Q1 2024 Summary
Published Feb 4, 2025, 6:40 PM UTC- CPKC is confident in achieving double-digit EPS growth for the year, even if there is a short-lived strike, demonstrating strong earnings potential and resilience.
- The company is on track or ahead of its synergy targets from the merger with KCS, expecting to double the $350 million revenue run rate achieved at the end of 2023 by the end of 2024, indicating significant future growth.
- CPKC is unlocking new growth opportunities through strategic partnerships and service expansions, such as the Mexico Midwest Express train, new terminal developments like the Dallas auto compound, and collaborations with partners like Schneider and CSX, which are expected to drive substantial volume and revenue growth.
- Potential labor strike may negatively impact volumes and earnings: Management repeatedly mentioned the possibility of a labor strike, which could affect second-quarter volumes and overall earnings. They are modeling guidance cautiously due to this uncertainty. For example, Keith Creel stated, "We've got to get through this potential work outage that's ahead of us. We've got to see what the macro does..."
- Softness in domestic intermodal due to overcapacity in the truck market: The company is experiencing challenges in the domestic intermodal segment, facing softness in volumes and pricing pressure due to overcapacity in the trucking market. John Brooks noted, "If I were to call out one area where we've seen maybe softness versus others, that would be in the domestic intermodal front... relative to some of the overcapacity challenges in the truck market out there."
- Macroeconomic uncertainties may impact volume growth and guidance: Despite a strong start to the second quarter, management remains cautiously conservative due to macroeconomic uncertainties. Q1 revenue growth was only 2%, with operating income flat year-over-year. As Walter Spracklin highlighted, "When I look at Q1, revenues up 2%, operating income is flat... it feels like we're at the point now where the story is going to really start showing up in the model..." This may signal challenges in achieving growth targets.
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Union Negotiations and Potential Strike
Q: Will a strike impact earnings guidance?
A: Management acknowledged the potential for a strike with the TCRC union around May 22. They remain cautiously optimistic but are planning for the possibility. They are confident they can still achieve double-digit EPS growth even with a short-lived strike. -
Volume Guidance and Outlook
Q: Is volume guidance conservative given strong trends?
A: Management maintained a low single-digit volume growth guidance, labeling it as "responsibly conservative" due to uncertainties like a potential strike and macroeconomic factors. They started Q2 strong, up over 9% in RTMs , but are modeling volume growth of 2–3% for the quarter. -
Growth in Lazaro Cardenas Traffic
Q: How is growth at Lazaro Cardenas affecting the business?
A: Traffic through Lazaro Cardenas is up 40% through February and continues to grow. This growth is expected to contribute to cross-border business into Texas and Gulf markets in the second half of the year and into 2025. -
Synergy Targets and M&A
Q: Are synergy targets on track?
A: Synergies are progressing as planned, with management noting they exited at $350 million and expect to double that on the revenue side. They are ahead of schedule in delivering on growth categories outlined at the Investor Day. -
Pricing Environment
Q: What is the outlook for pricing?
A: The company is exercising discipline in pricing, achieving top-end expectations in Q1. While domestic intermodal is facing softness due to truck overcapacity , they see potential upside in pricing as the market improves. -
Length of Haul Increase
Q: Is the increase in length of haul sustainable?
A: The increase in average length of haul is seen as a natural progression due to shifts in traffic mix, including strength in international, grain, potash, and growth in MMX and ECP. Management expects this trend to continue with the development of their closed-loop automotive supply chain and the opening of the Wylie terminal in June. -
Meridian Speedway and Southeast Growth
Q: How does the Meridian Speedway agreement impact growth?
A: Management stated that concerns over the Meridian Speedway agreement are unfounded. The agreement opens up growth opportunities without significant share shift from competitors. The focus is on capturing truck traffic in lanes between Mexico/Texas and the Southeast U.S. in partnership with CSX and NS. -
Intermodal Business Shifts
Q: Is increased competition affecting intermodal volumes?
A: Some short-haul domestic intermodal volumes have shifted away, which management views positively as it frees up capacity for long-haul business. They are focusing on growing long-haul intermodal services, such as the Mexico Midwest Express. -
Automotive Business Opportunities
Q: What are the plans for automotive growth?
A: The company is capitalizing on automotive growth opportunities, developing a closed-loop supply chain, and opening new terminals like Wylie. Automotive is seen as a pull-ahead opportunity, with significant volume growth expected over the next 2–3 years.