about two points of deterioration in the OR and an EPS impact of $0.07. Going forward assuming less volatility in OHD prices, this headwind should be less impactful.
Depreciation expense was 166 million which is higher by 4% as a result of higher asset base. We can expect this run rate to continue for the next two quarters and then expect a slight increase in Q4 as capital projects are completed and added to the asset base. Purchase services increased by $57 million to $278 million but if you exclude last year’s landfills and FX impact, it is essentially flat.
We continue to benefit from lower crew hauling costs and other efficiency savings. However, these were offset by higher snow removal costs, property taxes and general inflation. From modeling purposes we still expect $50 million to $60 million of landfills but these will largely be in the second half of the year.
Looking to older line, other charges are flat excluding significant items and interest expense is slightly favorable as a result of foreign exchange. Our tax rate came in at 26.5% which is in line with our guidance for the year. In terms of EPS for the quarter, our adjusted diluted earnings per share came in at 250 which is flat from 2016.
I recently met with each of the rating agencies to reaffirm our commitments are strong investment grade ratings. We are committed to protecting our balance sheet and maintaining financial flexibility.
As I mentioned on our last call in Q4, we will bring – it was on share repurchases and dividends to the board in the next month. We do think a healthy balance between share repurchases and dividends funded by the significant free cash we generate is an appropriate way for us to return capital to shareholders.
In summary, with a solid first quarter in the books, a return to positive volumes and much user comps ahead, we remain confident in our ability to deliver.
And with that Keith, I’ll hand it back over to you.
Okay. Thanks Nadeem, John appreciate that color.
Real quick before we open it to questions. Just to rephrase, very proud to share this as well relative to the comments I made earlier on positive relations. I just have notified that we have ratified with our U.S. the brother and sisters that represent the clerical work on the Canadian side of the border a five year deal actually ratified it early. Their deal was good currently through the end of this year.
I think it is very progressive and innovative as well, maybe the first in the industry relative to the last two years there has been an ability for these employees and we recognize their contributions and as we see our team revenue growth and they can benefit from their share that as well by getting increasing their wages relatives to their tailwind.
So there is something in there for them as well which is exactly the way we want to get people aligned across the board, be it officers, be it our craft employees as we work together in the CP family to create this kind of results that our shareholders and our customers deserve and expect.
So that said, we’ll turn it over and open it up for questions.
[Operator Instructions] Your first question comes from Ken Hoexter from Merrill Lynch. Please go ahead.
And the next question comes from Scott Group from Wolfe Research. Please go ahead.
Thanks, afternoon guys. So wondering if maybe Keith or Nadeem you can share with us how you’re thinking about RTM growth in the second quarter and how we should be thinking about incremental margins as the revenue turns positive here.
As far as the RTM growth goes Scott, what we’re seeing now is pretty much what we expect to see as we go forward. So mid-single digit RTM growth we don’t see any definitive indicators to tell any more than at this point so that’s what we’re going to stick with as far as the RTM growth and on the margins…
Yes Scott, we talked a lot about how we want to convert the growth to the bottom line and the power of operating leverage, it would be nice to see that again. I mean we haven’t seen revenue growth since Q3 of 2015. So we are very excited how we can convert this and I would just say that our expectation for the year is to improve our margins and lower the operating ratio.
So you can expect that to be the case. I mean our train lines, our trains weights are significantly improved even three weeks into the Q2. And so my reference to operating leverage you can expect the incremental margins are going to be very strong.
Okay. And then Keith, wanted to ask you, obviously the big change from a quarter ago is that Hunter is now at CSX and I’m not going to ask an M&A question but you guys obviously think a lot alike. I’m wondering, do you see opportunities to work with CSX be it on coproduction agreements or maybe something in Chicago at the belt, do you see opportunities to work together that could be a meaningful cost or margin opportunity for CP?
Obviously Scott we philosophically you know the way I think, I’m not going to disagree with you, but at the same time I would – this company would be prepared to work with any railroad be it CSX, be it NS, be it UP be it BN if we can create operational synergies.
So with that said, if there’s a willing mind and a willingness to do that but obviously we’re going to look at that. We certainly understand in Chicago the dependence upon that city, the dependence upon the belt, the suspect nature of how I can operate a time.
So to me, if I can create an environment where I’ll let some opportunities upon, some of those complexities that drive additional cost into deteriorate service, they’re not – silly not to do that. So that would be my best way to answer that.
Is there a natural rail to work within the Chicago area?
Our single largest interchange carrier in Chicago is the CSX. We said that before. It’s a matter of public record. And all that traffic goes to belt currently today. So from an operational standpoint, I would have to think there’s got to be some synergies, some opportunities that would give asset terms and premium as well as customer experience – be it CP originated or CSX terminated or vice-versa.
All right. Thank you, guys.
The next question comes from Fadi Chamoun from BMO Capital Markets. Please go ahead.
Thank you. Keith, I want to circle back to some of the remarks that you made at the start of this call on sort of priorities. I’m not sure if you agree with the view that going forward your growth, your earnings growth is little bit more dependent on volume and commercial success. If you can talk a little bit about sort of the priorities under your leadership versus prior leadership, and how you’re trying to steer some of that strategy to emphasize these opportunities for CP going forward.
So Fadi, essentially what we did is just to continue one of the stores. We came here the four years, I’d say we know who the way is, this team tiers as well as Hunter and I with the mandate to fix the engine, to fix the railroad, we’ve done that.
So as we go forward, my focus is to your point, is topline growth and that’s exactly what my mandate is for my team. That’s the reason we establish the position with John to make sure that we’ve got the right leadership, we’ve got the right focus, creating the same kind of performance culture in that marketing team that we have on the operating side while not forgetting what got us there.
We can’t lose our ability to provide service and do it at low cost and turn assets. That’s never going to change. That’s the fundamental recipe of success and sustaining and running in this railway, that’s precision railroading. So that’s not going to change.
What will change as we go forward is given that we’ve got credibility in the marketplace, we can have completely different conversations today that we could have two years ago, or we could have three years ago. We talked about this. We said, listen, it’s going to take some time to get to a point that with all the change we’ve driven, customers will listen to us and customers will trust us with their supply chains.
And that’s exactly what this is all about. And that’s exactly the strength of this franchise but we’re short in key markets. I should own those lanes. If I’ve got low cost and great service, and you’re a customer that will invest it, and you’re turning those assets and I can lower your ownership cost and give you dependable truck like reliable service, then we should be able win in the marketplace.
And that’s exactly what this recipe is about and that’s exactly the product of this operating team is creating given John and his team to be able to covert the marketplace. And that’s what we are seized and focused on doing.
There’s quite a bit of business and I’ve said this before, that’s out there that naturally gets our network be it on the rail, be it on the road, and we’re going to go after and we’re going to get it. We’re going to hustle and we’re going to get out there, we’re going to sell the service, we’re going to show customers how we can help them win in the marketplace. We win as a result as well. It’s a win-win for both parties and you’re going to see topline growth in this company.
And I’ll just Fadi, that we still have run rate for margin improvement and that’s not dependent on volumes if you look at our guidance or the year. We’re talking high single digit EPS growth with slightly positive volumes. So we still have the ability to increase EPS without the need for volumes per say this year.
Okay, thanks. But my second question is just from a maintenance point of view. Can you remind us what is the pension income benefit you’re expecting this year and how much of that occurred in the first quarter?
It’s about $100 million benefit and it’s equal in each quarter. So about $25 million benefit each quarter.
Great. Thanks guys.
Your next question comes from Chris Wetherbee from Citi Group. Please go ahead.
Good afternoon guys. I want to pick up on sort of the volume point that’s been made a couple of times. I just want to get a sense. Keith, it sounded like you’re maybe a little bit more optimistic about a potential inflection volume. And then Nadeem, I think you talked about being able to grow without volume growth or get improvement in EPS growth.
But you do feel based on what you’re seeing from customers and sort of the pick-up you saw late in the first quarter. And then 2Q, the things are maybe getting maybe a bit better than you thought they might be when we talked 3 months ago.
I would say that the fundamental — I wouldn’t disagree with that at all Chris. I would say that number one from a cost standpoint, we’ve got crew behind us, we have got winter weather behind us. Obviously last year, second quarter was dynamic for this company.
So we’ve got an opportunity now with strong demand in potash, strong demand in coal, strong demand in grain, we’ve got favorable weather condition, our cycles, dedicated trains are moving, speed is picking up. So all those underlying fundamentals are what gives us the confidence that we have.
But with that said, we’re seeing about 6% year-over-year RTM growth now and I see and expect the same. There’s nothing that I see that we would expect to lessen anywhere between now and end of the quarter.
Okay, that’s helpful. I appreciate it. And then just switching gears really quick to the pricing side and I apologize I missed this if you gave a core pricing number in the quarter, if you did, we’d love to know what it was. And then just sort of generally thinking about the pricing dynamic particularly in Canada. If you see any dynamic changes there, kind of, how you guys are thinking about that over the course of the rest of the year?
Chris, it’s John. So our same store was in that 2.5% to 3% range. To be honest, I was hoping Q1 might look a little better in terms of that change in that dynamic. There are still a lot of challenges out there in terms of the trucking sector and what we are seeing across the franchise. That being said, we are optimistic that that dynamic is going to continue to turn. So I’d say we haven’t quite felt it yet, but hopefully maybe a Q3 Q4 story we can tell.
Okay. That’s great. That’s very helpful. Thanks for the time. Appreciate it.
The next question is from Walter Spracklin from RBC. Please go ahead.
Thanks very much. Good afternoon everyone. I guess my first question will be for John as well. I think you’ve got a lot of growth opportunity coming on in Vancouver. Right now we’ve got Delta Port going to be opening up in the summer with 20% more capacity there.
My question therefore is that, with intermodal coming online there, are you less concerned about getting share gain versus your real competitor? Are you going to focus on share gain on truck? I know you’ve got a nice ad there with Jonathan from a trucking background. Where is there a share gain to be made back from rail? How do you look at all the buckets of growth in intermodal? And which do you prioritize as you’re looking at the next year in that segment?
Yes, so you brought up the Vancouver port and the opportunity there. Certainly, Walter, we are excited about that. We think there’s a lot of upside in 2017 and certainly beyond there. I think there’s a great opportunity for us to leverage our fastest most direct route in Chicago hitting our eastern partners and also leveraging certainly our business into the twin cities.
I would say for that international businesses that’s probably job one that continues to secure that route in that opportunity. As I think about the buckets certainly over the road is probably takes the top billings I think we’ve done a heck of a job in growing that business in our cross border. I think we’ve got work to do in domestic Canada that we can still convert a lot of that traffic and as we talk about on the pricing front is that sort of warm terms here in the second half of the year I think that opportunity begins to build for us.
Okay, that’s great. Moving second question here over to Keith, sort of interesting you mentioned ruffled feathers I think when I look back to the period after Hunter left CN there might have been a case that there were some ruffled feathers there and you were certainly part of the team that unruffled those feathers with CN – certainly to a good degree of success.
Is there anything that you learned from there that you might apply to CP here and I’m talking about – those customer service agreements that were put in place is there anything specific you have in mind that you want sort of go forward with particular with regards to customer reengagement that you might have learned from your time over at CN in that period?
For the customer engagement Walter I have been doing since I arrived here, so there is just more of the thing there. Those kind of ruffled feathers honesty because of our previous life and may be they led the way a lot of the similar customers they expect to pay their demurrage bills they expect to go to some fair assessment of demurrage charges and pay the bill. I mean some of that was significant change that CN drove that now the same customer today is also given a fair and accurate bill you don’t have those same kind of responses that we might have had in the past.
My focus is more specific to our craft employees. I mean at CP we’ve driven a tremendous amount of change trying to restore the health of the company what we were doing before is not sustainable. And I don’t blame the employees for that the employees certainly just didn’t that we had to drive the change that we drove. And the union that’s been affected by the most was TCRC.
We’ve had two strikes with the TCRC and listen we haven’t got it all right, but at the same time as far as my focus is to – focus on those things we haven’t got right to establish relationships of trust and respect and it works both ways it’s not just for us to the TCRC it’s also the TCRC with us. So that’s been my focus from the very beginning and that was the President of that specific union. I mean I’m probably interacting with those specific employees as well as the other employees and it’s refreshing to see the response and the wiliness to change and the positive momentum that we’re starting to create.
So as we do that and we go forward we get to an environment where we can actually negotiate a favorable collective agreement for the employees as well as for the company and for our customers and allow us to necessarily be continue to provide the service that John needs to be able to drive that revenue top line story.
I guess might add to that Walter that from a customer experience perspective we’re not going to be everything to everybody and certainly we’re going to pick our partner and want to help them succeed in the marketplace.
And from a customer experience standpoint I think that means more product development on improvement and in working with our IT systems in providing more transparency into our service for our customers. And then it’s also about building a high performance customer service group. So I think there is a number of elements you’re going to see on that front in terms of the customer experience things that we can fold into this overall product.
Okay, makes a lot of sense. Thanks very much guys.
Your next question comes from Ravi Shanker from Morgan Stanley. Please go ahead.
Thanks, good afternoon everyone. So questions specifically on crude I mean we’re hearing reports on kind of ramping of crude production out of the Canadian oil sands especially in the second half of the year. Wondering what you’re hearing there and what your current crude outlet might be and if you’re prepared to handle more crude barrel volumes if it comes to that?
I’ll let John provide some color but I’ll say this I’m commitment guy and I don’t have any commitments so I’m a bit pessimistic about crude I love to be surprised at this point we have been burned so much of this company with crude – to a point that it’s you know it’s less than 2% of our revenue. It’s important business to us I’m not going to suggest it’s not, but at the same time it’s nothing that I’m will to bet the former owner are likely to get ahead of us the way we did in the past but with that said John go ahead and.
I guess I can only add that I think we’re excited about the prospects of the new production coming on towards the end of the year if that in fact provides the opportunity to sort our script we can move it in the pipe and we can move it on rail. We’re going to be there to mobilize the assets, the service to try to deliver that but as Keith said in no means are we banking on that today.
Okay, understood. Again this follow-up on the ruffled feathers comment how do you ensure that kind of smoothing those feathers doesn’t send your OR backup again I think you said some of the actions you maybe unsustainable I mean does it worsen that kind of necessarily hurt your profitability?
When you say feathers it doesn’t mean you comprise your principles. The way we run this – precision railroading it means going out and explaining to people so they understand what’s in for them and understand why we do what we have to do. It’s very encouraging when you go out and speak to some of the employees that have gone through this ruffled feather comment I don’t want this thing to get too carried away with us.
But if we sit there and explain listen we didn’t have a choice we weren’t very well respected when it came to service. Our competitor was beating us day in and day out so do you want to work productively, safely and efficiently and provide good service to our customers.
So you get the benefit and the honor of moving that freight or if not the alternative is not very attractive but they want us. And when you have those kind of conversations with people they get they understand it. It doesn’t mean you change the way you do business it just means we better communicate eye-to-eye, boot-to-boot and on the ground with our employees they understand why it’s important that we did what we did and why it’s important how we do what we do day in and day out to be able to provide that service at low cost.
So that we can compete in the marketplace and protect their jobs and I think as we grow add more jobs back to the company, but it’s going to be lodged up with revenue it’s not going to be given away any kind of efficiency that we’ve worked blood, sweat and tears to put ourselves in a position to be able to benefit from.
Great, very helpful. Thank you.
The next question comes from Tom Wadewitz from UBS. Please go ahead.
Good afternoon wanted to ask you a bit – first on cost drivers I know that – perhaps it’s a lot of different factors not one or two big ones, but if you could identify what are some of the key cost drivers or alternatively what might drive the operating leverage as volume come back?
The main driver I’ll let Nadeem provide a little color Tom, but the main driver is absorbing the additional business without simply adding additional train starts. So we made investments at our physical plant it’s time for those investments to be paid for. We got DC power and 100% of our fleet we can run longer trains which we’re doing.
We can run heavier trains which we’re doing, which are more fuel efficient trains, which drive those synergies and the leverages to the bottom line. So with that said that pretty much in it it’s basic block and tackling when we’re doing what we do and what works well for us.
Yes there’s always the initiative that you continue to incorporate to help offset some of the inflation on the expense side. We have a fuel sourcing initiative that’s going to add some savings that we’ll see it benefits us in the coming quarters. Some of the locomotive modernization program we put in place that are going to help us reduce some of our cost associated with how we run the network. But a lot of it just blocking and tackling the opportunity to grow at low incremental cost – and like I said – the power of operating leverage as well.
When I think of that I would have thought that unlike your coal and potash trains you already would have been running optimize train lengths. I know you identified a couple quarters ago how you could run longer grain trains but is that the way we think about it or can you run longer coal and potash trains as well?
But Tom the coal is there I would say no in coal I think we got that at an optimal spot. The potash there still more opportunity left we run 172 car trains to the West Coast to Neptune there in the North Shore and Vancouver, but also a portion of that business goes down to Portland Oregon. So that’s one of our initiatives we working close with the UB as well as the customer to expand that train length as well.
Some of the things we done on the South Shore contrary to some of the safe news that I read last week the service in the South Shore has never been better. We’ve got efficiencies we’ve created we went in to make some investment down there. So we’re effectively moving our assets faster for our customers with less operating cost.
So all those things when you put it altogether – there is no home runs anymore it’s single and doubles but you start putting those singles and doubles together and they start adding up the scores. And that’s how we continue the stores we go forward.
And recall Tom a lot of the initiatives that we put in place last year were more in the back half of the year right. So we’ll see the benefits of that currently and that will flow to the bottom line as well.
Okay. And if I’m going to add another second one or whatever, I probably want to parse in but a second topic if you will just any quick thoughts on the competitive environment. Obviously volume growth is a function of what the truck market provides, how well you execute but also how the other railroad behaves. So is that – anything changing there, is it still pretty competitive with the broader rail market?
Tom it’s John I would say yes, it’s a competitive environment right now right as I talked about a little bit earlier I hope for little breathing room to get after it maybe later in the year in terms of that over the road business. But that being said we’ve also been pretty successful on that front. And I can be focused on the competitor certainly when you do understand what they’re doing and how they go about it and will do that.
But first and foremost we’re focused on what we need to do to grow with our customers that’s the priority so that competition is all going to be there this is more about how we can get after with our existing customers, grow their share help them win and then eventually convert more over the road.
Yes Tom, we always said this and you can expect this to be maintained at this company. We’re not going to commoditize ourselves, we’re going to make smart business decisions, we’re going to sell service and selling service is not selling price, selling services going into a customer and educating that customer how we can help them spend less money may be not in rate, but also in their total transportation span, to make them more competitive in the marketplace so they can grow their topline and we can grow with them.
It’s blocking and tackling it’s taken this franchise and lot of these lanes that we have service for a lot of ability. We’re actually sure follow-up the market so I talked about this before I talked about to a specific customer I’m not going to name last month about this.
So I said listen if you own 4,000 cars in this particular lane and I can give you an asset to turn this 25% faster you need to own 25% fewer cars, do maths on those cars and it’s over 100 million of capital cost that you can avoid as long as you can rely on this company to get your product to the marketplace.
So we can have those discussions now, which is exactly what we’re doing. Our team is learning how to have those discussions Tom to be able to convert this and that’s what gives me confidence as we go forward to grow this topline taking share, that rightly should be on this railroad as well as be it rail be off the road be off the highway.
Okay, great. Thank you for the time, I appreciate it.
Your next question comes from Brandon Oglenski from Barclays. Please go ahead.
Good afternoon everyone, and thanks for taking my question. It’s like I guess I want to belabor that point that point that Tom got into here Keith if you don’t mind. Because for investor it’s a relative world and we do see your competitor with higher valuation and I think the perception that their operating model might be just a little bit better.
And if you look at their OR they’re leading you a little bit. So what are some the incremental steps that you can take to get back that rightful share that you talk about and retain growth that maybe matches or even exceeds you know the other stocks that potentially investors could also look at?
Well again if I think about the operating ratio, we’re pretty much on par with our competitor I’m not going to get focused on what CN is doing. I’m focused on what we’re doing and what we need to do better. I understand I’ve got a very unique understanding of this industry in Canada both sides of the border that I think steers this company well and allows us to understand what we’re go at and – those lanes that we’re good at we should be able to convert that business be it again like I said from the rail competitor or truck competitor.
As long as we maintain and don’t get too consumed whether if it maintain a low cost structure and provide good service we’re going to win in the marketplace. There is no doubt about that as far as I’m concerned it’s worked in the past, it will work as we go forward I mean that’s what we bring to the table with this franchise and that exactly what we’re focused on converting.
Okay, I appreciate that. And John welcome to the sell-side questions here. I’m going to ask more for you how integrated is the operating culture and the sales and marketing team at CP and how much of an integrated approach do you take when you’re looking at these opportunities that you guys have laid out on the call today?
Yes so very integrated I can tell you I’ll give you an example as part of our focus in growing that margin that maybe even Keith spoke about we recently put an initiative in place for a work and very closely with key superintendents and operating managers out there to go train by train and I call it a surgical growth approach we go train by train and look at the opportunities on those trains where we can add length to add products at a low incremental cost. And it’s a matter of picking that apart with the operating team understanding that opportunity in what lanes it’s in and what customers then we go after and provide that attractive opportunity.
All right, thank you.
Your next question comes from Allison Landry from Credit Suisse. Please go ahead.
Good afternoon and thanks for taking my question. Maybe thinking about the notion of topline growth from sort of the longer term perspective clearly you have the 200 million to 300 million opportunity that you can chip away at and merchandise and over the road conversions to intermodal. How much of that 200 million to 300 million do you think you need to get and how much intermodal growth may be on a three to four-year view in order to consistently drive either high single-digit or low double-digit EBIT and earnings growth?
I can tell you on the merchandise and the auto perspective. If I look back at my first 100 days or so in the role I have spent a lot of time focusing in that area of our business. Certainly there is less and opportunities and the bulk and we’ll capture those opportunities. I think we’ve got lost and running in the intermodal space and certainly we’re going to pick our partners and deliver on the international side the opportunities that we want for Canadian Pacific and its future, but that opportunity in the merchandise and autos to repatriate that business and bring it back.
I don’t know what the number is and how quickly it comes back to our properties but I can tell you in terms of spending the time in those areas and looking at those opportunities it’s very real for 2017 to make a material move and certainly 2018 in those areas. Certainly there is a lot heavy lifting to be done on the network to pick that business back and put on the railroad, but it’s out there.
Okay. And I guess have there been any changes in the conversations with similar customers that give you increase confidence that some of this will materialize this year and more of it next year?
I would say yes unequivocally yes the recent conversations we’ve had out there and John can speak to his but there is certain businesses out there that’s in place now as we speak that likely will be awarded later this year that again, back to my point my thesis, it serves to the strength of our franchise again we turn assets if you own assets and I have got a route and I can reliably turn them so that you have pure assets moving the same amount of business or the same number of assets even more business that’s a pretty compelling value proposition that makes it quite easy to have a conversation that could come to a good outcome with the customer. So long answer to your question, but the answer is yes.
Okay, great. Thank you for the time.
Your next question comes from Turan Quettawala from Scotiabank. Please go ahead.
Yes, good afternoon and thank you for taking my question. Just have one here I guess also on the topline growth just wondering when you think about your guidance of slightly positive RTM growth here for the full year. Is it possible to pass out sort of how much of that do you expect will come from share gains or sort of this new topline growth that you talking about as opposed to what will come from maybe the economy and the easier lapses and such?
That’s tough one Turan. I mean – there is a lot of uncertainty in terms of some of the merchandise space and what’s happening in the economy I would say that we have a lot more comfort around the bulk environment there. We talked a little bit about John referenced K+S coming online we had a strong start with potash in Q1 it’s going to be a very strong bulk quarter in Q2 that we can certainly check the box. But to pass it out in the manner you described I mean I don’t think we have the comfort to be able give that kind of color and visibility I’m sorry.
That’s fair but I guess what I’m try to drive on Nadeem is it mainly you think will come from what you’ll get from the economy and the bulk side or are you expecting a lot of share gain in that positive?
I would say not a great amount of share gains is based into our slightly positive RTMs I can definitively say that.
Thank you. That’s helpful. Thank you very much.
Your next question comes from David Vernon from Bernstein. Please go ahead.
Good afternoon guys and thanks for taking the time. Keith I wanted to address the sort of the cultural transformation on the marketing side with you just a little bit differently. If you think about kind of how you may have seen other railroads kind of approach the market the tools and methodologies the marketing practices that were in place. How long do you think it will be before the team you recently put together kind of gets to that same level of execution from a sales and marketing perspective.
I think it’s a shorter runway I mean this is work that we started two years ago so we didn’t just start two months ago I think with John, John is very entrepreneurial results oriented guy he gets accountability that’s the reason he is put in a position and he is working that day in and day out and sort of taking the baton that I handed him. He has worked with me for the past two years he certainly understands what I expect from accountability standpoint and applying that to the team.
We had a sales training session we call it this is back in January I guess or February first week of February a show of hands and we’ve got about a 100 rough number 100 people that work under John’s leadership and about two-thirds of that were new less than two years of services.
One-third of that about a year of service so the people that here now by and large are people that subscribe performance, the people that want to be incentive, they want to be compensated, they want to make commissions they step into those challenges, they don’t step away from again by an large.
I think the culture is there, the people the players I have said this before when we brought on Jonathan we want A players. We want people that come to work, they want to get paid for the results but at the same time they know they understand it they don’t produce results someone else will that’s our obligation to our customers, that’s our obligation to our shareholders and I take that very seriously and John subscribes for the same kind of thought process.
So again I think the team is here I think we’re going to start to see the results some the things that we’ve done already the strategies John and his team have put together. What we did last year driving intermodal growth being the only carrier in North America that did it as a result and pretty positive of that. So you can expect more of that as we go into 2017.
And may be as you think about helping us who a little bit maybe outside the business or investors who are trying to understand this from the outside looking are there any sort of sign post or goal post or biomarkers that you can point to I think on the operation side you got the award and that’s pretty straightforward but I think on the sales side I mean it just weekly carload progress or is there something that we can think about as far as kind of additional insight that you might be able to help us to tell us whether this transformation is actually happening or not?
I’ll let John speak.
Yes, I don’t know if there is any answer obviously it’s the carload growth and the revenue that ultimately will define our success. I will say and I’m not going to provide the playbook here but there is a number of things that are sort of being developed in the tool shop that will be able to sort of. I think certainly outline more if they materialize and I think that’s it’s and may be the area of network development.
And I think certainly one of the things in the merchandise and auto space that hasn’t covered here in this first 100 days as our network is set up from an operating standpoint as Keith spoke about to succeed. But there is some key areas of focus in terms of enhancing that reach and enhancing that franchise that I think become milestones as we move through the year.
I think something I would point to is take a look at RTM growth when you see RTM growth and CP growing faster than the economy that’s pretty possible what we’re talking about at the same time maintaining our pricing discipline. We’re going to control sustain profitable growth those key words we’re not going to get away from that. We are not profitable, we’re not going to chase this.
Appreciate your time and wish you the best on that effort. Thanks.
Your next question comes from Brian Ossenbeck from JPMorgan. Please go ahead.
Good afternoon, thanks for taking my call. Just a follow-up on the domestic intermodal strategy answer that did drive the growth. If you can just give us a little bit more context of what really triggered that kind of outside growth relative to rest of the industry was it finally getting down to the utilizing the planning seem to be another focal point I think it is the majority of your mix of intermodal. So if you could give us some color on that it will be helpful.
Yes, I think it was a number of things and it started with people right. So I took over the intermodal franchise I don’t know year and a half ago or so – and a lot of it was assessment on the people and getting again sort of that right performance culture and mindset in place. We spend a lot of time just getting the team out in front of our customer base selling the service that the operating team had put in place.
So again I think there was a lot of opportunity out there in lanes that our competition whether it be CN or trucks had taken away from CPO over the years and it was really getting the product back out in front of those customers. So it’s leveraging the service, getting back out in front of the customers and then I think there is some areas in terms of our cross border business that maybe CP in the past just hadn’t put a lot of focus to. So we can kind of end up that focus and got those customers on that and in that case really got after the service in some of those lanes and previous results.
It’s Keith cross border domestic intermodal growth was the key driver force last year that really started to get some life and gained traction with John and his team and something we’re still working on we’re not done but at the same time that was definitely one of the key star success in innovation and new product offering as well. The business with the triangulation of refrozen and frozen pizzas and just being innovative in the marketplace and putting solutions out there for our customers and previously we’re not there is what’s driving this growth.
Okay. Was the trip plan being implemented I know that was in the fall of last year was that contributing to any of this or is it still a bit too early?
Yes it’s too early trip plans we came through the winter, we’re focused trip plan performance coming out but the benefits of that both from sales for John and his team to go out and sell service but more specifically for the operating team to turn after it. Those are all opportunities that’s all part of some of the operational synergies will be driving this year low volume cost, low volume dwell time making sure the right cars and the right train asset turns will improve those are all things that we will be focused on the second or third quarter from an operating standpoint and from margin standpoint on controlling the cost.
Yes, I would add I’m not here to scratch the surface and how well we can leverage to a plan and really how we present and sell that to our customer base. And with that particularly on the intermodal side having to take that to the next level and really provide our customers daily transparency to their boxes their trip plan and their expectations. We think it is going to be a strong selling as well.
Okay, great. Thanks for the detail and your time I appreciate it.
Your next question comes from Benoit Poirier from Desjardins Capital Markets.
Good afternoon, gentlemen. First question may be it’s for John you recently strengthened the bench on the marketing front so I was wondering if you could provide an update on where you are right now in terms of new position that you added and also what you are tracking in terms of key matrix to measure the success of this initiative?
Yes, so I think certainly the bulk and the intermodal side were often running on terms of the people as I said I am extremely pleased with the new team we’ve got in our intermodal side they’re deep into the market, we’re measuring the success actively of our sales team not only in terms of generating revenue the number of sales call we’re seeing where customers seeing how often they’re out on the road spending time with our customers.
I’m very pleased with the direction of our team. In the merchandise and auto front we’ve got some gap we’re still filling in that area, but we’re aggressively sort of implementing all the discipline that I think we had success in the intermodal side into that area for our business to.
Okay perfect. And second question could provide an update on key process related to the timing whether it’s second half or the end of Q2 and also quantify the impact we might see or we should see on the volume front in the second half?
I think we’re looking at a June-July timing in terms of starting to see some of that business moves and we’re anticipating about 500,000 tons at this year.
Okay perfect. Thanks John.
Your next question comes from Konark Gupta from Macquarie. Please go ahead.
Good afternoon and thanks for taking my question guys. This is the first one can you please provide update on grain network fluidity, I guess the bad weather and some derailments have negatively impacted your car supply to your customers and if you probably have lost any volumes to your competitor are you seeing those volumes coming back to you on your network?
Yes, we just put into the marketplace the largest number of cars last week in our grain franchise than we ever have. The velocity on our dedicated trains particularly when you add in Thunder Bay is that at very high levels. I feel very confident in the level of service and the speed of our service as it stands today.
Okay, thanks for that. And Nadeem one for you just wanted to touch upon the CapEx side of equation your gross CapEx has roundabout turn north of 20% for much of 2011 to 2015, but came down to 19% this year and last year. I was just wondering are you running into the risk of under investing relative to your competitors when you look at CapEx as percentage of revenue or your pretty happy with what you got for the next two, three years?
No, we don’t invest based on what our competitors does we invest on what’s required to run safely and efficiently and grow the business and quite frankly those are decisions we make independently in respect to what our peers do and we’ve raised our CapEx 6% this year and it varies year-to-year depending on what the growth projects are and where the needs are.
One thing we don’t second guess is how much we spend in basic maintenance CapEx which is 750 million to 800 million. And you can just put that in pen every year so quite frankly right now 1.25 billion is what we expect to spend and again it’s a little bit I think we’re the only rail that increasing CapEx this year and we’re confident and that’s what we need to run our business.
So do you anticipate sorry?
I would just add a little color that to remind everyone this railway also is the only railway that gets to take capital holiday. We’ve got locomotives that are stored we don’t need to buy locomotives we are not obligated to buy locomotives I think there is only one other railroad in this industry that can say that.
So we’re in very good stand and position we’re still one year or two we talked about this last year of taking out switches out of the mainline taking switches out of sidings taking switches out of yard tracks that represents decline of about 1,000 switches that again when we take those switches out and one that are serviceable which many are because they’re not necessarily and haven’t be used we just inventory those and it foregoes our ability or our obligation not to buy those additional switches as we go into 2017 and 2018 in line with our basic capital expense.
So those are a couple positives that this company certainly is benefiting from and well over the next couple of years unlike some other roads in this industry.
Okay I appreciate the color. Thank you.
Your next question comes from Justin Long from Stephens. Please go ahead.
Thanks and good afternoon. So I wanted to maybe follow up on some of the earlier questions about the potential to improve some of the interchange points going forward. Is there a way to frame up the potential benefit or runway you have from just operating and more fluid network around Chicago. I just wanted to see if there was any way to put that opportunity into perspective.
No, I would say to early I mean you could have a better to think about beyond the possible but I think it takes more the synergy discussions and then the true time when the true benefit would come it actually during the tough times when you have severe weather, when you have line outages, when you have congestion in the city that’s when you see the true benefit both from an asset terms standpoint as well as service reliability and costs.
So it’s effectively a little bit too soon to talk about that, it’s way too soon to put a number of that. But I’d just suffice to say that there is opportunity there.
Okay, fair enough. And then as a quick follow-up, maybe this one’s for you, Nadeem, but 2Q is a tricky quarter to model especially with the easy comps. And you talked about expectations for mid-single digit RTM growth. But is there any color you could provide on the OR expectation for the quarter? Just curious what’s getting embedded within the full year guidance that you’ve given?
Sure. So I’d say that keep in mind of course that what impacted us this quarter was fuel. And the impact on fuel surcharge was a bit of a headwind. But as you look at Q2, typically you don’t have the weather challenges, although there was now in Calgary Sunday.
I would say that you’re going to have the operating leverage that we talked about. The strong bulk performance that we have in front of us. So all the run rate will allow us to reduce the OR meaningfully especially compared to last year, and certainly meaningfully sequentially.
So all that without really giving you a number, Justin, sorry but we expect a very low operating work ratio relative to where we’ve been.
Okay, great. I’ll leave it with that. Thanks for the time.
Your next question comes from Matt Troy from Wells Fargo. Please go ahead.
Yes thanks. Wanted to ask a question on grain specifically, the diversions in your numbers versus your competitive clear up in Canada. You talked about the challenges in the western quarter and your reconnecting partners. I was just wondering could you just provide investors with a little bit more detail as to exactly what happened in 1Q to drive that divergence?
And perhaps what you learned from that and how we can get comfortable that gap will narrow in terms of the relative RTM growth through the year? What’s your roadmap there? Thanks.
I guess first thing, Matt, I need to just remind everyone that in 2016 Q1, we had our largest world record grain movement in Vancouver. That was out at CP. So we’ve got a big comp out there from again at record level.
I think what we are seeing now is our grain product flows in its sort of – the dedicated train is an offering to both our U.S. and our Canadian grain customers. So really we try to operate as one grain franchise. And I think what we saw through Q1 is some of those supply chain, whether it be in Vancouver or the U.S. PNW, you saw our customers moving their trains back-and-forth across the border to fill market opportunities.
The Vancouver was full or slow or there was an outage, those trains move into the U.S. If you see it in the PNW, the same issue, they may move back up into the Canada. So that sort of moves our numbers between our property. But I think the bottom line as you look forward is the velocity in demand is strong in Canada. A lot of those trains that we are operating in the U.S. have now since been moved into Canada by those customers and with Thunder Bay open up, we get a bigger lift in terms of that velocity. So we are optimistic with that.
Okay, got it. And the follow up would be, you did press release the United States Steelworkers agreement today. I think you said that something like 600 employees. Perhaps just an update from Keith or someone else on the team, just give us a refresher if you could on union negotiations. I know some of its collectively with the other roads but from a CP specific perspective, what’s the roadmap over the next 2 to 4 years in terms of what major agreements are coming up for negotiation? What are outstanding? And Keith what are you focused on there? Thank you.
The Canadian side to your point, we ratified – there are still workers. That’s all the clerical employees and it is just about 600 employees. We are currently in early negotiation discussions with our Maintenance of Way which is also TCRC but Maintenance of Way employee represents 2300, 2400 of our employees.
That contract expires within this year. The big one that we still have to negotiate is actually TCRC running trade. It’s about 2500, 2600 of our Canadian employees. The current agreement we have expires also at the end of this year. But certainly we’re starting to have some discussions as part of what we are trying to do to connect and establish relationships to trust and respect so we can have productive discussions. But with that said, the competitor road is ahead of us in their bargaining schedule. So they are actually – I believe they’ll get a data this summer.
So they are certainly the same people, the same leaders that are consumed with that contract first. So our work, the heavy role and so to speak will be done in the second half, not the first half when it comes to the TCRC. So other than that, we’re in good state. We’ve got an agreement that goes through 18 with Unifor, which is previously the Canadian Auto Workers, CAW.
We’ve got TCRC or dispatch is a good for 2020. And the last piece which we had not a lot of fanfare about, but we were – we talked about this last year. We ratified an agreement an hourly deal, progressive deal with our engineers on the U.S. property. However, we did not have an hourly agreement with our TELL and our UTU conductors, switchman, brakeman.
We’ve since gone through an arbitration process and literally I guess about two weeks ago, the arbitration are working back and effectively we will have an hourly deal for all our running trades employees on U.S. property. We are going to implementation of that now. We’re going to make sure we do with the very orderly fashion working with our employees.
But with that said, that was the last sort of agreement that we’re taking out in the U.S. out as well. So across the board, we are in pretty good shape. I feel pretty good about it again. You know, the TCRC running trade employees talked about this a lot. I don’t want to continue to harp on it but we are certainly working hard and working with the TCRC to focus on negotiating an agreement and not having to go through a strike like we had the last two times. And I am confident – cautiously confident that that outcome is possible.
I appreciate the detail. I’ll keep it to those two. Certainly don’t want to ruffle any feathers. Thanks guys.
Our last question at this time comes from Ken Hoexter from Merrill Lynch. Please go ahead.
Great, thanks for coming back. I don’t know what happened earlier. But, John, maybe can you talk about the capacity? You talked about the record grain volumes. Keith, you just talked about kind of the locomotives you’ve got. But are there any capacity issues in terms of track, train lines anything that requires new startups as you hit some of these record volumes in terms of trains.
Ken we just need velocity. The challenges we had in the first quarter, first quarter it’s not – it’s an outdoor sport. Avalanches on our railroads, the mudslides when the snow melted fast and then of course, part of our product on the grain side is in partnership with one of the roads south of the border. And they had some of the similar weather, similar operating challenges.
So whenever those supply chains are affected, then obviously it’s going to affect the velocity of those assets that are out there running. So without those headwinds, we should expect to see what we are seeing now.
We’ve got cycle terms that are moving fast, the dedicated trains are spinning. We should get three trips, round trips a month whatever dedicated train wire in the winter time. You might only get two. So those things are behind us now and we go forward, we’ve got extreme confidence. We’ve got locomotives, we’ve got the people, we’ve got the cars that will be able to move record amount of grain as long as mother nature cooperates with us.
Great. That was a great rundown on the employee kind of contracts before. But with this, you’re taking out about a third of your employees over the last few years. Is this a comfortable level for you in terms of staffing? Do you still find – when you talk about, Nadeem was saying, still room on the operating ratio. Is that via more cost cutting on the employee reduction side or is it just refining operations. Where do you see continued improvement coming from?
These things always going to be constant continued improved. We’re going to get better at doing what we do. I mean, Vancouver is a good point there Ken. We went through a lot of crisis back in December. Went down, took a look at the operation where we spend a lot of money, and the customers weren’t very happy. And quite frankly what we were doing was not sustainable.
So I went in and we made some investments, we made some operational changes, we pushed some business back to another road which effectively we were being their agent and that was eating up our capacity, our customer’s capacity to be able to provide good service and turn our assets, it just didn’t make a business sense for us.
So, we triggered a change. We said, you know what guys, I can’t do this anymore, I can’t be your agent and give you reliable service for your customers and give my customers reliable service, and I know which one that I’ve got to keep happy first as a provider.
So with that said, costs come out, we’ve become better at what we do. We’ve got a much lower cost and a much better service. And that’s one of the key quarter was for us where specifically back to this grain, those dedicated trains are going straight to that service area. And if we can turn those assets faster, get it back up to the splitter to move more of that grain that’s out there waiting on us to move, then that’s a win-win for us.
We are seeing on the South shore specifically, Ken, record set – I won’t say on a weekly basis – but it’s not uncommon with our grain customers those two facilities that we are servicing with the investments we’ve made and with innovation work with those customers and the team that we have in place are very, very much improved lower cost operation which helps drive part and parcel to those additional operating synergies.
So it’s that kind of story. You sprinkle it all over the railroad as we get better doing what we do day-in and day-out and that’s what allows us to drive continued improvement and provide superior service that John’s team converts to the marketplace.
Thanks for the time. Appreciate the insight.
And we’ll now turn the call back over to Keith Creel.
Okay, let me wrap this up, and I’ll close saying this, I’m extremely excited and energized. I’m honored to be the CEO of this iconic company. We build a leading team of talented committed railroaders. We’ve got tremendous runway ahead of us and we’re committed to delivering to our customers, our shareholders and the communities that we serve in the months and the years ahead.
We did what we say we are going to do in the first quarter of this year and you can expect more the same as we go forward to the balance of 2017. We’ll certainly try to achieve the guidance that we set out at the start – at the beginning of the year to again meet the expectations of our shareholders, as well as our customers and our employees.
So with that said, I thank you and I look forward to you discussing second quarter results since we get to the quarter. Thank you.
This concludes today’s conference call. You may now disconnect.
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