Q3 2022 Canadian Pacific Railway Ltd Earnings Call

Good afternoon. My name is Gretchen and I will be your conference operator today at this time I would like to welcome everyone to Canadian specific third quarter 2022 conference call. The slides accompanying today's call are available at Investor <unk> CPR Dot C. A.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session. If you like to ask a question simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question press the pound key.

I'd now like to introduce Christa, Brian Managing director Investor Relations and Treasury to begin the conference.

Thank you rich.

Good afternoon, everyone and thank you for joining us today before we begin I want to remind you. This presentation contains forward looking information.

Actual results may differ materially the risks uncertainties and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and U S. Regulators. This presentation also contains non-GAAP measures outlined on slide three with me here today is Keith Creel, our president and Chief Executive.

Officer, John Brooks, our executive Vice President and Chief Marketing Officer, and Megan Alderson, Our Vice President of capital markets, who is standing in for Andy.

The formal remarks will be followed by Q&A in the interest of time, we would appreciate if you limit your questions to one it is now my pleasure to introduce our president and CEO , Mr. Keith Creel, Alright, Thanks, Chris listen but.

Before I get into the results as Chris mentioned and I am sure Youll notice maybe not.

Not with US here today, but he sends his best from Boston, where he is attending a program at Harvard, which obviously is a part of our commitment at CP.

To invest in our most precious assets, which are our people.

I will tell you I've always felt that the measure of the impact of our leaders felt vast when he's not around our she's not around for a prescribed period of time I'm sure that he is proud to see the great job that Megan <unk> and Chris are doing in his absence. It certainly reflects well for him.

Some might suggest now in the world could maybe even be at Harvard in these times that we're facing I would suggest there's never been a better time in this lull before or what we hope is a and.

And expected ramp up as we get into what we expect to be and hope to be a favorable ruling from the STB youll be back finished the course I think end of this month after that though don't tell them you may not know this yet but he is going to be out on trains and the coldest winters learning a bit more about the operation I know that he is going to step into that and be a better railroad or as a result of that.

So we will get them back in the saddle I would suggest.

Into January just in time for <unk>.

Our final times ahead.

Now to our results I'm going to start with a special thank you to Mark grabbed the operating team and our 13000 railroad or as they continue to evolve our safety culture.

Allowing more folks everyday to go home safe their efforts in the quarter produced a remarkable 76% reduction in our train accident ratio to an all time record low of $3 seven FSU and equally impressive performance on the personal injury side with the reduction of 12% year over year to a 0.86.

Sure.

Yeah.

Personal injury ratio on the financial side.

First quarter revenues of $2 3 billion and or operating ratio of $58, seven and core EPS of $1 <unk>.

Speaking to the metrics on the operating side with six 2% of our Tam growth the network remain fluid no degradation to train speed weights increased.

Which spells productivity lengths increase respectively, 3% and 4%.

Crew starts and slot of six 2% additional business a modest one 5% increase and even crew re.

Crews improved as well year over year. So the railway is running well, it's running safe and that's the key to our success as you run a truly successful precision scheduled operating model from a resourcing side. We said all along this is going to be a tale of two halves, we've ramped up our hiring to make sure that we're resource properly for this great grain harvest that were.

To be taking.

To Tidewater.

We're certainly youll see it in the numbers in the third quarter, the largest demand, though obviously coming into the fourth quarter. We've hired about 1500 conductors year to date all in about 2000 craft employees, we're investing in our physical plant, we're accelerating some capital into this year again to make sure a physical plant is ready for future opportunities in <unk>.

'twenty three.

Suffice it to say overall, we're in excellent shape from a resource standpoint the network.

Is ready and willing and able to handle this this very encouraging grain crop as well as the strong demand in potash and intermodal that John and his team are are winning and bring to the.

The operating team to convert day in and day out.

Now, let's say a couple of words on the <unk> transaction.

It's been pretty exciting last couple of weeks last month and I am extremely pleased that I had the opportunity to personally sat in.

Through the public hearings.

In Washington, DC, John an hour, they're obviously Pat as.

As well as John or and our regulatory team James comments.

It was it was a pleasure to be able to lay out in detail our facts and our very compelling truths base case on this.

Transformational merger that we're pursuing.

Some have suggested that some of the ratings and maybe some of the talks that I've had that the hearings.

<unk> certainly longer than they expected and I'll tell you I've said this to the STB and I'll say this publicly now I applaud the seriousness and the thoroughness and which the STB handle these hearings.

For certain they take their job seriously they wanted to make sure that the facts are heard and make sure. They get this right and I can tell you that was a fair process that allowed all parties, a fair chance to share their facts to.

To share their perceptions of what they believed to be true as well as anything that had to stay positive or against.

The transaction.

I'll tell you haven't listened to all the testimony on never more convinced about the benefits. This merger will create for all stakeholders for the public interest of our employees for our economies of these three nations.

For our customers.

For the environment.

Check all the boxes perfect the high stand, but I'll tell you. This is an ideal merger in a very unique way unlike any in the rail industry's history.

In the past or in the future.

So in terms of next steps as we all know we filed our final brief.

Party stand this past Friday, we continue to anticipate a decision sometime in the first quarter of 2023.

So with that said, let me turn it over to John I'll, let him provide a bit of color on the business and then Megan to cover the numbers and then we'll transition to taking your questions alright. Thank you Keith and good afternoon, everyone. Let me start by saying I would say overall the quarter played out much like we expected.

Looking at the results as Keith mentioned revenues were up 19% on the quarter volumes were up 6% and FX and fuel provided us about a 13% tailwind the pricing environment as we'll talk about I'm sure more continues to be very strong contract renewals for us in Q3.

Tended toward the high single digits.

I will take a look at the second quarter results now I'll speak through results on a currency adjusted basis. So let's start with grain grain volumes were down 2% on the quarter core revenues were up about 9%. We saw this year's grain harvests really start to begin in the last couple of weeks of the quarter and volumes have quickly now ramped up.

As we move into Q into Q4.

The most recent expectation for the Canadian grain crop sizes around 75 million metric tons. This would make it a top five all time crop and about 7% better than the five year average.

This comes at a great time, certainly following a lot of investment into the supply chain by not only Canadian Pacific, but many of our grain partners. This will be the first year, we have a critical mass of our new high capacity grain cars.

As you recall back in 2018, we announced a multi year plan to purchase 5900, new high capacity grain cars that were going to receive the last little bunch of those later this year.

If you look at that investment we are seeing on average about a 5% lift in our loaded tons per car and by the end of this year I can tell you we'll have over 50% of our origin elevators capable to load 8500 feet.

As grain typically makes up about 20% of our book of business. As I look ahead, we are well positioned for strong performance across our grain network on both sides of the border.

On the potash front, we had a record third quarter with volumes up 31%, while revenues were up 48%.

Although the record pace of slowed some as we moved into Q4, the long term outlook for potash remains extremely strong and we continue to work closely with our partners to drive more resiliency and efficiency into the supply chain.

And to close out the bulk business coal revenues were down 2% while volumes were down 11%.

An outage at <unk> <unk> mine in September has impacted our volumes on the quarter and is expected to remain a slight headwind as we move into November .

On the merchandise front, the energy chemicals, and plastics portfolio saw revenue decreased 10% while volumes were down 1% the.

The decline in ECP was driven by less conventional crude by rail partially being offset by increased volumes of our <unk> crude.

Im extremely pleased with how this non hazardous pipeline competitive product is performing.

This unique product now accounts for nearly two thirds of our crude by rail business, providing stability in this historically volatile business segment.

The third quarter also saw IPL begin to ship from their newly built Heartland petrochemical facility that is single serve by Canadian Pacific.

Our partnership with IPL expand Cp's plastic service to both export and domestic markets and this volume growth will be a tailwind for us as you look to Q4 and into 2023.

In the fourth product buying a business volumes were up 5% while revenues were up 18%.

Creased velocity across our lumber network.

As well as higher volumes of newsprint and pulp enabled by our <unk> acquisition in close partnership with the Irving companies drove a record Q3 volume.

In MMC revenues were up 22% and volumes increased 8% setting an all time quarterly volume record.

Pricing and demand for Frac sand remains robust as we continue to see strong drilling activity, resulting from higher <unk> prices.

In automotive revenues were up 31%, while volumes were up 4% on the quarter.

We continue to see pent up demand in this space and ongoing inventory replenishment, although the Oems are making progress on this backlog vehicles built shy holding at CP origin remains well over 7000 then.

I am excited to announce today that VP and Ford Motor Company, you have again partnered on a long term contract to expand our relationship and the development of new supply chain solutions.

Similar to our strategic development of CP land to create the Vancouver auto compound back in 2019.

CP is excited to welcome forward into our new Chicago auto compound located in Bentonville.

Additionally, I'm also pleased to announce we are reopening our Edmonton auto compound provide more service options to Ford as our anchor tenant for shipments of trucks and Suvs into this northern Alberta market.

Both of these facilities will be open January one and we will provide new capacity for over 200000 wins in these marketplace.

Finally on the intermodal side quarterly volumes were up 18%, while revenue was up 44% both all time records.

International volumes were up more than 30% in the quarter as our strong service capacity and <unk> acquisition continued to drive growth.

Domestic intermodal continued to be strong as we saw good growth with our anchor customers and continued strong renewal pricing.

With our market share wins and expansions underway at the port of St. John I expect our intermodal franchise to have a strong finish to the year.

So let me let me close these remarks by saying as I look towards the remainder of 2022 with the new business. We have brought on over the course of the year of course with the strong Canadian grain comp we are on pace to deliver double digit RPM growth the back half and volume growth for the year.

As I look further ahead into 2023, while we are all still watching the broader macro environment. My team is staying close to the customers and our operating team and we will navigate any changes appropriately.

We remain laser focused on executing our playbook and making our own luck through delivering our unique self help initiatives.

If you think about it with our strong bulk franchise, our pipeline of new growth opportunities in CP Casey only gaining momentum.

We believe we have a truly unique position as you look to 2023.

So with that I'll pass it over to Meghan for her remarks.

John and good afternoon, I'm pleased to be standing in for Nadeem today and to speak to the results that the CP team has produced this quarter looking.

Looking at the quarter. The adjusted operating ratio came in at 58, 7%, a point better sequentially and 70 basis points better year over year.

Taking a closer look at the expense side.

I'll speak to the variances on an FX adjusted basis.

Comp and benefits.

Is that 2% or $8 million versus last year. The primary driver or drivers of the increase were higher volumes and training costs as well as general wage inflation.

I'd note on a sequential basis stock based compensation was $19 million headwind.

You'll also note average head count was up quarter over quarter by an additional 4% as we continued to resource up for the fourth quarter.

Fuel expense increased $153 million or 75%, primarily as a result of higher fuel prices, which were up 60% versus last year.

Materials expense was up 29% or $15 million.

Due to higher non locomotive fuel costs as well as higher locomotive and track maintenance related expenses.

Depreciation expense was $213 million, an increase of $8 million as a result of a higher asset base and.

Purchased services and other was $294 million after adjusting for acquisition costs, an increase of $2 million.

Moving below the line equity pick up from Acs with $221 million on a GAAP basis or $275 million after adjusting for <unk> acquisition related costs and the impact of purchase accounting.

Other components of net periodic benefit recovery increased $7 million, reflecting a higher discount rates compared to 2021.

Net interest expense was up $62 million versus last year as a result of higher debt to fund the <unk> acquisition in Q4 of 2021.

Income tax expense increased $27 million or 16%.

Excluding tcs related items and a one time deferred tax recovery the effective tax rate was $24 two 5% on the quarter.

Rounding out our income statement core adjusted EPS was $1.01 up 15% in the quarter core adjusted net income was up 60%, partially offset by a higher share count year over year.

On the free cash side Youll see we received $200 million U S dollar dividend from Tcs in the third quarter to date <unk> has received a total of $465 million U S and dividend payments from Tcs.

So <unk> continue to reinvest in their respective businesses as we prepare for the growth we expect to be able to deliver.

Upon a favorable ruling from the STB.

Beyond what is needed by the business, we are using our free cash to pay down debt year to date, we've repaid nearly $1 2 billion Canadian and debt and have several maturities coming due in early 2023.

With the 100% of our term debt at a fixed rate and with no near term financing requirements were on a strong path to return to our target leverage of two five times net debt to EBITDA.

With that I'll turn things back over to Keith to wrap things up alright, thanks, Jonathan making a.

Semis at all to say the bottom line <unk> in an excellent position to execute a very strong fourth quarter.

Kerry ourselves into 2023 with tremendous momentum into an opportunity rich environment.

Represents I think an industry unique strong value creation story in 'twenty three and beyond.

So with that operator, let's stop our comments and open up for Q&A.

Yeah.

Okay.

Thank you if you'd like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.

<unk> highlighted please limit yourself to one question. The first question comes from Christian Wetherbee Citi.

Great. Thanks, Good afternoon, good afternoon, guys Hey.

Hey, Chris maybe if I could just short to start a little shorter term and think about the sort of cadence for the back part of the year. So in particular in the fourth quarter I guess, the archaean acceleration is happening to get a double digit rpms in the second half how should we think about the operating ratio improvement you've made some improvement from Q2 to <unk> should we expect to see.

The amount more improvement as we get into the fourth quarter, just want to get a sense of how we should think about the cost scaling is rpm's ramp up.

Yes, Chris It's fair question.

Say that we're certainly on track in terms of ror progression, we talked last quarter about being in I think it was the high mid mid fifties from our perspective, and we remain convicted in that view. So you will see.

Further sequential improvement on the operating front as we get into the fourth quarter and continue to see volumes ramp and that operating leverage flow through.

Yes, you should see an exit rate in the mid fifties Chris.

Okay. Okay. That's helpful. Thank you.

And our next question comes from Shani.

I am sorry, our next question comes from Scottish Salmon from BMO capital markets.

Okay. Thanks, good afternoon.

I'm curious if you can kind of.

Big maybe a level deeper into.

Some of the comments you provided about 2023.

I guess.

A lot of.

Strategic business win.

And to be specific opportunity, but to get them, a big grain crop but.

What what the 2023 look like to you.

Based on what we know right now I know the economy is a little bit all over the place but.

Can you grow volume can you kind of give us a framework for how we should think about 2023 for you from a.

Volume perspective, but given all of these cannot help.

Yeah, Let me, let me take a first run at that and I'll ask John to provide a little color and unfortunately I'm not in a position to.

To give guidance, but I can say this we're set up well for the first half obviously from a comp standpoint grain versus last year potash strong versus last year, Florida, St. John coming on for the first half we didn't we didn't have that IPL is online now.

So the first half.

We're in a really good position and then you get into the second half some of that carries into the second half obviously, but then you start layering on.

These new market wins, you start laying on the self help initiatives you start laying on with a favorable STB decision.

Pretty exciting synergy.

Storylines in fact points that obviously, we're not in a position to discuss yet but.

But rest assured it's going to be exciting so John if you want to but bottom line before John speaks I'll say.

All things being equal you should certainly expect volume growth in 2023.

Pretty exciting level.

I will echo that.

The last part I was going to add body, we fully expect the volume growth.

Obviously, we're watching the macro environment closely but I'd say, so far we've been able to Buck a number of those trends and.

Others speaking about declines in international and refined products, we've seen some acceleration in some of those areas.

And not that over time, the macro won't impact some of that but again some of these initiatives that we've been talking about for quite some time continues to propel our volumes as we move into 2023.

Building, a little bit on CPE, Casey and again, assuming we get the favorable response from the FTB.

I've talked a lot about just how that propels operate not only opportunities for the new railroad, but how it even.

Some of those conversations and opportunities difference with our existing franchise.

Part of that just look at the announcement of these two new auto compounds, we've talked about bentonville for awhile.

Edmonton is going to play an important part in our future also and so that in itself in 2023 is a pretty big opportunity for this company, Yes, I think let me add a bit more color Friday just.

Put things in context, how you're thinking about a world where a lot of shippers.

Not all but I would suggest most of experienced supply chain constraints.

Obviously theres been a unique demand environment that perhaps does it sustain itself, but I'll tell you. There's lessons learned at every process that you go through.

Having new alternatives, new choices not putting all your eggs in one basket diversifying the supply chain that we're going to be creating with the power of this combination if its approved by the STB.

When I say transformational their unique end to end single on opportunities that simply.

Don't just allow us to be competitive I would suggest that supply chains need.

The resiliency never more so than before and that this this solution. This combination creates a whole lot of solutions to a lot of the shippers problems and our nation that they've experienced and we're excited to get into the solution provider.

Providing business that's exactly what we're focused on and that's exactly what we're going to do with this larger scale network pending dsw's approvals to serve the public interest.

Great just one follow up.

On the automotive.

Opportunity, you talked about with Chicago and Edmonton.

This is a new business coming on CP starting January .

I get that right now.

Yes, that's correct, it's new organic growth.

Okay. Thank you.

Thank you Eddie.

Our next question comes from Jon Chapelle from Evercore ISI.

Thank you.

I don't know if youre best to answer that when we look at the Tcs contribution in the third quarter is effectively flat.

From the second quarter. Despite the fact that their volume carloads were really strong.

Senior appendix here that there are actually deteriorated is there any information you can give us as what was happening there was that a cost issue is it a pricing issue mix.

Any info as to why.

Had some LR deterioration while U.

Of course, <unk> network did so well in the third quarter.

Yeah, So I'll, let <unk>.

<unk> and Mike speak to <unk> results.

Having looked at the numbers like you have the one thing that I would highlight is that they did have.

$9 million.

Prior period adjustment related to the labor agreement.

Embedded in those numbers.

And certainly I know that.

From an operating standpoint.

Arent immune to some some challenges in the quarter. So I'll leave it there and certainly would encourage you to reach out to the Casey's team is if you want to dig into it and a little bit more detail.

Okay.

Really quickly I didn't know if there is any of these prior period all these rails and all the rails prior period stuff that we've been stripping out kind of apples to apples I can follow up with actions. If you happen to have the number on any prior period accruals that we can strip out right now that would be helpful. Yes.

So they had $9 million.

In the numbers this quarter and I believe going into 2023, they're expecting in increments.

$6 million going forward into 2023.

And our next question comes from Walter <unk> from RBC capital.

Markets.

Yes, thanks, very much operator, and good afternoon, everyone I wanted to zero in Jonathan on the intermodal and.

<unk> got a number of new lanes that you've been developing and just love to hear an update on on your St. John Route on your.

On the Lazaro Cardenas route that you were you were testing out there and wondering if the Mississippi.

There's been some media reports about.

Low water levels, if that sustains as a long term trend with with Casey now as part of your network.

Subject to the rule.

Would that be would that be another area of upside for you on that north North South route.

Yes Walter.

I'll start with the water level for.

I think near term this is going to provide itself to be a rail opportunity.

Now, it's a little early for CPE Casey to enjoy it in some of that but I think some of those north south routes will see the.

The natural gravitation of those grains that would truck to the river.

<unk> rail heads and want to rail down to the Gulf for export.

So I do see this as a potential rail tailwind.

As we look to the future CP Casey I, certainly think there is an opportunity for us to play.

In that space.

I think theres a origin elevator development.

Piece of that component that will compete in that sort of territory that would be impacted in the future and then as we gain access into that golf market.

In Texas and also down in the Mexico.

I believe it's right in the wheelhouse of the new organization.

Back to your prior question, we've had a ton of success I couldnt be prouder of our intermodal team this year.

The asset team that works with our intermodal group.

Terminal operators.

Our operations group and Mark's team and the marketing and sales team.

I can tell you that supply chain is still not real clean.

Across the U S and in Canada, but we've navigated it I would say as good or better than than anyone in the industry. There's still challenges out there. We've got a lot of tonnage in St. John We've we've had a lot of success, we're putting a lot of good pressure on that that port and that fluidity and opportunity is only going to continue to grow.

For Us we've got the best route from the Atlantic Tidewater.

Not only into Canada, but also down in the Chicago in beyond into the future down to Kansas City.

I'm Super excited about that.

<unk> raised Lazar ROE and I can tell you my enthusiasm as I'm around that opportunity is only building I actually believe we've got some more tests.

Trial containers on the water right now.

That we're working on an <unk> basis with the Casey's team is as sort of this ongoing proof of concept in <unk>.

And I think the feedback relative to the Optionality. It creates for shippers not as a replacement for certainly la long beach or are some of those other gateways, but to diversify.

Portfolio is going to be a tremendous opportunity for CP Casey.

And our next question comes from Tom <unk> from UBS.

Yes, good afternoon.

John I wanted to ask you about the pricing I think you said that you had like high single digit renewals in the quarter I believe that was the comment.

And I don't know if I recall, you, having a comment about renewals quite that high before.

So I'm wondering is this.

Should we be anticipating even even stronger pricing in the next couple of quarters relative to the kind of maybe 5%, 6% that I normally think of as being.

Favorable and then I guess just related.

You think that there is it feels like there is just a more favorable pricing dynamic in general in the rails, maybe Canadian rails.

Do you think that's true is there may be some persistence to that that could last more than a couple of quarters. Thank you.

I do Tom Im actually quite bullish on the pricing front. He can ask my commercial team as we were working on our plans for next year and in their target.

I do think fundamentals have shifted a little bit on on that front.

In terms of just how all carriers are thinking about the value of their capacity and their service now I'd tell you I think we have remained consistent in this space.

The narrative has been as always we are in good times and bad times going to price to the value of the service marketing team provides an and I believe capacity is more valuable than it maybe ever has been in the past so.

I do believe there is even in a maybe tighter demand environment as you look forward potentially.

If there is some recessionary pressures I think that discipline stacks.

I think I said to somebody in my 28 years of railroading.

This last quarter, the renewal pace youre right with us by the strong us as I've seen.

And I think that that opportunity.

We'll see how it plays out into into Q4, but I think my expectations kind of fall right in line with with what you saw in Q3.

Yeah.

Our next question comes from Justin long from Stephens.

Thanks.

To start with a follow up on that last question. John when you look at the gap between pricing and inflation, how has that gap changed because it sounds like pricing is very strong, but obviously inflation is moving higher. So just curious if that gap is changing at all and then I.

Thank you had previously talked about adjusted EPS growth in 2022 is that still something you expect.

Yeah, I'll, maybe start off with that first question. So we're certainly on pace.

Adjusted EPS growth for the for the year.

And on the pricing thing Youre right.

That inflation plus.

Renewal spread always kind of moves around a little bit.

I would say Youre right.

It is.

Well I don't know.

Each what you measure inflation exactly.

And all the various components of it but I'd say we have definitely.

Hit the Mark here, most recently and as I said in Tom's question I think it's the same in Q4.

To have that definitely be an inflation plus.

And then again, we'll see how.

The pressures.

How they change as you think about 2023, but that irregardless again, I'm going to fall back on.

The value of our capacity I think has never been as important in this.

Sort of environment that we live in today and a big part of that is making sure. When we we do work with our customers and whether to bringing on new ones or working on the renewals that.

We're being certainly fair on.

On what that value is and ultimately what that pricing looks like and I just don't see that changing as you look into 2023.

Okay.

Our next question comes from Ken <unk> from Bank of America.

Great. Thanks, Good afternoon Keith.

Jonathan and Megan.

Just before I ask my question Megan just to clarify what you just answered that was off a 376 normalized last year and $2 63 of reported normalized so far this year right. So you are talking at least $1 13.

Fourth quarter, just to clarify that.

That's correct okay perfect.

Thanks, a lot to unpack in front of you once you turn into 2023 and post approval, maybe you could talk a little bit about how the process unfolds as the year of resetting train schedules and things get messy upfront and so first quarter came through our second quarter and get a little messy are there services you are able to launch right away maybe understand the flow of what we should expect as the synergies to.

You've talked about already in terms of now there are only a few months away.

Yes, it's certainly not a case, where we're planning for any messiness, Ken as you can imagine we are.

We're pretty adept at planning we have.

We're taking some exhaustive steps with an integration management office that we've created and a lot of preplanning, we've got about 165.

Processes of change that we've got mapped out across each discipline of the business.

Got.

Disciplined leaders that are full time assets. If you look at it altogether, either full time or part time in part there's over 1000 people that are involved in the planning process for this integration.

So the operating plan itself, we've got everything mapped out for leadership change what's going to happen in the first 30 days 60 days 90 days the operating plan changes on the operating side.

Got that laid out so we're going to pull everybody together, we're going to get aligned quickly and I can tell you. This is a beautiful part about this transaction that I think is very unique number one.

It is not.

It's not <unk>.

The horizontal.

Merger is not a horizontal integrations to the heart that some have suggested in the past.

Sale of executions are painful executions.

Simply it's just not that complex you don't have lines that are redundant you don't have a bunch of rerouting of traffic.

I don't have a tremendous amount of stress is coming onto the network. All at one time. This business that we're talking about and I've said that sits in our application and it's part of the way you run a <unk> Railroad you don't get ahead of yourself with business and oversubscribed capacity.

Taken inspection trip just last week I took a look at all the infrastructure that's going in from.

But across the river junction down into Kansas City.

A couple of months ago, I took a trip over the Casey's from Kansas City to Laredo. So I believe my eyes on each one of these sidings dislocations the work that's being conducted now.

Tell you will be choreography the choreography would be strong we've got an operating plan that will allow us to layer. This business on and we're not going to disappoint our customers Thats. The worst thing in the world that we could do is overcommit and under deliver.

Hi to motivate our customers they've got choices, we're not eliminating one choice.

They get to maintain all the choices they enjoy today, but they get to get inspired and motivated about the new option, we're going to get them in for them to get motivated inspire it's got to be good.

So rest assured we're going to do that.

We're going to be resource step right with people resource right with assets be it rolling stock be it locomotives and the physical infrastructure to get out here and get this done and I'll tell you I'll be boots on the ground I'll be in Kansas City, Kansas City today came down to visit our terminal we had our board meetings.

So rest assured there are plans being laid.

It's not going to be perfect. We're not perfect human beings. The operating world is not perfect, but we certainly are doing all of our homework upfront and plan to exceed expectations and youll start to see synergies both on revenue as well as on the cost side as we grow this railroad going forward, you'll start to see them.

Second quarter, you will start to ramp up third fourth and that momentum will continue in 2024.

Yes.

Our next question comes from Scott Group from Wolfe Research.

Hey, Thanks afternoon.

Keith just wondering coming out of the hearings.

Anything.

Surprising or anything that you think that.

Need to be thinking about from a concession standpoint and then.

Just as we think about 'twenty three obviously it sounds good volume price synergies any initial directional thoughts on how we should think about operating ratio next year.

Well sequential improvement I can't give you got it Scott, but certainly when we layer. This volume first half to <unk> standalone, it's pretty compelling opportunity with that density that we'll have next year that we didn't have last year and we start to combine these networks and take out.

Grain handling car handling car hire savings locomotive savings.

Leads to a natural outcome of our margin improvement next year sequentially in <unk>.

I think moving to a place that is going to be very exciting to allow us to continue to create cash and invest in the network and reward our shareholders.

That's what it's all about I think at the end of the day as far as the hearing Scott not only surprises where theres, some very creative minds and creative lawyers that some of it.

So overreaching, an unreasonable out some of it I found it to be a bit shocking.

But the thing that.

That to me was encouraging is most of that shock was correctly. It was completely unsubstantiated about back in I think this is an STB board of.

Board members that take their job seriously I don't think.

That attempts to pull the wool over their eyes will be taken lightly I think they do their homework and I think they want history to show. They got this right. It's the first major transaction in two decades.

I would suggest arguably it might be the last one Scott in all honesty I think it could be the one that solidifies the industry increase the most.

Impactful and meaningful realm networking and this nation for our futures growth.

So again.

Everybody made their best case, I think our facts are better I think our facts lead us to.

And undeniable case that says this is in the public interest in and ultimately I believe based on fact.

And based on our belief that this STB body.

Their job seriously it makes decisions not on rhetoric, but one fact based after doing the homework I think are factoring in a great place and we look forward to getting to work again pending there <unk>.

They are aligning with what my view of the facts are but to me. The truth is the truth I've said that from the very beginning and I think thats whats going to carry day and carried the day in this merger application.

Our next question comes from Steven Hansen from Raymond James.

Yeah. Thanks, guys I appreciate it just a quick question on the staffing levels. If I may Keith I think you referenced the big uptick in conductors and trade employees in anticipation of this back half traffic surge here just curious if you're sort of at a standstill now or where you need to be or should we continue to expect to see that roll through higher yes.

We ramped up in the third quarter train ahead, youll see a slowdown in the fourth quarter more finished full year, just little above flat, maybe about 1% a little less than 1% is where you should model too.

Okay, perfect that's great and just a follow up if I may is just on the quarter capacity issues in your prior commentary just curious about the western corridor in particular, given the surgeon in Bulks, we've been seeing how do you feel about the corridor capacity, whether it's infrastructure rolling stock related.

In all honesty I feel good and let me tell you why I feel better than I have in a long time and im extremely I never was able to get this done.

Was the head operating Guy Mark has and.

And the team the engineering team they've just done a phenomenal job you imagine thats the most dense part of our network.

We're facing a bumper crop, we got a lot of expectations.

We're going to meet expectations. So the last thing, we need or extended work blocks in what I call capacity.

Yes.

So typically you strive to get it all done so that you can get out of the way for this big surge of demand.

Never really got it down the way Mark has and his team they've got all the major capital work buttoned up. They finished in September you start to see it in the momentum the record numbers of our grain cars they've gone a couple of weeks, where they've hit all time highs I think you had 60 902.

Two weeks of 6900 <unk> go into the West coast for export. So I think at the end of the day when it's all said and done we never been in better shape, Steve not listen.

I don't want to get arrogant here at all mother mother nature can humble US tomorrow, that's a tough railroad to operate in but I'm very very pleased and happy to say that mark and the team have done all they can do to control what they can control.

Short of that and set us up for great success. So we're in a good place.

Your next question comes from Jason.

Hi, Doug from Cowen <unk> company.

Thank you operator afternoon, everybody Keith can you give us maybe an update on any puts or takes for some of the revenue synergies that you guys had previously talked about what the kgs transaction.

To see how youre feeling based on what you said before and what we're seeing now in the marketplace I'll.

I'll, let I'll, let John provide color about the put some I don't know too many takes.

Yes.

Jason Keith installed my my comment there.

It's definitely been more more puts.

As I mentioned Lazar Roe earlier.

In the call that continues to be bright.

A bright spot and a huge opportunity to add a team over.

In Asia here, the last week or so in the feedback that we're receiving from a lot of the steamship lines and frankly, even more so the beneficial cargo owners around.

Having that supply chain optionality.

To the current options today continues to be a powerful opportunity.

I've spent the better part of.

Today, we're working with Keith and my intermodal team and Mark on on our North style strategy and what that domestic train looks like and what the key opportunities are on that and I continue to be very bullish on that front.

I think somebody raised the water issues.

Earlier, but the bulk franchise in the grain opportunities into Mexico, we've talked a lot about that but but ultimately also into that that Gulf region in Texas and competing into some of the feeder markets continues to be a bright spot you have got this renewable.

Diesel phenomenon that is rolling across bringing crush plants to light.

Across our territory and certainly the Canadian franchise that presents itself as a unique opportunity for CB Casey.

So again I would tell you.

Even foreshadowed a little bit this whole the auto compound in Bentonville and Edmond tender. The reason we're opening those now.

And assuming we get the STB approval those are going to be important cogs and in <unk>.

As negotiations with the automakers and the parts opportunities too so.

There's no slowing down I can just tell you we are.

We remain super optimistic that we're going to get this over the finish line and then as Keith said, we will begin to ramp up and you'll see us capitalize on this stuff.

And our next question comes from <unk> Gupta with Scotia capital.

Thanks, and good afternoon, everyone. So John I just wanted to.

SKU on the intermodal contracts you have won so far this year.

Is it performing versus your expectations in light of the recent macro uncertainties, we have seen in <unk>.

Somebody can speak on behalf of Kcl, perhaps.

This recent sort of U S MCA energy dispute going on with Mexico under their thoughts about the tariffs on Mexico Cross border traffic and how does that play into your sort of synergy books for the next couple of years.

Well on the intermodal front, how the volumes are trending I would say.

Specific to the port of St John they've exceeded our expectations.

We've got a lot of freight.

Out there to haul and obviously, we're working very closely with the <unk>. The short line railroad out there at the Port of St. John DP World the operator.

Those those expectations on those volumes have.

Again exceeded our expectations.

And no real slowdown.

We also brought CMA onto our franchise this year.

I would say the majority of that has come through the port of Vancouver, and those volumes have have lived up to everything that they've said I think.

The question is really around are we seeing any sort of macro slowing in that volume.

I would say, maybe a little lame segmented we might be.

A little left to to the U S.

But but certainly I would say our Canadian franchise has held in there very strong in and I see nothing that would impact sort of how you should view the sort of finishing out the year and then we will look to.

So next year on that front.

Megan you any comments on that.

On the units MCA yeah, yeah.

On that topic Qunar.

We have a general belief that free trade benefits the north American economy.

And the smooth movement of goods across the border is beneficial for all parties. So.

CPE.

CPE Casey by extension would be uniquely positioned to benefit from from U S. MCA in free trade.

So STB willing.

We look forward to providing great service for all three nations.

Yes.

It's not like we've got this massive bucket of synergies.

<unk>, two that we've sort of known and through our due diligence and being into this for well over a year now in this effort that.

There was some volatility in that space. So.

Certainly if things work out.

Great then we see some resolution in that space, we're just going to benefit I would consider that all incremental on top opportunity as you think about as you think about synergy.

Our next question comes from Ari Rosa from Credit Suisse.

Hey, good afternoon.

Congrats on the strong momentum here.

So I wanted to ask a question about the.

CPG Acs transaction and just thinking about the <unk>.

To which.

It has the potential maybe alter the competitive dynamics between the rails, we've seen some of the rails kind of raised some complaints certainly at the STB.

About about the transaction.

Potentially take some kind of retaliatory actions in response I just wanted to hear your thoughts on the extent to which you see yourself as kind of competing with them versus maybe taken some volume away from trucks and if thats really whats true opportunity comes from.

I'll maybe start.

I would say this.

There is certainly a part of the revenue opportunity for CP Casey that is flat head to head against the competitors that are in that lane.

Those lanes and what I've heard from the customers is they want another option that may be service in some of these lanes hasnt been up to expectations.

They're looking to just like you would in your money they want to diversify their books and theres going to be I think a natural opportunity for some call it share shift in some areas but.

The flipside is I think the bigger opportunity as some of these products.

That don't exist today, maybe some new creations and initiatives of new lanes that.

The service markets that don't exist today, and then you said it yourself.

<unk> piece of this business is actually.

I think bigger than we've been no.

I can pay the discussions around the value of trucks off the road and the scope three emissions greenhouse gas reductions that we can bring to the table by providing.

Truck like service North South for that quarter, I think it's compelling to shippers.

<unk>.

The competitive response is what it is it's it's good.

B out there the other rails are going to do what they need to do on that front, but we're going to compete hard just like we have in the past and we're going to find the areas, where we can drive success with with our customers.

And our next question comes from Brian <unk> with Jpmorgan.

Hey, Thanks, Good afternoon. So a quick follow up for John first one of.

It puts I didnt hear about was potential second bridge at Laredo.

So thats been watching and waiting for a long time and it seems like it's actually moving forward a bit faster than at least we initially had anticipated. So curious to hear your thoughts on that.

And then a broader one for Keith.

Great to hear your thoughts on the CPA CTO standing on its own merits, but as you mentioned theres a lot of other interested in potentially affected parties.

You think theres going to be any settlements or agreements reached with any of them whether freight rail shipper groups passenger rail.

Before it goes in front of the STB or do you think that.

The board is.

Well to handle that and you would rather the merits speak on their own without doing any additional deals before then.

Let me start yes, let me start with the latter.

I've always believed that you can do a better deal yourself and expect the government to do a deal for you we've been reasonable from the very beginning we said were open.

To reasonable settlement a.

A lot of the arguments that we heard.

Unfortunately.

Don't represent reasonable.

So with those positions remain the same then I would suggest there's not an opportunity for us to reach a reasonable settlement, but I'm hopeful and optimistic that some of the parties after they've weighed all the facts and perhaps better understand.

The assurances we provided the positions that we've taken and our commitment to keep gateways open our service assurance as well, we're going to be good partners listen we're not doing this to go to where they have a railroad we're doing this to create value for all stakeholders. We're doing this.

To benefit our employees our shareholders the environment, the North American rail network, and we're going to after the dust settles, we still have to be great partners will be competitors and partners at the same time with some of these railroads. So all that being said reasonableness matters, we're going to stay reasonable and if we can come to an agreement and I'm optimistic.

<unk>.

Mike.

It's to be determined but at the end of the day, if we don't it's because we've exhausted all reasonable Miss.

And we have nothing no choice, but to.

Allow the STB to rule, because we won't we will not do.

As allow.

Unrealistic expectations impede our ability to deliver the public interest benefits that we've committed we're in business to deliver that's part of our thesis that the facts and we're going to protect that.

The other point you made about the bridge Super excited Youre exactly right.

Pat and the team have done a phenomenal job they are actually having a ground breaking ceremony I believe on Monday.

Laredo, the time to get to build bridge built.

Pat share with me, it's going to be about 15 to 18 month process.

So again when it comes to strengthening the North American network resiliency capacity all of those things that allow commerce to flow freely over the border between Mexico.

In the U S in one.

One two are from Canada.

We're going to a better place some super excited about that.

That enhancement to the physical plan of the border.

Our next question comes from <unk> majors with Susquehanna.

Keith or Megan.

Complexities, both practically and from a legal standpoint of the case, yes transaction catch.

Kept you from guiding and updating the street and the other way that you normally would this year as we get into next year is there an opportunity to give a more traditional CPE annual guide in January or is that and maybe some form of.

Investor day after the transaction closes more likely as far as the updates that you can do have unexpected. Thanks.

We will get as traditional as the facts allow us to.

Obviously, there might still be some uncertainties, but certainly more clarity than we were able to provide today and I will go ahead, and let you know as far as an Investor day, We're certainly planning one we havent landed on the exact date, but we're targeting likely.

The first part of June .

And we have reached our allotted time for question and answer I would now like to turn the call back over to Mr. Keith Creel.

Okay well. Thank you for your time. This afternoon, I know you sense, our enthusiasm and our optimism and I'll tell you.

<unk> done a bit of reflecting its hard to believe I used to be the young guy in the room I'm not anymore.

Im about to close out my 30 <unk> year in this industry I've had a lot of good years and been blessed to work with a lot of people and to collectively create a lot of success in this industry, but I'll tell you I have never faced a team already where talented and equip and a combined CPE Casey and I'm talking about the team at CP I'm talking about the <unk>.

<unk> to put these two teams together to create a CP Casey family equipped with an opportunity rich environment that is unlike anything I've ever experienced in my history, and certainly I believe unlike any that exist in the industry.

Extremely extremely exciting times for value creation for all stakeholders.

Something in it for all of US our nation included and we're ready to get to work.

Everybody stay safe.

We look forward to sharing our results after this quarter soon take care.

This concludes today's telecom. This concludes today's conference call you may now disconnect.

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