Q1 2022 Canadian Pacific Railway Ltd Earnings Call
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Good afternoon, My name is Leo and I'll be your conference operator today.
At this time I would like to welcome everyone to Canadian Pacific's first quarter 2022 conference call. The slides accompanying today's call are available at Investor day.
C P.
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After the Speakers' remarks, there will be a question and answer session.
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I would now like to introduce Megan Alderson, Vice President capital markets to begin the conference.
Thank you Leo and 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 in our MD&A filed with Canadian and U S. Regulators. This presentation also contains non-GAAP measures, which are outlined on slide three with.
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 President and Chief Marketing Officer.
Also attending our call today on behalf of Tcs are CEO , Pat on fire and CFO , Mike Upchurch will be happy to answer any questions regarding Tcs 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 tough period.
And prior to S. P S T be approving see pes control.
K C. S C P and K C S operate independently and Casey as a business is managed by its own officers and has overseen by its own board of directors.
During this tough period.
Right.
Truly Casey S. As management is all is in the best position to answer investor questions regarding their performance and results I would highlight the Casey's has also posted an information package to their website.
And should you have any questions about their performance that aren't addressed on today's call.
Ashley and Daniel on K C. S. As IR team would be pleased to answer your question.
Formal remarks today will be followed by Q&A and in the interest of time, we'd appreciate if you could limit your questions to one it's now my pleasure to introduce president and CEO , Mr. Keith Creel, Alright, Thanks, Meghan and good afternoon, and welcome everyone joining us on our first quarter earnings call.
Let's not be remiss not to start I'm thinking.
The 12th out the strong CP family that are endured quite a challenging quarter. That's been one one for the ages in fact all of the.
The uncontrollable challenges that we had relative.
Did the weather, which was a huge challenge and obviously this COVID-19 omicron Spike This company spiked up we moved up to about 500 employees they had to face.
Neil Mcfarlane challenged during the quarter, which obviously.
First impact to our network velocity and then finally, it very unfortunate work stoppage, but in spite of all those challenges the tenacity and the grit.
Of this team the commitment that we have to each other to provide service for our customers and serve all of our stakeholders are well done.
Hum.
Chopped out never short I have an opportunity to step into that and to meet and exceed those challenges.
So let me talk about the results of the quarter delivered first quarter revenues of $1 8 billion in operating ratio.
69.8 core EPS of <unk> 67 cents on the train accident front, we are encouraged that we reduced our reportable train accident frequency by another 25% in the quarter on the safety front when it comes to personal injuries, we did have a bit of slippage there at 13% versus last year.
As always a reminder to myself the team the company that safety.
It's not a destination. It's a journey, we can never lose sight of the importance of making sure that every member of our family go home safely every day. So it was a tough quarter I'm not here to make any excuses. This things out going to today, we knew that it would be challenging in the first half certainly more out in Q1, despite those challenges our outlook on the year remains largely unchanged.
<unk>, we continue to see very strong and supportive macro environment, we still expect to deliver double digit RPM growth in the back half and ultimately grow our teams on the year. So.
The point that we made earlier that this was going to be a year a tale of two halves, it's playing out as expected on.
On the CPE Casey transaction the merger front the preparation of the planning to ensure we execute our integration between these two great companies from day. One continues we're excited to announce that during the quarter that we successfully launched our first Standalone service from Lazar O Cardenas to Chicago in early March with a.
Seven day transit time from the time the ship.
The poor docs to the time, the first container was DRAM down the Chicago and hit the payment seven days, a pretty compelling product to test the market. It was a demonstration of the significant opportunity obviously to bring an alternative to the congested west coast sports for our customers and for our marketplace. This is a product that works when its congested. This is a product that works with its unclear.
Yes, it it's an under novel compelling product that these two companies will be able to bring to the marketplace.
Pkc's.
Represents extremely meaningful opportunity to take trucks off of our highways to leverage our fuel efficiency that we enjoy on the rail side versus truck and that contributed obviously to a low carbon future.
For North America, Canada, and Mexico.
Also I'm going to tell you even more excited about the potential.
This unlocks for the North American supply chain, which is becoming increasingly increasingly more important the additional outlets for north American resources that in fact are increasing in demand.
We've got three very resource rich nations are creating a network to connect to ports 11 of those sports that will uniquely serve and ultimately get our products to tidewater to lock them out of countries around the world.
To say, we're excited I would suggest is an understatement as we look forward to the opportunity. That's ahead of us our customers are looking forward.
To us as well the prospect of this great single line service for Mexico through to Canada, and I'll tell you. We're excited and looking forward to the path forward and on that point I know that many of your phone. The STB process closely obviously, we all know the procedural procedural schedule has been paused right. Now is we've been asked to clarify some of the data.
Which we have done we're certainly optimistic things will be restarted soon I say that and I remind folks as well there's room in the overall schedule for the board to take the time it needs to consider all the facts and the data we do not see this materially delaying the combination we still anticipate a ruling by the latest.
Early 2023.
With that let me hand, it over to John to bring some color to the markets and then they deem will close up before we open for questions elaborating on the numbers.
Alright, Thank you Keith and good afternoon, everyone. So as Keith mentioned, the first quarter certainly had its challenges it was tough in the quarter to really build any momentum and rhythm. Despite what I would consider a very strong demand environment.
But you know Howard the CP team and our sales folks and the operating folks are experienced I can tell you. We stayed focus on the task at hand, selling to the value of our franchise.
And as now we come out of the work stoppage that happened at the end of March we are seeing definite momentum building as we moved through April .
So looking specifically at Q1 revenues were down 6% in the quarter driven by the 14% decline in our T M grain.
<unk> contributed about 7% of the decline in our Tms with the strike contributing about another 3%.
Fuel and FX combined to be 6% tailwind in the pricing environment continues to be strong and I'm very pleased with the sales and marketing teams discipline in the marketplace and creating that value for our product overall, our cents per our T. M was up 9% in the quarter.
Now I'll take a closer look at our first quarter revenue performance I will speak to the results on a currency adjusted basis.
Grain volumes were down 26% in the quarter, where revenues were down 20%. We are continuing to see the impact of last year's drought in Canada, which resulted in a 40% smaller crop.
That will continue to be a headwind before we get to the back half of the year and hopefully a normal more normal crop this fall.
The challenging Canadian crop was again, partially offset by continued strength in our U S grain franchise, which posted a second consecutive record quarter in.
In Q1, we moved 14000 carloads of U S grain into Canada compared to fewer than 600 at the same period last year.
I'm very proud with the nimble actions of the marketing and sales team to create this market and the operating team to deliver and execute it as well.
We provided help in with the Canadian farmers and feeding their cattle.
While still in the early days of the outlook for the new crop. This fall we are cautiously optimistic that we will be returning to a more normal crop size by the time, we get to harvest on.
On the potash front volumes were down 4% in the quarter, while revenues were up 3%.
The decrease in volume reflects the impact of our work stoppage and.
And we believe all those volumes are recoverable through the year looking ahead strong global AG product demand combined with the disruption in potash production and Belarus, and Russia have driven potash prices in demand to record highs.
<unk> partnership with Canpotex, and K, plus S positions us well to deliver record volumes of Canadian potash to the world markets I expect double digit full year growth in potash.
And to close out the bulk business coal revenues were down 15% while volumes were down 24%.
As we move through Q2, we will begin lapping the routing shift in tax business and I expect upside in coal as we move to the back half of the year.
Moving on to merchandise the energy chemicals, and plastics portfolio saw revenue decrease of 20% while volumes were down 17% most of the decline in the volume was a result of crude by rail and the challenging start to the year.
You will notice a slight decline in cents per our T M, which was driven by the expiry of our crude contracts and the associated liquidated damages.
Moving forward I expect strengthening in ECP volumes, driven by new business with independent energy and IPL, both ramping up the second half of the year and through our initiatives to continue to develop our distribution network for refined products renewable and Biofuels.
Forest products volumes were flat, while revenues were up 8% I'm proud to say it was our second consecutive record quarter in the forest product space.
In MMC revenues were up 14% and volumes increased 1% driven by continued strong pricing and demand for frac sand as we are seeing higher drilling activity moving in line with higher <unk> prices.
Automotive revenues were down 16%, while volumes were down 21% on the quarter, while the supply chain continues to see equipment cycle and chip shortage challenges, we're expecting improved performance in Q2 and through the back half of the year.
The new GM business, we announced in Q4 is moving well and we are excited about a number of new opportunities that are emerging that will further support growth in the automotive sector across our network.
Now finally, moving on to the intermodal side of the business.
Clearly volumes were flat, while revenue was up 13% our second consecutive consecutive quarterly record.
As we announced on Monday, we are very pleased that have big Lloyd will be adding another weekly call at the port of St. John as they continue to leverage our east coast advantage.
This service will drive significant new volumes from northern Europe through the Port and will exclusively use <unk> service to access markets across Canada.
In the U S.
We're excited about this opportunity to continue to grow our intermodal product from Atlantic, Canada with our partners at DP World, The Port and <unk>.
This is exactly what we said.
And this is exactly what.
We said, we would do when we purchased the <unk>.
We've taken that property property, we've leveraged our route advantages we've created a superior service product and we're using the capacity on our network from St John to grow with our customers.
And the shift to the domestic side of the business. This was our sixth straight record quarter. We're clicking on all cylinders not only from an operating perspective, but also working with our customers to restock the store shelves across Canada.
We are watching closely the changing demand in the truck market, we're watching the demand with our consumers and of course, the most recent COVID-19 related shutdowns in China. Despite some of this uncertainty I expect our domestic intermodal demand levels to continue strong and our volumes will be further supported through our playbook.
Initiatives.
So now let me close by saying the first quarter was certainly tough sledding.
We have built the momentum as we move through April and I'm, starting to see our revenue and volume reflect the demand environment.
As I sit here today, excluding Canadian grain volumes are up mid single digits quarter to date, and we have over 200 million annualized of new initiatives, starting up over the coming months.
We said at the start of the year as Keith said that it was going to be the tale of two halves and thats exactly what I expect to play out.
While the Canadian grain headwinds will persist into Q3, we still expect to deliver double digit RPM growth the back half of the year and grow our Tms in 2022.
So let me close by saying the team is energized, we're staying close to our customers and we are adapting to the environment. As we move ahead, so with that I'll pass it over Canadian great. Thanks, John Good afternoon.
Going into the year, we did we knew Q1 would be a difficult given the weakness in Canadian grain, but the quarter prove even more challenging than we had anticipated. This is largely due to a combination of the ongoing co.
Covid impacts to our crew availability the weakness in Canadian grain as I mentioned as well as the impact of severe winter operating conditions in January and February and of course finally, the labor disruption we had a late in March.
That being said as we have moved in April we are encouraged by the strong demand that Jon highlighted and definitely a more fluid operating environment.
You'll notice in our results. So we've added two additional non-GAAP metrics. These metrics have been added an effort to provide transparency and give investors meaningful comparative figures to evaluate our underlying operating performance. The additional metrics core adjusted EPS and core adjusted income remove the impact of <unk> purchase.
Counting going forward, our key focus will be on core EPS and core income post merger, we will publish core O R, which will remove any noise from the depreciation step up.
Now looking at Q1 overall, the adjusted operating ratio was 69, 8%.
Clearly this isn't up to the CP standard are the main drivers on the quarter, where the decline in volume, which added almost 500 basis points, although our year over year the increased fuel prices on the quarter.
Third 40 basis points and the strike at an estimated 120 basis points now.
Now taking a closer look at a few items on the expense side.
Comp and benefits expense was up 2% or $8 million versus last year. The primary driver of the increase was higher stock based comp in the quarter.
Fuel expense increased $67 million or 33%, primarily as a result of higher fuel prices, which were up 46% on the quarter.
Materials expense was up three sorry, it was up 5% or $3 million as a result of cost inflation largely in non locomotive fuel.
Equipment rents were up 6% or $2 million as a result of winter weather and the work stoppage, creating a drag on efficiency depreciation.
<unk> expense was $210 million, an increase of $8 million as a result of a higher asset base.
Services was $290 million, an increase of $49 million or 20% when adjusted for acquisition costs. The main driver of the increase was lapping the gain related to the Chicago Tollway transaction, which was $50 million in Q1 2021.
Moving below the line the equity pickup from case, Yes was 251 million when adjusted for case, yes, as acquisition related costs and purchase accounting.
Other components of net periodic benefit recovery increased $6 million, reflecting higher discount rates compared to 2021.
Net interest expenses is up $50 million as a result of a higher debt load related to the Tcs acquisition in Q4 of 2021.
Income tax expense decreased $106 million or 55%, excluding tcs related related items. The effective tax rate was 24, 25% on the.
Rounding out the net running out the income statement core adjusted EPS was <unk> 67 in the quarter.
We continue to generate strong free cash and along with the dividend from Casey's repaid over $500 million of <unk>.
Term debt and finance leases during Q1, we will continue to utilize our cash flow return our balance sheet to our targeted two five times leverage at which point, we will revisit our capital allocation strategy.
The quarter was certainly a challenge, but we expect to deliver significantly stronger performance. Starting this April the network has recovered from the challenges we faced in the first few months as well as the strike as John mentioned, we continue to see path forward to volume and revenue growth for the year and I fully expect a much stronger margin performance with improving.
And volumes and see a path to core EPS growth for the year with that let me turn it back over to Keith and we'll go into Q&A.
Thanks, Thanks, John in a game operator, let's open up the line to questions.
Thank you if you would like to ask a question simply press. The Star then the one number one on your telephone keypad. If you would like to withdraw your question press the pound key as previously highlighted please limit your question to one.
We will take our first question from Jon Chapell of Evercore ISI.
Thank you good afternoon, everyone.
John you kind of laid out the mid single digit improvement in volumes.
Oral to date.
<unk> online.
Kind of help us understand that the impact of the strike is completely over the mainline is completely up post the watch out theres no other issues with whether it's related to weather or Avi crime that youre running where you want to run or at least you're on your way there.
Yeah, Let me, let me take that one I will let John we focus on the revenue I can tell you the railroad the network overall is in really good shape.
We go back to January actually first six weeks of the year were extremely challenging with level three level four cold temperatures and essentially what that means is we run shorter trains to run safely which means your operating costs are going to go up it means your needs for assets cruise locomotives is going to increase and all of that happened at the same time that we had.
AUM across surging. So we came out of that and I can tell you.
Coming out of February into March we were starting to gain a bit of rhythm then when the weather broke.
We're in really good shape overall as a network when we had to face the strike.
And I say that you can look at our metrics and our numbers. Since then because we bounce back quick and we've restored service for our customers. We're at CP like numbers now cars on line are down train length is up.
At or above what it was last year train weight at or above what it was last year. In fact, both of those metrics are above our cost per G. T M on accrued basis, which we measure back to a favorable place versus last year. So everything is normalized it all says that the engine is running well and you should expect with demand ported onto this net.
We had the resources, we have the assets and we have the team to execute and youre going to see more normalized and improving safety performance numbers.
I just might add that on the on the revenue front.
Look at last week in particular.
Versus I want to say I went back 40 weeks.
It was one of our best performing weeks, we've had over that time period, and if you look at really our asset utilization of our fleet that we own that services. Our center beams that are mill guns, and those types of sort of CP owned assets.
Seeing that velocity pick up.
To create more loads.
And in those revenue areas is starting to shine through and as you guys know that's what we've done and Thats. How we are successful at at CP and turning those assets and working our customers to maximize to generate those revenues.
Got it I appreciate all that thanks, John Thank you Keith.
Thank you.
Your next question comes from Fatih Shimon of BMO.
Good evening and thank you for taking the question.
Keith you.
<unk> talked in the basketball with engaging with some of the other railroads.
In terms of.
Maybe addressing some of the.
Concerns I've highlighted in their filings and perhaps finding some.
Common ground to move this merger process forward is there an update that you can share with us on those conversations.
Well I'll tell you, we're keeping an open mind in an open line of communication body.
There's a couple of.
Physicians the <unk> position, obviously, we've always said we're willing to make.
Reasonable agreements with reasonable folks with reasonable arguments, that's not a reasonable argument. So I don't see any hope with that position to be able to to come to any meeting of the minds will just have to agree to disagree we intend to grow that railroad, we're certainly not going to divest that railroad and we think at the end of the day those facts matter they matter to the cut.
I think they will matter to the regulator, but obviously the regulator will have to rule on that when it comes to the NFS.
We've got we will assuming that the STB approves this deal and we believe they will we're going to inherit.
<unk> joint venture that NFS and <unk> entered into back in 2006, and we're going to honor that.
But that was a commercial discussion a commercial relationship is established were going on and what the contract says, but using the merger application to try to gain something that you didn't commercially negotiate is not something that we.
We're interested in considering so.
Again, we think thats.
A very reasonable position to take and we're going to maintain that position when it comes to <unk> <unk>.
Some of their concerns happens to be around infrastructure, we believe that the infrastructure if used properly and.
In the Houston area, specifically is more than adequate.
For the level of business that we believe our synergies will bring that said should we exceed our synergies.
Should <unk>.
Investment need to be made.
Cooperation and partnership with BNS.
NSF and Upa there are mechanisms within.
Those agreements now Theres trackage rights agreements that allow for those investments to be had so again.
I think our position is reasonable and I don't see that changing when it comes to the other <unk> overall I think we're making some progress with <unk> I believe we're in a very reasonable place and we're continuing to have very progressive discussions.
Thank you.
Your next question comes from Chris Wetherbee of Citi. Please go ahead.
Hey, great. Thanks, Good afternoon guys.
Was hoping maybe you can you can you give us a little bit more clarity on what the strike was specifically in the quarter and then I know you mentioned about core earnings going up I forgive me if I missed it how do we think about the operating ratio for the core CP business. This year.
And maybe how quickly connect start moving back towards parity on a year over year basis.
Sure. Thanks, Chris So I mean purchase accounting isn't going to impact the hour. So we just have our adjusted or not.
Not a core one.
I think we're <unk>.
Theyre going to have negative volumes in Q2 were still seeing the impact of the drove will probably run out of grain.
Partway through the quarter and don't go go into seeding in May and so that's going to be a challenge that being said I mean.
I do expect a sub 60 or in Q2 by all means.
As we head into the back half of the year and assuming a more normal Canadian grain crop and some of the significant opportunities that John highlighted.
Some of it.
Just a return to a normal environment, but at the same time some of the market share gains that we've had and in some of the self help.
And we feel very good about the back half of the year and the operating leverage that comes with additional volumes I think thats the key to how.
How are we going to improve the ore is bringing on the volume at a low incremental cost. So I'd say that in the back half of the year you should expect a.
More a kind of mid fifties or that you've kind of come to expect from us. So that's kind of the cadence as we see the or as far as our earnings.
Yeah, I expect us to have a you know.
Core EPS growth year over year.
So that's kind of where.
How it lines up for 2022, so we dug a hole here in Q1, but I have a huge amount of confidence, especially given how the network is recovered in April .
How we're operating in and the volumes and revenues that are coming back to the network and the significant demand environment that we have so I'm pretty bullish for.
For the next eight months.
Got it thanks very much appreciate it.
Thanks, Chris.
Your next question comes from Walter Spracklen of RBC capital markets. Please go ahead, yeah. Thanks, very much operating and good afternoon, everyone. I just wanted to come back to Zurich Dana.
Keith seven day is pretty compelling.
Curious as to whether there is a history when theres labor disruption in La long Beach going back a few years ago I know the Canadian ports are about a 13% lift in volume that was above normal due to some of that disruption and diversion do you think that kind of you know.
Do you see patterns in the past an opportunity here as you go toward this July date for some of that volume to shift to your new service and and how how sticky would you see that you would you be able to hold onto some of that.
Some some of that diversion.
If it does come.
Come to pass.
Yeah.
Great question, Walter and I would say, absolutely, yes, I see an opportunity.
Once you get that service established and you make it reliable and you make it reliable through the processes that have to be ironed out obviously.
<unk> process is border crossing processes.
And then you follow that with investment.
So you set the processes in place.
In lockstep with investment we're investing in the railway.
Aligned with our merger application process and you create an unlock reliable capacity.
That to me stands.
Stands the test of time, it's never going to take all the business away from L. A long beach, but I think he can complement and create a very reliable supply chain for a steamship.
Customers that we'll be able to take product to market in a very reliable efficient fashion that.
And that again.
We will diversify their book of business and make them not so dependent upon L. A long beach and in the ebbs and flows with the challenges that occur on the West Coast and I think it's there to stay once you establish it because it'll be so compelling and hard to compete with.
Yes.
I appreciate that color. Thanks, thanks very much.
Thank you.
Your next question comes from Tom <unk> of UBS. Please go ahead.
Yes, good afternoon.
Wanted to see if you could.
Offer some thoughts on where customers maybe you have the greatest opportunity for expansion when we think about.
Got it.
Geopolitical if you want to call it that rest of Ukraine. However, you want to frame it.
But a big step up in commodity prices across a number of different markets.
Which of those markets do you think that you serve customers, where do you think those customers could expand.
And you know maybe some thoughts on the timing for that just trying to think about that.
<unk> volume opportunity.
Looking out a little ways. Thank you.
Yes, Tom so.
You Teed me up a perfect on that one so I spent last week.
Turing essentially from Houston to New Orleans up to Baton Rouge.
With with exactly what you described in mind.
And I can tell you there is a.
Think about as I said Bell, Russia, and Russia controlling 40% of the world's potash production.
Canada supplying right now 40% of the world's potash production think about CPE Casey in the future and add those export opportunities through the golf to serve as South America.
Versus sort of the east coast of Canada, or even the west coast of Canada, just lays out a compelling.
Not only story in terms of diversification, enabling Canada's growth in potash to the future with.
With Canpotex K plus S. Maybe BHP in the future.
But being able to do it on a single line haul service to do the Gulf of Mexico to service those markets.
Just that opportunity in itself jumps off the page, but I can tell you our diversification.
Vacation from a grain perspective.
The ability to backfill roughly 20 plus percent of the world's exports that come out of that Black Sea region.
And serviced by Ukraine.
And the Russian growth growing territory becomes again, just a compelling story for for our not only our Canadian franchise, but our U S franchise and again I think diversification is of port.
Xactly, what Keith described and what <unk> brings to the table for our bulk business I see tremendous opportunity and that means again.
Not only potash, but potentially grain and other products are D are you today.
Being able to get crude and in and safe crude products to Tidewater I think all lineup has huge opportunities for this combined network in the future I'll give you a little snapshot Tom.
Take a look at this.
The feed my interest is taking a look at the potash mines that are in Saskatchewan that obviously would originate this potash to get it to market a top water in the Texas Gulf versus the East coast.
Radian alternative one way, depending on what mine Youre talking about minimum 240 miles.
Line haul shorter.
Up to 400 mile advantage, that's one way to do that on a round trip. If your car hire owner the capacity that's created with that single line service opportunity from origin to destination, one railroad accountable turning those assets in a closed loop.
That's a needle move or Tom.
Yeah.
It certainly sounds that way is there anything on the crude by rail side would should we think of that as opportunity as well or not so much.
Well at this point and John can add a little bit of color. Obviously, it's all about the delta in the spread and the spreads driven by how much production and how much pipeline takeaway right now production is not exceeded the pipeline takeaway capacity from.
The locations.
For the crude comes from.
That said.
Production comes back online and the demand increases at some point, that's going to happen and I think that puts us in a very strong position for normal crude movements, but outside of normal crude we've created a niche market with <unk>.
<unk> came up to nameplate capacity, we're running it's doing what it said it will do we were there last week, we took a look at it as well.
John and I toured the facility down at <unk>.
At Port Arthur and its expandable, it's scalable it's ready to handle it. So it's just a little bit of.
A little bit of work to get the infrastructure in ground to double the footprint. So again I think that's a very compelling value opportunity.
For a niche market that we uniquely serve coming out of Hardesty go into the Texas Gulf.
Great. Thank you for the time.
Thank you Tony.
Yeah.
Your next question comes from Ken <unk> of Bank of America. Your line is open.
Good afternoon.
Just Keith just a follow up on that last one is there anything left to cover Jon I guess is there anything left to clean out of the ECP in terms of crude by rail that you had any legacy contracts that are going to expire just to see if volumes are going to anything further drop off but I guess my bigger question is is just now it seems like I guess piece.
<unk> is kind of under attack in terms of a lot of different ways of whether it's still the right way to run the network or trouble growing other other companies in the U S still having trouble growing once they've implemented is that just different ways of running it versus your experience Keith I mean, it seems like your ops have rebounded post strike main mine fires.
So operationally not at the same point in what we see in the U S or is there is there something you would do you need to hire more or anything that's left to get this back on track maybe just your bigger thoughts on on that.
Well I think at a high level can <unk> not CSR, it's not.
The name alone.
Clearly execute <unk> in the good times and the bad times, you've got to understand what it is so you don't get it off the shelf and say this is what I'm going to call. It. It's all about identifying making a plan of service plan because if you don't provide service to the customer.
Youre not accomplishing anything and you do it by determining what the process should be you create the service plan based on defined the service plan defines the assets you need whether it's locomotives whether it's people whether it's cars and then the last piece that's critically important.
Got to have the infrastructure to be able to execute it.
I don't care I go back to my CN days I'll go back to my days, you don't just say I'm going to be a <unk> railroad run 10000 foot trains. If you don't invest in the infrastructure. It takes to execute it because it's all based on being able to turn the assets. If you can't move the trains that means get them over the line of ROE get them in your terminal.
Keep the assembly line moving it clogs up it backs up and the outcome is not going to be low cost, it's not going to be good service. So it's a formula that has to be managed it's not going to manage itself. It has to be done.
Done with a disciplined fashion and you have to ensure that you've got your assets and lock step with what your demand is so you've got to understand what you're putting on your railroad.
Can't Oversubscribed. Your railroad you can ask the physical assets can only do so much you've got a plan and build the service design around what your physical plant is capable of handling and it requires investment and it requires measuring and it requires a discipline to execute that that's how you do it.
But it's again to do it.
It's easier said than done you have to understand what youre doing and it doesn't happen overnight and I am not going to suggest that the other roads and they're all at different forms of implementation can figure this out because I'm, telling you <unk> done right is the best way to run any business, it's effectively using assets to produce a consistent.
Service that the customer values at a low cost. So you can sustain the service sustained investment and allow your customers to win in the marketplace and that Formula works in any business you want to apply it to the airlines the train lines the shipping lines.
But again it goes back to the service and if you can't move the assets to create the capacity youre not going to succeed at.
So I'm not I understand customers' concerns it's my position in this company we get this we understand this we've shown that we're beyond trying to implement this we're executing it.
Day in and day out and again it doesn't just happen. It takes it takes focus discipline execution and that's what we're going to stay committed to we're not going to Oversubscribe. Our network, we're not going to ask the network or the assets to do more than what they are equipped to be able to handle and if you do that and you balance that then youre going to come out with a great product for the customer.
And as a result of that it's going to naturally be low cost and it is going to be sustainable that allows you to continue to invest into growth.
Okay.
Thanks, Keith and then just John thoughts on the ECP anything just left on there to cut out I. Appreciate those thoughts kit, that's obviously detailed and informative compared to the difference of what we're seeing out there.
Ken I think we in terms of crude by rail within the ECP I think we've settled into sort of a.
A pretty stable state in terms of those volumes.
All I'd say 40, 45000 is sort of my projection in terms of carloads.
In the crude space for the year.
So I think thats, a pretty similar run rate to what we.
We saw in Q1.
About half of that volume is a little over half actually is is the Dr. Yu and relative to the to the liquidated damages in that I think you should expect to sort of see that trend play out through the balance of this year as those contracts served us right. They were put in place.
For all the right reasons to protect our investment protect our capacity.
And so we will see a little bit of that headwind continue out through the balance of this year.
And then it will run its course will be I guess free and clear as we move into 2023.
Thanks, Scott I appreciate the time.
Thanks Kim.
Your next question comes from Scott Group of Wolfe Research. Your line is open.
Hey, Thanks afternoon, guys I just wanted to focus on a couple of things on the revenue side. So John the price mix. Other was plus 2% is that just the the LD headwind you were just talking about.
Does that 2% get better as the year goes on and then if that's the case, yes, guys or on any update on the energy reform business. It was down a bunch as any signs of that business bottoming at all.
Yeah, So Scott that was reflective of that that headwind there.
I expect obviously youre going to see sort of the fuel surcharge level out a little bit that tailwind level out as you move through the year I expect pricing to continue to be to be very strong.
Our renewals are hitting.
Hitting a 6% plus.
And my expectation sort of remain that way is as I look out the balance of the year, we're definitely going to have to balance that out against.
Maybe some slightly negative mix and in these LTE headwinds that I've spoken to.
Okay.
The segment I think Michael.
Scott This is Mike Upchurch.
I'll take that question on our refined product I think as everybody knows it's been a challenging environment for us since mid year 2021.
When the government took some incremental actions too.
Pull back on some permits that were available increase inspections of product that some shippers were shipping into Mexico, and this labeling to take advantage of not having to pay excise taxes.
Accordingly.
Can see in the quarter, we had an almost 70% decline in that business.
Still delivered I think really solid results across the rest of the business.
We are seeing a little encouragement.
For them from a government here with some.
Facilities that had been shut down that are beginning to get their permits back for trans load capabilities. So that is a good sign for us.
The macro environment really isn't a lot changed from what we've seen in the past were roughly 60% of the demand is still.
And the Mexico. It just happens to be with rail terminal shut down that's now moving by truck and marine.
So we're encouraged by some of the facility's reopening here and we'll just have to see.
How that rebounds, we've been pretty conservative in our forecasting.
That particular business, but the rest of our segments performed incredibly well.
Mike since you're on any just high level thoughts on revenue growth margin improvement for the year.
That you can share.
Well, we haven't provided any official guidance, but if you look across our business in the first quarter Scott.
Whether it's.
Industrial and consumer up 20% revenue AG.
<unk> up 31 energy up 25 intermodal up 18.
Automotive up 23.
We've got a pretty solid demand taking place in our business, providing good service, we would expect that to continue.
I would say, it's a challenging environment to predict right now with all the macro issues, but we're pretty encouraged by what we're seeing and what we hear from our company.
Overall, we do expect that we would see or improvement on a year over year basis, but I won't go.
In the quarterly details there.
Thank you guys appreciate it.
Thanks Scott.
Your next question comes from Konak Gupta of Scotiabank. Please go ahead.
Good afternoon, and thanks for taking my question.
So just wanted to go back to the peak.
STB approval process for <unk> transaction, it's Keith I wanted to ask you was there anything in the demands made by class ones that you think is necessary to get stb's approval and that would either require you to make incremental investments or that might eat some of the cushion you have in the synergy targets.
None that I'm aware of no.
Yeah.
Yeah.
Okay. Thank you.
Thank you.
Your next question comes from Brandon No Glinski of Barclays. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my questions Nadeem can I come back to your earlier.
I think your response to another question I think you said you know getting back to like a 55 or in the back half of the year is that correct and can you just give us.
Maybe some more specific guidance on some of these cost items I know purchase services was quite high this quarter, but what's the right level to be thinking going forward.
Yeah, No it's correct kind of mid <unk>.
Level in Q3, and Q4 confident about that.
And.
As far as purchase services.
We're looking kind of in that $2 $80 million to $290 million a quarter.
Excluding the <unk> transaction costs.
It's probably a good run rate so some of that like I said, we had year over year the impact of.
The $50 million from the Chicago Tollway land acquisition or land sale that was part of a credit to purchase services. So year over year, that's what's the big drag there but.
The other the other consideration is for services is kind of where a lot of the inflation or deflationary expense costs kind of come through so.
That's why I'd say 280 to $2 90 is a good run rate.
Alright, thank you.
Alright, Thanks Brandon.
Your next question comes from Jason Seidl of Cowen.
Thank you operator, Keith and team.
Thanks for taking the time I wanted to get back a little bit to the Lazar lose sort of seven days in the Chicago, one what type of demand do you envision for this product. If you guys can keep it consistent at seven days.
And do you think that you could also sort of run trains since you mentioned it over the Meridian speedway into the southeast from laser are sort of giving you that Mexico to the fastest growing population in the U S.
Yes, so look I look at this very similar to our sort of our bellwether.
East West trains that we run across Canada, Jason.
It'll start with.
A train a day and we will build that volume from there and I can tell you Keith spoke to the opportunity.
That we ran that's going to be an ongoing opportunity.
[noise] is now building upon itself and we're going to see irregular movement there.
And I can tell you I can't name the name at this point, we've got another major steamship line, that's testing that product this week actually.
So I'm confident we're gaining traction there and again, it's not intended to replace or that it's really a complement to our west coast access its about diversification. It's about solidifying some of these supply chains and the fact that we can prove it on an interline basis.
Only makes us I think more confident that as we put together with the STB.
Approvals. This product we can be successful in and I can tell you I did Keith spoke a little bit about the Meridian Speedway.
And that with DNS.
I've been over that railroad.
It's a great product I am increasingly excited and talking to all shippers and not only the international but domestic.
And auto.
And others around that route and the potential to hit that that eastern.
The us market and frankly, both directions.
And linking it to Mexico. So I can tell you in terms of the intermodal space. It gives a lot of fanfare relative to this Casey CP opportunity, but it should these are routes that are going to add I think unparalleled competition.
And more options that that shippers have been today.
Okay, Yes.
Yeah, Jason obviously can say it's.
Kind of eye opening EMEA grew up in the south to be back down on that railroad, we took a trip across there.
Brady into Dallas, and think about the growth thats occur or think about the trucks that are on that highway to think about our environment as I'm running down the railway and I see the capacity and the great service that Casey's in Ns's created on that speedway and into Dallas.
Literally seeing 20 not far away.
Got me really excited about taking more of those trucks out that interstate putting them on that railroad I think it's a compelling opportunity that this nation needs and that this railroad uniquely we'll be able to provide a solution to.
Well, thanks for that color Keith how should we think about the yield.
On that intermodal, one Lazar order Chicago compared to maybe the average yield.
You know what.
It's a little early to tell obviously I'm only seeing a half that's an interline movement, but Jason I think I would ask you to sort of rest back on our principles of how we sell and approach our capacity and our customers in the marketplace.
We're not going to be doing it for practice I can assure you that we're going to earn cost of capital. Jason. So we can continue to invest in infrastructure and create a product.
That.
Is not going to be easily defeated when it comes to competition a great product at a low cost and it's a reliable service again that.
These three countries need that this combination uniquely we'll be able to unlock and create a very compelling.
We see the compelling value not just to the railway, but obviously to the shipper and to the nation.
That's going to be interesting to see if you guys can unlock sort of one of your original dreams, what Lazar. It wasn't it was created so I appreciate the time as always.
We certainly intend to do that.
Your next question comes from Ben <unk> of data more than bank.
Go ahead, yes.
Yes, thank you very much and good afternoon, everyone.
Just to come back on your single line service from La.
Card in Austin, Chicago, how much does it represent or is included in the billion dollar of synergies that you've talked about and I was curious also to learn more about your ability to add up more vessel in St. John on top of the recent contract that you just announced with <unk> Lloyd.
Thank you.
Yes so.
I think.
And the intermodal side and I.
I'm not going to drill down to specifics to relative to lesser OTA, Chicago, but I want to say, we had a couple of $100 million.
Tag to our intermodal product and again.
Based on what I've seen spaces, the enthusiasm from the steamship lines the wholesale community the retailers.
Quite comfortable in our ability to not only achieve and exceed as we build that that product.
I can tell you and glad you brought up the hefei loading the Saint John opportunity.
Just a tremendous proof point of a $40 million.
Revenue railroad that I see line of sight that now will exceed $200 million in a short two year time period, we have.
The marketing and sales team in combination with our operating.
And our partners in St. John have for lack of a better way to say it hit it out of the park with with that acquisition and our and our entry into Atlantic Canada.
I can tell you that business alone.
Is it going to double the size of our train pair that moves between St. John in Montreal, and the neat thing about that is you to begin to think about the power of that density on that line and what it does to the average cost per unit.
It does to the margin.
In that lane becomes quite powerful and frankly only makes us more competitive on a route that we already have a 200 mile advantage against our competitor in that lane.
This opportunity that I can't say it enough as a big deal.
It just strengthens our partnership with <unk> Lloyd and it's another way for eastern European producers to service, not only Canada, but but the upper Midwest of the United States.
That's great color John Thank you.
Yes.
Your next question comes from Brian Austin Bask of J P. Morgan. Please go ahead.
Hey, good afternoon, thanks for taking the question.
John can you, maybe expand a little bit on that $200 million of annualized revenue starting up in the back half of this year. I think you also mentioned there is some potential upside in there. So some more details on that would be helpful. And then I don't know if you can answer this one but the STB just announced an updated schedule in <unk>.
Of resubmitting the data.
For the.
Excuse me for the for the acquisition May 27th is when they expect it now so just big picture does that kind of still keep you.
On track for for the timeline you were talking about earlier. Thanks. So let me Yeah. Let me, let me take that and then I'll, let John provide some color on the revenue. The answer is yes, we still see an ability to get to.
A decision by the STB certainly within the regulatory timeframe no later than February .
Okay.
Yes so.
Brian on the revenue.
Sort of here's here's how it builds up I guess first of all on the coal opportunity I think.
We're going to begin to lap.
Well number one some easier comps.
We're going to begin to lap as that routes switched.
It's part of it is moving with our competitor.
But but also demand.
For tax coal is is very very strong and the.
Last I saw I think we were looking at the potential for an additional million tons roughly.
In in 2022 versus 2021, so certainly upside there I can tell you just staying on the Bulks.
Potash opportunity is even bigger than that million million five metric tons year over year in terms of opportunity.
Certainly we're going to get our big share of that with Canpotex and K plus S.
Do you think about that $200 million.
Maybe simply think about it like this.
40% of that is new business.
That is starting up with IPL and independent energy.
And into the Toronto market for refined fuels. So at the ECP business and then the bulk of that opportunity really centers on the intermodal business and.
That being the half AG Lloyd business, we spoke to and some other opportunities I can't speak to yet, but that we're pretty excited about that are going to be joining CP.
Alright, Thank you very much I appreciate it.
Thank you.
Your next question comes from Steve Hansen of Raymond James.
Please go ahead.
Yeah. Thanks, guys I appreciate it John just a quick question on the potash cadence the market's very acutely tight as you described.
Nutrient mosaic have already announced augmented production to backfill some of that lost supply, but we really haven't seen the potash volumes moved much at all yet.
Im looking at the weekly cadence has there been any restrictions beyond.
Whether I guess in Q1, and some of the Covid sort of curtailments that you've had I'm just trying to understand the cadence there how that ramps up and what restrictions have been thus far.
The good call out Steve it's been frustrating I can tell you it's been frustrating for Canpotex.
Also.
And we fully expect that.
Ramp up now.
And I think we have seen a little bit of improvement here the last.
Last couple of weeks.
I can tell you where we.
We're struggling a little bit on our Portland movement right now just with some of the off road struggling on on cycles.
That's held us back a little bit in that corridor. So.
I think.
Certainly a few hundred thousand tons over the last three weeks have haven't moved in that corridor that we had fully expected.
But I can tell you there is there is no lack of.
Desire from from certainly Canpotex, our cable SaaS perspective, I think we are in great position CPE.
To be able to handle the volume and I can tell you. There is there's ongoing investment being made by those both those shippers in equipment to be able to work with us and fill that that demand as we move through the year.
Okay, that's great perspective.
Yes.
We have reached our allotted time for question and answer right now like to turn the call back over to Mr. Keith Creel.
Okay. Thanks, everyone for joining us this afternoon, let me close by saying hopefully takeaway the sense there is an undeniable momentum.
Moving forward at this company, we're excited about that I would call them industry unique.
Opportunities ahead of us with our line of sight for our CB standalone opportunities and certainly the promise of a combined <unk> network the future looks very bright new unique and exciting for this organization. We're looking towards the future ahead with great optimism, we're going to continue to grow more confident excited about the transformational part.
<unk> abilities that lie ahead, we look forward to sharing.
The evolving chapters of that on our next call as well as Ah.
A much different outcome in our results given the demand and the operating condition of this network when we talk together again.
<unk>.
Okay.
This concludes today's conference call you may now disconnect.
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