Q2 2021 Canadian Pacific Railway Ltd Earnings Call
Good afternoon my name is.
As Sylvia and I will be of conference operator today at this time I would like to welcome everyone to Canadian Pacific's second quarter 2021 conference call the.
Slides accompanying today's call are available at Ww Dot C. P. R C.
All lines have been placed on mute to prevent any background noise after the speaker's.
Those remarks, there will be a question and answer session. If you would like to ask a question simply press Star then the number 1 on the telephone keypad and if you would like to withdraw your question simply press Star followed by number 2.
And I would like to introduce Chris the brand managing director of Investor Relations and Treasury to begin the conference.
Thank you Sylvia and good afternoon, everyone and thank you for joining us today the <unk>.
For we begin I want to remind you of this presentation contains forward looking information actual results may differ materially.
The risks uncertainties and other factors that could influence. The actual results are described on slide 2 in the press release and in the MD&A filed.
Of the Canadian and U S. Regulators. This presentation also contains non-GAAP measures as outlined on slide 3 with me here today is Keith Creel, our president and Chief Executive Officer.
The <unk>, our executive Vice President and Chief Financial Officer, and John Brooks, Our executive Vice President and Chief Marketing Officer.
For all of ARX <unk>.
Followed by Q&A and the interest of time, we would appreciate if you limit your questions to what.
It is now my pleasure to introduce our president and CEO, Mr. Keith Creel.
Hi, good afternoon, Thanks, Chris.
I want to begin my comments by saying.
Saying that my thoughts of my peers of rain with those affected by the wildfires.
In British Columbia, specifically.
All of those and letting you know of Hartford C. P.
Go out to everyone. That's been impacted the village of lifting of late in the first nations and several members of the CP family, who actually lost their homes in the living fire on that.
So I'm going to continue to thank the more than 12 hours of strong CP railroad or is.
Of that are truly the drive.
Rivers behind the unique story of sustainable profitable growth at CP.
The bar none of it's the best team of railroad as the industry. We continue to prove it its a team that I'm extremely proud to be.
Railroading with so let's spend a time of spoke to some of the results Needless to say extremely proud of what the team has delivered this quarter.
Through the collective efforts of our railroader of the quarter.
Quarter, we delivered record second quarter revenues of nearly $2.1 billion record second quarter operating ratio of 55, 3 net earnings growth of an impressive 27% to a record dollar of 3 cents behind.
Behind those numbers, obviously, the very impressive operating performance special thanks to Mark read.
Industry best team of <unk>.
Talented railroader is that he leads and serves with daily.
To produce train weights train lengths continue to improve built on last year's records up 1.3 per cent, respectively. A record second quarter of car miles per day up 4% on the quarter tripping of compliance for our customers better than 80%.
The continues to improve and most importantly.
The safety of results for the quarter, both all time lows for this company records on both reportable injuries as well as reportable derailments personal injuries were down 34% and train accident frequency decreased 70% 7 zero percent.
And the the only attainable with the right safety culture, It's 1 of.
Focusing on getting stronger something we're continuously focused on the pursuit of excellence you never really arrive.
Keith pursue perfection.
Again the.
On ongoing continuous improvement process focusing.
This is the commitment to investment of technology people and process continues to show our efforts through the results of constant improvement of the financial on the operating results this quarter.
On the Napoli continuation of argue unique precision scheduled railroading story of Canadian Pacific truly shows wood of proven season.
We have sort of motto can accomplish sustainable profitable top line growth margin improvement earnings growth.
On the network efficiently and safely and creating significant value for our customers and for our shareholders. It's truly a balanced approach and a balanced outcome. This is the team that has a track record of producing.
The results, creating value no excuses to make them the results of the here in these areas be it managing on the downside or being yet the rebound in post the pandemic prove that in states.
That said, let me say the balance of my comments for our Q&A and I'll.
And put it over to John to provide some color on the markets.
Alright, Thank you Keith and good afternoon, everyone. So as Keith said I mean, I'm extremely pleased with the record results of team delivered this quarter. We achieved the all time records think of core.
Order revenue at $2.1 billion up 15%.
Year over year.
And I can tell you despite a choppy supply chain environment, we grew our top line by 4% versus 2019.
Now looking specifically at the Q2 of our.
Of our Tms were up 9% in the quarter for you.
On FX combined to be of 2% headwind.
Turns and mix combined to be positive, 8% the pricing environment as many of talked about remains very strong and our mix was driven positively by moving more autos and carload merchandise volumes.
Now taking a closer look at the second quarter revenue performance I will speak.
Speak to the results on a currency adjusted basis grain volumes were down 1% on the quarter, Although our revenues were up 4% our U S. Grain volume was up close to 40% on the quarter as our PNW export demand continued to be strong.
In Canada I am pleased report the CP of moved over 30.
30 million metric tons of grain and grain products of crop year setting an all time company record I want to thank all of the members of the CP family and our customers that relentlessly drive every day to make records like this happen.
In Q2, we did have lower volumes in Canadian grain driven by a combination.
<unk> of factors, including high grain prices and record movements, resulting in lower grain supply and carryout.
Now looking ahead, we're monitoring the dry conditions across the prairies, we see a high likelihood for an early harvest and are forecasting normal peak demand levels.
As.
We close out the crop year, our grain franchise development has been impressive we have added 13 more elevators upgraded to our unique 8500 foot model, we have 8 more upgrades coming on line by the end of the year and we'll add 3 more 8500 Greenfield elevators to our network in the next 6.
<unk>.
Additionally, we have at this point now over 4300 of our new high capacity covered hoppers and service.
Moving on to the potash front volumes were down 9% in the quarter the.
The decrease in volume reflects the impact to export volumes as a result of infrastructure upgrades.
Going on at our ports.
We are pleased with Canpotex investment at the Portland terminal that enables greater supply chain resiliency and increase throughput. The Portland facility will now be able to land 388 car trains at the terminal.
We continue to see strong demand fundamentals.
For potash use we expect upside to our potash franchise in the back half of the year and into 2022.
And the closeout the bulk business coal revenues were up 32%, while volumes were up 12% as the supply chain executed well and we lapped COVID-19 related challenges.
We.
Strong demand from tech into the second half of the year as we look to recover volumes impacted from the recent fires.
Moving on to merchandise the energy chemicals, and plastics portfolio saw revenues increased 16% now.
Now excluding crude ECP volumes exceeded expectations.
Expect <unk> to be up 18% as demand for products such as gasoline asphalt LPG all rebounded from 2020 lows.
I expect strength in ECP to continue as the recovery does into the second half of the year.
I would also note we're very excited about the forthcoming launch.
<unk> of our first Dr. You train from the USD terminal at Hardesty, Alberta for Conocophillips.
This train is destined for USPS facility in Port Arthur Texas, and we expect this business the ramp up to 15 to 20 trains per month in Q3.
This marks the beginning of of long term shift.
Launched from traditional crude by rail to drew bit of.
For more sustainable environmentally friendly and pipeline competitive product.
It is cps honoured to be partners with Gibson energy USD and Conoco Phillips as we're delivering the innovative safer rail solution.
Moving on from ECP, our forest products.
Shift news were up 22% as lumber prices hit record highs pushing our volume and revenue to an all time best in the quarter.
We expect to continue to see solid demand as inventories remain relatively low and housing and home improvement start.
Continued to be strong.
In MMC.
<unk> revenue revenues were up 49% and volumes increased 51% largely driven by higher volumes of Frac sand as drilling rebounded with the oil markets.
Further we are seeing a good recovery in steel and metals related markets I would note that we are adding 150 mill gone.
<unk> to our fleet to support strong customer demand for finished steel and scrap.
On the automotive front revenues were up 216% while volumes were up 259 on the quarter. So while we lapped easy comps are business wins.
With the Oems.
Gone with FCA Honda drove our outperformance in this space relative to the industry.
Now looking again, we do expect to see ongoing chip challenges during Q3.
But with dealer inventories remaining low and demand continuing to be strong we expect increasing.
Loan levels as the auto industry tries to catch up.
And moving on finally to the intermodal side of the business.
Quarterly volumes were up 9%, while revenue was up 27%.
We have now had 3 consecutive record quarters in domestic intermodal with our reliable service.
Product and capacity for growth, we continue to perform well in this space anchored by our strong retail franchise.
I am extremely pleased with our intermodal growth into Atlantic, Canada through our acquisition of the <unk> Q.
Since the startup of this service we have moved over 10000 containers in this market.
<unk>, we are on a current run rate that exceeds 20000 or.
Our service from St. John is the most direct fastest rail option for customers to Montreal, Toronto, Chicago and beyond.
On the international front, we had record revenue, while managing through significant supply chain challenges with.
And acumen of port congestion vessel delays and container imbalances across the industry.
I am pleased to announce that we've expanded our new strategic partnership with Cosco and double of CL. This.
Of this multi year contract will deliver new growth on our core intermodal lanes.
Originating from both Vancouver, and Montreal utilizing existing train capacity.
We expect this contract will generate over $100 million annually in incrementals of revenue the.
The partnership is grounded in and reflects the value of that CP can uniquely offer in terms.
Well, the half city and service for Costco double LCL and our mutual customers.
And finally, Maersk International volume continues to onboard successfully and.
And we look forward to the opening of our domestic trans load facility in Vancouver in September.
The trans load facility as a reminder, you the Cps land capacity to offer a unique service solution and stickiness for our intermodal customers.
Additionally, this service product.
Alleviates congestion in Vancouver by taking thousands of roads off the truck thousands of trucks.
Off the road by using direct rail service from the port to the customer.
So let me close by saying.
No different than how this team outpaced the industry on revenue and volume through the pandemic.
Now halfway through 2021, we are leading the industry again.
Compared to 2019, and we expect to continue to execute our playbooks and deliver on our self help initiatives.
Looking forward to the balance of the year on into 2022, we have a strong pipeline of initiatives.
And we expect robust demand environment to continue as the economies around the.
The world continue to recover.
You can count on the CP team to continue to deliver sustainable profitable growth.
So with that I'll pass it over to the NAV.
Great. Thanks, John and congrats on yet another contract win.
I'm proud of the exceptional results of payments produced in the quarter as John mentioned.
See the Q2 record and revenue and we did that while effectively managing resources controlling costs. The outcome of the solid execution by our 12000 plus team of railroad yours was the Q2 record adjusted operating ratio of 55, 3%.
The team executed on all fronts with 15% revenue.
<unk> reached 19% operating income improvement of 170 basis point decrease in the AOR and grew adjusted diluted EPS of <unk>, 27%.
Looking at the results you will note that we have adjusted a total of $308 million in costs related to the case, yes transaction.
99.
From the <unk> and $209 million below the line in other expense I will speak to the adjusted results today.
Taking a closer look at a few items on the expense side I'll speak for the results on a currency adjusted basis comp and benefits expense was up 13% of $44 million versus last year. The primary.
The driver of the increase was higher volumes and increased training costs in support of the improved demand environment.
Recall in Q2 last year, we refer lowing employees. So most training expenses for on hold.
Head count was up 6.6% in the quarter as we successfully bring on resources to accommodate the improved demand environment.
<unk> expense increased 98 million or 82%, primarily as a result of higher fuel prices and increased volume the law.
Lag in timing of recoveries in our fuel surcharge program was an $18 million headwind in the quarter equipment.
The equipment rents was down $2 million or 7% as efficiency improvements more than.
Offset increases in rent expense from automotive contract wins.
Depreciation expense was $200 million, an increase of 6.6% as a result of of higher asset base.
Purchased services was $256 million adjusted for the acquisition costs, an increase of $3 million or 1%.
The main driver of the increase was the increase in volume.
Moving below the line as expected other components of net periodic benefit recovery was up $10 million, reflecting lower interest costs related to a decrease in the discount rates.
Income tax expense increased $68 million of 36% primarily.
As a result of higher taxable income, partially offset by a lower effective tax rate.
Rounding out the income statement adjusted diluted EPS grew 27% to $1.3 in the quarter on it.
A reminder, we executed a 5 to 1 share split in the quarter.
Moving.
Moving on to free cash to wrap things up we generated very strong cash flow on the first half of 'twenty, 1 with cash from ops, excluding the termination fee increasing by 28%.
Our balance sheet and liquidity remains very well positioned with leverage of just 2.0 times adjusted net debt to adjusted.
The EBITDA at the bottom of our targeted range, we have repaid all of our commercial paper and our credit facilities remain undrawn, while our share buyback program remains paused.
We currently have approximately $900 million in cash, which is available to return to shareholders through buybacks dividends.
At our strategic options.
We continue to reinvest in the railroad and are on track to meet our $1.5.5 billion guided capex spend for 2021, we remain.
Disciplined stewards of capital with our industry, leading adjusted ROIC of 16, 7%.
Look last year about the improvements in our capital efficiencies.
CNC and how we proactively increased our capital spend to take advantage of the softer volume environment. During the height of the pandemic, which in hindsight has laid the foundation to support our safety growth agenda on for.
Hard to say, we've continued to build on the efficiency gains we established last year.
Our year.
The dividend per unit cost of rail ties is down 7% versus last year and down 10% versus our 3 year average of <unk>.
Out of the team and culture, we have at CP for the team will meet challenges like the pandemic head on and look for ways to turn them into opportunities and then we build on those gains it's a relentless drive.
Find efficiencies to do better to generate value.
So while the start of Q3 has had some challenges the network has recovered well and we see a clear path forward, we have a strong demand environment and the team in place to manage resources control costs and ultimately deliver for all stakeholders. The communities, we operate in customers and our shareholders.
Year to day with that I'll turn it back over to Keith to wrap things up.
Okay, Thanks, Nadeem and John for that color on that.
Some of it up volumes came in strong against 2020.
But also very importantly, John made this point uniquely exceeded our 2019 volumes and the team products the bottom line driving operating income growth.
These growth and margin improvement.
Safer than ever before set of.
Sort of has set us up well the closeout of a very strong 2021, enjoying a very strong demand environment, which we see continuing well into 2022 and partnership with our self help initiatives you can continue to expect to see outperformance.
Thats by this team the Canadian Pacific.
Of that let me open it up to the operator for questions and commentary.
Thank you Sir.
If you would like to ask a question simply press Star then the number 1 on your telephone keypad. If you would like to withdraw your question press.
Star then the number 2.
As previously highlighted the please limit your questions to 1 that will be a brief pause while we compile the Q&A roster.
Thank you for your patience and your first question moving from Jon Chappell at Evercore ISI. Please go ahead John.
Thank you good afternoon everybody.
Hey, good afternoon.
Keith.
You've been pretty.
Passionate.
The merger activity, thus far this year and you know.
Maybe you've said anything you want to say and it's in the Stb's ends at this point, but I would've thought maybe with the executive.
The border earlier this month in the house transportation.
Letter that you guys published earlier this week you might have been even more emboldened with some updates there so.
Maybe you can just kind of catch us up the speed on on what Youre thinking post some of those important letters have been posted.
And how you things how.
If things proceed from here.
It will take some.
You know I can tell you my.
My conviction about the police up on the strength of the proposal that the we successfully negotiated with <unk>.
K T. S. Initially has not change has not wavered at all on track.
You throw on the stronger the facts are very compelling it's the only class 1 combination.
That presents pro service pro competition pro growth new lanes.
Essentially it's all winners of the zero overlap there's no losers the debits and credits it's not about trying to suggest that you.
<unk> enhanced its about for serving in enhancing so it's very unique.
And the facts and with that said you know we think.
We think that obviously those facts of being weighed on obviously, it's in the S. C. B Sands, we expect the decision in the coming weeks and we stand ready to Reengage with the case of yes.
And we're gratified by the outpouring of support that our deal.
Even outside of that still continues to garner we've got over 1050 support ladders and yes C. N has support letters to think their numbers over 7 to 850, which they are probably.
Communicated however, they've forgotten it there's also over.
Gunnar 40 opposition letters to the combination.
Customers Amtrak Nisley T F. R E T C labor unions.
Certainly not just of what has been discussed this week, but with all of that being said when you think about the executive order how does that affect our beliefs in the way we look.
For I can say this overall, we're not fans of more regulation and I'm not going to suggest that we think competition is the best way to assure of good outcomes for our customers and.
For the North American economy, but what was the.
Regardless of the specific executive order are we.
We think that in fact and emphasize.
On the importance of the competition it emphasizes the importance of the Amtrak access both of which are unique facts speak well to without the need for the STB. The in force do any new promises. So we think that proves and fits well for our proposed combination.
I think in reading and listening to the statement that.
The chairman over them in.
Spoke to and I believe even see them, perhaps spoke to it last week consolidation can be beneficial under certain circumstances, we firmly believe that our facts.
Satisfies and complements.
The certain circumstances, where consolidation can be beneficial.
Yeah.
So again.
We feel very strongly about the US ultimately you know it's up to the STB, it's in there of capable hands and.
You know I'll finish where I started.
We stand for.
Ready to engage.
Reengage with the case, yes I'm.
Should the STB rules.
We'll in opposition to the Canadian National Trust them. So, we'll see where it goes we're in a wait and see just like everyone else.
Got it thank you Keith.
Rest of the question.
It does thank you.
Thank you next question will be from <unk>.
Some of them at the BMO capital markets. Please go ahead.
Good evening. Thank you.
Keith.
You've laid out quarter after quarter here of very compelling kind of organic growth story for the C. P and you continue to execute on that front, but.
Just.
Just wanted to get your thoughts if the M&A path becomes harder for whatever reason.
And thinking kind of 3.510 years out.
What what are the Levered as of what are the things that you can do to kind of.
Stimulated the growth story for CP on the long term base.
They are things that the that you can do is peers in the industry as far as commercial agreements go or.
Marketing strategy that could kind of enhance your access to markets and enable you to kind of produce the kind of growth outcome of longer term debt would have come.
On an M&A transaction.
Yes, let me.
That of your Youre right on target with a line of thinking, but let me start though that our own backyard, we still have.
Over 1000 acres of develop.
The development land currency, so to speak across our network, which is very unique.
On the northern our competitive space it has been.
Table Stakes for for our success, that's been part of our strategy of uptick you're back to our Investor day, 3 years ago for years ago, the town's falling by so there are still several.
The opportunity for self help initiatives be it seem Q property built that out of the build out.
Unique ft in the Chicago Gateway, the Buildout of additional land assets in Vancouver. So there are still many chapters left of that growth story that ended up itself is going to drive organic growth that unique we believe to the industry of Canadian Pacific.
Do you think about replicate replicating M&A, obviously I don't.
Capacity to the attributes of.
You know the unique opportunity that the combination would create for us with what the case, yes, we spoken enough about that but in the absence of debt fatty I think with our unique origin strength.
Our unique assets access to some of those markets shortest length of haul and partnership.
Perhaps with marketing alliances.
Where the western rails, you can make the case to different markets for both.
And even some of the markets east of the Mississippi as well. So we'll continue to look at those opportunities they've never been bashful about doing whats best for the customer to try to create new.
Supply chain solutions, obviously, if we can give them the origin and give them. The destination, we can do at controlling our own destiny and controlling the products.
The best.
Outcome, but in the assets of that opportunity.
Certainly going to leverage the way we run the railway the origins of strength.
On the shortest length of the power of the markets to get into some of these additional growth markets that M&A would allow on again leverage yet with our unique capacity at our terminals be it in Chicago.
On in Toronto, and Montreal be it in Calgary be it and went back be it in Vancouver, we have a very unique opportunity. Unlike.
Anybody else on this industry to enable that so again priority 1.
Think the best outcome comes through M&A, but in the absence of M&A, we're going to make the best and I think do better than the balance of the industry, where the very unique outcome.
Okay, great. Thank you.
Keith.
Thank you. Your next question is from Allison Landry of Credit Suisse. Please go ahead.
Thanks, Scott for him and I appreciate you.
Taking my question, so Keith I mean, obviously C. P. N fact, what's arguably a new bar for what the industry can achieve from our perspective.
Especially seeing.
The 55 in Q2, Great day, that's just 1 quarter, but could you could you address how much further to improve you have in terms of the productivity metrics train line weight fuel efficiency.
And what that May tell us about the trajectory of the long term and maybe just if I could ask.
Got it got it in a different way. If this is the better way since you do have a demonstrated track record for growth.
Is there a point, where you think the alarm bottoms out and the focus behind the shift.
<unk> growing EBIT dollars and an improving ROIC the.
Well, let me.
Let me start with the ROIC.
It's the industry, so I'm pretty proud of where it's at I think it sort of healthy place again, I think if you get fixated too strongly on any 1 particular number you don't optimize all numbers and then I'll go back to the operating ratio. We don't have a focus on the operating ratio, what's the natural outcome of running the business the proper way.
That's the best when you.
Bring on sustainable profitable growth. That's the key you have the assets on the resources property in place.
To create a fluid network.
So we're gonna be controlling your cost.
That's going to drive your operating income that's going to drive the earnings growth in the out put out that.
A very impressive operating margin.
So we're at industry Best you know how of much further do we have to go I can tell you know that until we have every train linked optimize we haven't converted all of the 85 or foot facilities. We don't have a perfectly organic fleet of high capacity grain cars we.
Don't have flawless equipment, we don't have part of our network if I go to <unk>.
I'll give you the for instance, it's much better than it was and it's been a journey of the constant improvements at even for Canpotex.
I go back a year and a half ago, we were running on 130 car train sets.
Portland with partnership did the U P.
Is the free P. S are on U P and that was part of our you know part of our evolution. We're now running 188 car trains the Portland, but that still is not the same as the Vancouver of where we enjoy the efficiency of running of 200 car trains. So so there are gaps all the way across the network as we continue to strategically invest.
That should expect us to continue to make incremental improvements in train length.
Train weights locomotive productivity and terminal dwell.
That's truly what P. S. Oreos, it's it's a continual pursuit of excellence yesterday's records become your floor of your benchmarks and you pursue.
The improvement you don't accept excuses you create constructive tension you have a list of opportunity areas.
Have a interest in simple terms the top 10 list and once you accomplish those top 10, and then guess what you've got another list of 10. So it's it's it's an imperfect science, it's an outdoor sport you're never.
Totally get perfection, it's just the constant pursuit of that and the ability to understand how to manage the business flows how to manage it when the when the business goes down when you go into a pandemic how to adjust resources and how do you adjust those resources, so that you're positioned well when the rebound comes.
So that you can avoid some of the lumpiness in some of the challenges that quite frankly until you have gone through the cycles, they truly understand how to manage it as well.
For all coming up as you down and vice versa. You can't have the kind of results the C piece of producing.
So again, it's work in progress we're.
We're going to remain humble we're going to continue to work hard working to identify opportunities we're going to the best in our people to develop the culture, we're going to invest in our process and our technology and at the end of the day you will see continued improvement.
I believe on margins I believe bringing it to the bottom line and to your point.
Driving pretty impressive earnings.
Growth is the result, I just think it's the recipe for success. It's the gift that keeps on giving if you truly know how to run a piece of railroad you can satisfy the shareholder in a very unique way you can satisfy the customer and you can do it in a safe and efficient manner.
On a day out it's it's just the recipe for how to run the railway successfully.
Thank you.
Thank you all.
And your next question will be from Chris Wetherbee of Citi. Please go ahead.
Hey, Thanks, good afternoon.
Maybe if I can ask you sort of take that answer other than pull.
All of down into the maybe the second half of a year of maybe give us a little bit of a sense of how you think the the potential on or maybe it looks for the back half. Obviously you made some great strides on the first half of the comps are a little uneven for you for the Q versus for Q1 being a little bit easier than the other just trying to get a sense of maybe what the full year operating ratio it looks.
And sort of how that plays out.
What's obviously, a pretty robust top line opportunity seems like a better pricing environment, but there are some inflationary cost out there. So maybe the keeps kind of put that into but all together give us a sense of how the at the margin opportunity looks in the back half that'd be great. Thank you.
Sure, Chris let me take that.
So.
Like this.
Over half of half of the year, and we had a bit of a challenging winter.
We got some.
Fuel prices, which are which can impact.
The owner of it negatively we've been able to overcome that.
The wildfires that we're dealing with them.
Some of the.
The impact of that has in July.
But these arent excuses I think to us.
Pointed out of some of the the upside.
Of the opportunities.
The railroad has never been run so effectively from a casualty in the safety point of view.
On to Keith's remarks of my remarks.
Mark's earlier.
We continue to find ways to do things more efficiently.
Mark read and the operating team or our outstanding group of railroad or something and the continuous improvement culture driving opportunities to to offset some of those challenges.
Challenges that present themselves. So to me you know.
We had said at the beginning of year of that at least 100 basis point improvement off of the 57.1.
I'm not backing off of that Theres, probably upside on on that you know could we do of 150 basis point type of improvement.
Absolutely. So we're pretty bullish on what we can do from a efficiency.
Are the here on the back half of the year.
That's helpful. Thank you very much appreciate it.
Thanks for thanks, Chris.
Next question will be from Tom why the with UBS. Please go ahead.
Yeah. Good afternoon, I wanted to help you on line, but I wanted to ask you 1.
To your point so the question on the M&A stuff.
Yep Yep.
Ah the MTB I'll, just give you the scenarios and see how you respond to it but you know obviously, there's the scenario where SCB could reject the voting trust.
C N deal with kids he doesn't expired in February so there could be just kind of period of time, where there's uncertainty.
Just the you know.
Whether what we'd see on wood would try to do but it also might be an obvious period for you to get engaged with Keith you again I'm. Just wondering if you could talk about your thoughts on the the approvals that you achieved the waiver and devoting trust is there.
Expiration date on those.
Time of considerable.
About <unk> relative to the sizable break fees or just how do you think about you know how quickly you might want to reengage.
If the scenario is that you know there is the rejection.
Of the voting trust from S. T D.
The time I thought it would be pure speculation on.
The risks.
We've been clear on.
The strength of the facts, obviously it depends on what the STB says and it depends on how they say other than what they are focused on in north end of the day I guess the best question as to the KC of shareholders. You know how much risk are they willing to take.
Part of I think the best way to answer. Your question is we stand ready to engage we've got a very compelling.
Value proposition, we've got a path to approval.
Certainty.
We've got the unique facts that are pro competitive theres, so much uniqueness and strength of eye creation and our story again.
And.
We think it's compelling but at the end of the day the KC estimated decision to partner with the Canadian National.
Canadian Natural's facts are not supportive we think they are bad we think their anti competitive we've not been bashful about saying it but at the end of the day, what we think.
It's just our view.
So you can't and ultimately the STB is the regulator and the STB certainly holds the authority.
And has the experience and I feel we'll make a decision on when they do we'll assess it.
Again, it's going to be up to the case yet.
Shareholders you know.
Should they not allow it.
It's gonna be the question the answer is.
It is how much risk is the case the of shareholder willing to take.
Maybe if I were just open the window for so we'll see.
Maybe I can just narrow it a little bit to give you a better chance to the response do you think theres any kind of risk of the further time goes out the STB would come back and say your waiver and your voting trust.
The approval of expired or is your understanding that you know there is good in the euro as they were you know when they were originally granted.
Or fax haven't changed though again I'd be speculating because theres no precedents in this time. So it was just my guess and <unk>.
My view is based on the facts are facts, which.
The uniquely allowed us to be granted the trust under the old rules uniquely allowed us to be granted the old rule consideration.
As long as those facts don't change and they don't it's broke competitor to the San Dan for all of those reasons I would only assume that we'd get the same consideration, but again theres not a presence and and.
And I don't want to get ahead of my skis here ultimately the STB is the decision maker, but I do believe our facts are compelling and I would suggest you assume that we get the same consideration.
Sure Okay. Thanks for entertaining the questions appreciate it.
Thank you Tom.
Next question will be from Brian Awesome Bank of J P. Morgan. Please go ahead.
Ed.
Hi, good afternoon, thanks for taking the question.
Wanted to switch over to the end markets for a minute obviously that's been.
Quite a few challenges on the network as we've talked about earlier, but you're still reiterating the guidance for couple of due to the EPS growth I'm, assuming that's the 1 is the high single digit our teams in there. So maybe John you can.
Walk us through where you feel more convinced in terms of hitting that target where you expect to see some growth I know you gave us a few few commentaries before but basically the finer point on that and kind of what underscores the confidence and then separately just how you feel about staffing up and resourcing to that level of growth.
Alright, Brian So yeah definitely.
Standing by strongly our guidance of a double digit our T M.
I can tell you that first half of 'twenty, 1 as everybody has seen it feels like we've been through a dog's breakfast of issues cold snaps chip shortages of mine outages fires supply.
Chain disruption strong demand.
And and now droughts, and we've delivered and and frankly as I look across.
All of our business units.
Maybe grain being a little bit of uncertainty around the drought, but my experience in the grain side of the business.
This is as you approach harvest and you get into harvest, we're going to see probably pricing moderate and farmers wanting to monetize.
The success and what they have produced on the crop will produce the strong push.
During harvest, so I feel confident that that's going to give us.
Our strong grain book towards the end of the year.
As I said I see no change in the consumer side of our business in terms of the domestic.
Intermodal.
We've set records, we're going to continue to set records our retailers are strong our reefer business is growing strongly.
<unk>.
The international side of the business is it's there for the taking.
I think all the things that the other roads of talked about.
We've felt some of those pressures, but I also think we're going on not only catch of tailwind in that space says as some of those things improve.
As we move through the back half of the year.
All of that with our market wins.
I see a significant upside in our international business.
Frankly, I see upside.
If you think about all the challenges the U S ports of head and some of the challenges in the Chicago.
We're open for business in Vancouver, and St. John.
We've taken a few additional add the planned vessels at those ports the feed the Chicago market as others of have have.
<unk> had challenges and I can see some of those opportunities continuing into the back half of the year.
We're blessed by.
<unk> automotive book that is it makes up on the mix of the automotive.
The products that our Oems produce are strong there the the top selling vehicles. So they're getting a I think in most of those companies areas theyre getting the chips versus maybe other models arent.
So not that we won't face challenges in the auto space, but I continue to feel very strong in that area. We've got potash upside. We've got makeup from the from the fires in the coal so.
And frankly, I don't I don't see the forest products and steel business slowing down either.
Brian So.
Can completely bullish we could use a little luck on some of the supply chain issues.
But if we don't get it we'll continue to make our luck.
Oh, and then the second part on Resourcing.
Yeah, I don't know.
Of the resources, given all of that yeah yeah.
Maybe I'll say it this way Keith might want to add but free.
We've built this railroad with the capacity to bring on business, we do it in the lock step way my.
On my team's comp.
Constantly tied to hip to Mike Foran, and Mark read on on understanding those.
So frankly I don't have concerns and then as I said, we're actually chasing some opportunities that we see in the intermodal space is because we have the capacity.
Yes, I would only add on the resources side.
There's no concerns at Canadian Pacific, we're ready for the business.
We ramped up last year with.
The flow damage, if we think about back on the days when we thought <unk> was running the way and there was a big demand.
For capital you've got on over 100 locomotives in storage ready to engage as we need we're fine on workforce. We did some very unique things back during the pandemic.
2.
Compensate our employees.
And in the way that we didn't have to do in fact to help them get through the pandemic does it relate off of we enhance the benefits and and in exchange for that our employees of stuck with us.
They're committed to us and we've not had the same.
<unk> challenges, perhaps at the industry has had a word of good place on training and we're preparing for the business.
We're going to work closely with our customers to continue to bring it on the bring it to the bottom line on the very efficient manner. So that we satisfy our customers' needs.
Alright, Thank you guys.
Next question will be from Justin long Stephens. Please go ahead.
Thanks.
Good afternoon, I wanted to see if you could comment on truckload conversions and how they've trended recently on the network you've talked a lot about the truckload conversion opportunity related to the merger, but when you just think about the organic opportunity for truckload conversions going forward any way you can.
So think through what that addressable market looks like.
Yeah, Justin So maybe a couple of comments there.
The first of all of them and actually I was on a call with my team earlier.
Help us.
Please standby it appears that Mr. Bryan I was disconnected 1 moment please.
John are you still.
Okay.
Operator, do we should have for guests.
This is Jeff and I'm still on I think we may have lots of John.
1 moment, while we reconnect on zone.
John's going to continue John Alright.
Alright, yeah, So Justin I was saying of working with my team earlier today focusing on a couple.
All of those various specific the truck conversion.
Our major retailers across Canada have felt the the trucking pinch similar to what maybe at a little more intensified pace of faith. The the U S side has faced.
Theres a fair amount of effort to look at how we can.
Kurt and dive into the book of of our major real estate.
The retail companies in Canada.
To convert those truck options in particular of focus on some of the cross border opportunities.
Not only between say.
Eastern.
Canada in the Chicago market, but also looking at how we work with our eastern carriers. They are they're very.
For the <unk>. They are very focused on truck conversion and looking at those opportunities the utilize our capacity up into the upper Midwest up into the twin cities market.
Conversion.
Ultimately, maybe even in the Western Canada.
I'm always having a 'twenty.
$20 million to $30 million road to rail conversion target.
For my domestic intermodal team and.
Those are some of the areas that we're focusing on.
Okay.
And is there a way to think about the opportunity outside of domestic intermodal as well, if it's $20 million to $30 million. There. If you look at merchandise traffic what would be a reasonable target on that Brian.
You know what I look at specifically I can tell you. We just converted a significant piece of steel business I think about 8.
$8 million of the year.
Through our new St Luke Trans load.
Previously business that lives trucking believe it or not the all the way down in the in the Mexico in in down into the the Minneapolis market, we've converted that to where it'll be truck now into our trans load and in rail.
On down to those marketplaces so.
It's a little hard to quantify.
Justin Big picture, but it's it's really the foundation of <unk>.
Why we've created these trans load the crossed our network to go after that that type of business I wouldn't be surprised if it's similar type numbers.
Okay, Great I appreciate the time.
Yeah.
Thank you next question will be from Scott Group at Wolfe Research. Please go ahead.
Hey, thanks.
Keith I wanted to ask your question you referenced the capacity challenges in the industry and I know you said it's your.
Youre not.
Seeing them, but I'm sure. It doesn't help you with respect to your interchange business and I'm just wanted to get your perspective here, what's the fix for.
For the industry as it just as simple as more people and more equipment does it mean, maybe the rails. The other rails didnt do PSA are in the right way just curious.
But how to fix this.
Yeah, that's the that's a pretty global question it would be very global answer I think it's different stories.
Different railways, I mean, I I can imagine.
Think about the tidal wave of the tsunami of traffic that's came in on the West Coast you know for.
Fear of Western rail to have to die.
Just that all bringing it in east and having things out of balance that that's the key here, while we reset in this economy.
P S O and O P. S. R M D.
There's going to be a lot of noise, you've got supply chains that are completely out of sync.
About our network alone.
Your thoughts at all of the <unk>.
If the moves that made on intermodal equipment and all of the lost revenue because I'm hauling air just to get those containers back for the West coast ports. So they can get back over 6 to get the next load to bring the next tsunami, so whats going back and forth, it's like sloshing of.
Water sloshing back and forth inside of a big tank.
Some of this is inevitable.
If I look at overall of the way the industry has handled this.
For the customer experience on the pain of it I'm not going to suggest that it's pleasant, but at the same time overall I think the industry has done well and if not for PSM.
The outcome I believe would have been a whole lot worse.
Think about given all of the additional resources in cars and congestion and terminals that quite frankly, we've had.
2.
It depend upon now having more fluid operations to get a better outcome. So I don't think it's a matter of if any of the railroads not doing a good job I think the.
P of Sars of learning process, obviously are those of us that have been doing it for 20 years of what we've learned a lot we've learned a lot over the years and we apply it.
We were frankly pretty efficient our results speak for themselves I don't want of a pound our chest, but we know how to manage it coming down we know how to manage it coming up we know what to look for.
And sometimes you just don't know what you don't know so overall the industry I think has done well I think the outcome because of the <unk> better than it would've been otherwise what I see the other railroad is doing and the hiring that theyre doing and the investments that they're making once you get some of this choppiness out of supply chain I think youre going to see extremely impressive.
For the outcome for the customers and for the industry.
So again.
I know for those that have been adversely impacted.
It's not an easy answer and I'm not going to minimize that but at the same time. We trust. This process. We go through it and you're going to see as we all get better at doing this across the industry of much improved outcomes.
The rest of it.
Thanks for the thoughts.
Thank you Scott.
Next question.
Comes from Stephen Hanson Raymond James Please go ahead.
Okay.
Yeah. Good afternoon, guys. Just a quick 1 for me is is in relation to the grain side again.
John I know you've already spoken to do it for something.
Some degree of but I'm, just trying to get a sense for how you think that grain moves starts off we've obviously got of dry period, we're comping up against the of dry an early harvest last year as well, but you still think that the back half can be quite strong as the farmers move the product. They do have I guess I guess, we'll see the derivative benefit.
The derivative hit in the 2000.
The 22, I guess is the way to think about it.
I think that's the right way to think about it Steve.
We're obviously, we're stand super close to or our customer there is no doubt yields are going to be impacted.
Hi, this is <unk>.
Frankly could be of pretty strong sort of quality crop in terms of proteins and different things, which will bring some unique.
<unk> in terms of.
But maybe needing the blend in some different movements, but I think we're the message. We're getting is the peak will be as close as normal as as is as we've seen in recent years and then the impact will be in a in more in 'twenty 'twenty 2 depending on what the.
Total size ends up being I think the the other thing to keep in mind is.
We're going to see some unique movement the.
The us has some deficits in some areas, where I think is going to present, the actually the Canadian farmer and producer some some good pricing opportunities right out of the chute.
For the feed the U S markets. So we're we're doing the things we need to do to be nimble the.
We're able to handle this crop once it once it starts up here.
Okay very helpful. I appreciate the time.
Yep.
Next question will be from Jason Seidl of Cowen. Please go ahead.
Thank.
Keith and team I appreciate the time.
As we look in the 22 a lot of companies are starting to say hey, we see we see strength out into the year could you talk a little bit on the intermodal side that you mentioned about the restocking how long do you think that's going to continue on 1 of your customers telling you in terms of where they want.
To get their stock back it was of back to prior levels or are we looking at even going beyond that because people are rethinking of the supply chain.
Well I can I can start Jason.
Actually Keith and I, just met with the major international Shipper last week.
And are they they were extreme.
Thank you only bullish that this is going to push rate on into 2022, and probably be the better part of the the whole year.
They were they were quite.
Bullish on the.
The contracting opportunity.
The fee sort of the.
<unk>.
The demand profile and frankly some of the challenges that continue at the overseas ports continuing.
And that just creating the this longer and longer tail.
They had recently met with.
A number of their big <unk> retailers and that was.
Stream of same sediment debt.
This has really pushed itself.
A couple of months ago, I would've said just right past the.
The Chinese new year, and and now the.
The settlement of this is likely to push well through 2022.
And just for clarification was this an intermodal shippers of you met with.
It was yes, okay perfect.
That's great color I appreciate the time nice quarter.
Thank you.
Next question comes from going on at Scotiabank.
Scotiabank. Please go ahead.
Thanks, operator.
Just wanted to dig into the pricing and mix. So you guys mentioned pricing.
The exact swaths of combined I think 8%.
So like the very good support from mix as well, but just kind of looking ahead.
Do you see on what kind of visibility you have on on the same store pricing given the supply chain being tight here and then how does the mix of ball over the next couple of quarters of potash.
I think in the coming back and Green, obviously being a little bit of all the times of the short term here as well of said the are you starting up thanks.
Yeah. So.
I expect.
And the pricing to remain strong.
Probably sound like a little bit of a broken record here, but we started to see a.
Dash tick into what I consider the upper range of of our guidance on on pricing actually all the way back in Q4 of last year. It accelerated in Q1 and it's it is hit even stronger levels in Q2, I don't see that changing just looking at our.
Book of renewals for for Q3.
Particularly our intermodal and our our.
For our merchandise carload business at the <unk>.
At the top end of of our of our of our high end range in terms of pricing.
On the mix front.
It was.
It's quite strong here in in in Q2, I expect it as you described as maybe the potash picks up.
To moderate a little bit, but I do expect mix to remain positive over the next 2 quarters and would probably be.
We're still seeing a little bit of a headwind on FX and fuel combo, and we probably expect that to moderate.
A little bit as we move through the year too. So that gives us I think of little bit of a tailwind on that front of if you think about our cents per our team going forward.
That's great. Thank you.
Yes.
Next.
It comes from <unk> <unk> at the Bank. Please go ahead.
Yes, Thanks for taking my question and sexy, Jeff on behalf of <unk>. So I just wanted to come back on the.
The contract with Costco and W or Seo congratulation for the warrants could you provide a bit more details about the timing.
Question, the kind of the seasonality of this contract Lee Thank you very much.
Yes so.
The the contract actually of starts up immediately we're actually seeing some freight.
Convert over to our rail lines this week and I expect it to.
The ramp up into the <unk>.
Through August.
And we should be at a full run rate at some point here in Q3.
It's a partnership debt that just flat out works.
We've got good capacity coming from the South shore.
On.
This will allow us to use that train capacity.
And and frankly takes our share at our send term terminal, which is on the south shore, which we serve.
The over 50% and why that matters.
Is the merits.
The business a lot of that will flow through <unk> term.
The Costco double of LCL business of front run through through for that terminal also and it allows us to begin to really leverage and build direct trains out of there into not only eastern Canada.
But also the Chicago.
So we're quite is quite service quite excited about the service products.
We're able to provide costco double of CL, Maersk and our other customers coming out of that terminal.
Thank you very much congrats again.
Alright, thank you.
Next question comes from Brian.
So mark Glinski at the Barclays. Please go ahead.
Hey, guys. Good afternoon, and sorry, I got disconnected, so I hope I'm not being repetitive with my question in here, but Keith I think in response earlier, you were talking about how marketing the license without the North American carriers could help drive further organic growth for CPT I guess.
Nathan's questions for John as well, but do you guys.
It really won't be on your network for the next 5 to 10 years of growth or do you think some of these organic opportunities that you guys have been driving the past 3 years to 5 years can continue while down the down the road here.
You start Brandon.
John So.
2 things 1 is Keith nailed it on the head.
Earlier, when he said our land capacity is something we've talked about previously it's of currency that can continue to provide growth on this network as I look ahead.
And you combine I think that.
With the ability to convert the truck business.
I think an extensive focus particularly in the U S with U S roads to look at how bringing they can bring more to the rail.
And I think the opportunity as you think about alliances.
And other marketing partnerships.
As Keith spoke to is how we take that.
On that.
Line rail move and make it truck competitive a lot of the opportunities we always talk about.
We are focused on just maybe our long haul single line shipments, but if you really think about as more and more <unk> evolves on the U S roads, you get more of like mind in this in terms of opportunities in service.
How can you combine networks to really.
Drive.
The truck conversion.
So look it's a combination we're constantly looking at what we got to do with our own network and where those opportunities are and how we use our land.
But but also you begin to think about well.
If M&A doesn't happen what are the.
These areas that you can create the.
Seamless model.
On to potentially better service.
Those truck markets.
Okay.
Thank you.
Thank you.
Sure.
We are now out of time I will turn the call back over to Mr. Keith Creel. Please go ahead Sir.
Okay.
Okay, well, let me let.
Let me wrap up with where I started thanking everyone for joining us today to go through our results certainly extremely proud of.
Of this team's execution during the quarter, but even more excited about the balance of the year, we're going to finish 2021 strong.
Expectations meet or exceed guidance in the cure.
Momentum into a strong 2022 looking for it we look forward of sharing our.
Third quarter results soon have a safe and productive day.
Okay.
Thank you. This concludes today's conference you may now disconnect your lines.
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3 of them.
Hmm.
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