Q3 2021 Canadian Pacific Railway Ltd Earnings Call
Good morning, My name is Sylvia and I will be your conference operator today at this time I would like to welcome everyone to Canadian Pacific's third quarter 2021 conference call.
The slides accompanying today's call are available at Www CPR CA.
All lines have been placed on mute to prevent any.
Any background noise. After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question simply press Star then the number one on your telephone keypad and if you would like to withdraw your question. Please press Star then number two.
And I would like to introduce Megan Alberson, AVP Investor Relations and pensions.
To begin the conference.
Thank you Sylvie and good morning, everyone and thanks for joining us today before we begin I want to remind you that this presentation contains forward looking information and that actual results may differ materially.
The risks uncertainties and other factors that could influence actual results are described.
Two in the press release and in the MD&A filed with Canadian and U S regulators.
This presentation also contains non-GAAP measures, which are outlined on slide three.
Today, we're joined by Keith Creel, our President and Chief Executive Officer, Nadeem, <unk>, EVP and Chief Financial Officer.
On slide and John Brooks, EVP, and Chief Marketing officer. The formal remarks today will be followed by Q&A and in the interest of time, we would appreciate if you could limit your questions to what it is now my pleasure to introduce our president and CEO, Mr. Keith Creel.
Alright, Thank you Megan and welcome.
Welcome back so let.
Officer, let me start by thanking the 12000 strong CP family that obviously continue to drive the results that we're presenting today.
As we're all aware the industry is experiencing some pretty unique volume challenges in the quarter and as you've seen in our press release, we've updated our volume guidance to reflect those challenges but in spite.
Let me add that we've reaffirmed our guidance for double digit EPS growth in 2021.
The team remains focused on the elements we can control.
Delivering excellent service for our customers and managing our resources in lockstep with their business, which obviously creates a compelling value for our shareholders.
Results themselves the collective efforts third quarter revenues.
More than $1 9 billion, an increase of 4% year over year and operating ratio of 59.4.
Driving earnings growth of 7% continued improvement in.
In train weight and length as we continue to become more productive at Canadian Pacific All.
Of that records and fuel efficiency in the quarter.
Happy to say that we can improve their fuel efficiency by more than 20% just over the last decade, which makes cp's ESG value proposition, even more compelling for our customers and the times never been more important to the customers or to the environment. So that's something we're certainly.
All time excited about John's going to speak to it another record quarter in domestic intermodal building on four consecutive record years, we certainly had a tremendous amount of success converting share from truck, we're looking to replicate.
That same success on a much larger scale, obviously with our combination with the case, yes.
Certainly we've got capacity in our terminals capacity on our network, we provide a truck like reliable service and especially in today's market, that's extremely compelling and value, creating both for our customers as well as <unk>.
For our shareholders and we're extremely excited what the future holds for Canadian Pacific in particular in combination with the.
Yes from an operational standpoint, a financial standpoint, and an environmental standpoint.
So with that said, let me say a couple of things about the case, yes, obviously, it's been a journey an epic journey.
It's been a great Battle I think one one for the ages, but one we were extremely proud to participate in an extremely.
Casey the outcome.
So speaking to the path forward as we're all aware September 30 at the STB reaffirmed our trust approval.
Certainly we were pleased by that decision we plan on filing a merger application with the STB before the end of this month.
We continue to expect to close the transaction actually.
Actually in the fourth quarter, that's still a very real potential outcome, we're making some progress with Copa C, which is encouraging so assuming that continues to proceed.
Well as it is now.
We've got our comments back from the SEC.
Seven are therefore, we intend to have our shareholder meet.
In December the eight.
We expect to have solid support from our shareholder base.
In support of this historic combination with those things said, we do see a path to get closed in the fourth quarter entered a worst case.
Perhaps that rolls over into the first quarter, but again, we're focused on the forth from there the STB.
We will begin their review process of the merger, which we expect to take 10 to 12 months, obviously, we make commitments.
Part of the application that will honor, but the facts are the combination of extremely unique I know some has spoken to concessions and I'll say this now and happy to take any questions significant concessions are required.
Wired offset losses of competition issues of network overlap issues of predatory pricing or poor service, which this combination uniquely does not representative those concerns.
We've got zero overlap zero shippers loosen option, we're going to create new competition, new service options for our shippers.
Which were all very positive compelling facts that support this combination the combination is get unlocked capacity and create the first U S Mexico Canadian Railroad.
At a time, it's never been needed more.
So there's.
Certainly challenges ahead as we look forward to our base business, we've got a smaller.
Grain crop, we've got some supply chain issues challenges that the balance of the industry are also experiencing but the macro environment is extremely strong the opportunity set for CB Casey is growing.
Which continues to drive and increase our excitement about what lays ahead for our combined entity for our employees for our customers.
And for our shareholders. So with that said I'm going to turn it over to John to bring a bit of color on the markets Nadeem will elaborate a bit on the numbers and then we'll step into some questions.
Alright, Thank you Keith and good morning, everyone. So as Keith said the quarter certainly wasn't without its challenges.
I would maybe characterize it as just flat out frustrating in a few areas, but as Keith said, we remain focused on controlling what we can control.
I believe many of these supply chain issues that certainly we faced and frankly the industry faced are temporary in nature.
Our pipeline of initiatives that I look at remains as strong as it's ever been and frankly overall demand fundamentals that I go down through the commodities and many of our markets still remain favorable.
Now looking specifically at Q3 revenues were up 4% in the quarter Rpms.
<unk> were down 4%.
Fuel and FX combined to be 2% tailwind.
Rice and mix combined to be positive, 6%, who will talk about the pricing environment.
This morning, but it continues to be strong now taking a closer look at our third quarter revenue performance I will speak.
To these results on a currency adjusted basis.
Grain volumes were down 27% in the quarter, where revenues were down 21%.
The challenges in the Canadian grain crop has been well documented with the crop size is expected to be around 50 million metric tons or about 40% lower than last year's record crop.
<unk>.
On the U S side, the crop is definitely looking less challenged although the harvests definitely is smaller we expect high demand and we're seeing high demand given the Canadian green shortfall, and a fairly robust soybean and corn export markets.
Despite the challenging Canadian grain.
Grain crop.
Excited we continued to build out our franchise with our customers expanding to our 8500 foot high efficiency product. We had six elevator upgrades complete in Q3 alone and many more to come in Q4 and into 2022.
On the potash front volumes were down 22.
2% in the quarter. The decrease in volume was a reflection of ongoing port maintenance and upgrades at the Neptune and Portland terminals.
We saw supply chain disruptions due to the wildfires and also with the early closure of mosaic Colons a mine.
Fight that we feed demand fundamental.
<unk> for potash continuing to be strong we see upside as we move into Q4 and into 2022 and beyond and further we are excited about the prospects of renewing our canpotex partnership for the years ahead I can tell you we expect to announce the extension of a long term contract with with Canpotex.
In the very near future.
And to close on the bulk business coal revenues were up 22% while volumes were down 2% as the supply chain rebounded well in August and September following the fires.
Moving on to the merchant side merchandise side of the business the energy chemicals plastics.
Portfolio saw revenues increased 27% to a record Q3, excluding crude ECP volumes were up 10% as we continue to see recovery in strength and growth in our refined products and plastics.
<unk> started shipping in Q3.
And ramped up quickly to more than 15 trains per month.
We are excited about this stable long term viability of this business and the pipeline competitive nature of this new product.
Forest products volumes were down 3% and revenues were up 10%, we saw volume decline sequentially.
Lumber prices fell off the record levels in Q2.
In MMC revenues were up 35% and volumes increased 30% larger.
Largely driven by recovery in the demand for steel and Frac sand.
Steel capacity utilization and prices continue to drive growth in.
Our steel and metals franchise.
Automotive revenues were down 8%, while volumes were up 3% on the quarter, we lapped our globus contract in September and like all the other roads continue to see the impacts from ongoing chip shortage.
Q4 will be choppy on the automotive front as we see this chip shortage.
Continuing and frankly, it's volatile from week to week.
Looking into 2022, though.
Dealer inventories remain low demand continues to be strong and we see good opportunity for the automotive business to about specs in 2022.
Finally on the intermodal side.
Side of the business quarterly volumes were up 4%, where revenue was up 16% another Q3 record.
We have now had four consecutive record quarters in domestic intermodal with our reliable service product and capacity for growth. We continued to perform well in this space anchored by our strong retail franchise.
Franchise.
The two things two things in particular that really excite me on the domestic intermodal front on September <unk>, we opened our Pacific Trans load Express, our new Vancouver, Trans load facility and partnership with Maersk.
Direct port to rail Trans load facility is one of a kind.
In Vancouver, and we will take approximately 100000 truck moves per year off Vancouver roads.
The customer support that's fill that facility has been extremely strong and I can tell you we're already talking about expansion.
Secondly, I'm excited about the sequential growth we've seen in our domestic intermodal with.
Two in Atlantic Canada service.
We have driven a 39% increase in volume through St. John domestic intermodal versus Q2 'twenty one.
On the international front, we performed extremely well in the quarter as we on boarded copco, Double-o CL and the Maersk volume.
Volumes continued to grow.
We continue to see strong demand and we are working closely with our customers to manage the ongoing supply chain congestion.
We expect challenges in the international intermodal space to persist into 2022.
So let me close by saying, while we continued to battle some of these temporary.
Our.
Supply chain issues and challenges and certainly we monitor and work closely around the Canadian grain crop. The CP team is focused on the things, we control and making our own luck in this marketplace.
We remain committed to delivering quality service for our customers while at the same time improving our.
Larry all customer experience.
As I look further out the network combination between CP and Casey's will create a new set of service and route options for customers.
While enhancing competition across North America.
The positive feedback from customers Trans loaders short line partners.
<unk> and bringing these two networks together has been overwhelming and the list of opportunities continue to grow.
With that I'll pass it over to Nadeem, alright, Thanks, John and good morning.
I am proud of the results. This team produced on the quarter, especially given some of the challenges challenges John mentioned, we faced some transitory headwinds.
On certain business segments, and while some of those will persist in the near term, we will manage them in the same way.
Come to expect from this team.
On the quarter adjusted operating ratio was 59, 4%.
120 basis point increase from Q3, 2020, softer volume environment and higher fuel.
Prices put pressure on the operating ratio, partially offset by the strong pricing environment John spoke to.
Looking at the results you will note that we adjusted a total of $98 million in costs related to the Tcs transaction.
$15 million from purchased services and other and $83 million below the line in other expense.
This is largely pertaining to some pre issuance interest rate hedges.
I'll speak to the adjusted results on a currency adjusted basis. This morning.
Taking a closer look at a few items on the expense side comp and benefits expense was up 2% or $6 million versus last year. The primary driver of the increase was additional training and.
And head count along with higher accruals on long term incentives.
Fuel expense increased $65 million or 49%, primarily as a result of higher fuel prices, partially offset by a 2% improvement in fuel efficiency.
Price was down $6 million or 16% as a result of lower price paid per pull equipment.
Despite higher IMS volumes.
Depreciation expense was $203 million, an increase of 6% as a result of a higher asset base.
Purchased services was $288 million adjusted for.
For acquisition costs, an increase of $19 million or 7%.
The main driver of the increase was increased.
Casualty costs in the quarter and incremental spend from the British Columbia wildfires.
Moving below the line as expected other components of net periodic benefit recovery was up $9 million.
<unk> lower discount rates income tax tax expense decreased $20 million or 11%.
<unk>, primarily as a result of tax recoveries related to the Kansas City transaction and a lower effective tax rate.
Rounding out the income statement adjusted diluted EPS grew 7% to 88 in the quarter.
Moving on to the free cash flow to wrap things up regenerated.
<unk> strong cash from operations in the quarter with an 11% increase year to date, we have over $1 2 billion and free cash generated we continue to invest in the railroad and are on track to meet our 155 billion guided capex spend for the year.
We remain disciplined stewards of capital with our industry leading adjusted.
Grow at a 15, 9%.
Our balance sheet and liquidity remained very well positioned with leverage of two four times adjusted net debt to adjusted EBITDA.
Well within our targeted range our share buyback program remains paused, while leverage will increase with the pending <unk> transaction we remain.
Committed to our Triple B, plus credit rating and we will reduce leverage back to our targeted range over approximately 24 months.
So while Q3 has some challenges the network is running well and we remain on track to deliver on our guidance of double digit EPS growth.
A strong team in place and a transformational opportunity.
Front of us so with that I'll turn things back over to Keith Okay. Thanks, Nate Daymond, John I guess just to summarize overall.
Certainly not a shortage of challenges but.
No excuses this team's controlling what we can control we can't make it rain, but we certainly can stay in game shape provide best in class service.
And for all of our cost allow those customers demand is there to actually grow in their marketplace and realize a better outcome and prepare for.
This transformational transaction, that's going to unlock until compelling long term value for our customers for our employees and for our shareholders.
With that said, let's open it up to questions.
Thank you, ladies and gentlemen, if you would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then two.
Previously highlighted please limit your questions to one that will be a brief pause while we can.
<unk> come to the Q&A roster.
And your first question will be from Tom <unk> with UBS. Please go ahead.
Yes.
Yes, good morning.
Keith I wanted to ask you made some comments on the deal.
And the timeframe I wonder how are things going.
<unk> with the discussions with shippers and other railroads has that been something you've spent some time on or does that come later.
And would you say that there is there any anything of interest in those discussions.
In terms of.
Going well or resistance both from the.
Conversations with other railroad team with shippers.
All right great Great question, Tom I can tell you. This obviously, we're not we're not a team that waits for things to come to US. We go to the issues and we've approached that we've worked very progressively so far with <unk>.
Shipping organizations, obviously, we had an opportunity.
Some discussions initially that.
We've rekindled since we've.
<unk> been become re engaged with with the Acs and they are progressing well, obviously, they have concerns but given our facts.
Our completely unlike anything they've experienced in the past and our track record to actually integrate.
To run the railway well.
Well for us.
We're gonna address we're gonna be reasonable we're.
We're having a reasonable discussions and I expect those to come to a good place the same thing with in.
And our partners in the rail industry, obviously, we havent spoken in depth with all railways, but we have started some very in depth discussion.
<unk> with.
With a couple of.
Very larger railways that that the combined entity would have quite a touch point with when it comes to interchanging and being a part of their moves and again those are very progressive encouraging discussions and I think as long as we continue and we will to take a reasonable approach and that's met with.
Reasonable expectations from customers and reasonable expectations from other railways into our supply chain partners, we will get to get outcomes. Because again. These facts are so compelling.
That.
It's unlike anything they've experienced in the past where those same concerns just simply do not exist the facts matter, we're going to speak to.
The facts, we will stay humble will stay reasonable and again, we'll get to a good place and we're going to create something that's going to be great for this industry great for the customers great for competition and in the in the U S rail industry overall will benefit from this not be threatened by this.
Okay.
Okay great.
Thank you.
Next question.
We will be from Walter <unk> at RBC capital. Please go ahead.
Good morning.
Right.
So I know.
Looking at the volume changes <unk> had some pretty significant moves on on particular Canadian grain.
Canadian grain.
Being roughly 15%, 16% of your revenue and down 25% this year.
Looking out to next year and some of the share gain opportunities that you've had.
I guess it is a question for John do you think that those have been enough.
Access on share gain.
The economy reopening.
<unk> and so forth.
<unk> offset the decline in grain.
Such that you can achieve volume growth for next year do you think that in the in the realm of possibility there.
Yes, let me I'll take the high level and I'll, let John get into the color absolutely Walter we definitely see a path.
The positive our team.
<unk> growth, we see a path to margin improvement. So in spite of those headwinds and when you think about that you quantify the quantum challenge.
That grain represents in this book of business to overcome that and still produce positive volume growth positive <unk> growth and margin improvement that tells you the compelling value of the work that John and.
<unk> actually been able to convert in the marketplace with our service and our capacity. So I'll, let John provide a bit of color to those strengths that quite frankly are being muted by this.
This challenging grain story that once that dissipates and transitions out it's extremely extremely exciting.
Yeah, Walter So as Keith said.
We do see a path in 2022 to positive volumes, despite the grain headwinds and and you know what we're still sort of educating yourself on what this all means as much as we're frustrated we've had a good ride in Canadian grain over the years and it's going to open up new markets and new opportunities for our U.
Screen franchise, and frankly that may provide more of an up offset to some of the challenges in Canada that then we fully realize at this point.
Beyond that.
And a lot of good work not only in terms of market share gains.
But just creating solutions.
For our customers, adding new customers that that I do think will provide us that tailwind we've got in our pipeline starting up next year, we've got the Costco double O C.
The whole LCL business that frankly is about 20%.
Stronger volume than we anticipated.
That will get a full year on the mirrors trans load as I said, we're already trying to figure out how we can squeeze more out of that facility and there could be an expansion in the future. We've there is a significant.
<unk> opportunity.
In the crush Canadian grain crush business.
As more and more of those oils want to move into the renewable fuels.
The St John C M Q opportunity.
We've already we've already doubled that franchise business from when we acquired the <unk>.
And there's still a fair amount of meat on that bone. So it's D are huge.
And so I can go down the list.
Despite the challenges in and then the Canadian grain headwinds just about all the other commodity areas I see a fair amount of upside and opportunity.
Okay, great exciting opportunities looking forward for the updates that thanks, thanks, everyone.
Thank you Walter.
Ramping question will be from Asahi Shimbun.
Please go ahead.
Saudi please on mute your line.
Yes, good morning, a policy that was muted so.
Next on the pricing side so.
Can you help us understand a little bit.
Pure price momentum that you've experienced maybe in the last couple of quarters.
The opportunity to.
To touch.
The business, maybe in 2022 from a price.
Our net perspective.
Patty.
You don't really.
The team I.
I guess number one pricing is always an initiative at <unk>. Our team is disciplined we sell to the value of our service and that's how we price.
We've long talked about the.
Pricing environment in good times being that 4% plus.
And it may be more challenging times slightly inflation plus on the lower end.
We're seeing we're seeing pricing.
Has accelerated through the year.
We've got about 25% of our.
The price roughly renewing here in in Q4, and again I expect to be on the upper end of that range as I look to 2022.
I don't know about you, but I don't see a lot changing.
At least right now in terms of.
Truck market.
Book in terms of capacity sort.
Sort of.
I think ongoing discipline growing with with the other rail carriers in terms of how they're valuing their service.
I'm looking to 2022 to be the.
<unk> may be very similar to what we've seen in 'twenty one.
Hello.
Did that answer your question.
Thank you.
Thank you next.
Next question will be from Chris Wetherbee at Citi. Please go ahead.
Hey, Thanks, good morning, guys.
Just wondering Keith if you could talk a little bit about some of the stuff that we're seeing.
KSU.
In the last quarter, or so, particularly as it pertains to some of the Mexican business that theyre running at a teacher strike, which I think has been sort of on and off for the last year or so and maybe some.
Some slowdown in the refined products, which might be.
Yeah to some regulation dynamics going on there.
Maybe not necessarily so deep into the.
Seeing that it was sort of bigger picture, how do you still sort of view the opportunity for the combined company in Mexico can you maybe sort of put some thoughts around what you see now relative to what you thought during the whole diligence process, leading up to the initial bid has anything changed or is it still as good an opportunity in your mind.
Yes, Chris we can't deny there's some some some noise.
These are transitory challenges they are dealing with to your point on the refined fuels.
Which we see is working itself out the issue with the teacher strike obviously there is.
There is some politics, there that we can control ultimately that port that Sarah Lazarus once they get that resolved and I believe they will.
<unk> that is a very compelling opportunity with with reliable service to displace.
Cargo that has challenge is getting into the interiors of the U S coming on a U S West Coast Port.
So certainly maybe not now, but that's a future opportunity for us that we certainly intend to convert but in the meantime.
All the other positives in the discussions we're having Chris and if you think about and we've said this but I mean, it's undeniable if it made sense six months ago with all the pain and suffering that offshoring has caused.
North American.
Customers.
Even more compelling today, so the discussions that we're having.
I will tell you I had one last weekend in Toronto with the.
With a major Canadian retailer they are to the possible to be able to take more control of their supply chain to be able to source it.
Not be exposed to.
Some of these things we can't control that are happening in on the west coast in there so.
For an issues in moving parts in that to be able to stabilize our supply chain.
<unk> sure or near source.
The components that allow you to compete in business since exceeded business. It's.
It's an undeniable compelling discussion.
So those issues that theyre dealing with the case, yes.
They've done a phenomenal job and continue to do so navigating those challenges.
It's noise in the opportunity chain, but it is not noise that concerns me at all and it certainly.
Muted.
The other opportunities they continue to develop themselves that present themselves. So we were just as bullish if not more than we were when we stepped.
They do this.
We're going to take.
We're going to take those lemons at the world and the life in the market given us and make eliminate with it.
Got it that's helpful color. Thank you.
Thank you Chris.
Next question will be from David Vernon of Bernstein. Please go ahead.
Hey, good morning, guys. Thanks for taking the.
Theft, and Nadeem I wanted to ask you about.
The sort of transition here from an accounting standpoint.
What should we be thinking about in terms of the percentage of of.
Casey as net income to be sort of rolling up into the other line while held in trust and then as you think about.
Sort of doing the merger accounting and have you started to put any thought.
The time to sort of asset write ups or marking up the value of the asset.
In a way similar to what.
Berkshire had done when they when they bought Burlington.
Yes, so I'll take your second question first so yes, we're working through the PPA process.
A lot of work being done in.
Internally right now.
Got it.
So.
That's ongoing.
Certainly.
Given the value that we paid for it.
Lots of work as to what that asset right it will be and you'll see that through our depreciation.
We will update that in Q1.
Now.
As far as the percentage net income.
While in trust.
We'll have to get back to you exactly what that looks like I don't have that necessarily in front of me. So.
Again when we.
When we consolidate them.
There will be an equity pickup.
And Jamie.
Below the line.
Sure.
Initially and then a year from now they'll be fully consolidated once we get full approval.
So that's how the accounting will work, but but as far as what that equity pickup will look like.
I don't have that for you right now David.
Thank you.
Thanks, Dave.
Next question will be from Ken <unk> of Bank of America. Please go ahead.
Good morning.
The restaurant going through the process.
Net.
Some thoughts on your margin outlook, you were very early to say confidence in subsea.
60 through the year and achieve that given what Jon was just talking about in terms of pure pricing maybe your initial thoughts on where you had into 'twenty two.
In case, you just kind of looking at your your thoughts on the network. Thanks guys.
Sure so well.
We're still confident we're going to have margin improvement.
Okay. This year. So I think it gives you a good sense of whats left in Q4.
And keep in mind of course that where all the rails, we're all facing the impact of higher fuel prices. So.
Certainly, it's not as big a margin improvement as we had anticipated the beginning.
You are given.
Given some of that.
His around fuel surcharge, but.
I think it's pretty strong performance to still get margin improvement.
2022.
As John mentioned, Keith mentioned, we see the Paas.
<unk> towards positive rpms.
And assuming.
22 looks similar to this year in terms of the macro.
So fuel and FX et cetera.
I think we still have.
Good line of sight for increased improvement in the operating ratio. So margin improvements in 2022 is our view at this at this point and we.
Very confident we'll be able to achieve that.
Any scale or target levels on that is another 100 basis points just given the pricing is there a natural flow through her.
You'll have to wait three months for that answer there okay.
Okay.
Thank you.
Right.
Your next question will be from Brandon <unk> of Barclays. Please go ahead.
Hey, good morning, everyone and thanks for taking my question.
Johnny that we've heard and seen so much about congestion on the U S. West Coast ports, especially can you talk about how maybe you guys are approaching this situation differently and how the situation is in Vancouver.
Yeah, So Bryan maybe a couple of thoughts on that is just.
Just kind of going back to Keith lemons to eliminate.
A year ago, we were one four port railroad essentially Vancouver, we've added.
Through the CMO.
Cooper East Coast Atlantic Coast access with the acquisition, we add we add.
Golf and the U S and then too.
Ports on each coast of Mexico, and I think given what we are seeing diversity and having that port diversity will matter and I can tell you those discussions.
<unk> with our customers our robust on that front they like the ability now that Canadian Pacific will have well today, but also in the future to diversify their books I can tell you.
And I was talking to my International team. This morning early.
We.
<unk> got three extra loaders coming in on Q4. So that's that's the team working with our shippers to find ways to get them to move out of the.
Congestion in the La long Beach area.
And and utilize the capacity we have at Canadian ports.
I can tell you we've got.
Two or three opportunities with smaller chartered vessels.
Which we would look to to also bring into either east or west coast ports.
To try to not only alleviate the congestion but drive some revenue in that capacity we have in those those.
Yes.
I think the bottom line is going to be hard at least it's hard to quickly decouple.
For the steamship lines.
They are facing but we are optimistic that this will drive a longer term change and with the ability of our new network to touch all of these.
Port, we think presents a tremendous opportunity for the future.
Thanks, Ron.
Yep.
Okay.
Yeah.
Sylvia do you want to progress to the next question.
Yes. Please.
Please go ahead, Justin Youre next.
Thanks, and good morning.
As you've done more diligence.
On the synergy opportunity for Acs I was curious if you have any updated thoughts on the cadence of those synergies over the three year period, and as we think about preparing for integration and those synergies are there any incremental operating costs that we should be mindful of as we think about next.
<unk> alright.
Incremental margins should fall.
Okay.
Well I'll touch to the.
So the revenue synergy piece.
As Keith.
Fifth Keith said there.
Okay.
<unk> year.
Justin I think your line.
Please standby.
Sylvie.
Please standby it appears that Chris has disconnected.
One moment, while we try to reconnect.
We're okay without Chris let's get back to our callers.
Certainly Sir please continue.
Okay, Justin sorry about that.
So so look we've done a lot of work and we're actively meeting with customers and in quantifying the timing of these opportunities as we speak I can tell you. We've got the team <unk> team coming together next week to go through exactly what you just described.
The good news is I'd say a lot of the.
Initial revenue synergies.
I think our mer and becoming more front end loaded there's a lot of opportunity there.
You know as we as we work with customers to try to line up their timing.
For these opportunities.
At the end at the end of the day, it will probably spread.
The pretty equally through the three years as you think about the top line $1 billion in revenue and then we'll obviously work with with the Navy and the operating team to make sure that we have the capital and the products in place to to be able to hit those synergies running yeah. Let me I'll provide a little color on.
On the cost side and on the capital side I've been very involved in this and I'll continue to be.
I can tell you now that Casey asked the team John Warren is operating team, they're doing a better job every day of running the railway is as they get further into their <unk>.
Integration of the true P. S. Our railway so we would expect.
That their costs will continue to improve their service will continue to improve.
Which increases capacity at the same time and in lockstep Mark in our team we're working closely to make sure the joint agency as well as in our network that from.
From a partner standpoint from an interline standpoint any.
<unk> you can do to help them become more fluid and vice versa, we're going to take advantage of that and obviously through our planning for our operating plan, which is part of the merger application.
We've uncovered several opportunities to be able to do that so we'll do that now we've already started to implement some of those things and it serves us and.
Puts us in a good play.
Place so as we integrate the two companies once we get STB approval.
The capital spending obviously, we've got a plan over a three year period that will be in lockstep with the business its very prescriptive.
Its plan for its Theres nothing that's surprising in it at all.
But what it will allow in a very short period is a C. P. Like in a C. P case, it Casey pro forma environment operating experience.
With similar margins similar train links.
Once we get into that three year period, and a lot of capacity to grow with our customers and.
Reliable.
<unk> compelling value proposition. So so we're excited about it.
We're not resting on our laurels, we're actively engaged in that process and we will continue to be as we go through the STB.
Review process, and then pro forma as we execute and.
Convert and exceed those synergies.
Next question will be from corn at Scotia Bank. Please go ahead.
Thank you operator, and good morning, everyone. So John just wanted to kind of dig into your comment.
Had about.
How are you are kind of using supply chain.
Congestion.
And core and how the St Johns and <unk> they have increased their business.
Can you speak to.
Are you seeing.
Any discussion or having any discussions or seeing any interest from shippers a steam ship lines and <unk>.
Incremental sort of.
West to east or west to south shift and shipping lanes due to supply chain constraints.
Haps or maybe other opportunities.
Yeah.
We are.
I think initially.
Many of the steamship lines were apprehensive.
To make our attempt to make massive changes in terms of their flows hoping that this would be.
Fairly short term in nature now that this is continued on and I think most expect will will bleed into 2022, I would say those discussions are accelerating.
As I've said we've.
We've worked with the steamship lines to maybe reconfigure some of these boats in terms of how they they load.
Or two in some cases, where typically a vessel would come into Vancouver, and then dropped down to Seattle Tacoma, and then maybe head back overseas.
What.
<unk> two to maybe eliminate that Seattle, Carl almost stopped.
Because it might take 20% to 30 days out of out of the cycle of that of that vessel and make a quicker turn.
So.
Looking at all those options.
What are they on as I said, we're starting to see some I would say better momentum in terms of those opportunities we're going to see some of that in Q4, and I think that accelerates as you move into 2022 of these issues persist.
Thank you.
Your next question will be from Jason Seidl.
Please go ahead.
Jason Please on mute your line.
Sorry about that guys.
Wanted to talk a little bit about your domestic intermodal in the long.
Term opportunities of keeping some of the strength that you've taken off the highway because you know clearly right.
We're probably in one of the most congested truck markets than I've ever seen what percentage of the business that you've taken lets say over the last year year and a half do you think you are going to be able to keep on the railroad.
Jason Here's the interesting thing about the domestic intermodal front I think we believe that the opportunity to convert.
Right now is traffic.
Maybe not directly that is directly running on track, but were actually growing the rail wallet share with our base retail customers has existed we've got the shortest routes. We've got the best service, we control the capacity in our terminals.
That allows for quick turn of trucks and I can tell you we've since we've implemented our demand management program.
That we spoke extensively about back at our at our Investor Day.
Loud our customers to really help manage their supply chains and when they.
<unk>, so if we get the opportunity to potentially pay a cheaper rate or a premium rate depending on how they want to the flow of their traffic into their distribution centers and thats allowed us to really smooth out our train length.
But I think it's also created a product that makes this this business.
And free inverted sticky long term.
So you think it's more of a supply chain shift from your customers.
Yeah, Yeah and again.
As much as there is a nice pop we've seen relative to maybe some incremental loads given this environment. This isn't an overnight thing.
We've been building in the last two three years and I think we're we're experiencing and enjoying sort of the fruits of our labor and again I do believe it it stays sticky to CP and we continue to enjoy that freight yes, let me, Jason I'll add a little bit of color to that just some recent discussions ive had with.
This is some of our key.
Retailers, especially in the Canadian space, they've enjoyed because of our service as part of their formula.
It's a partnership and that's the way we've approached this.
And you can say the words help your customer growth. So you can grow with them, but when you are a key enabler and they're meaningful growth and they are taking market.
From their competitors and you become part of that recipe that gets baked in so as long as you provide that reliable service.
That value proposition cusp.
Customers don't shy away from paying a fair rate increase they don't treat you like a commodity they treat you like a partner because again you are part of that formula and especially.
Not sure. If this is unique to our network in Canada, given the long lengths of haul given the way the distribution centers are set up and all of these key metropolis. This key urban centers, we have land capacities that we've used as part of that formula as well as terminal capacity and you match that up with our superior service running.
<unk> reliably from from node to node from town to town from distribution or distribution Center again, you become baked in and part of the inner goal recipe for their success. That's the magic to this thing. So again, it's not transitory it's fundamental it's foundational it's the way we have.
Running the book of business and it's the way we will continue to grow the book of business.
Oh, that's great color and I appreciate the time as always gentlemen.
Thank you.
Next question will be from Scott Group Wolfe Research. Please go ahead Scott.
Hey, Thanks, good morning, So Keith.
We have built maybe any conversations you've had with the STB.
Regarding the expedited timeline for the merger and then can you just remind us while while you own Tcs and trust what are the kinds of things you're allowed to do with either customers or operations or interchanges. Just so you can sort of hit the ground.
Post merger.
Yes, So let me start with the second question first.
You can do when you are in trust US is run the company independently so K CSS to run <unk> on CP.
Likely could before.
The combination or.
Round marriage, we can discuss interline opportunities and we'll continue to do that we have done that obviously.
If you are one of those customers that participate in an interline move.
And Youre looking to diversify your book of business Youre looking ahead youre looking at.
Do I want a seat at the table.
You can have those kind of discussions.
As far as planning, but as far as exercising control you can't as far as doing anything unnatural you can't and we will not the last thing we're going to do it.
<unk> put ourselves in a position, where we're going to violate indoor draw the IR or irritate the STB the.
<unk> B is the regulator, they're going to regulate.
And we're not going to put ourselves in a position to give them any reason or justification to take exception.
What we're doing so we're being very cognizant of that.
One to the point about discussions with the STB on timing.
<unk> not had any updates we filed within our application.
We filed what we would like.
Request as far as the timeline they have not commented yet it could be and we expect that once we file that merger application at the end of this month, perhaps we'll get comments back on the timing at that point, but at this point today.
I've asked but they have not.
<unk>.
And we expect to hear something.
Hopefully soon after we filed that merger application.
Just so I understand so if a customer's not using interline service today. They can start using its still obviously has to be underlying but they can start using interline service next year.
Supply absolutely yeah, there's nothing that stops the customer from from giving us more business.
It's just we can't act as if we're one company, obviously K CSS to negotiate there their piece of the business as they see best fit for their railway and see people do the same thing.
Okay. Thank.
Yeah.
Thank you Scott.
Your next question is from Brian Awesome Bank at J P. Morgan. Please go ahead Brian.
Hey, good morning, Thanks for taking the question.
John wanted to come back to you on the coal market, maybe some of the things that could offset the Canadian grain.
For next year. So this year has been really strong for cole despite some supply.
Blockchain challenges in the market share shifts.
So maybe you can talk about what's driving that and just given where prices are and expect it to be.
For the foreseeable future.
Do you think youre going to see some mines come back to life as their volume upside as you look into the fourth quarter into 'twenty, two and again to possibly offset some of those.
Canadian Green challenges.
Going back to that list you are you are running down earlier. Thank you.
Yeah. So.
Beyond Tech, which should as I said rebounded quickly coming out of the fires, they're going to turn in.
Pretty strong grow.
K every year I think over 26 million metric tons.
You described the met pricing environment continues to be strong and I think teck is in as we work closely with them on and plan for 2022, we expect a fair amount of growth opportunity right there.
We initially modeled.
More of the business.
Running to Neptune, we see opportunity with <unk>.
We're sure to play a role in this as you as you look at 2022.
In addition to that we've seen a good bump in our <unk>.
<unk> Europe.
Coal volumes now whether or not that is sustainable we'll we'll see.
No.
We don't have any imminent mines that are that are opening up maybe dissimilar to our competitor I know they talked about that as an opportunity to offset next year.
I see more is it being this organic growth with tech in the U S side, we have worked on a number of other facilities that could be the Riverdale mine.
Others that could be longer term opportunities those discussions are ongoing and we will have to see how those.
<unk> play out.
The biggest thing that gives me comfort.
As I look at 2022 again is all of the self help things that we've described.
Is really presenting that opportunity to offset.
Frankly, if you can just give you. An example, if I look at Q3.
If you if you just were to normalize grain and potash.
Our Tms were up over 7%.
And Thats a lot of those other business units, where we've created these opportunities with our customers and and again as I work with my team that is our.
Our focus.
Running into 2022, how do we take all of these other opportunities that that are in the pipeline get them delivered and get them ramped up as fast as possible to offset that green headwind.
Alright, great. Thanks, John.
Alright.
Your next question will be from Steve Hansen at Raymond James. Please go ahead.
Yes. Good morning, guys. Thanks for the time, John I am just going to dovetail on your last comment there on the potash front.
We're currently pushing decade high pricing here I think we've got a seven handle now in the western hemisphere, even 800 in Brazil.
Yet to be your prepared remarks, there's been a number of issues both on the production front and on the terminal side that have held back volumes. This year. So can.
Can you just perhaps give us a little bit of color on how you see the potash environment shaking up next year for you guys and whether any of those impediments that have been holding us back will allow volumes to flow more aggressively.
Yeah.
I think Steve that this is a good news story.
<unk> actually meeting with the Canpotex team here just in the last few days and talking about their projections.
Youre not going to speak for them, but they have a pretty strong growth trajectory.
Part of the challenges we saw were frankly.
Their upgrades at Portland, we fee as a diversification play to Neptune.
Now the ability to essentially land three trains in the Portland.
A big Big difference for Canpotex.
So.
Whether it's canpotex and.
And their growth expectations, I think world fundamentals around grain and feed and fuel and the need for those nutrients all remain.
Positive.
Key plus as I can tell you.
Similarly has strong growth projections not.
Not only.
In terms of their ability to up their their export capabilities, but also there are domestic opportunities.
So I do see potash.
Steve as a good growth story for us in 2022, and also into 2023 and beyond.
Appreciate the color. Thanks.
Thank you.
Yeah.
Next question is from <unk> at the South Bank capital markets. Please go ahead.
Yes, good morning, everyone.
Could you.
You talk about the.
The opportunities to either leverage or accelerate the excess land deployment in light of the overall supply chain issues.
Our land opportunities mature.
Yes, exactly the excess excess acres.
Across your network, whether it be Arizona fortunate to accelerate this.
To leverage this deployment in light of the overall supply chain issues, we see these days.
So I think there definitely is I think Keith spoke to it earlier as we look at the development of a.
Our new international product that includes in the future with the kps the Gulf in two ports in Mexico.
We see the introduction of.
If a domestic product that runs north south through through the U S. As we see.
The new found sort of opportunity.
In the hall with the automakers.
I think all of those bode well in terms of our land capacity not only to create solutions.
New automotive compound, but also it gives us the landing spot.
And Thats something.
To that I think is different than a lot of the other carriers in the industry. We not only have the over the road capacity to attack. This volume, but we have the landing spot at our inland terminal due to this land capacity to improve our footprint. So.
I think it's a.
It's a differentiator as you think about our.
Something story of the last few years and our story looking forward yes.
Yes, I think the other very been while the other very exciting point that can't be lost with the credibility we've created with our ability to actually execute this land strategy matching it up to create additional value value combination and capacity for our customers.
The success, we've had scaled that up when you go to the case, yes. When we combine these two railroads they have very strategic land assets as well that are continuing to contiguous to their property.
Don't expect that we're not thinking and planning.
To take what we've done at CP at a much larger scale as part of that.
Combined supply chain.
Integration success story, that's going to be created with CP Casey.
That's great color thanks for the time.
Thank you Ben.
Thank you.
We are now out of time I will turn the call back over to Mr. Keith Creel. Please go ahead, Sir alright.
Alright, well thank.
<unk> for your time. This morning I can tell you. This team we remain focused or we're going to get to this fourth quarter will close the year strong we're going to have margin improvement.
We're going to have some.
Some artyem growth and we're going to set ourselves up well for 2022 to replicate the same and at the same time prepared to hit the.
Again as we integrate these two railroads with a successful review of the STB when we come out as a pro forma company.
This team remains.
Humble hungry disciplined and driven.
Focused on creating compelling long term value in a way that was never possible without.
With this <unk>.
The ground, which allows for these two companies as we go forward into the future in a unique way unique to this industry that uniquely supports north American commerce in the U S rail network and competition.
So with that said, we look forward to speaking to everyone in future events and reporting our results next quarter.
Combination of care.
Thank you, Sir ladies and gentlemen. This concludes today's conference you may now disconnect your lines.
[music].