JS Earnings Call Notes 7.26.2015 – UNP, CFX, CNI, CLB, CBI

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.


Union Pacific (UNP) CEO Lance Fritz said the shipment of coal remains a weak spot for railroads

“Solid core pricing gains were not enough to overcome a significant decrease in demand. Total volumes in the second quarter were down 6%, led by a sharp decline in coal. Industrial products and agricultural products also posted significant volume decreases.”

Union Pacific (UNP) CFO Rob Knight said the company was able to raise prices above inflation

“A 4% core price increase was a positive contributor to freight revenue in the quarter.  Core pricing continued at levels that are above inflation and reflects the value proposition that we offer in the marketplace. Of the 4% this quarter, just under a half percent can be attributed to the benefit of the legacy business we renewed earlier this year, and this includes both the 2015 and 2016 legacy contract renewals.”

Union Pacific (UNP) CFO Rob Knight said the company will increase its buyback when its share price is weak

“To your point on the share buyback, if you look at the first half of this year compared to last year’s first half, we’re up about 10% in terms of our share buyback, and we will continue to be opportunistic, and at the prices that we’re seeing right now, we think those are nice entry points. So we will – we are certainly, as we always have, buy more when it’s down, less when it’s up.”

Union Pacific (UNP) Vice President Eric Butler discussed their primary competitor, Burlington Northern Railroad, and competing with trucks

“Not only is the Burlington a tough competitor, but we compete with other railroads and other markets. We also compete with trucks. Trucks are also a tough competitor, and lower fuel prices are helping them.  It’s our goal to have the best service and value proposition in the industry. If we do that, we think we’ll be able to price appropriately for our value.  Clearly lower fuel prices will incrementally make truckers more competitive, and clearly as the shale play has gone down, there appears to be what we think is a temporary alleviation with some of the driver shortages or a temporary reduction, I should say. There still are long-term driver shortages out there, but some of the move of labor from that to truck drivers has alleviated some of the shortage. So trucks continue to be a competitive option.”

Union Pacific (UNP) Vice President Eric Butler thinks the U.S. is now a relatively low cost place of production

But long term, North America is still kind of a strong, productive, secure, relatively low cost place of production. It’s also a huge consumption market. Those things will continue to drive us being in the sweet spot for our transportation services, whether it’s export or import. “





Colfax (CFX) CEO Steve Simms says he wants to focus the company more on the profitable after-market

Despite the lower short-term CapEx cycle in several of our end markets, one of our key growth initiatives is to capture higher aftermarket content from our growing installed base. And we’ve seen encouraging traction in several areas of our business.

And he sees the global economy continuing to decelerate 

“As we look at it, I think that we have seen an industry which has softened further beyond what we anticipated in quarter one and we see that softening occurring really on a global basis. The softening that we have seen is driven by really two factors, one, virtually any end market that’s tied to oil and gas, the oil pipeline work, offshore oil wells, OSV, we’ve seen significant further deterioration in those trends and accelerated in to second quarter.”






Canadian National Railway (CNI) CEO Claude Mongeau said the firm is adjusting efficiently to lower volume

“We’re recalibrating our resources to drive efficiency. As Jim will describe to you, all of our core metrics are in line or better than last year, and that’s very important because that’s all we can do when the environment is a little tougher from a volume standpoint. It’s how fast and how efficient you are at reacting that makes the difference.  We responded quickly to the lower workload by decreasing dwell, cutting back on active cars, rightsizing our locomotive, increasing our end-to-end velocity; key that we didn’t concentrate on one piece but end-to-end and nice to see that again.”

But the pricing of their services held up well  

“Solid same-store pricing came in at 3.9%.  In short, the deceleration in carload and fuel surcharge revenue was wholly offset by solid pricing and by gain in foreign exchange.”

While “crude-by-rail” has slowed dramatically for all rails during the quarter, many of the rails are including Canadian National Railway are seeing a pickup in natural gas by rail shipments

Industry-wide, crude by rail economics were challenged by narrowing crude spread and by improved pipeline supply/demand balance. NGL volume grew nicely, reflecting ongoing opportunity to sell stranded Alberta NGL as merchant liquid in tank car into better-paying market than leaving it in the natural gas.

Canadian National Railway (CNI) CFO Luc Jobin said the company said a quarterly performance record in a tough volume environment

Our operating ratio was 56.4%, a record level for a second quarter. This represents a 320 basis points improvement over last year.  Our Q2 operating ratio was a record all-time, not just for CN, but for the industry.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed how the company thinks about pricing

So, we’re into a long term and we like compounding effect of inflation plus pricing. And you look at our chart for the last 10 years that Janet has, it shows the effort and the mindset of compounding effect. And so, we try to stay away from the commodity type approach of commoditizing rail freight as you would tend sometime to do in export coal or crude by rail because of the downside of that midterm, right? So what we have, 3% to 4% above inflation, steady Eddie. That’s the game plan for 2015 and 2016.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed how they incentivize their sales force to optimize for profitability

By the way, our salespeople, one-third of their sales bonus is related to pricing, so it’s not just about top-line revenue. It’s one-third top-line revenue, one-third pricing and one-third other initiative and that’s the balance that we like to have going forward.

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed why the firm is not willing to cut pricing on their “crude by rail” shipments in order to gain volume

“Regarding crude by rail pricing, there’s always some pressure on pricing from customers. And the crude by rail is an example where the spread is all over the map. The crude producers are under financial distress. Of course, they want something better. And these are big volume that sometime they’re more like the mirage because they’re big, but you never quite get there. As you get closer to them, you find that there was really no lake, it’s just another pile of sand.”

Canadian National Railway (CNI) CEO Claude Mongeau acknowledged the Canadian economy has slowed materially in the first half of the year

“The general economy in Canada has been more sluggish than what we’ve seen in the U.S.  I think what Canada is facing, is people probably understated the impact of the energy complex cutback on capital expenditure.  But we don’t see Canada in a recession. We see Canada in a technical slowdown that happened to take place for the first six months of the year.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed the cost competitiveness of trucking vs railroads

So, the cheaper energy makes the trucking a little more competitive versus rail. The spread – the cost between the two is obviously narrowing. Then you get back down to the basic of how many drivers there is being the number one bottleneck of our growth for the trucking side.  I think the future of intermodal long haul is extremely viable.”






Core Labs (CLB) CEO David Demshur sees a V-shaped recovery

“Core sees the V-shape recovery, led by higher commodity prices and followed by worldwide drilling activities, starting to increase in early 2016.”

Core Labs (CLB) Chief Accounting Officer Chris Hill said they have increased their share buyback to such a pace that their shareholders equity could go negative

Depending on our share buyback activity in the coming quarter, we may actually see book equity go to zero, below zero.  Clearly, book equity does not represent the solvency of a company. And, we note that several S&P 500 Companies who generate significant levels of free cash, also have negative book equity, because, they return that free cash to their owners, just as we have done. We do not have debt or contracts compliance requirements, to report positive net worth.”

Core Labs (CLB) CEO David Demshur discussed the notion that oil companies are re-directing capital expenditures to producing more from discoveries already made rather than exploring for new oil

“If you look at some of the comments made by the major operating companies in the deepwater, Conoco being the most recent, they talked about creating value from discoveries that have already been made.  So, as opposed to looking at CapEx for drilling exploratory wells, CapEx is now being focused on development. We’re seeing a lot of the CapEx dollars that were going for exploration which as you know from Core, really is not of a high interest to us, going right into our wheelhouse in the development of these discoveries that have been made, over the last 3 years to 5 years.”





Chicago Bridge & Iron (CBI) CFO Michael Taff said the company took advantage of favorable debt markets and borrowed heavily to buyback shares 

“Following the close of the quarter, we entered into financing agreements to amend or extend our existing credit facilities and establish additional financing capacity based on our assessment of an attractive lending environment, the ongoing growth in our end markets, and our strategic initiatives.  These changes strengthen our ability to execute our long-term backlog, return capital to shareholders, and pursue additional growth initiatives while maintaining adequate funds for our working capital needs. Moreover this is an important strategic step towards an efficient and optimal capital structure, allowing us to extend the maturities of our total debt and positioning us to implement a formal capital allocation policy in the near future that should be favorable to our shareholders. On that topic, as Phil mentioned, since the close of the second quarter, we have repurchased approximately 4 million shares of our stock.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman said international turbulence is delaying some of their customers spending plans 
“Russia and China are a big part of our markets for many of our technologies. And of course with the foreign exchange and the ruble to the dollar as well as the sluggishness in the Chinese economy, many of those opportunities that we saw in the first half of the year seem to be shifting to the right.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman said the international competitive environment is tougher than the domestic environment 
“We have a number of European and Japanese firms competing for that as well. So it’s a little bit tougher environment. You probably see more pricing pressure on that. So we’re very cautious on those jobs. We’re very selective in terms of locations. Most of work that we see are particularly in the Gulf region as opposed to other parts of the Middle East. So we’re seeing those. But again, there’s no indication that those won’t go forward.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman is optimistic about winning construction projects outside of the U.S. 
“So we see some interesting opportunities in the Middle East and elsewhere. Again, East Africa I can’t talk enough about the impact it’s going to have on us long-term, but certainly we will see, I think some more LNG coming in this next year with some of the projects I mentioned as well as some additional combined cycle awards as well as everything outside the mix of work that we have, or the mix of businesses we have.”