Q2 2021 Canadian Pacific Railway Ltd Earnings Call
Good afternoon my name.
As Sylvia and I will be a conference operator today at this time I would like to welcome everyone to Canadian Pacific's second quarter 2021 conference call.
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 speakers.
<unk> 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 your 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.
For we begin I want to remind you. This presentation contains forward looking information 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.
For 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.
<unk>, our executive Vice President and Chief Financial Officer, and John Brooks, Our executive Vice President and Chief Marketing Officer for all of our Rx will.
Followed by Q&A and the interest of time, we would appreciate if you limit your questions to 1 it is now my pleasure to introduce our president and CEO, Mr. Keith Creel.
Hi, good afternoon, Thanks, Chris.
I'm going to begin my comments by saying.
Saying that my thoughts for my prayers remain with those affected by the wildfires.
In British Columbia, specifically.
Those and letting you know are hard to G. P.
Go out to everyone. That's been impacted the village a litany of letting first nations and several members of the CP family, who actually lost their homes in the living fire net.
So I'm going to continue to think for more than 12000 strong CP railroad or is.
That are truly the drive.
Rivers behind the unique story of sustainable profitable growth. That's C. P. A bar non 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, let's focus on the results I needed to say extremely proud of what the team has delivered this quarter.
Through the collective efforts of our railroad as the.
Quarter, we delivered record second quarter revenues of nearly $2.1 billion record second quarter operating ratio for $55..3 net earnings growth of an impressive 27% to a record dollar 3 cents behind those numbers, obviously, the very impressive operating performance special thanks to Mark read.
Industry best team of <unk>.
Talented railroad or is that he leads and serves with daily I'm able to produce train weights train lengths continue to improve built on last year's records up 1.3%, respectively. A record second quarter car miles per day up 4% on the quarter trip and compliance for our customers better than 80%.
<unk> continues to improve and most importantly.
Safety 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 per cent 7 zero percent.
And then 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.
Keep pursue perfection.
Again.
And ongoing continuous improvement process focusing.
Just for their commitment to investment in technology people and process continues to show our efforts through the results of constant improvement or.
The financial and operating results this quarter.
Denapoli continuation of argue unique precision scheduled railroading story at Canadian Pacific truly shows with a proven seed.
Yes, our motto can accomplish sustainable profitable topline growth margin improvement earnings growth.
Running 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 a team that has a track record of producing.
Results, creating value no excuses to make them the results for 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 for 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. This team delivered this quarter, we achieved our all time records.
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 <unk>.
Rpms were up 9% in the quarter fuel and FX combined to be a 2% headwind.
Turns and mix combined to be positive, 8% the pricing environment as many have 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'll 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'm pleased to report that CP has moved over 30.
30 million metric tons of grain and grain products. This crop year setting an all time company record I want to thank all 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.
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.
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 online 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 our Portland terminal that enables greater supply chain resiliency and increase throughput. The Portland facility will now be able to land 388 car trains at their 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 to close out 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 expect.
Small strong demand from tech into the second half for the year as we look to recover volume impacted from the recent fires.
Moving on to merchandise the energy chemicals, and plastics portfolio saw revenues increase 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 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 Conoco Phillips.
This train is destined for USPS facility in Port Arthur Texas, and we expect this business to ramp up to 15 to 20 trains per month in Q3.
This marks the beginning of a long term.
Launched from traditional crude by rail to drew bit.
A more sustainable environmentally friendly and pipeline competitive product.
It is Cps honor to be partners with Gibson energy USD and Conoco Phillips as we're delivering this 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.
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.
<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.
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.
Globe 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 a reliable service.
Service product and capacity for growth, we continue to perform well in this space anchored by our strong retail franchise.
Im 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> and we are on a current run rate that exceeds 20000.
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.
Well documented 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 <unk> CL.
This multiyear contract will deliver new growth on our core intermodal lanes.
<unk> originating from both Vancouver, and Montreal utilizing existing train capacity.
We expect this contract will generate over $100 million annually and incremental revenue.
The partnership is grounded in and reflects the value that CP can uniquely offer in.
With wells of capacity 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.
In terms of trans load facility as a reminder uses 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.
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.
When 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 and into 2022, we have a strong pipeline of initiatives and we expect robust demand environment to continue as economies around.
Round 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 day the Navy.
Thanks, John and congrats on yet another contract win.
I'm proud of the exceptional results with payments produced in the quarter as John.
We achieved a Q2 record and revenue and we did that while effectively managing resources and controlling costs. The outcome of the solid execution by our 12000 plus team of railroad Yours was a Q2 record adjusted operating ratio of 55, 3% the team executed on all fronts with 15% revenue.
Mentioned.
19% operating income improvement of 170 basis point decrease in AUR 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.
$9 million from <unk> and $209 million below the line and other expenses I'll 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% or $44 million versus last year. The primary.
Primary driver of the increase was higher volumes and increased training costs in support of the improved demand environment.
Recall in Q2 last year will refer lowing employees. So most training expenses were 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.
Lag in timing of recoveries in our fuel surcharge program was an $18 million headwind in the quarter equipment.
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 a 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 or 36% primarily.
As a result of higher taxable income parsed.
Partially offset by a lower effective tax rate.
Rounding out the income statement adjusted diluted EPS grew 27% to $1.3 in the quarter. A reminder, we executed a 500 to 1 share split.
Quarter.
Moving on to free cash to wrap things up we generated very strong cash flow in 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.
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 pause.
We currently have approximately $900 million in cash, which is available to return to shareholders through buybacks and dividends.
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.
Cincy 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 and growth agenda.
I'm proud to say, we've continued to build on the efficiency gains we established last year.
Our year.
Dividend per unit cost of rail ties is down 7% versus last year and down 10% versus our 3 year average.
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.
With that I'll turn it back over to Keith to wrap things up.
Okay, Thanks, Nadeem and John for that color.
Sum it up volumes came in strong against 2020.
But also very importantly, John made this point uniquely exceeded our 2019 volumes and.
The team product for the bottom line driving operating income growth.
With growth and margin improvement.
Safer than ever before.
So that has set us up well to close out a very strong 2021, enjoying a very strong demand environment, which we see continuing well into 'twenty 'twenty, 2 and partnership with our self help initiatives you can continue to expect to see outperformance.
It's about this team at Canadian Pacific.
With 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 and if he would like to withdraw your question press.
Star then the number 2.
As previously highlighted 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 about the merger activity, thus far this year and you know maybe you've said anything you want to say and it's in the S. T V's hands at this point, but I would have 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 to speed on on what you're thinking you know post some of those are important letters have been posted and how your things.
If things proceed from here.
It will take some share.
You know I can tell you my.
My conviction about the police off and the strength of the proposal that that we successfully negotiated with <unk>.
K T. S. Initially has not changed has not wavered at all in fact.
How're you thrown 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 winters. There is zero overlap there's no losers zone debits and credits, it's 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 what.
We think.
We think that obviously those facts are being weighted on obviously, it's in the S. E. B Sands, we expect a decision in the coming weeks and we stand ready to Reengage with the case, yes.
And we're gratified by the outpouring of support that our deal.
Even though I signed up still continues to garner we've got over 1050 support letters and yes C. N has support letters too I think.
Their numbers over 1700, and 50, which they are probably COVID-19.
Communicated however, they've forgotten it there's also over.
Gunnar 40 opposition letters to their combination.
Customers Amtrak Nisley T F I E C C labor unions.
Certainly not just what has been discussed this week, but with all 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.
Not going to suggest that we think competition is the best way to assure a good outcomes for our customers and.
For the North American economy.
Regard for the specific executive order are we.
We think that in fact and emphasize.
The importance of competition. It emphasizes the importance of Amtrak access both of which are unique facts speak well to without the need for the STB 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.
Chairman over them in.
I 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.
So certain circumstances, where consolidation can be beneficial.
So again.
We feel very strongly about this ultimately it's up to the STB and their capable hands and you.
I'll finish where I started.
We stand for.
Ready to engage.
Reengage with the case, yes I'm sure.
Should the STB rules.
Rule 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.
Dressed for the question.
It does thank you.
Thank you next question will be from body.
Shimon at BMO capital markets. Please go ahead.
Yes.
Good evening. Thank you.
Keith I mean, you've laid out quarter after quarter here very compelling kind of organic growth.
For you for C. P and you continue to execute on that front, but.
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 are the Levered as what are the things that he can do to kind of.
Stimulated the growth story for CP on a long term base.
Things that you can do is peers in the industry as far as commercial agreements go or.
Our marketing strategy that could kind of enhance your access to markets and enable you to kind of produce that kind of growth outcome longer term debt would have come.
I'm in an M&A transaction.
Yes, let me.
Fatah Youre right in target with a lot of thinking, let's let me start though in our own backyard, we still have.
Over 1000 acres of developed.
<unk> land currency, so to speak across our network, which is very unique.
As noted in our competitive space it has been.
Table Stakes for for our success, it's been part of our strategy. If I take you back to our Investor day, 3 years ago for years ago. The Time's flying by so there's still several.
Opportunities for self help initiatives be it seem Keith property built that out the build out.
Unique ft in the Chicago Gateway the it build out additional land assets in Vancouver.
Still many chapters left of that growth story that ended up itself isn't going to drive organic growth. It's unique we believe to the industry at Canadian Pacific.
Do you think about replicate replicating M&A, obviously I don't.
Capacity to the attributes of <unk>.
You know the unique opportunity that a combination would create for us with 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 with.
For the Western rails, you can make a 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 what's best for the customer to try to create new.
Need to 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 absence of that opportunity.
Certainly going to leverage the way we run the railway the origins of strength.
The shortest length of power to the markets to get into some of these additional growth markets that M&A would allow and again leverage it with our unique capacity at our terminals be it in Chicago and.
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 in this industry to enable that so again priority 1.
Thank 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 for the industry with a very unique outcome.
Okay, great. Thank you.
Keith.
Thank you. Your next question is from Allison Landry at Credit Suisse. Please go ahead.
Thanks, Scott for him and I appreciate you taking my question so.
So Keith I mean, obviously C. P. N fact, what's arguably a new bar for what the industry can achieve from an or perspective, especially seeing.
The 55 in Q2 grants and Thats, just 1 quarter, but could you could you address how much further to improve you have in terms of debt the productivity metrics train length weighted fuel efficiency.
And what that May tell us about the trajectory of the long term and maybe just if I could ask.
In a different way if this is a better way since you do have a demonstrated track record for growth.
Is there a point, where you think the or bottoms out and that's okay I understand.
2 growing EBIT dollars and an improving ROIC.
Well, let me.
Let me start with the ROIC.
S N industry, so I'm pretty proud of where it's at I think it's in a healthy place.
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. It's a natural outcome of running the business the proper way.
When you.
Bring on sustainable profitable growth that's key.
You have the assets and 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.
Is a very impressive operating margin.
So we're at industry Best you know how much further do we have to go I can tell you know that until we have every trained linked optimize we haven't converted all 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 a for instance, it's much better than it was and it's been a journey of constant improvement, but even for canpotex.
I go back a year and a half ago, we were running at 130 car train sets.
Portland with partnership did you Pete.
As per <unk> and that was part of our part of our evolution.
Now running 188 car trains to Portland, but that still is not the same as Vancouver, where we enjoy the efficiency of running a 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 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 a constant pursuit of that and an 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 are 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 those cycles and truly understand how to manage it.
Well coming up as you down and vice versa, you can't have the kind of results that C piece producing.
So again, it's work in progress.
We're going to remain humble we're going to continue to work hard working to identify opportunities for work and invest in our people to develop the culture, we're going 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 a result.
I think it's a recipe for success, it's a gift that keeps on giving if you truly know how to run a PSL 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.
In a day out it's it's just the recipe for how to run a railway successfully.
Thank you.
Thank you all.
And your next question will be from Chris Wetherbee at Citi. Please go ahead.
Hey, Thanks, Good afternoon, Yeah, maybe if I can ask you sort of take that answer then pull.
All it down into maybe the second half of a year or maybe give us a little bit of a sense of how you think the potential on or maybe it looks for the back half obviously made some great strides in the first half the comps are a little uneven for you for Q versus for Q1 being a little bit easier than the other just wanted 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 topline opportunity seems like a better pricing environment, but there are some inflationary cost out there. So maybe you could just kind of put that into you put that all together and give us a sense of how about the margin opportunity looks in the back half that'd be great. Thank you.
Sure, Chris let me take that.
So.
Like this.
And over half of the year, and we had a bit of a challenging winter.
I think we got some.
Fuel prices, which are which can impact.
They are a bit negatively we've been able to overcome that.
Got the wildfires that we're dealing with them.
Some of.
The impact that that has in July.
But these arent excuses I think to us.
You pointed out some of the upside.
For the opportunities.
Railroad has never been run so.
<unk> from our casualty and safety point of view.
And to Keiths remarks in my remark.
Mark's earlier.
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.
Ability, we had set at the beginning of year that at least 700 basis point improvement off of a 57.1.
I'm not backing off of that Theres, probably upside on on that you know could we do a 150 basis point type of improvement.
Absolutely. So we're pretty bullish on what we can do from a efficiency.
Our point of view in the back half for here.
That's helpful. Thanks, very much appreciate it.
Thanks for thanks, Chris.
Next question will be from Tom why don't you.
UBS. Please go ahead.
Yeah. Good afternoon, I wanted to know if you don't mind, but I wanted to ask you 1.
<unk> for additional question on the M&A stuff.
U S D. B I'll, just give you a scenario and see how you respond to it but you know obviously there is a scenario where SCB could reject devoting trust.
And 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.
Uh huh.
Whether what would see and we 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 approvals that you achieved the waiver and devoting trust is there.
Expiration date on those.
We kind of consider.
The abomination relative to be a 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 a rejection.
Devoting trust from S. T V.
Well, Tom I thought it would be pure speculation.
Syddanmark.
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 and you know at the end of the day I guess the best question as to the case you as shareholders.
Much risk are they willing to take.
On our call you know I think the best way to answer your question as we stand ready to engage we've got a very compelling.
Value proposition, we've got a path to approval to deal certainty.
We've got unique facts that are pro competitive theres, so much uniqueness and strength that I creation and our story again.
In.
We think it's compelling but at the end of the day. The case he estimated decision to partner with Canadian National.
Canadian Nationals facts are not supportive we think they're bad we think they are anti competitive we've not been bashful about saying at the end of the day, what we think.
It's just our view.
So opinion 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 and when they do we'll assess it.
Again, it's going to be up to the case, yes sure.
Shareholders you know.
Should they not allow it.
It's gonna be the question to be answered.
Or how much risk is the case, yes share holder willing to take.
Maybe if we just opened a window for us so we'll see.
Maybe I can just narrow it a little bit to give you a better chance to respond do you think theres any kind of risk for further time goes out the STB would come back and say your waiver and your voting trust.
Rusty approval of expired or is your understanding that you know there is good in a year 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's just my guess and <unk>.
My view is based on the facts are facts, which.
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 competitive it's N. Dan for all those reasons I would only assume that we'd get the same consideration, but again theres not a presence in.
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 to us saying that we get the same consideration.
Sure Okay. Thanks for entertaining the questions appreciate it.
Our next question will be from Brian Awesome Bank at J P. Morgan. Please go ahead.
Yeah.
Hi, good afternoon, thanks for taking the question.
I wanted to switch over to the end markets for a minute obviously has been quite.
Quite a few challenges on the network as we've talked about earlier, but you're still reiterating the guidance for double digit EPS growth assuming that still has the highest single digit rpms in there. So maybe John you can.
Just 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 commentary before.
You can put a 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 mine outages fires supply.
Chain disruption strong demand.
And now droughts and we've delivered.
And frankly as I look across.
All of our business units.
Maybe maybe grain being a little bit of uncertainty around the drought, but my experience in the grain side of the business.
As you approach harvest and you get into harvest, we're going to see probably pricing moderates and farmers wanting to monetize.
Their success in what they have produced on the crop will produce a 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 businesses is growing strongly.
Wrongly.
The international side of the business is there for the taking.
I think all the things that the other roads have talked about.
We've felt some of those pressures, but I also think we're going to not only catch a tailwind in that space as some of those things improve.
As we move through the back half for the year.
Couple 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 have had in some of the challenges into Chicago.
No.
We are open for business in Vancouver, and St. John.
We've taken a few additional add to planned vessels at those ports to feed the Chicago market as others have.
<unk> had challenges and I can see some of those opportunities continuing into the back half for the year.
We're blessed by.
<unk> automotive book that is it makes up the mix of the automotive.
Products that are Oems produce are strong there that the top selling vehicles. So theyre getting 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.
Loan down.
Brian So.
I am completely bullish we could use a little luck and some of these supply chain issues.
But if we don't get it we'll continue to make our luck.
Oh, and then second hard on Resourcing.
Yes, I don't know.
All of our resources, given all that yes, yes.
Maybe I'll say it this way Keith might want to add but.
Frankly, we built this railroad with the capacity to bring on business, we do it in a lock step way.
Teams constantly.
Constantly tied to hip to Mike Foran, and Mark read 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.
Those flood damage.
Think about back in the days when we thought <unk> was run anyway, and there was a big demand.
For capital they've got over 100 locomotives in storage ready to engage as we need where final workforce. We did some very unique things back during the pandemic.
2.
Compensate our.
And in a way that we didn't have to do in fact to help them get through the pandemic does it relate off we enhance the benefits and in exchange for that our employees have stuck with us.
They're committed to us and we've not had the same ramp up challenges perhaps at the industry has had a we're in a good place on training and we're preparing for the business.
Employees.
Going to work closely with our customers to continue to bring it on and bring it to the bottom line in a very efficient manner. So that we satisfy our customers' needs.
Alright, Thank you guys.
Next question will be from Justin long of Stephens. Please go ahead.
Thanks for.
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 debt 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.
First of all in and actually I was on a call with my team earlier.
Can help us.
Please standby it appears that Mr. <unk> has disconnected 1 moment please.
John are you still.
Okay.
Operator, we should have for guests.
This is Jeff and I'm still on I think we may have lost John.
1 moment, while we reconnect argon.
John is going to continue John.
Alright, yeah, So Justin I was saying I was 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 trucking pinch similar to what maybe add a little more intensified pace have faith that 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 Rio.
Our retail companies in Canada.
To convert those truck options in particular, our focus on some of the cross border opportunities.
Not only between say.
Eastern.
Converter in the Chicago market, but also looking at how we work with our eastern carriers. They are they're very.
In essence, <unk>, they're very focused on truck conversion and looking at those opportunities to utilize our capacity up into the upper Midwest up into the twin cities market.
Canada, and ultimately maybe even into western Canada.
So I'm always having a <unk>.
$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.
I look at specifically I can tell you we just converted a significant piece of steel business I think about 8.
$8 million a year.
Through our new St Luke Trans load.
Previously business that was trucking believe it or not all the way down in the in the Mexico in down into the Minneapolis market, we've converted that to where it'll be truck now into our trans load and rail.
Down to those marketplaces so.
It's a little hard to quantify.
Justin Big picture, but it's really the foundation of <unk>.
Why we've created these trans loads across our network to go after that that type of business. It 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 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 the industry as it just as simple as more people and more equipment does it mean, maybe the rails. The other rails didnt do GSR and the right way just curious your.
But how to fix this.
Yeah, that's a that's a pretty global question it would be very global answer I think it's different stories.
Different railway, so I mean, I I can imagine.
Think about the title wave with the tsunami of traffic that's came in on the West Coast.
You know for your western rail to have to die.
Just that all bringing in east and having things out of balance that that's the key here, while we reset in this economy.
P. S. R. L. 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.
Think about our network alone.
Thoughts at all the empty 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 its going back and forth, it's like slosh enough.
Water sloshing back and forth inside of a big tank.
Some of this is inevitable I think if I look at overall the way the industry has handled this.
For the customer.
Experiencing 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.
How come I believe would have been a whole lot worse.
Given all the additional resources in cars and congestion and terminals that quite frankly, we've had.
2.
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 that.
<unk> is a learning process, obviously those of us that have been doing it for 20 years.
And a lot we've learned a lot over the years when we apply it.
We're frankly pretty efficient our results speak for themselves I don't want to 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 the P. S. R is better than it would've been otherwise what I see the other railroad is doing and the hiring that they're doing and the investments that they're making a once you get some of this choppiness out of supply chain I think youre going to see an extremely impressive.
For outcome for the customers and for the industry.
So again.
I know for those that have been adversely impacted.
It's not anything answer and I'm not going to minimize that but at the same time, we talked.
This process, we go through it and Youre going to see.
As we all get better at doing this across the industry a much improved outcomes.
For us.
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, but I'm just trying to get a sense for how you think that grain moving starts off we've obviously got a dry period, we're coming up against the 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.
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 staying super close to or our customer there is no doubt yields are going to be impacted.
Hi, this is.
Frankly could be a pretty strong sort of quality crop in terms of proteins and different things, which will bring some unique.
<unk> in terms of.
Maybe needing the blend in some different movements, but I think the message. We're getting is the peak will be as close as normal as as we've seen in recent years and then the impact will be in.
More in 'twenty 'twenty, 2 depending on what the.
Total size ends up being I think the other thing to keep in mind is.
We're going to see some unique movement.
<unk> had some deficits in some areas, where I think is going to present to actually the Canadian farmer and producer some some good pricing opportunities right out of the chute.
To feed the U S markets. So we're we're doing the things we need to do to be nimble.
We're able to handle this crop once it once it starts up here.
Okay very helpful. I appreciate that.
Yes.
Next question will be from Jason Seidl of Cowen. Please go ahead.
Thank.
Keith and team I appreciate the time.
As we look into 'twenty 2 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 restocking how long do you think that's going to continue and what are your customers telling you in terms of where they want.
To get their stock back it was a back to prior levels or are we looking at even going beyond that because people are rethinking the supply chain.
Well I can I can start Jason.
Actually Keith and I, just met with a major international shipper last week.
And they they were extreme.
Thank you Ali bullish that this is going to push right on into 2022, and probably be the better part of the whole year.
They were they were quite.
Bullish on the contracting opportunity.
They see sort of the.
<unk>.
The demand profile and frankly some of the challenges that continue at the overseas ports continuing.
And that just creating this longer and longer tail.
They had recently met with.
A number of their big <unk> retailers and that was.
Stream that same sediment debt.
This has really pushed itself.
Months ago, I would've said just right path.
Maybe the Chinese new year, and and and now the <unk>.
Settlement of this is likely to push well through 2022.
And just for clarification was this an intermodal shipper that you met with.
It was yes, okay perfect.
That's great color I appreciate the time nice quarter.
Thank you for it.
Next question comes from <unk> Gupta at Scotia Bank. Please go ahead.
Thanks, operator, and good afternoon, everyone just wanted to dig into the pricing and mix. So you guys mentioned pricing.
The exact source combined I think 8%.
Like a very good support from mix as well, but just kind of looking ahead.
How do you see or what kind of visibility you have on same store pricing given the supply chain being tight here and then how does the mix evolves over the next couple of quarters with potash.
I think they are coming back and green, obviously being a little bit for all the time for the short term here as well as Dr. You're starting up.
Yes so.
I expect.
The pricing to remain strong.
Probably sounded like a little bit of a broken record here, but we started to see a.
Potash tick into what I consider the upper range of our guidance on pricing actually all the way back in Q4 of last year. It accelerated in Q1 and if it is hit even.
Even stronger levels in Q2, I don't see that changing just looking at our.
Renewals for Q3.
Particularly our intermodal and our our.
Our merchandise carload business.
At the top end of of our over our high end range in terms of pricing.
On the mix front.
It was.
Was 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.
Book, we're still seeing a little bit of a headwind in FX and fuel combo, and we probably expect that to moderate a.
A little bit as we move through the year too. So that gives us I think a little bit of a tailwind on that front. If you think about our cents per <unk> going forward.
That's great. Thank you.
Yes.
Question comes from <unk> <unk> at <unk> Bank. Please go ahead.
Yes. Thanks for taking my question is ex Jeff on behalf of <unk>. So I just wanted to come back on the current.
Truck with Costco and W. OCR congratulation for this 1 could you provide more details about the timing.
And kind of the seasonality of this contract Lee Thank you very much.
Yeah. So.
The contract actually starts up immediately we're actually seeing some freight.
Convert over to our rail lines this week and I expect it to.
<unk> ramp up into through.
Through August.
And we should be at a full run rate at some point here in Q3.
It's a partnership debt just flat out works.
We've got good capacity coming from the South shore.
<unk>.
This will allow us to use that training capacity.
And and frankly takes our share at our send term terminal, which is on the south shore, which we serve.
Up to over 50% and why that matters.
Is the marathon.
This business a lot of that will flow through <unk> term.
Costco double LCL business upfront 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 product that we're able to provide cosco double LCL Maersk and our other customers coming out of that terminal.
Thank you very much congrats again.
Alright, thank you.
Next question comes from Brandon.
Mark landscape.
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 alliances with other north American carriers could help drive further organic growth for CP.
Yeah.
Nathan's questions for John as well, but do you guys.
Really look beyond 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 to 5 years can continue while down the downward growth here.
I.
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 a currency that's going to continue to provide growth on this network as I look ahead and.
<unk>.
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.
As Keith spoke to is how we take that.
That interline 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 in the U S roads, you get more like mindedness in terms of opportunities in service.
How can you combine networks to really.
Drive.
Truck conversion.
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 also you begin to think about.
If M&A doesn't happen what are these areas that you can create this.
Seamless model.
To potentially better service.
Those truck markets.
Okay.
Thank you.
Thank you.
We are now out of time I will turn the call back over to Mr. Keith Creel. Please go ahead Sir.
Okay.
Well, let me.
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 and I'm curious.
Covid them into a strong 2022 looking for it and we look forward to sharing our.
Third quarter results soon.
Have a safe and productive day.
Yeah.
Thank you. This concludes today's conference you may now disconnect your lines.
Okay.
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That momentum.
Hmm.
[music].
Okay.
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