Q4 2021 Canadian Pacific Railway Ltd Earnings Call
Good afternoon. 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 fourth quarter 2021 conference call.
Slides accompanying today's call are available at Www Dot C. P. R C H.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We'd 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 Alban Vice President capital markets to begin the conference.
Thank you Sylvie good afternoon, everyone and thank you for joining us today before we begin I want to remind you that this presentation contains forward looking information and actual results may differ materially the risks uncertainties and other factors that could influence actual results are described on slide two in the press release and then.
The MD&A filed with Canadian and U S. Regulators. This presentation also contains non-GAAP measures, which are outlined on slide three with me here today is Keith Creel, our president and Chief Executive Officer, Nadeem, <unk> Executive Vice President and Chief Financial Officer, and John Brooks Executive Vice.
<unk> and Chief marketing Officer.
Also attending our call today on behalf of Kansas City, Southern our CEO , Pat Ottens, Myer, and CFO , Mike Upchurch, who will be happy to answer questions regarding case yet.
As C. P. Investors are aware Casey S is now beneficially owned by C. P through a voting trust pending control approval by the STB.
During this trust period and prior to the STB approving Cp's controller K C. S. C P and K C. S operate independently and case, yes. Its business is managed by its own officers overseeing.
Overseen by its own board of directors during this tough period and prior to the STB, making a determination regarding control C. P and K C. S operate as two independent arm's length companies.
As a result, only Casey S management is truly in a position to answer investor questions regarding their performance and results I would highlight the case, yes, it's posted an information package to their website.
And should you have any questions about tcs's performance that aren't addressed on today's call. Please feel free to reach out to Mike Ashley and the Casey's team.
We will start the call with some formal remarks and follow that up with a question and answer period and the interest of time and to allow as many participants as possible. We would appreciate if you could limit your questions to one it is now my pleasure to introduce our president and CEO , Mr. Keith Creel.
Great. Thank you Megan let me.
Let me welcome launching pad to the call today as well.
And then proceed to think our CP family.
Just a lot of railroading is an outdoor sport, but I can tell you this quarter had some exceptionally challenging conditions that the team's commitment.
Grit and determination, certainly which tested but to overcome and produced this resolved under those truly incredible conditions that I think deserves a special thanks yeah.
The catastrophic flooding in British Columbia, which we're all very aware of that occurred in November . They took a took a deep breath from what I would call was a miraculous effort to get the railroad open again.
These days the sale brought into 40 degree temperatures again, as we close the year out which carried into.
January so again.
Outdoor sport, yes winter, yes, we know them, but I'll tell you this was an exceptional.
Given the challenges that they face and thank you for that and thank you for your commitment your sacrifice.
So the results themselves of quarter, we delivered fourth quarter revenues of $2 billion.
Operating ratio of 57.5, and adjusted EPS of <unk> 95 for the full year. Our total revenues were up 4% the operating ratio.
57, six which is 50 basis points increase over last year's record of war.
Adjusted EPS of $3 76 represents.
Revenue growth of 7% versus last year.
As I said the CP family finished the year with a strong operating performance in spite of the challenges we face to think that we were able to drive productivity improvements and still increase train lengths and lag three.
And 3%, respectively again is an outstanding.
Fuel efficiency as well in spite of those challenges improving about 1% and outstanding result in all three of these metrics were new record lows for the company on a safety front something we're extremely proud our personal lenses were down 17% year over year to a new all time CP low this marks the sixth consecutive year.
And the improvements on the personal lines every front and it's a testament to the team's commitment and that's all 12000 employees.
To coming home safely every day.
That said this is an area, where we don't rash safety is a journey I would say that often you never arrive.
While we're certainly proud of the progress that we've made on the injury front, we did see a bit of step up in train accidents from our all time record low of last year, but that said again for the 16th consecutive year. We're proud that our commitment to people process and technology allows us to enjoy the best safety record in the industry.
We know there's more to do with that said, we're going to continue to leverage technology and this strikes safety culture that we have this company to drop further improvements in this area.
Focusing on the sustainability front. This is another area that we continue to make significant progress we're proud to be named the highest marine freight transportation company on the corporate Knights Global 100 index as well as named for the second consecutive year to the Dow Jones sustainability North American Index.
On the hydrogen front, which is all becoming more topical as the days progress we continue to demonstrate our leadership in this space commitment to a more sustainable future, they're a hydrogen locomotive project, where the additional grant funding that we receive from the emissions reduction Alberta, we've been able to expand the scope of the three locomotives in two fueling stations as we enter into <unk>.
22, we look forward to moving from the lab setting into the next phase of switching enrolled trials and I am very happy to say that our hydrogen locomotive in the fourth quarter move from concept to reality it actually moved in its own volition under its own power. So it's not a concept it's.
It's not spin, it's fact, and it's going to change in a very meaningful way the emissions footprint of freight locomotives in this industry.
On the transaction itself. That's another area again in the fourth quarter very excited they hit a milestone with our C. PKC journey.
Closing KC.
Acs into trust on December 14th the regulatory review process is well underway.
No doubt many of you have likely seeing some of the early headlines related this process, we're going to respect the regulatory process, we're going to work with the other rails and the shifting groups to find reasonable solutions to address the concerns are reasonable concerns that might arise.
We're extremely excited too about our ability to reach an agreement with Amtrak demonstrating our commitment to passenger service not.
Not only on the CP network, but most specifically too.
The Baton Rouge, New Orleans.
Network on the case, yes railroad.
Customers are enthusiastic about the opportunity for the seamless sufficient reliable single line rail service across the U S, Mexico, and Canada, John will elaborate I'm sure. We can address it in Q&A, but our we have all been intimately involved getting in front of our customers. We made over 90 customer contacts talking about the art of the possible.
Talking about what this new transnational railroad.
Assuming it's approved or when it's approved by the STB and we will be able to go to work, creating and reaching new markets and service that quite frankly has never been possible and I believe will only be.
Forever is a long time, but I think the single one and only transnational railroad to exist in the North American continent. So with that let me, let me hand, it over to John to bring a bit more color on the markets and then Nadim will elaborate on the numbers and we'll save the balance of the time for Q&A.
Alright, well, thank you Keith and good afternoon, everyone. So as Keith spoke about the fourth quarter would certainly that that other reminder, that this is an outdoor sport are.
We knew this quarter was going to be challenging certainly given that the grain comps, but the the beefy outage certainly a pride even more pressure to our customers and into our volumes. My team did as they always do we stayed super close to our customers that our operating team and they worked hard to find solutions.
Across our marketplace.
As our western part of our network continued to recover through the quarter.
Well Q4 performance certainly was challenging aldi in 2021 full year.
With a record for our freight revenue and our total revenue now looking specifically at Q4 revenues were up 1% in the quarter. Despite an 11% decline in our T M fuel and FX combined to be a 4% tailwind and price and mix combined to be positive, 8% as you've all heard.
Over the past few weeks from many in the transport industry the pricing environment continues to be very strong.
Now taking a closer look at our fourth quarter revenue performance I will speak to the results on a currency adjusted basis.
<unk> volumes were down 21% in the quarter, while revenues were down 12% as expected the 40% reduction in the Canadian crop is driving this decline in volumes.
The good news is we've taken the decline in the Canadian grain crop and created an opportunity we had an all time record quarter and year for our U S grain franchise with 30% year over year, our T M growth.
As an example, the team worked extremely hard with our shippers and receivers to create a new supply chain to offset some of the challenges in Canada by moving U S corn into Canadian cattle feedlot to supplement the sort of shortage of domestic feed.
We expect the challenges in Canadian grain to persist until we get the new crop in Q3, we will start to get some better visibility into the potential of the 2022 crop in the spring, but we are certainly happy to see snow on the ground across the prairies, providing much needed moisture.
Now on the potash front volumes were down 4% on the quarter, where revenues were up 14%.
And volume reflects the BC flood outage, but we worked closely with canpotex to minimize the volume lost by moving more trains to Portland.
As you would've seen in December we announced the signing of our new long term contract with Canpotex. We are proud to extend this partnership and we expect to see high single digit volume growth in 2022, if canpotex continues to see strong demand and its global markets.
And as we close out the bulk business coal revenues were down 14%, while volumes were down 27% as the supply chain was challenged by the floods, resulting in reduced volumes from the mines.
And more trains routing north to Ridley.
Moving on to merchandise.
The energy chemicals plastics portfolio saw revenues increased 15% on slightly negative volumes.
We had a record full year revenue performance in ECP, despite flat volumes and crude.
I'm excited to see two new growth opportunities in ECP with independent energy beginning to produce ultra low sulfur diesel.
And inter pipeline commissioning their new plastics facility in the Alberta Heartland.
Both of these new customers are expected to start rail operations in Q2, and <unk> is proud to be their per preferred rail partner.
Now full year, we moved about 60000 carloads of crude.
In 2022, we expect that run rate to slightly declined in the last of our contract liquidated damages to roll off through the year.
The D. R U unit at Hardesty, Alberta has successfully ramped up or we're at a run rate of 50000 barrels per day that we expected as phase one of this initiative.
As a reminder, the <unk> process produces a non hazardous grew brick product that C. P exclusively surfaces from Hardesty and this movement goes to Kansas City for interchange to the case, yes.
In forest products volumes were flat, while revenues were up 10%. It was a record Q4 in forest products and the team continues to deliver strong price performance.
In MMC revenues were up 28% and volumes decreased increased 20% largely driven by our frac sand business our steel business.
And in an almost double digit growth in our trans load business our.
Our service product is winning in both unit train and single Carload business.
And these manifest markets.
Automotive revenues were down 18%, while volumes were down 19% on the quarter, the chip shortage and Covid related facility shutdowns continue to challenge our Oems.
Despite these latest disruptions related to the omicron variant the 2022 outlook is looking better, particularly as we move into the second half of the year.
We were excited last week to see our first Chevy Silverado vehicles load under rail at Gms Oshawa plant feed.
C. P M. G M. A partnered on this new business for the distribution of these vehicles.
Now finally on our intermodal side of our business quarterly volumes were down 5% and revenue was up 9%.
We have now had five consecutive record quarters for our domestic intermodal franchise, even with the significant disruptions in BC.
The new Pacific Trans load expense facility, we opened in Vancouver, with Maersk is offering our domestic intermodal customers new distribution solutions, while enabling merits to spin their containers back faster to overseas markets.
Our trans load solution will take thousands of trucks off the road the Vancouver, while at the same time, delivering new revenue growth in 2022 to our franchise.
We are also very proud of a new multi year contract with Canadian tire.
Our long standing partnership with Canadian tire is growing stronger and we look forward to continued collaboration with their team to deliver supply chain solutions across Canada.
And I'll finally, our Internet international franchise supply chain challenges in the BC outage negatively impacted our volumes in the quarter, but I can tell you. The team is working hard with our port partners and customers to regain fluidity we.
We see strong pent up import demand and anticipate ongoing recovery as we move through 2022.
So let me close by saying you know, we're looking as I see it at record demand levels across many of our lines of business and see opportunities to overcome the Canadian grain headwind ahead of us.
As always my team is laser focused on pricing to the value of our servicing capacity.
And we are working closely with our customers to help them win in their marketplace.
As Keith Kimmel, Keith referenced we met with the almost close to 100 customers in Q4.
To educate them on our new routes and the competitive alternatives that the C. P. Casey's combined network. Once we're approved by the F. T. B will create I can tell you the opportunity list is growing longer and the customer feedback remains extremely positive.
So with that I'll, I'll stop and turn it over to the knee.
Thanks, John and good afternoon.
2021 was a year of challenges that highlighted the team's resiliency as we look to 2022, we're excited about the opportunity ahead of us, but it's not without some noise.
You'll notice that we did not provide formal guidance in our press release with so many moving pieces. We think it would create false precision to provide guidance. If there are more variables unusual that we don't control.
For example on the case, yes front, we do not have control of their operations and did not create their 2020 to plan. So it will not be providing guidance as to their expected performance and its impact on our earnings.
With the timing and the conclusion of the regulatory process in the hands of the STB.
As well as with pharma Crown and other macro factors presenting some near term uncertainty we felt it was prudent not to provide formal guidance.
Committed to providing as much transparency as we are able to and I will provide key modeling data points in my remarks, where where appropriate.
So now looking at Q4 overall, the operating ratio increased 530 basis points to 59, 2% on an adjusted basis. The operating ratio was 57, 5% a 360 basis point increase from Q4 2020.
I will remind you that Q4 2020 included a 330 basis point impact from the Detroit River Tunnel transaction.
Taking a closer look at a few items on the expense side I'll speak to the variances on an FX adjusted basis.
Comp and benefits expense was down 6% or $25 million versus last year. The primary driver of the decrease was lower volume in the quarter.
Fuel expense increased $66 million or 40%, primarily as a result of higher fuel prices. This.
This year, we once again achieved a full year record fuel efficiency moving as a step closer to our 38% locomotive emissions reduction targets.
Materials expense was down 6% or $3 million as a result of lower volumes in the quarter.
Equipment rents were down 12% or $4 million as a result of lower volume and lower prices paid per pooled equipment dip.
Depreciation expense was $206 million, an increase of 6% as a result of a higher asset base.
For <unk> stand alone, we expect a similar $40 million increase in 2022 as our asset base grows.
Purchased services was $250 million, an increase of $56 million or 29% when adjusted for acquisition costs. The main driver of the increase was lapping the gain related to our acquisition of the Detroit River tunnel.
For a total of $68 million in Q4 2020.
Moving below the line, we are recognizing 18 days of equity pickup from <unk>, which included a $169 million of transaction costs incurred at the end of the year, which we've excluded for our adjusted diluted EPS.
Other components of net periodic benefit recovery increased $16 million, reflecting lower discount rates in 2022, we expect this to be relatively flat to 2021.
Net interest expense is up $12 million as a result of higher debt loads. Since we issued $10 7 billion in acquisition debt during the quarter.
We issued a total of $6 6 billion of U S and $2 2 billion of Canadian dollar denominated debt with a weighted average coupon of two 4%.
Financing across multiple tenors allowed us to finance at very attractive rates, while also maintaining the financial flexibility to delever in accordance with our plans.
For 2022, CPR Standalone interest expense should be approximately $650 million.
Income tax expense decreased $44 million or 23%, primarily as a result of a lower effective tax rate.
Rounding out the income statement adjusted diluted EPS decreased 6% to <unk> 95 in the quarter.
Moving on to full year results on the next slide.
The fourth quarter performance capped a challenging year for the CP family, our full year adjusted operating ratio was 57, 6%, a 50 basis point increase year over year.
Adjusted income grew 7% and our record adjusted diluted EPS increased 7%.
As you model 2022, we would expect Cps average share count to be approximately 930 million shares and for the corporate tax rate to be in the 24% to 24, 5% range.
We were prudent with our balance sheet. This year with actions taken a pause the buyback program and dividend growth as we work on the transformational opportunity of our merger with Acs.
Leverage is currently at its peak as we have issued all of our acquisition that Youll.
Youll see our rapid or lever leverage rapidly come down as we pay down acquisition debt over the coming 24 months, the buyback or dividend increases will remain pause until we return to our two five times debt to EBITDA target. We are already starting to see cash flow from Acs with the dividend in January this month that will be applied.
The outstanding debt.
Before wrapping up on our private provide a little accounting context around the Tcs equity pickup.
We are recognizing 100% of their net income in our financial statements as one line below operating income reflecting that we do not have control in Q4 2021, we only own the shares for 18 days.
So you see 18 days of equity pickup, which includes a $169 million of transaction costs, creating a loss you see in those 18 days embedded in the equity pickup will be the step up depreciation and amortization from the preliminary purchase price allocation.
In 2022, we expect the depreciation step up to be approximately 220 million U S. Partially offsetting the increase in depreciation will be credits for deferred taxes and interest expense. So the net impact to the equity pick up as a reduction of $125 million U S from Casey's as 2020 equity income.
2021 tests, our mettle and our team of Railroader rose to the occasion that every term 2022 will be a year of opportunity, but it will not be without some noise. We will work hard to be as transparent as possible as we move through the regulatory process I am proud of the team and look forward to what we can accomplish in 2022.
So with that let me pass things over to Keith to wrap things up for Q&A.
Okay. Thanks, Nadeem and John Let me close my remarks by saying sort of looking forward as we move past some of the uncertainty and disruptions. We're super excited about the opportunities that lie ahead of us in 2022. The demand environment is strong you coupled out with our unique initiatives and our service capabilities.
And to succeed in 2022 and beyond <unk>.
You combine our standalone opportunities with added this combined CPC Casey network the future is extremely extremely bright.
Please stand by while we reconnect Keith's line.
Okay.
Okay.
Yeah.
Yeah.
Please standby everyone.
Okay.
Ladies and gentlemen, please continue to standby, while we reconnect the host site.
Okay.
Hello Please.
Please go ahead, Sir you've been reconnected.
Okay, so I'm going to assume that.
Everything that I said, which quite frankly I think.
Yes.
The remarks that I made a minute ago, we're not heard so I apologize for the technology.
<unk> difficulties. So let me let me back up and just say, thank you John and Nadeem for that color and I want to close my remarks.
By saying as we look forward through 2022 to get past some of the uncertainty and the disruptions we're excited about the opportunities.
The lie ahead. This demand environment is extremely strong and couple that with our unique initiatives and our service capabilities, we're extremely well positioned to succeed.
Yes.
Please standby, ladies and gentlemen.
Once again, ladies and gentlemen, please continue to standby, while we reconnect.
Okay.
Operator, I think.
It's nadeem blending we have myself and Keith Creel.
Please go ahead.
Greg we can open up for Q&A.
Certainly ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone and if you would like to withdraw your question. Please press star followed by two as previously highlighted please limit your questions to one there will be a brief pause while we compile the <unk>.
<unk> roster.
And your first question will be from Walter <unk> at RBC. Please go ahead.
Yes, thanks very much good afternoon.
<unk>.
Thank you Walter.
So perhaps we could start with just a question on <unk>.
On concessions I know I get a lot of those.
If you can hear me.
We get a lot of those from investors has been a lot of.
Noise in the in the filings you mentioned that you're separating what's reasonable from what's not reasonable can you.
Can you highlight what what what what areas of request that you might deem reasonable that that you received in that we may see an are you you continue to be of the view that material concessions.
<unk> continue to be unlikely as part of the outcome for this for this review.
Well, let me Walter hopefully you can hear me, Okay I'll start with the.
The statements that you just made.
And oftentimes, we think about that.
Cash flows are required offset loss of the competition.
Network overlap.
<unk>.
Those points.
Points are true about this transaction as proposed transaction itself.
Morning.
There is a class that have been made so far not a surprise, obviously, we expected everybody to come to the table asking.
Sure.
But at any time.
You may begin.
On reasonable terms and reasonableness.
The two way conversation obviously.
Again pro competitive that May.
Any leads to a good outcome for the customer.
That's right for the final Blackhawk.
So significant concession we have good access and they also for competition not a reasonable expectation for anyone to come to <unk>.
That's probably the best way I can say and I can tell you forecast very encouraged.
Ladies the STB.
Okay.
Think about what that estimate.
This is a fair and open process.
I think it demonstrates a commitment for the <unk>.
Pedro schedule.
It's been timely review of our proposed transaction, which bodes well for the very cost competitive back to this combination.
I appreciate the time as always thank you Keith.
Thank you Frank.
Thank you next question will be from Tom Waterworks at UBS. Please go ahead.
Yeah good afternoon.
Keith My understanding is that you're obviously constrained on the operating side you can't you can't touch the case, yes network, but from a customer perspective, you can go to customers. Obviously I mean, you said I guess I don't know if it was in conjunction with Keith Yes management, but 100 calls or meetings is a lot.
Do you think that we would expect any kind of new win type of announcements in 2022 of business related to the combination that you know.
You were able to reach.
Talking together with Cats, you you know auto auto contracts, New AG sites, you'll be serving things like that.
And I'll, let me, let me start by saying.
We have to handle this.
A very similar fashion.
Same with Atlanta.
Obviously myself and our team handling are.
There's nothing that prevents us from going to a customer that might be interested problem or that might benefit from the changes proposed single line.
Service, assuming the STB approves the transaction we can make.
Any discussion of contingent upon that so the answer is yes.
Possible.
At this point I can tell you the meeting with that.
The lion's share.
Participated in their J P team talking about JV opportunities with our customers and then obviously, we just got what the future might look like so the groundwork is being laid the key.
With our customers.
To get into long term contracts that lock you out of the opportunity to benefit from the competitive nature and opportunities and options in this transaction.
Beneath the customer decision to make but obviously, we're doing our best to educate them to the benefits of that using that so that they can uniquely benefit from the unique.
Combination is going to create.
So hopefully that answers your question.
We got to be very careful not to extend and we will not enter control or influence over tcf standalone, but again, the two together and talk about what the future looks like and what that might mean for the customer assuming the STB. It brings our transaction.
So it sounds like maybe you keep the expectations low for this year and probably setting the stage for more to come after the approval.
Yes, we're certainly not making any customer wins that business.
After the transaction, we're just preparing for and laying the groundwork for what's to come beyond the possible.
Great. Thank you Keith.
Thank you. Thank you Tom.
Next question will be from <unk> <unk> at BMO. Please go ahead.
Thank you good afternoon, everyone.
A question along the same lines I mean, you have.
With Amtrust support statement, which clearly aggressively keeping song.
Bye bye bye regulators.
Are there other things that you can potentially.
And I try to.
Firm up.
Our head of regulatory process week.
Other key.
Parties in this transaction like short volume load, even other railroads I guess longer.
Okay.
There are things that you can.
Address.
Potentially before before then.
We go to the hearing process maybe.
No.
A little bit quieter on so.
Yes, yes.
A question and the answer is absolutely, yes, and I would suggest that.
And on the individual partners, if we can reach agreement.
Whenever the aten might be under reasonable terms.
Wayne ourselves, whether it's where the short line women's for the mainline with us for the customer whether it's where they.
And association.
I think the STB would prefer that.
So obviously those discussions are being added all those areas.
Had discussion.
More than others.
All the class one we've had discussions with short lines, we're having discussions with shippers and organization.
So we're prepared and making ourselves available to have reasonable discussion.
Serums and hopefully.
First of all acceptable.
Solutions between all of those parties.
Too long Todd.
Todd I guess in parallel with the furniture application process.
Okay.
Are you viewing when you.
Kevin address all of these things we see a world class one carriers are the views widely different between where you see things and where do they want things to go.
Well the way I look at it number one I'm going to let US know what you ask is but the backdrop.
I can Eric.
Obviously, I've got a lot of precedents I've got a lot of history I think.
We can review because this is moving forward under the old rules. So obviously there is a there is a catalog of different deals that have been done and concessions and agreements that have been made that have been filed with the SP base, we have the benefit of prospects and the benefit of those.
Navigated these waters before us.
Starting with FX, obviously to keep interchanges offering on reasonable terms in physical terms.
We're not going to create new bottleneck pricing.
To enter into some reasonable.
Arbitration settlement process individual discussions with our shipping group, nor our customers.
So theres a menu of options.
That are on the table.
But always with a backdrop of I understand we understand what the laws are we understand that competition.
The STB.
We represent pro competitive facts.
And a very strong position.
These discussions are reasonable terms again to come to a reasonable solution and if they're not up.
Sure.
If we can't resolve it somewhat Dave <unk> Dan.
Dan will be tabled and Thats what.
The STB ultimately lots of vinyl.
Okay, Great I appreciate it thanks.
Thank you Patty.
Next question will be from Chris Wetherbee at Citi. Please go ahead.
Yeah, Hey, thanks, good afternoon guys.
I appreciate that there's a lot of moving parts to this year certainly.
But I was hoping that maybe we could talk a little bit about you've got two fronts, maybe how you see the volume dynamic playing out obviously, there's been some challenges outside of your control 21 that would be thoughts around at least maybe the ramp of volume as we go through 2022, and then just any thoughts that you have in terms of operating ratio I know you gave us some help on some individual line.
Items within the cost within.
On the cost side, because we want to get a sense of CP standalone basis, how you're thinking about a walk for 2022.
Now let me.
Without getting into guidance I'll give some color and I'll, let you go any blank city microphone two.
This is the way I see it.
Chris This is a <unk> story this year, we obviously have pretty tough comps.
First half we don't have brand this year, we had a great last year.
We had.
We had a unicorn January the bet.
Weather conditions in January .
Experienced in my history, railroading going to Canadian railroad as a compared to last year.
Thanks.
This year. So there is some obvious pressures.
We ended the from operating condition and from a compare standpoint on volumes that we won't benefit from that are headwinds in the first half. So you could expect.
<unk> to be down in the first half.
The second half and again, what's true in the first.
Thanks to a tailwind in the second.
Further on our side, you've got very favorable comps, we hope can we.
To date with all that celebrates following we're going to see a more normal grain harvest that comes in.
The fourth quarter when <unk> starts to move.
I think youre going to see autos chip shortages that start to.
The normalized and stabilized so again with that demand environment do you feel that valeant with grain and with all these other initiatives with these contract wins that John spoke to assess to on a run rate on the second half double digit RPM growth. So that leaves us to positive RPM growth for the year that leads to margin improvement for the year that.
We believe this deposit EPS growth for the year all on a standalone basis.
Okay. That's super helpful. Appreciate that.
Thank you.
Next question will be from Jason Seidl of Cowen. Please go ahead.
Thank you operator, Keith and team thanks for taking my call.
I wanted to talk a little bit about the intermodal sector. It seems like the way you guys are are couching it it.
It might be more of a back half story as congestion eases its going to make sure I'm reading that right also wanted to see if you guys have seen.
Any inquiries given sort of the vaccine mandate there for cross border traffic in the trucking industry.
Hey, Jason I can this is John I'll jump in there.
I think certainly on the international side of the business, we've got a lot of pent up.
Import demand out there not only in Vancouver on the water but.
So I do think it's going to take a little bit of time to grind through that.
Good the good news is that the volumes are nowhere representative of the demand environment as you think about international intermodal for us.
Domestically, we've we've come strong.
I expect.
Our domestic intermodal franchise to continue to execute.
You'll see a strong Q1 Q2 and.
As I said I think we're expecting another record year for our domestic intermodal franchise in that space. So.
Maybe it's a little different between the two yeah, probably more of a second half story on international.
But but I would expect a strong full year in our domestic franchise.
Okay and regarding the cross border.
You know what.
We were looking at sort of their volume on a few of our trained pairs are early this morning, and we haven't seen a lot of variability yet I can tell you. There is a fair amount of discussion going on with our customers on that front, but I would say, we're kind of in a wait and see mode.
Right now in that and that cross border.
Okay I appreciate the time as always gentlemen.
Yep.
Thank you next question will be from Steve Hansen of Raymond James. Please go ahead.
Yeah, Thanks, guys for the time.
John I wanted to circle back on one of your comments on the pet Chem side, where you talked about the opportunity.
It was both plastics and the ultra low sulfur diesel opportunity. Your peer has also been talking about this concept of renewable diesel and the big opportunity that might present in the coming years is that is that something that you see also started to ramp up on your on your line as well and just give us some context around that broader step up overtime.
Yes.
Steve Thanks for thanks for the question it definitely is.
Not only are.
Across Canada as we're working you know certainly close with the input side with the whether it be canola oil or other oils, but also on our U S franchise is.
We're looking at opportunities for additional soybean crush on our franchise as feedstock for those opportunities.
So I think the easy answer is yes, we see this as sort of a long term opportunity.
For the franchise in and frankly.
If the FTB.
Grants control and as we look to the future relative to CPE Casey I think it's a it's a tremendous opportunity as we've got the feedstock in the origin franchise planted in the rates that with the with the grain customers and potentially the single line haul to get down to the refinery then.
Into the golf market so.
I think standalone, it's a it's a good story for TEP and <unk> and in the future <unk> could provide a pretty good opportunity also.
I appreciate the color. Thanks.
Yep.
Okay.
Thank you next question will be from Brandon O'brinsky at Barclays. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my question.
Just point of clarification, I think I heard earlier that pet Ottens Meyer and Mike Upchurch were on the call is it okay. If I ask a question of them on cashew.
Of course, absolutely.
Yeah, Hey, guys and I apologize I didn't realize you put out your earnings release until this call. So I'm not that created multitasking, but it looks like.
Things came in pretty much in line with where maybe we thought it would be maybe margins a little bit ahead, I guess, what can you talk about some of the opportunities in.
Challenges that you see approaching here in 2022 for your network I appreciate it.
Yes, it's Mike.
Give you just a quick overview here I think on the volume and revenue side, we would expect to continue to see nice growth.
We believe that all of our segments with the exception of chemical and really due to the refined product issue that I think has been well discussed in past should grow we have a lot of new facilities on our line, particularly in the steel side of the business.
We have mittal attorney M steel dynamics, all with major facilities.
Builds in the U S Gulf coast or down in Mexico, and Pescetarian Lazar Roe.
Should see a little bounce back in auto.
Brain I think what's really strong with with.
Significant growth in the cross border grain shipments. We also are really excited about an expansion of the diamond Green renewable diesel facility, that's going to add some growth.
The Dru facility down in Port Arthur should it should add some growth. So we're pretty excited about the growth opportunities and that should lead to good volume and revenue growth on the cost side as you know from our first three quarterly earnings releases, we had in 'twenty. One we had some cost challenges.
Those are behind us really to John Ward's leadership and the entire operating team.
Many thanks to them, we really have.
Network is running very very efficiently right now and in 2022 is going to be all about continuing to generate productivity on the labor side and around fuel efficiency and continuing to better leverage our equipment in our franchise. So we're pretty excited about those opportunities here in <unk>.
22, Brandon I would just add to that if you look at the package that we put on our website.
Look at some of the operating metrics and statistics that we included in that package.
Including the performance of our grain fleet. So we definitely had some weakness in a couple of the areas that Mike mentioned.
The cross border refined fuels continues to.
Lag because of some regulatory changes in Mexico, but our service has.
Prove just substantially.
Since the middle of last year. So we are well positioned we think we've got good visibility to some of these opportunities coming back and our network is performing extremely well and I think we're in great shape too to see and take advantage of those growth opportunities when they come back.
Thank you.
Thank you. Your next question will be from Ken Hector at Bank of America. Please go ahead.
Hey, great.
Keith Congrats on closing the acquisition Keith obviously, a lot of cost impacts here, maybe you can talk a little bit about anything ongoing cost to talk about the restructuring costs and what you plan to spend.
Too early for that or maybe just walk us through what we should expect this year in terms of the impact on costs and then.
Just.
Coming back to your thoughts there on case, yes, any any thoughts on the outlook that you're providing with for KC up at this time.
Yes, Kenneth sorry.
Just wanted to clarify when you say impact of costs can you just clarify that.
Yes, I guess I guess there are two places one is on M&A and the second would be any kind of restructuring costs I guess, it's too early until you blend the companies right. So just a standalone operating it's just a mathematical example, there's is there any other costs, we should be aware of.
In terms of the ownership structure here in the year in 'twenty two and.
And I guess, it's too early to talk about restructuring. It's 23, yes. No. You are right. There is it's too early on 'twenty three.
But I would say we've talked about this being a growth story so.
It's going to be.
Additive to head count over time, as we as we grow.
<unk> networks and <unk>.
Add on the synergies that we talked about the $1 billion of synergies.
And then some cost savings through.
Through ice and in finance and some head count as we talked about there.
Shifting the Kansas city, but apart from that.
In 2022.
Talked a little bit about the the equity pickup in.
We would have.
Our net income from from Tcs would be would come up through our net income.
There would be some depreciation step up about $220 million U S.
And there'll be an offset to that.
About $40 million of.
Credit for the fair value increase in <unk>.
Kansas City Southern is debt.
And also an offset of about $55 million U S credit for deferred taxes. So that's that's the income statement impact that I'd highlight so apart from that nothing.
<unk> costs or restructuring.
Yes.
And then Pat any thoughts.
In your outlook did you provide an outlook any different than now with CP is talking about in terms of forecast.
We have not and we're going to shy.
Shai away from that at this time, just so many uncertainties about.
Covid and the impact on workforce and supply chain congestion and chip issues affecting our auto and auto related business and then the.
The future.
The trend in the refined products.
We're going to stay away from specific guidance at this point, but as Mike covered in.
Touched on with our service I think we see opportunities for some pretty nice productivity gains when when volume recoveries occur.
Okay, great. Thanks for the time today.
Ken.
Next question will be from Jon Chappell at Evercore ISI. Please go ahead.
Thank you good afternoon.
Good timing for the follow up Pat you touched on just really briefly their refined products obviously Mexican.
Ministration made a big announcements since we last spoke to you in October on on oil dependency or independency I should say refined products has been such a huge growth.
Silo for you over.
Over the last couple of years, I know youre, not giving guidance, but how should we think about the Mexican administration, new views on oil and refined products and how that relates to your rail in either growth or maybe even some some deceleration there.
Yeah. This is Mike I'll go ahead and take that one obviously this market has been a terrific opportunity for us at least through through mid year 2021.
Then the government really stepped up regulations inspecting.
Inspecting cars be because some shippers were illegally labeling of the product to avoid excise tax.
And the next step the government took was to inspect and shut down a number of refined product rail terminals that were receiving this product in Mexico.
We're beginning to see stabilization in that business. So that's good news.
Hard to predict exactly where.
That's going to take us here in 2022.
But if you think about the overall macro environment here the demand is still relatively weak in Mexico.
Pemex did in 'twenty, one over easy comps in 2020 increased production, but really not above 2018 in 2019 levels. So we'll kind of see what their production is for 2022, but imports have clearly.
Shifted from rail to truck and Thats whats hurt our business.
Cause of the closure of these rail receiving terminals in Mexico.
They've inspected pretty much every terminal in Mexico. The good news is companies are beginning to get approval to continue to be open. So we're optimistic that that market will stabilize here and hopefully even grow because the macro environment.
Pemex is only producing about a third of the overall demand in Mexico. So the other two thirds has to come from imports and that's where.
We are very hopeful that we'll see a shift back from truck to rail which is much more economical and then maybe one final point pet Pemex, just recently announced the acquisition of a deer Park.
Refinery and that are really looking to ship a lot of fuel heavy fuel oil into that facility and then refined product down back into Mexico. So we're going to be ultra focused on finding a way to work with pemex to make them successful both on the shipments north and a refined product back.
So hopefully that gives you a little bit of color on this market.
And still long term, we believe this is a good growth opportunity for us.
Definitely does thanks for all that detail Mike.
Thank you next question will be from Scott Group at Wolfe Research. Please go ahead.
Hey, Thanks, good afternoon, guys. So.
Last year, we talked about potential for 55 O or Standalone and obviously there were a lot of challenges last year. Keith do you think there is possible of getting there this year or is that more of a.
2023, when we get the green recovery.
Yeah, realistically stock without giving any guidance.
Okay.
I can tell a story thats going to be challenging.
Obviously to get to that level.
Or improvement and obviously when things normalize as we get into 'twenty three with the normal grain crop.
The benefit of that meaningful volume.
And those outcomes.
Fortunately not.
Not in 2022.
Okay and then Ken This is John just one question so with the revenue synergy targets I'm sure. There are some bigger lumpier kinds of contracts that you have in mind just directionally to those are there are a lot of those opportunities in 'twenty late 'twenty two 'twenty three.
In terms of the bigger contracts in mind.
Yes, I think so Scott as Keith said earlier, you know, we've we've undertaken a pretty aggressive outreach to the customers and some of those areas, where it might have lumpier contracts to talk to them about.
Why they need to think about if the STB does grant control that don't.
Don't Miss the opportunity for this new competitive option in the marketplace and it's been received well.
Scott.
So you've got that bucket of opportunity that I think you've got a whole whole bunch that are out there that.
This contract timing works, well and as we create a new product it opens up those opportunities for those customers regardless of their of their contract status and.
I'll just give you an example.
And you probably saw some of this but.
Most recently you've had two major Canadian companies.
Announce where they've made acquisitions into the United States and in more of the global and North American markets, one being Richardson and international and the other one just most recently being Vitaros and you look at those opportunities.
And those are synergies that that sort of go above and beyond but they're totally indicative of what we believe this north American combination can create.
And in the diet desire for some of these companies to invest to be able to help create the opportunity to your share in the new routes that this combination creates is powerful and with those two examples.
You know and those are big base customers for CPE today that are that are very excited about.
This combination if we get approval.
Presents them.
Helpful. Thank you guys appreciate it.
Thank you Scott.
Thank you next question will be from <unk> Gupta at Scotia Bank. Please go ahead.
Thanks, and good afternoon, everyone.
Just wanted to come back to the demands from from your competitors.
That you have received so far and potentially vascepa from the remaining guys.
Shortly.
Case, Keith I know you mentioned that you will address all reasonable demand.
When do you have any address any reasonable demand from your competitor, especially.
Do you see or anticipate.
Any kind of impact on your stated synergy targets.
Considering you may be acquired to perhaps divest some sections on Mexico. Some some lanes that is can you talk a little bit about the impact potentially on synergy targets all of those demands.
Yes.
I'd be speculating, but let me take the fact, hey, Tim I always works best for me.
When it comes to significant concessions.
Don't support it.
Specifically divestiture I know there is one.
Particular railroad our main competitor.
Yes.
They'd love to see as the best of luck to Springfield.
But if you get to the back some of the assumptions that were made in that request.
That proposed request based on that that there's factual errors misstatements.
If we get into the details of our filing and understand what our.
Planning calls where that specific line.
No, it's not going to shrink.
I don't overlapping track it doesn't go to Chicago.
Again, when I think about a reasonable request I would say that is.
Expect this company to.
Vehemently oppose that and certainly not a piece of that and I don't think.
Earn back to rule on.
That's been accretive yard one moment.
We are also part of our network.
Part of our single line benefit.
<unk> brings uniquely to the table and competition.
Hercules.
So again that one I would say very unreasonable and I'm not concerned.
Based on that.
The other way to think about what's been asked before.
No date after that it grew just arrived for convergence, Paraguay, which frankly, they're not currently contemplated in the JV that was a negotiated agreement between the case there Savannah bank in 2000.
So again, if you think about that.
The transaction.
The advantage of the gain a better position.
That you otherwise wouldn't.
Benefit from.
This preference around the rules around that they're allowed correct on that.
The beta is Katherine with a protracted drive south of Reno.
Now with north of Savannah, again ask that have been asked.
Does that go.
Don't change or create that back and if it did not understand.
Now so again in the context of the settlement, we will talk about reasonable path and reasonable.
And reasonable outcomes.
It's reasonable for both parties.
We can get there, but if it is unreasonable.
We're not going to be in a position to a great year.
Our current competitive attack.
Got it.
Okay I appreciate the time thank you.
Next question will be from Ben <unk> at Deutsche Bank. Please go ahead.
Yes, thank you very much and good afternoon, everyone.
<unk> lindeman, given the congestion with the West coast ports.
Do you see an increased interest for east coast ports, and maybe for Pat do you see an increased interest for lateral Emerald card enough. Okay.
Okay.
You don't want all of those things.
To date all of those.
<unk> and those are our base for discussing the different stages of discussion with our steamship lines.
The board of laterals.
Obviously, theyre talking direct the caveats about that but what I know about it for my diligence.
<unk> built with a ton of capacity deepwater asset.
It's a compliment whats going on in that label the chip will never replace it.
The business case, the delays looking at today's traffic much flat, considering but near shoring is going to bring in the future of the data file before that should uniquely.
Benefit this franchise, Keith yesterday, J P J J in the future assuming the SPP approves our transaction.
Think of ETF reported thank you Doug.
John has a tremendous amount of capacity.
On slide for Tidewater to the key markets.
The <unk> solution is the shortest route.
Hey.
With the capacity as long as they can handle it expeditiously and efficiently through the port we have got a better product and that's exactly what we're selling and again when you have these discussions now.
Now and in the future.
The SPP approves our transactions, we now have three pretty close the final debt.
Paul.
Solution enable our supply chain enabler for growth for our customers, our stakeholders and ethanol.
You could be extremely excited about.
And the art of the possible.
Exciting to those customers too so I see a perfect marriage coming for growth and that's exactly why we're pursuing this transaction.
Exactly.
There's something in it for everyone here pro competition.
Girls toys.
Josh.
Customers kgs customers customers customers of tomorrow that neither of us might serve today.
Have an opportunity to benefit from.
This unique transaction brings to the table that otherwise would not be possible and I believe to be the last major transaction later combination or merger and the North American continent.
I am pretty country.
At a beautiful time.
In a world where because of all the supply chain challenges.
We need a solution like this.
It's extremely compelling.
And all of those conversations.
Our following that narrative it just makes too much.
In a perfect time in history.
That's great. Thanks, Steve.
Thank you.
Now out of time I would like to turn the call back over to Mr. Keith Creel. Please go ahead.
Okay, well listen let me close by thanking you for your time. This afternoon I can tell you as we look forward, obviously, we're seized with number one.
No.
Additionally, safely for our customers.
Throughout this process will be running and participating completing the merger application process in parallel with planning for integration of these two great companies so that they do.
Yet the favorable locker CFPB, which we.
We anticipate it will be.
Prepare to hit the ground running day, one as seamlessly as possible and start to create this unique benefits for all of our stakeholders.
They are talking about so that's what we'll be focused on the balance of 2022, and we look forward to sharing our second quarter results our first quarter.
Results on the next call.
Thank you.
Thank you Sir.
This does conclude today's conference you may now disconnect.
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