Good News, bad news at CN

[kgbw49]

BNSF's 2nd Quarter Financial Synopsis is not yest posted. However, here is the location of their 1st Quarter Financial Synopsis.

http://www.bnsf.com/about-bnsf/financial-information/performance-summary/pdf/performance_update_1Q_2015.pdf

[CNSF]

Here in Canada, Heinz and Kellogg's have recently closed long-standing, pre-NAFTA Canadian plants and are now servicing the Canadian market from US plants instead. There's also been very little new investment in Canada by the automotive industry; Mexico's getting all the new plants now. Of course, that's anecdotal. Who knows what the overall impact of NAFTA and other deals is.

[dakotafred]

Good reading by Schlimm, above. The railroads have learned nothing if not cost control in a timely, almost anticipatory, manner. But all the railroads have been heard from now, and their stories are the same: volumes down almost across the board (and the exceptions up only modestly).

When everything is considered and given its due weight, the Great Recession quietly continues. This may be our new reality, as it is, seemingly, Europe's.

I think it's fair to ask what contribution all our trade deals of the past 25 years may have made to this state of affairs.

[diningcar]

Mac, you are correct. The name this process given by ICC accounting rules was "Betterment Accounting". But the significant factor overlooked was there was no depreciation of the track structure for accounting purposes which led to an overstatement of profit.

However, if for example a branch line was abandonded, with ICC permission, the entire formerly undepreciated track investment would be charged off as an operating expense in the year it was abandonded. This has been corrected with these materials now capitalized and depreciated on an annualized basis. I believe this accounting change was made about 1980.

[schlimm]

Bad news and a little good news UPRR

http://www.cnbc.com/2015/07/23/the-associated-press-union-pacifics-2q-profit-falls-7-percent-as-volume-declines.html

Profits down slightly (-7%) $1.2 bil. from $1.29 bil.

Revenue down 10% because freight volume down 6%; coal down a whopping 26%.

Automotive traffic up 7%; containers hauled up 2%.

Cost-cutting helped, but when a major sector of the revenue stream dries up, trouble lies ahead.

Cost-cutting largely = jobs cut.  In previous quarter, 1200 furloughed and more since.

 

[PNWRMNM]

garyla

 

PNWRMNM

 

Electroliner 1935

Does defering track maintenance reduce the OR in the short run?

 

 

 

Much less than it used to now that program track repairs have to be capitalized and depreciated over many years.

 

Mac McCulloch

 

 

 

 

Interesting point. 

Wasn't it true, under the old ICC accounting rules, that most track repair and maintenance, and even major upgrades, were all treated as current-year expenses?

 

My understanding of the old rules, which were conservative in that they minimized the asset base AND current year income and taxes, is that tie replacement, new ballast and surfacing were all current expense. Theory being you had a tie before, you have one now.

If you increased weight of rail say 90# to 112#, the cost of the rail was split on the basis that 90/112 was expensed and 22/112 was capitalized.

The book value of track was thus the original cost of rail, ties, and ballast, plus subsequent upgrades in rail. This gave lowest base for rate making purposes back in the post WW I era when rates were regulated with the intent that rate of return on assets would not exceed 5.5%.

New track was capitalized at current rates. Track removed was written out of the capital accounts based on historic cost.

If someone else acutally worked with the system, please feel free to correct and extend my explanation.

Mac

[garyla]

PNWRMNM

 

Electroliner 1935

Does defering track maintenance reduce the OR in the short run?

 

 

 

Much less than it used to now that program track repairs have to be capitalized and depreciated over many years.

 

Mac McCulloch

 

Interesting point. 

Wasn't it true, under the old ICC accounting rules, that most track repair and maintenance, and even major upgrades, were all treated as current-year expenses?

[PNWRMNM]

Electroliner 1935

Does defering track maintenance reduce the OR in the short run?

Much less than it used to now that program track repairs have to be capitalized and depreciated over many years.

 

Mac McCulloch

[Wizlish]

Electroliner 1935

Does deferring track maintenance reduce the OR in the short run?

It sure did for NH and PC.  You have to start with 'reasonably good' track (so that the problems caused by the deteriorating track don't reduce your performance by more than the 'savings' -- things will go upside down or start to snowball at some point) or have a falloff in traffic and concomitant expenses that makes the wear and damage to the track less significant.

[Electroliner 1935]

Does defering track maintenance reduce the OR in the short run?

[MP173]

Was there any mention of the new CSX operating system for certain manifest trains and whether or not that contributed to the results?  I have not had time nor motivation to read their release and look at numbers.

Could it be that King Coal, with the dramitic decreases in volumes, is not quite the cash king as thought?

Ed

[AgentKid]

MP173

other carriers 2Q results...dont even know if any are out

CP's came out yesterday. The items the mainstream media picked up on are projected job losses at both companies and revised downward forecasted results going forward compared to what they had announced after the first quarrter reports.

Bruce

 

[schlimm]

BaltACD

CSX announced their results on the 14th - Record net and Operating Ratio

http://investors.csx.com/phoenix.zhtml?c=92932&p=irol-newsArticle&ID=2067712

 

"Revenue declined 6 percent, as pricing gains were more than offset by the impact of lower fuel recovery, a 1 percent volume decline and changing business mix. At the same time, continued low fuel prices and savings from efficiency initiatives reduced expenses by 9 percent...CSX expects to deliver mid-to-high single digit earnings per share growth for 2015, although the upper end of that range has become more challenging given the current energy environment.  With low natural gas prices and high inventory levels continuing to reduce utility coal demand, CSX now expects domestic coal volume to decline by approximately 10 percent for 2015 and the outlook for export coal volume remains approximately 30 million tons for the year."   

While the $1 bil. record is great, that decline in revenue is a usually a red flag, and will likely continue and will be reflected in future quarters' earnings growth, as fuel will not drop as much and cost-cutting has short-term limits.  Investor sentiment is pretty flat.

[kgbw49]

BNSF will typically post a quarterly synopsis on their web site. They do have debt inestors as even though they are 100% owned by Berkshire Hathaway, they stiil raise some of their capital by issuing bonds. So they do provide a modicum of quarterly performance information primarily for reference by their bond holders. But you are correct in that it us not a typical quarterly report as put out by the other Class 1 railroads.

[caldreamer]

BNSF does NOT report its financial data since it is a privatley held company Ownded by Warren Buffets' Berkshire Hathaway).), . 

[Ulrich]

Yup, a good showing for CSX as well. And I look forward to NS results which come out on the 27th.

[BaltACD]

CSX announced their results on the 14th - Record net and Operating Ratio

http://investors.csx.com/phoenix.zhtml?c=92932&p=irol-newsArticle&ID=2067712

[MP173]

diningcar:

Do the math....the reduction in carloadings which result in a decrease in OR (and increase in net income) came from coal.

As Ulrich noted, coal is not that big for CN, but it is for UP, BNSF, NS, and CSX.  My guess is that those four carriers will have much different results than CN. 

 

ed

[diningcar]

A decline in carloadings, especially if it is among those carloads that require unusual or special handling, will certainly contribute to a reduction in OR.

[Ulrich]

I agree Greyhounds.. and CN's overall performance under these conditions can only be described as excellent. We in the trucking industry consider an OR of 85% to be great...so 56.4% is fantabulous.

[greyhounds]

MP173

2.  Operating ratio dropped from 59% to 56.4% for the quarter.

Never in my life did I ever think I'd see a major railroad post a 56.4% operating ratio.  That is beyond great.

[Ulrich]

It's a pretty sold performance given the overall state of the economy, especially here in Canada where the manufacturing sector has been in a sharp decline for at least 15 years now. Fortunately coal only represents 6% of total revenue, but with the decrease in manufacturing and volatility in the resource sector we really need a more solid footing in something... everything is shifting around like quicksand. I listened in on the call and took special note of how unsure everyone is on projections for the rest of the year never mind 2016. Trade with China and Asia in general is very much up in the air too.. domestic Canada manufacturing in sharp decline.. oil down.. Apart form this positive report I see some clouds on the horizon.. how dark they are appears to be seen.

[MP173]

First the positive:

1.  Net income for 2Q15 increased from $1.03 per share to $1.10 per share.

2.  Operating ratio dropped from 59% to 56.4% for the quarter.

3.  Revenue per revenue ton mile increased 7% (CN revenue per ton mile went up despite a significant decrease in fuel surcharge).  CN is really pushing their pricing power.

Now the bad news:

1.  Carloads for 2Q were down 3% despite 17% increase in automotive, 8% increase in forest products, 4% increase in chem/petro, and 2% increase in intermodal.  These were offset by 5% drop in metals, 7% decrease in grain, and 26% reduction in coal.  

2.  Revenue ton miles were down 7%.

3.  Overall revenues were flat at $3.125 B. 

So, we have a carrier who appears to have hit the sweet spot.  While carloadings are down, operating ratio is down (good) and net income is up (good).  Investors love growth as well as increased net income.  I tend not to take much stock (pun intended) in daily stock prices, but the investors have spoken positively as the share price is up 2.5% so far in early morning trading.

My guess, and it is a very unsophisticated guess is that the market has seen and heard of the declining coal tonnages and built that into the price.  Of course, CN is not a major coal hauler.

I have not looked at other carriers 2Q results...dont even know if any are out, but for CN it appears to be an "OK" report.

 

Ed