Q2 2022 Canadian Pacific Railway Ltd Earnings Call
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[music].
Good morning, My name is Stephanie and I'll be your conference operator today at this time I'd like to welcome everyone to Canadian Pacific's second quarter 2022 conference call. The slides accompanying today's call are available at Investor. That's C. P. R Dot C. A R.
<unk> have been placed on mute to prevent any background noise after.
After the Speakers' remarks, there'll be a question and answer session. If you'd like to ask a question simply press Star then the number one on your telephone keypad if.
If you'd like to withdraw your question press the pound key I would like to now introduce Megan Albertson, Vice President capital markets to begin the conference.
Thank you Stephanie good morning, 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 the.
M. DNA that are 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>, Chief Financial Officer, and John Brooks, Chief Marketing Officer.
The formal remarks will be followed by Q&A and in the interest of time, we would appreciate if you could limit your questions to one with that it's now my pleasure to introduce our president and CEO , Mr. Keith Creel, Alright. Thanks, Meghan good morning, and thank you for everyone. Joining us today, let me, let me start off as I always do thinking.
Our entire CP family I can tell you, it's a very challenging first quarter I'm extremely proud of the resilience and the tenacity. This teams demonstrated delivering these results over this second quarter of the year during the quarter. We produced second quarter revenues of $2 2 billion, an operating ratio of $59 seven core EPS of <unk> 95.
<unk>.
And as we expected with a more normal operating environment. The team delivered strong sequential improvement in number of the metrics that drove the financial performance. We had sequential improvement Q1 to Q2 of 16% on locomotives.
Productivity car miles per day improved 15% dwell improved 13% also I'm very excited about.
The self help business initiatives that continue.
Continue to be accomplished by the marketing team.
Saturn developments on the customer front, new business announcements and it even afford expansion, which John will get into more detail in his comments.
On the CPE Casey front positive momentum continues toward our transformational merger last week as many of you are aware the STB announced dates for the public hearings going to be late September as we continue toward in early 2023 decision date customer feedback continues to be overwhelming.
We continue to run test shipments.
On an interline basis in intermodal grain metals.
And continue to have very progressive and exciting.
Floor toward discussions about new opportunities in export potash. Another key development, we're super excited about the announcement by the case, yes. They successfully negotiated 10 year extension to the exclusivity rights and my hats off to Pat Oscar in the Casey's team for this tremendous outcome.
And again the momentum continues as we do our planning to hit the ground running good seed expectations for all stakeholders. So so we're in a good spot we continued to gain ground and look forward to realizing the vision of that transformational mergers as we March toward the first part of 2023 and looking at the back half.
The year from a demand standpoint, we continue to build momentum on the CP network the upcoming grain harvest. So it can better every day the demand environment continues to be strong we're resource to deliver cruise locomotives cars, we still expect to deliver double digit RPM growth in the back half and ultimately grow our Tms and earnings for the year.
That said, let me hand, it over to John to provide some color on the markets before I turn it over to Nadeem to elaborate on the numbers alright. Thank you Keith and good morning, everyone. So let me start by saying and reiterating what Keith said I'm very pleased with how Q2 played out.
Looking at the results revenues were up 7% on the quarter.
Fuel and FX combined to be a significant 10% tailwind offsetting the 2% our T M headwind, excluding the headwind from Canadian grain in the quarter Rpms were up high single digits during the quarter the pricing environment continues to be very strong with inflation plus renewals.
That actually are continuing to accelerate as we move into the second half of the year now taking a closer look at the second quarter revenue performance I will speak to the results on a currency adjusted basis.
Grain volumes were down 23% on the quarter, where revenues were down 18%.
As the current crop year comes to a close we will continue to see the headwinds from the 40% smaller Canadian grain crop until this year's harvest starts to come off the field.
We continue to offset some of that challenging conditions in Canadian grain with another strong performance in our U S Green franchise, which posted a third consecutive record quarter.
Now looking ahead, there is still a few months yet before the new crop is harvested, but the growing conditions have improved across all of the priorities.
Current expectations are for a crop above 70 million metric tonnes, which is in line or if not a little better than historical averages.
With delayed seeding in Q2 from too much moisture in some areas.
We expect harvest to be later than normal, which could push grain volumes into Q4 are actually into 2023.
Finally, we received positive news that regulated grain revenues will increase by 12, 7% for the 2022 2023 crop year that starts August one on.
On the potash front volumes were up 10% in the quarter, while revenues were up 26%. We continued to see strong global demand for AG nutrients with the ongoing disruptions in potash supply from Belarus and Russia.
We expect Canadian potash to remain a growth driver at CP.
Looking ahead, we see the strong likelihood for Canadian producers to continue to accelerate growth capacity and expansion to fill this growing need of potash supply.
The increased demand for Canadian potash is creating great opportunities for the potential to move volume south to new export outlet to reach the growing South American markets.
And to close out our bulk business coal revenues were down 4%.
While volumes were down 14% now moving onto the merchandize side of our business the energy chemicals and plastics portfolio saw revenue decreased 10% while volumes were up 3% now excluding crude core ECP commodities delivered record Q2 results.
<unk> ahead, you can expect ECP volumes to perform well driven by new business with independent energy and IPL. Both in the process of ramping up and will continue through the second half of the year.
Forest products volumes were up 1% or revenues were up 12% and.
And in MMC revenues were up 23%, while volumes increased 10% setting an all time quarterly record driven by continued strong pricing and demand for <unk> frac sand as we see higher drilling activity continue.
As we also see higher <unk> prices.
Our sand producers are well positioned on our network to meet this increased demand and we are working closely with our operating team and customers to increase our train lengths to maximize our capacity and the potential in these markets.
Automotive revenues were up 19% while volumes were up 4% on the quarter. We saw sequential improvement in Q2, and we expect continued improvement in the back half of the year. The growth. We are seeing in automotive is driven by ongoing industry replenishment and self help initiatives, including our new GM business.
They started up earlier this year.
Now finally on the intermodal side quarterly volumes were up 14%, while revenues were up 28%.
A third consecutive record and an all time best quarter for our Tms, beating the previous record by 13%.
New happy Lloyd call at the Port of St. John began at the end of May and we are seeing strong demand for this service.
The port St. John in collaboration with CP and other stakeholders were successful in securing additional federal and provincial funding to move the port from a 300000 Teu capacity the 800000 Teu capacity.
When we purchased <unk> just taking you back we talked about growing this business from 40 million to $100 million in 24 months.
As we look at it today, we are on pace to do over $200 million in new annual revenues over that railroad.
In Q2, we also announced new market share gains with CMA that started up July one and just recently, we extended our strategic partnership with Yang Ming.
We expect to deliver continued strength in the international intermodal space.
For domestic intermodal this was our seventh straight record quarter and our best all time performance for our Tms carloads and revenue.
We expect our intermodal franchise to continue to produce strong results in the back half of the year driven by our service strong pricing and self help initiatives.
So let me close by saying with the new business, we brought on in a more normal Canadian grain crop just around the corner I continue to be confident in the double digit RPM growth in the back half of the year.
The team is focused on executing our playbook continuing to sell and price to the value of our servicing capacity because that's what we do.
We are staying close to our customers and our operating team to ensure we are working closely to navigate any rapid change in demand.
Now finally, I continue to be streaming pleased with the support from our customers and the volume of opportunities as we look to open new markets across North America with our proposed <unk> merger with that I'll pass it over to Nadeem.
Thanks, John and good morning, I am extremely proud of the dedication of the team displayed to produce these quarterly results said back in January we expected to deliver a strong Q2, which we did and as we stand here today the balance of the year looks extremely bright.
We are building off this momentum and our expectation of double digit rpms in the back half to achieve volume and earnings growth on the year.
Now looking at the quarter. The adjusted operating ratio came in at 59, 7% more than 1000 basis point improvement sequentially.
I'm very proud of how the team control costs and manage the railroad in spite of rising fuel prices and the continued headwind from grain.
Taking a closer look at a few items on the expense side I will speak to the variances on an FX adjusted basis.
Comp and benefits expense was down 9% or $35 million versus last year. The primary driver of the decrease was lower stock based comp in the quarter.
Youll see average head count on the quarter was up sequentially by about 6%, you'll see another step up in Q3, as we continue to bring on resources to support back half volume growth.
Fuel expense increased $146 million or 65%, primarily as a result of higher fuel prices, which were up 68% on the quarter.
Increased fuel prices on the quarter added 220 basis points to the or.
Materials expense was up 15% or $8 million as a result of cost inflation largely in non locomotive fuel.
Depreciation expense was $211 million, an increase of $9 million, excluding FX as a result of a higher asset base.
Purchased services was $294 million, an increase of $35 million or 14% when adjusted for acquisition cost. The main driver of the increase was cost inflation and higher casualty costs in the quarter.
Moving below the line the equity pickup from Tcs was 261 million when adjusted for Casey's as acquisition related costs and purchase accounting.
Other components of net periodic benefit recovery increased $5 million, reflecting higher discount rates compared to <unk>.
Net interest expense is up $59 million versus last year as a result of a higher debt load related to the <unk> acquisition in Q4 2021 and.
And finally income tax expense decreased $25 million or 11% on an adjusted basis, excluding <unk> related items, the effective tax rate was 24.25%.
Rounding out the income statement core adjusted EPS was <unk> 95 in the quarter.
On the free cash side Casey has notified us we'll be receiving numbers in shortly and we continue to repay debt.
While interest rates have been volatile I'll remind you that 100% of our term debt is fixed rate.
And as we're focused on paying down debt to return to target leverage we have no near term financing requirements.
We continue to invest in the railroad and earn a good place from a capacity and resource perspective.
Set at the start of the year 2022 is going to be a tale of two house and that's exactly how it's playing out.
While there are headwinds from rising fuel prices inflationary pressures and slight delay in the grain harvest as John mentioned this team is well positioned to continue to navigate and execute them.
We are well positioned to carry this momentum forward and deliver a strong back half.
And as I look ahead to 2023, and our transformational merger of Kansas City, Southern I only get more excited about the opportunities in front of US we have a unique growth story in front of us with the team to execute it with that let me turn things back over to Keith before we answer some questions alright. Thank you for those comments.
Hey, Damon John Let's let's go and open up the line for questions operator.
Thank you have you'd like to ask a question simply press Star then the number one on your telephone keypad.
I'd like to withdraw your question press the pound key.
As previously highlighted please limit yourself to one question.
Your first question will come from Tom <unk> with UBS.
Hi, yes, good morning.
Wanted to ask you a little bit about intermodal.
I think we've seen some.
The evidence is some constraints or some indication of some issues at Montreal and Toronto.
I guess drayage and terminal I don't know if terminal issues or warehouse issues, but wanted to see if you could comment on that whether that said.
You would expect any effect on your.
Volume in second half and then also how would you think about U S consumer weakness.
And how that might affect the outlook for.
For your intermodal volumes in next couple of quarters. Thank you.
Alright, Thanks, Tom This is John .
Couple of thoughts on the congestion piece will certainly I can tell you at CP, we're moving record volumes of both domestic and international intermodal.
I think for the most part our network has stayed resilient on that front. It not that we haven't had some hotspots, whether it would be at the port or inland as you described but for the most part I am quite pleased with how the operating team and our commercial team have navigated through that.
I can tell you we're working closely with the ports were working closely with our customers to pull the levers we need to pull.
To ensure that fluidity.
We've got a unique circumstance at our inland terminals, where we have strong levels of capacity not only greenfield space.
But just general capacity in those in those intermodal facilities. So we'll watch it closely we'll continue to work if we need to pull other levels, we will but right now I feel pretty good about our positioning.
Not like in dissimilar that we saw over the last year that intermodal space and particularly international intermodal has been choppy at times.
As we've navigated through Covid and certainly some of the challenges that the U S ports or other ports.
Yeah.
Arctic continues.
So that that Choppiness is still out there, but nothing IC tells me that we're not going to continue to deliver strong record results.
The back half of the year on the intermodal front.
Certainly we're watching the news in here all the reports.
Walmart and others.
Pretty cautionary.
We're talking to our retailers our domestic team is talking to our retailers everyday and actually I'm still quite optimistic.
We see this year.
Continuing to be strong and in both of those books domestic and international and then we'll see what plays out in 2023, but frankly I'm still optimistic that at least the first part of that.
We continue to see a tail on this the strong demand that we're realizing right now.
Yes, I think the only thing I would add Tom key point key takeaway our terminals.
To John's point, we've had a little bit of Choppiness at times, but systemically no issues. We have capacity, we're not holding any freight at west coast ports or east coast ports.
To pace into our inland terminals, we have the capacity, we're open for business and we're ready to generate the revenue.
For ourselves our shareholders as well as for our customers.
Great. Thank you. Thanks.
Thanks Dara.
Thank you. Your next question comes from Betty Chen with BMO capital markets.
Yes. Good morning, Thank you for taking the question.
My question is on capacity as well.
Had a.
And almost five years now even more of a.
Very strong growth and I'm thinking about places, especially on the <unk>.
Western side of your network in Vancouver.
With a strong pipeline for growth over the next two to three years. How are you thinking about capacity are you starting to.
And feel.
The need to kind of.
Look into.
Capacity investment do you have the roadway to keep growing at the same pace of job had been the last few years without making any big capacity investments.
Yeah. The answer the short answer to that and absolutely. The answer is yes, we do fatty the last five years, if you look at the overall growth.
We are growing better than the industry has we've done better than others, but to me, it's still not an overwhelming amount of growth in all along that period, we've continued to spend money and invest in our infrastructure extended sidings. We have a very robust planning process. We look at it from a three year view, a one year view.
A six month view.
So theres a very disciplined.
<unk>, that's truly fundamental woven into the way of <unk>.
Words should work, where you plan ahead.
Look at Lane by Lane, we clearly understand.
Where are.
Capacity opportunities are and we invest ahead, just as we invest ahead and locomotives. We invest ahead and people it's sort of like approach, it's a very disciplined process.
But it's it's one that we've honed and we're very well versed at executing and it's how we navigate this railroad day in and day out so I'm not concerned about oversubscribed in this network, we're going to be a step ahead of that and if we get to a point with capacity and demand.
That would cause us to have concern will know ahead of time, we will plan for.
And we'll be ready for it much like I think about I'll give you a case in point that Maersk contract that we signed during the pandemic.
That was up eight.
<unk> nine month planning process part of that negotiation.
We participated in myself and John met with Maersk and we said if we're going to do this we've got a responsibility to our existing customers, we do want to grow and where we're going to grow with you, but we wanted to do what we say we're going to do we're going to deliver for you as well as fulfill our commitments that we've made previously to our customers. So there was a very.
Well thought out executed capital investment plan that laid the groundwork to be able to onboard maersk and grow with <unk>, because we have since we implemented that very strategic.
Contract win and that's the approach we're going to take we have taken and will continue to take CP as well as the CPE Casey networks.
Pending the Stb's approval of our transaction.
The only thing I'd add is we during the early part of Covid when when volumes were down significantly we did take advantage of that.
The network being open in order to us.
Accelerate some of our capital investment and be more productive with what were investing so that allowed us to do more with with less and I think has served us well.
Thank you I appreciate it.
Thank you. Our next question comes from Walter <unk> with RBC capital markets.
Okay. Thanks, very much good morning, everyone. So I want to go back to your <unk>.
Your point on intermodal and I know in some of the news here 40 container ships sitting outside Savannah, obviously, a lot of congestion in the east.
In the U S East and.
Your new auction through St John and the <unk> It looks like it's coming it couldnt come at a better time.
Mentioned, you've gone up to 300000 Teus.
From certainly under under 90.
And plans to go to 800. My question is could you could you be a 800 sooner.
In other words is the demand there to use more than the 300, you're using you're you've committed to right now and as the limiting factor.
<unk>.
The increase that you are looking to bring on and cannot be pulled forward at all if that's the case, what's the earliest do you see the full 800000 capacity being realized in your in your new route through St. John .
And no good question Walter.
So look the port.
Is the moment, we received the funding started the process, where we're filling in some open water fingers that are really the first step of getting that dock space.
Increased and that is underway. They are working as fast as I can there are some opportunities to incrementally step that up we don't jump from three to eight.
We will be able to do some of that work in 2023, we'll be able to take some step functions upward on that Walter.
You're exactly right I can tell you the <unk> original port of call service. The new service that that started in May and an even CMA is business that we brought on here in July all of those volumes are material sizing it.
At levels higher than than I think us and the steamship lines expected.
And I do believe that is a function of of these customers are looking to diversify their books the challenges on the.
The U S East Coast that you described and frankly.
We've got 200 plus mile shorter route into these markets and it and it matters and we've been able to with partnership with the <unk> and the port put together, a really strong value proposition for these folks so.
All of that to being saved to answer your question, Yes, I do think there is some incremental steps and opportunities to grow that port.
In the meantime, before we actually hit the 800000 Teu Mark.
Great color John appreciate the time.
Yes.
Thank you. Our next question comes from Jon Chapell with Evercore ISI.
Hey, good morning.
Nadeem I wanted to ask you about head count in comp and benefits in your head count on average in Q2 'twenty. Two is roughly the same as <unk> 'twenty, one, but your comp and benefits was down pretty meaningfully so kind of two part question. One is there something kind of one tiny in the cost per employee and this past quarter and B as we think about how your ramp.
Being up your resources over the next six months to meet this demand growth, but ahead of the big transformational event next year, how should we think about the cadence of head count growth and cost per employee.
Yes, nothing necessarily 111 time nature in the quarter.
There was some.
The quarterly.
Quarterly accruals that you have as far as incentive comp in <unk>.
The true up of stock based comp that we do each quarter. So there was some of that that occurred.
Beyond that as you think about.
What we've talked about which is double digit volume growth in the back half of the year, we've been hiring and training throughout the first half of this year. So we're actually absorbing some of those inefficiencies in terms of hiring training and the costs associated with that.
Not seeing the volumes and the topline benefit so youre going to continue to see that through Q3, as we continue to hire and train so we're going to have.
Higher labor costs, but.
But not getting that efficiency and thats why.
I feel good about the fact that Q4 and into next year, we're going to have a better overall cost performance and operating ratio just given the fact that we will see the benefit of this pre hiring that we're doing so.
It's kind of the cadence of.
Whats occurring on comp and benefits.
Okay.
Figures.
Head count adds over the next six months to hit the double digit RPM growth and again do we just kind of take this comp.
Cost per employee in the second quarter and think about that being similar to the rest of the year sorry for the follow up.
No worries.
Yes, you should expect us to continue to ramp up.
I think our average head count was about 12500 in Q2.
Sure.
Should see that going up another probably 400 people through the end of the year kind of on an average head count basis.
And what was.
Second part Sir.
Just the cost per employee I mean, it was down pretty meaningfully sequentially. So how do we think about that.
Yes, the cost per employee is a bit of a tricky one right.
Depending on what the stock does to stock price does.
Fact that so.
We've seen a strong July and I think we'll continue to see.
The stock performed well.
Is that Youll see additional costs kind of come up through that as we true up for the stock based comp so.
Can you tell me what the stock does well tell you what the cost per employee will do that that's that's a tough one.
I will try my best Thanks, a lot alright. Thank you.
Thank you. Your next question comes from Amit Mehrotra with Deutsche Bank.
Thanks, excuse me, thanks, operator, hi, everyone.
Can you talk about our expectations for the second half just given the Artyem inflection are we kind of solidly in the mid fifties. If you can just offer some color there and then Keith maybe more big picture.
<unk> National is talking about sure rating.
Some business back to their words not mine.
And we've talked about kind of growing too much in the wrong places and addressing that does that create opportunities for CP. If you could talk about that I know you guys want a decent sized CMA contract from them recently, but just wanted to see what's happening at CN creates incremental volume opportunities for CP and.
Our pricing opportunities. Thanks.
Yes, So let me just.
Feel good about the combined back half that will be in that mid <unk>, maybe kind of upper side of mid fifties in the back half.
I'd point out a couple of things just one to the earlier question, but stock based comp I think we'll see a little bit of that headwind in Q3.
And I think that John's commentary about the delay in the harvest so as the grain harvest gets pushed later into Q3 almost in Q4, we won't see the full benefit of operating leverage until kind of that October November timeframe. So.
Gives me.
Some reason to say I'd rather <unk>.
To a stronger Q4 than Q3, but.
Look at <unk> as a whole.
Kind of upper mid <unk> is probably the right place to.
Think about it.
Alright and <unk>.
Let me just say this.
What I'm seeing in the marketplace and what I hear.
See in say in and having a bit of experience in this in understanding this.
Business for the sake of business, if you can't make money on it obviously, we don't do this for practice, we've got a high.
Cost of capital in this business.
You got it you got to pay the light deals you've got to be able to pay for your you're seeing on the train for lack of a better term and if.
And your pursuit of revenue you've.
<unk> made some very unnatural decisions for your network that don't serve your network well are in fact in the answer of the customer well, it's not really a win win for either party. So as you.
Cure rate are you take a look at.
That's a natural what doesn't fit what doesn't work well for you and what doesn't work well for the customer.
Then, yes that does create opportunities for Canadian Pacific, but I can tell you. This.
The same disciplined approach that we've taken for the last.
Eight nine years, when it comes to business and making sure that.
We're able to provide a value proposition for our customers and in turn they felt the same way about it is the same approach. We're taking so he can talk about CMA you talk about some of this business historically.
Historically, if you look at the last same time period that swung one way to the other business that that's not as sticky. These big contracts. When we took a look at CMA as we take a look at our book of business.
We're going to make sure that we're providing added value for them and what they are operating at a rate adds value for us.
So again, we're not going to Oversubscribe, our network, we're going to do it smart low cost sustainable growth is what this business model is all about and that's the approach that we'll take on a go forward basis.
And in the end.
That is best for the customer that's best for the rail network as well because again you did know good if you're oversubscribed your network trying to please one customer in your Dissatisfy and disappoint the balance because you don't have the fluidity you don't have the velocity on the assets you don't have the service offering that running.
And a true <unk> railroad produces.
So that's a critical critical ingredient to success so again.
You need to expect that same disciplined approach in the marketplace from this company as we have and as we will going forward.
Okay, Alright, I appreciate the comments, thank you very much.
Thank you. Thank you.
Thank you. Your next question comes from Brian <unk> with JP Morgan.
Hey, good morning, Thanks for taking the question wanted to ask about Mexico, and the U S. Trade complaint that was just filed obviously these issues have been simmering for a while so just wanted to get your view on <unk>.
This dynamic headed into the CPE Casey transaction.
And then I don't know if.
Pat or Mike on the call, but any sense in terms of the range of outcomes.
This might impact the refined products business or even longer term some of the near shoring or cross border activity coming into the U S.
Well, let me, let me start pad microdot with us today, but I can tell you is the case, yes.
My discussions with patent attainment.
And looking at obviously, we had a lot of insight into this as we analyzed the transaction.
Their business has already been impacted by what's going on in the energy work environment. So to speak in Mexico and actually in spite of this dispute which is part of the U S. MCA.
The refined fuels is increasing they are actually able to bring more product than they were at the low point and so.
I see this USC U S. MCA provides the structure there is a dispute mechanism minute I believe that the parties will work these things out I believe that.
Even more so than ever.
And our countries our nations history, the world's history, there's never been a greater need for positive free trade between Mexico, Canada, and the United States. So.
So I think this is going to get navigated I think at the end of the day that.
This transformational merger that we're putting together will allow additional free trade to flow between these three nations and I think this is just a moment in time that none of us have to lose a whole lot of sleep about it doesn't change that thesis at all and I think it's going to be full steam ahead, and we'll turn the page and we will see these three <unk>.
<unk> grow together and benefit uniquely together.
Okay.
Thank you Keith.
Thank you.
Thank you. Your next question comes from Scott Group with Wolfe Research.
Hey, Thanks, Good morning, guys I don't know if its a little too early to ask this but as we get closer to the merger approval any thoughts on how to think about sort of the cost and revenue synergy potential in 2023, and then Nadeem you talked about getting closer to the top.
We get leverage.
Levels and I'm, just wondering if you see the potential to start resuming buybacks next year. Thank you guys.
Scott John Rex here so.
I'll tell you as I work through the synergy levels.
We think about initially I think we have said that you can think of that $1 billion is maybe a third a third a third as you think about how it comes on to the network and.
And I can tell you. We continue are calibrating, what that looks like specific too.
How we're going to invest where we're going to have the capacity to haul that freight how quickly we can generate an intermodal product.
That can effectively service three countries and in and out of Mexico, and certainly that golf and.
And Texas market.
I can tell you as I go through business unit by business unit on a weekly basis with my team looking at those synergies as we talk to those customers I continue to feel very confident that that 2023 that coming out of the chute.
It's going to be a significant opportunity.
To sort of hit that that plan as we've described again the traffic mix and what it looks like and certainly some of those areas that.
May require investment like port investment or new to brand load facilities.
That'll take a little time some of those likely as construction could start after we get get our final STB control.
May take a year that some of those opportunities roll into 2024, just because that that investment in that construction needs to take place, but all in all I feel real good about the opportunities that we can turn on I'm going to say very quickly to be able to hit that.
That first year target.
Scott on the cost side I can tell you this.
The Casey's team.
Not waiting as far as improving their operation, they're an evolving chapters of their <unk> journey I can tell you.
Jeff Solver.
Leading into this and now John or leading the operating team there.
They are working hard every day to run a more efficient network and you can see it in their numbers you can see it in their performance.
They are investing in their infrastructure standalone.
And that land going down into.
Mexico to the border.
You think about the gravity of this transaction, we said $275 million.
<unk>.
Capital investment that essentially thats dedicated to extended sidings new sidings rails.
Our rails ties and ballasts CTC all.
Hard asset infrastructure that will allow the network to run more efficiently run safer more fluidly.
That's about 30 sidings kind of split evenly between the two railways.
That said if you think about the case, yes network alone Theyre doing an additional.
15th 16th sidings.
Stand alone before the transaction at.
At the same time <unk> on our side of the railroad, we're doing things in that corridor north of Kansas City that is sort of getting a step ahead. So that as soon as we get these two railroads together the STB gives us a green light we will continue to invest in the infrastructure, but the investments we've already made the traffic that rides. It today the operating plan.
That we have ready to engage and execute youre going to see cost synergies.
Again, this is not driven by cost synergies, but just railroading better being more efficient with assets turning cars faster.
Putting these two networks together and benefiting on the backbone of those capital investments.
There is no doubt in my mind that we're going to overachieve when it comes to the cost synergy standpoint.
So again, we're getting ready we're not sitting here waiting.
The objective is when we get the Green light, we're going to hit the ground running we're going to be aggressive we're going to be responsible and we're not going to overcommit oversubscribed, its going to be very methodical, but at the same time, it's going to have a momentum to it.
I think there is going to take.
To exceed everyone's expectations I feel very confident about that.
Scott just on your leverage question, so when we look at it.
The outlook for our free cash for this year and the outlook that the Casey's team is is provided.
I think we're in a good spot as far as continuing to delever or nor plan.
Obviously, let's see what happens in 2023, but as you've heard there's probably more confidence in synergies and less so I think we'll be in a.
Very good position to get our leverage back down to our targeted level by the end of 2023.
I'd just say that.
Typically we make our capital allocation patient decisions with the board.
January timeframe, so when I look forward.
Probably look at that January 2024 is a decision point around what we do with excess cash flow once we delever back to our targeted two five times. So I wouldn't get too ahead of yourselves in terms of 2023, but 2024 is probably the right time to think about.
Capital allocation.
Yes.
Super helpful. Thanks, guys.
Thanks Scott.
Thank you. Your next question comes from Ken <unk> with Bank of America.
Great. Good morning, Hey, just a quick one for Nadeem did you talk about gains on the quarter from fuel revenues and costs and then Keith a few big picture thoughts it it seems like a lot of our new one <unk> is getting tossed out maybe your thoughts on one man crews from the foray and thoughts on PSL pressure as companies start to return a hump yards.
Back employees and locomotives ongoing pressure from regulators on service levels, maybe just your thoughts on if.
If companies are missing the <unk>.
Commitment or if theres something else going on that we've run our course, maybe just talk a little bit about that thanks.
Yeah, So Ken just on the fuel impact was a headwind on the <unk> bye.
<unk> 220 basis points, but on.
We did get a modest oi tailwind.
Modest in that around $30 million, so that's what I'd point to.
$30 million is different revenue cost Yeah go ahead, I'm, sorry, yes, sorry, okay. Thanks Nathan.
If I can.
Let me start with the FRE.
Yeah.
Noticed that came out yesterday I would say this it's disappointing.
I've always been a proponent of <unk>.
Personally until and unless we get the components that we put our trains together ways to become more reliable on until and unless we can make sure that we can get that train over the railroad.
Without a knuckle braking.
Gotta be extreme exception not a not a normal occurrence theres just when you put a trained together there's a lot of moving parts in those moving parts.
Historically have created some challenges so if a train separates and its 10000 foot long.
And you don't have a matter of enrollment to assist the engineer that can get complicated.
So that's something that I'm very sensitive to.
With that said, we work with our suppliers to improve those components, we should not be put in a disadvantaged placed when technology allows safe and efficient operation components allow us a safe and efficient operation to be disadvantaged from realizing the benefits of that and staying competitive.
And that's to me is exactly what that smelter.
To put us in a place where all of those things being accomplished we're at a disadvantage or cost disadvantage, we're not able to do our very dead level best to take trucks off the road put them on the rail to allow the customers to enjoy the benefits of those cost synergies as well as the environment enjoyed the benefits.
Of those less greenhouse gas emissions, we're talking about the environment matters, we're talking about.
Zero carbon we're talking about reducing greenhouse gas emissions, but yet we're talking and looking at potential actions by the regulator that says we can't do that or we can't optimize that outcome and to me that's troublesome.
So I'm sure that each railroad has their own view.
Again I'm not against the.
<unk> I've got to work with FARA I, just hope that as the discussions evolve around this topic that we really think about the unintended consequences to think about the totality of what's being suggested.
So that said when it comes to the regulatory environment around.
CSR implementation.
<unk>.
Is not.
And operating model and the name alone.
<unk> to me to truly integrate and implement a <unk> railroad.
It's a very well thought out process. It is that in and of itself. It's a process.
You've got to have the right number of crews you've got to have the right number of locomotives you got to have the right number of cars you got to have the physical infrastructure.
So it's not just as simple as implementing and integrating and different railroads have at various levels of success I can say that this pandemic and this manpower issue. If you don't have people trains don't move.
And some.
Some things have occurred in the middle of <unk> implementation, they quite frankly stack the deck against these other railroads that being said once they get their hiring done once they get their infrastructure to match their aspirations for train sizes and terminals as well as line of road.
You don't do a lot of good to run a 10000 foot train and it's got nowhere to.
To land, if youre sitting outside of a terminal.
You can't get in the terminal because the trains too large there are unintended consequences, if youre doubling trains out of terminals in park at a more main lines waiting on power because youre holding out one of those big trains because it can't get in the terminal you have unintended consequences and again those are all growing pains I know the real pains I know that obviously it's.
Affected.
The railroads.
Overall ability to serve customers needs, but I do see it getting better I see the hiring helping.
I see getting to a place that is is these railroads get their cadence and the rhythm and they get more experience in muscle memory and these processes that it takes to actually effectively run.
A <unk> railroad I think it's the right way to run a business and I think in the end, we will look back and we will say this was a good thing.
Hard to say that now.
With my experience having done this for over 20 years and I didn't get it all right either we made some mistakes along our journey at Canadian National and Canadian Pacific and even Illinois, Central but we will learn from those we've baked those into the way we railroad today and I think you can produce a better outcome and I think we are proof positive that we have.
Manage this cycle with PSA on the down cycle.
We've right sized the railroad we've grown like no. Other railroad has over the last four or five years, and we've created an infrastructure and a rhythm and an ability and a respect with our customers and our trust with our customers that we're helping them win in their marketplaces as we win for all stakeholders and we're doing it as a <unk> railroad.
I think I think it's a good thing.
And I think eventually the industry will get there as well, it's just taken a little bit of time.
To get there in a best thing. We can do is continue to improve best thing I can do and we can do at CP is make sure that our story, our unique story and our unique outcome running of <unk> operating model is understood and that's exactly what we're committed to doing we do about what we say we do it most importantly by what we do and the way we run the railway day in a day.
For our customers.
I appreciate that thanks for the question thanks, guys.
Thank you. Your next question comes from Chris Wetherbee with Citi.
Hey, Thanks, Good morning, guys. John You mentioned I think in your prepared remarks that contract.
Pricing on contract renewals was accelerating in <unk> wanted to get a sense of maybe how you're thinking about the pricing environment in the back half and there's probably been some sense that maybe we're getting closer towards a plateau of your ability to kind of get accelerating price, but it sounds like maybe you're having more a lot can you give us a little bit of color on that please.
Yes, Chris.
I know when you flip on the television it might be counterintuitive in some sense.
With all the noise out there, but then again.
Inflation hasn't slowed down either.
So we've got about 20% of our book left to go.
And just reviewing that.
I spoke in the past of of that were.
Even 6% plus.
And I'm seeing that even accelerated in terms of.
My team's expectations on on what the market opportunities are.
So.
I don't see that changing.
You think about our intermodal franchise and all of the business.
That we have out there today that demand I think our trucking.
And length of haul is different than what maybe the U S roads face day to day.
And that add some resiliency in that pricing space in Canada for us.
And then just frankly, the other lines of business continue to be strong and as I said, we're going to get a nice tailwind on the Canadian.
Grain front too with with the VR CPI in the back half of the year or two so.
I don't were not taken our foot off the pedal at all on that front and we'll see what 2023 brains, but as Keith said and Keith spoke about.
The <unk> journey.
Our sales discipline in how we approach the value of our service and our capacity doesn't change in good times or bad times, and and yes. The quantum is it always 6% plus it but but the discipline to keep that to make sure that we are inflation plus.
And we are capturing the value in the marketplace for our servicing capacity has never changed and as you know.
A big part of our compensation plan for my sales team.
Drive them on that discipline.
And that's not going to change so.
Regardless, what 2023 brings will we will continue to be I would say the top end of that that pricing bandwidth.
Got it thanks very much for LPGA.
Yep.
Thank you. Your next question comes from Brandon <unk> with Barclays.
Hey, good morning, and thanks for taking my question John Im just wondering if you could follow up on your commentary.
The delayed harvest that about Canada, or the U S as well and I guess, you still have a pretty bullish outlook on volumes what are the favorable offset for book to Bill and.
And the address.
Okay.
You are kind of quiet there, but I think I got I got most of it.
So the grain front, yes again in Canadian grain I can tell you we have we've fully subscribed or are trained product.
Our customers are chomping at the bid given such the year that that we've had in Canada.
Really the key point, we're watching right now is just simply timing.
When will this crop start to come off is it mid September or does it push all the way into October .
But regardless I think we are we are positioned well.
Vancouver Thunder Bay.
U S imports.
To service that market. The U S side is is not dissimilar, particularly.
Randy if you think about our network for so heavy dependent North Dakota, So the growing region not a whole lot different than southern Saskatchewan in southern Alberta.
So some of those same challenges persist there we will see I think we're in a little better shape in terms of a normal timing, we should start seeing wheat crop come off here in the coming weeks.
Soybeans in September and it's really that soybean pushed to export that really will begin to drive those U S grain volumes.
So again, we'll be watching tightly that timing.
That is typically a second half of the year September .
But we'll see how these next few weeks play out.
I think the projections look Mormon warm and hot so that helps get that plant matured and ultimately the opportunity to bring that harvests along on time.
You had a second part of the question Brandon I can't remember what it is now or maybe you didnt.
Yes.
That's getting pushed back that youre, maintaining your growth estimates what had been the favorable offsets.
Yeah. So.
As we talked about that that intermodal space you can't continue to drive hard.
But I can tell you.
As I look to forward demand curve for our system equipment across say our merchandise sector.
Our center beams are scrap guns are.
Box cars, our pulp business.
We're fully subscribed.
That is more about velocity customer discipline loading on weekends, how we can spin those assets as fast as possible.
And frankly as some of our connecting partners velocity improves we get that equipment back sooner we get another load.
I think youll see marked improvements in that we had a little bit of a choppy July and in the auto space sequentially. We saw a nice improvement, but it's sort of like what could have been if July would have performed better.
We saw all our Oems take some downtime not an unexpected, but maybe a little longer down time and continue to sort of muddle around with some of these parts issues.
But I do believe we continue to see a sequential improvement in our auto business. Even as you just think through the quarter as we move into August and September in that space. So select the grain is what it is it's not going to go away will.
If we don't haul it in September we're going to haul it in Q4 and in 2023, and we are going to drive hard in all of those other space that I didn't even mention potash, but.
We're full gas on in that space Canpotex is as I've spoke about is very bullish on.
On their second half year volumes.
So so we're fully subscribed there also.
I appreciate it.
Yes.
Thank you. Your next question will come from Jason Seidl with Cowen.
Thank you Robert Good morning, gentlemen.
Just some quick thoughts here Keith the Canadian government's proposal fertilizer emissions by 30% in 2030, you'd love to know what you think that could mean for volumes you think thats more of a cut on the domestic side and then a switch to some exports or is it going to be a cut overall and then maybe if you can put a little more meat on the bone.
And in some of your comments about running some more test runs with the Casey's I'd love to know to and from and how successful they've been.
So Jason I'll make a few comments on the on the fertilizer announcement in that.
It's a little hard to tell right now what.
What the true impact as this is down to the farm level.
Which is interesting there is no doubt Canada has to be a prominent player in terms of providing food and feed for the world.
Particularly in.
What we've experienced here the last couple of years.
So the great news is when.
Whether it's the U S farmer Canadian farmers. These folks have been resilient and figured it out farming technology acres farmable.
I have only an creased and so.
I am confident that Canadian and farmer, we'll figure this out.
It's hard to tell what that means ultimately if it drives more of that production to export or fit.
Maybe maybe.
More on the North America, and maybe maybe even Mexico, but the good news is with <unk>, we'll have the network that if you do see some trade flows like that that I think we can we can capital eyes on it and maybe the last point on that front is the reality is.
Fertilizer prices have been really high lately anyways.
So.
I think the the farmer as it is today has made a lot of choices around crop rotation and different things to try to curve, they're used or maybe be more disciplined than there used to be to begin with.
So it's kind of a wait and see but.
I think technologies in some of those techniques.
May and the end of the day make it a pretty small event.
Alright.
The test wells.
Yes, I'll give you a couple just a couple of <unk>.
Proof positive points that are really creating a lot of attention and excitement around the potential of this network with our customers and again. This is all on an interline basis and this is all without.
The benefit of all of that capital investment that we're going to be putting into the rails ties and ballasts in infrastructure over the next two to three years.
So the transits continue the trips where the container ship coming into lateral.
D ramping discharging for Chicago markets. So we're running we've ran now six seven trains that have came up from Lazar all the way to Chicago with seven day Transit that's west coast competitive.
We've Rand continued to run domestic moves out of Chicago intermodal that are going to the border at Laredo with 90, our transit times and again thats against an industry best service offering today, which is 89.
Execute all the investment that we're talking about are advertised time in transit is going to be 80 hours, so very compelling market opportunity going south.
The other thing we've ran several grain trains that have came out of Manitoba.
And as far South as Mexico City was Super impressive cycle times, a handoff to Kansas City is the Casey's team in getting those assets back for that return trip. So in each of those spaces, we are demonstrating with our customers of what the art of the possible is that again, we're just sticking our toe in the water and this is not what will be.
We're able to do this is what we can do today in an interline basis, we get these two networks together get that infrastructure in and get those assets turning its its going to be extremely impressive and compelling value add to add a third option.
And in some cases, a second option or an option at all that some of these customers never have from a competitive standpoint.
Really going to drive a lot of opportunity for this company.
Jason I just would add in.
You think about our <unk> product.
At our hardest C down to Port Arthur that we do on an underlying basis Casey is today.
That product is running on a cycle of 12 to 13 days round trip.
It's impressive it is it is a catalyst for other products not only that we could look at exporting out of the golf weather grain, whether it be coal weather, whether it be fertilizer, but it sort of sets up this.
The.
Proof of concept that is.
A real long term piece of business.
That now we're able to take to the marketplace as we have these discussions with customers to sell that.
And a lot of those equipment types of private equipment.
So the faster we can spin those assets hit that marketplace.
Been a compelling opportunity and and I'll tell you. This it's also <unk>.
Compelling enough to where our partners and the D are you.
Thinking about the opportunity of this being a combined network and an investment that Keith spoke about what that next second and third generation of that <unk> capacity looks like.
We're deep into that opportunity.
Sounds like you've got some good opportunities there and I appreciate the color and I appreciate the time as always gentlemen.
Thanks, Jason.
Thank you. Your next question comes from Vasco majors with Susquehanna.
Keith or Nadeem, you don't bargain with the U S rail coalition, but there is some uncertainty as to how the union wage increase is going to play out 2024, and I was just curious is are interested observer do you have any thoughts on the state of U S real national bargaining reaches its final star.
Ageism any indirect impacts that could come out of this to CP that youre looking at things.
Well I've got a limited view, but a very strong one in my limited view I try to stay away from the national bargaining I've had for the last almost two decades in my railroad career I think that local bargaining you come to the best solutions that fit your.
Your employment base.
On a national level, how do you get.
For railroads and multiple unions in multiple different sets of expectations to all get aligned one common vision I think in and of itself. It's a challenge so I wish them I wish them success I know that.
I know that both parties want to reach an amicable agreement and through this process.
This thing behind us as an industry, but as far as something coming out of it that will have any kind of adverse impact to Canadian Pacific I don't see it we're going to continue to stand alone we have a very unique and progressive I think industry best.
Collective bargaining agreement with our running trades employees, it's unique in that it's hourly.
We don't have separation between road and yard our employees are very productive and they make a lot of money for that productivity. My objective is to make them and make sure. They are the highest paid railroad or is in the business and at the same time, the most productive because the productivity and the reliability is what allows us to execute for our customers and provide a service.
Offering that again is unique.
So I'm glad that we're not part of that but at the end of the day.
Getting that resolved for the National group of railroads that are as well as the employees at <unk>.
That they employ in the members at the Union represents is and the industry's best centers and I'm glad that it's getting to a point where.
We can put this behind us.
Thank you for that perspective.
Specific to CP.
Anything on the collective bargaining front that could be impactful or that you guys are watching over the next one to two years I don't know if relate.
Related to the Casey's merger and integration or just for CPE directly.
Well I'd say, the only impactful some excitement some some energy around this space, we just actually negotiated and ratified.
Two contracts, one that <unk>, which is a property that goes from <unk>.
Savannah, Illinois down to Kansas City actually into what will become part of the consolidated territories.
That collective agreement those employees are represented by the <unk>.
Gave them a pretty significant Ray said it was an hourly deal we've had it for some time, we inherited when we bought the railroad back but there was a gap in the wages between what those employees made and what our Soo employees make so we've said all alone as we invested in infrastructure and we built density.
From what was a short line railroad taken it to a mainline railroad for lack of a better explanation that we're going to close that gap and that's what we've done so.
So that bodes well for attracting and retaining employees. It shows our employees how much we appreciate them.
We did that off cycle that.
We did it in a way that we felt felt it was important to get it resolved and it turned out well and then the other piece east of.
Montreal in the <unk> queue.
Employees represented by Smart took the same approach that was part of the <unk> property their wages were depressed compared to what market is so we gave you in substantial increase to get them up to market wages. So that theyre not at a disadvantage working for our company. So they understand how much they mean to us how value they are as employees and how critically ill.
<unk> they are for us to realize our growth aspirations and to deliver the service we've committed to deliver to our customers. So from a labor perspective. This company is in a good spot again, it's not perfect.
The space is never are but our employees know, we're committed to them and they're committed to us and in turn we can be committed together to our customers. That's a strategy that's worked well for us and it's a strategy again that we intend to.
To deploy larger scale on CP Casey shared the case, yes employees.
On that <unk> be interested in that approach and I think from a value proposition. When you can make more money and you've got a better quality of life, which comes of that collective agreement as well as scheduled days off in some of those things that have never meant more to employees and these are jobs that we work on the operating side I think that's a pretty compelling value proposition.
Thank you Keith.
Thank you.
Thank you we have reached our allotted time for Q&A I would like to now turn the call back to Mr. Keith Creel.
Thank you again for your time. This morning as you can sense from our comments, we're extremely excited about the momentum that we've created and we continue to March forward, not only standalone for CP and executing our plan in 2022 and setting us up well for 2023.
But especially.
Especially so for this transformational merger that we're on the cusp of.
Of getting approved we hope.
<unk> that the STB aligns with what our views are this is a very compelling proposition for all stakeholders public interest customers employees alike and for these three nations commerce together to grow into the future. So with that said, we look forward to executing as we said we would in the third quarter, we look forward to sharing.
Those results.
When the time is appropriate later in the year stay safe and we'll see everyone out on the rail.
Thank you.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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