Q4 2022 Canadian Pacific Railway Ltd Earnings Call

Speaker 2: O T just four coing.

Speaker 3: Please stand by your program as a boss of again. If you need audio assistance during today's program, please start at zero.

Speaker 4: that CPR, that CA. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question, simply press star. Then the number one, are you telephone key pet? If you'd like to withdraw your question, press the pound key.

Speaker 5: I would now like to introduce Megan Albesta, Vice President of Capital Markets, to begin the conference.

Speaker 6: Thank you, Gretchen. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide 2 in the press.

Speaker 7: Chief Marketing Officer, and we're welcoming back Nadine Balani, our Chief Financial Officer and CP's newest conductor.

Speaker 8: The formal remarks will be followed by Q&A and in the interest of time, we'd appreciate if you could limit your questions to one. It's now my pleasure to introduce President and CEO , Mr. Keith Creel. Thanks, Megan. Let me start by thanking our 12,000 strong CP family for their efforts that have allowed us to produce these results in the fourth quarter and certainly over the course of the last four decades we wonder who won the top 20. However, they have gotten to that top 20. So that's just a criticism of

Speaker 9: The 17th consecutive year of being best of class, best of ministry is related to reportable change of relevance in the industry, something to be extremely proud of. And then to Megan's point, our bench is only getting better. I'm tickled to death that we've got.

Speaker 10: CFO , Mr. Nadine Velani, chief financial conductor officer, CFC, CFO , whatever you want to call it. He's had a very rich experience. He's obviously a business acumen from his time in Harvard, has increased.

Speaker 11: But most importantly, his railroad acumen and ability to apply his business talents has increased with the railroad knowledge that he's obtained the last five years, five years it seems like, probably five years in this 25 alone. The last five months specifically on the railroad boots on the ground and the ballast.

Speaker 12: spending time not only getting conductor qualified but also riding trains, time in the mechanical department, time with the track department, time working from Big

Speaker 13: and the local motor department, all the functions that truly make this company run day in and day out by the great Professional roaders we have the minimum limit makes seep what it is So that said again welcome back maybe you'd like to get you back in the seat And I also want to come in Chris and make it any and for the great work They did when you were going in your absence. They certainly made you proud

Speaker 14: Moving on to the results, in the fourth quarter we produced revenues of $2.5 billion, an operating ratio of 59.1 and core EPS of $1.14.

Speaker 15: For the year, the total revenues were up 10%, we delivered an operating ratio of 61.4, core EPS of 377, which was flat versus last year. We knew from the beginning, 22 would be a year of two halves, and particularly we had high expectations for the fourth quarter, which we were ready and resourced to meet.

Speaker 16: Unfortunately, there were some factors that impeded our fourth quarter to some degree. But with that said, I'm very pleased with how we began the year. Strong revenue and operating performance in January , which carries great momentum to the first quarter of this year and as we play out in 2023. We're in a great place from a network and resource perspective in spite of...

Speaker 17: Historically taught labor market in 22. It was a record year of firing at CP. We added more than 1600 conductors over the course of last year. And we made some significant progress.

Speaker 18: with our labor agreements with the recent candidates collective agreements, both with the UNO4 as well as the BLET. Both of those agreements are out for ratification. Specifically to the BLET and this has to do with the consolidated territories which are obviously contingent upon.

Speaker 19: the SDP approving our merger application disagreement with the BLET, which are the locomotive engineers, and the earlier agreement that we signed with SMART, the conductors, for the KCS in Kansas and Missouri. They're both aggressively power the agreements which will improve our operational flexibility.

Speaker 20: as well as the predictability in our employees' quality of life. Again, it's an agreement that gives us flexibility in return, enables our employees to realize higher pay, schedule jobs, and a better quality of life compared to a traditional labor agreement is in the U.S. rail space.

Speaker 21: Parts of these agreements of course remain subject to the SDB's approval of the merger, but we certainly see additional opportunities down the road pending and it's seeming depending upon an approval to create a framework for the benefit of all employees and a combined CPKC network and also obviously the reliability benefits.

Speaker 22: and service that this agreement will provide for a combined CPKC. I want to say a couple words about the transaction on the CPKC Friday. Both of our teams, both CP and KCAS are hard at work preparing to seamlessly integrate these two iconic companies. I can tell you there has been a ton of tremendous work.

Speaker 23: It's been accomplished by teams that both railways can ensure this mood transition. And I'm extremely pleased last week also to note the release of the final environmental and tax day, but certainly that's no small feat. I'm huge quantum aboard by the SBB to get that done in the meticulous stealth away.

Speaker 24: that they handled not only just the environmental impact statement, but in the handling this entire file. So I commend the team for the work they did throughout the process. As I said, the SDV has been very thorough, has been meticulous.

Speaker 25: And we continue to eagerly anticipate that it is on our merger applications which we expect this quarter.

Speaker 26: On the environmental front.

Speaker 27: A couple of words, CP continues also to make strong progress in this space, specifically in sustainability. I'm pleased to see that the company's efforts continue to be recognized for the first time in our history. CP was named to the Dow Jones Sustainability World Index, which is a tremendous achievement for the entire CP family that we can be proud of. We were also named to the Dow Jones Sustainability World Index.

Speaker 28: our hydrogen locomotive project which is unique in the industry. In late October that project hit a significant milestone when the locomotive performed its second mainline test and first revenue move and we're soon to experience the second hydrogen locomotive which is the GP38, a four axle DC locomotive over the next month which we'll be making it.

Speaker 29: It's a debut, so to speak, as we get it outroling and operating so we can work the bugs out of it. So when it closed by saying 23 were poised and ready to roll, it's going to be a very special year for two-story companies. We can't wait to get to work abouting these two great companies and creating value for our customers, our employees, and the North American economy.

Speaker 30: We're focused on executing the plan and I'm very pleased with the start that we've had to this year to what I expect will be a historic year. So with that said, I'm going to hand it over to John to bring some color in the markets and then Nadine will wrap up elaborating on the numbers and then we'll get it up to Q&A.

Speaker 31: All right, thank you Keith and good afternoon everyone. So as Keith mentioned the fourth quarter wasn't without its challenges and certainly customer supply chains and the winter weather we faced impacted our volumes. We ultimately fell a little short of our RTM growth we expected to deliver for the year.

Speaker 32: However, I'm pleased, as Keith said, to the start to 2023 and believe we are uniquely set up for the year. I'll take a look at our fourth quarter results now. Total revenues were up 21 percent on the quarter. Volumes were up 8 percent on the quarter, while effects and fuel combined to be a 15 percent tailwind.

while revenues were up 42%.

Working in concert with our grain supply chain partners, CP set new all-time monthly tundra record for shipping grain and grain products in October .

and we delivered our second largest quarter ever for grain volume.

Our newest 8,500 foot high efficiency elevator, a Richardson Greenfield facility in Saskatchewan, started receiving grain in December . And in 2023, we expect to be over 50 origin elevators that will be 8,500 foot capable, enabling us to continue to move record amount of grain more efficiently.

On the US front, we saw strong demand in Q4 for both our export and domestic markets.

I fully expect our grain franchise to continue to be an area of strength as we move through 2023.

On the potash front volumes were down 2% on the quarter, so we ended up 9% on the year

While we saw volumes for export potash impacted by weather challenges, the long-term outlook for potash remained strong and unchanged.

I expect to see similar growth in 2023 as we saw last year in potash.

And to close out the bulk business, coal volumes were down 25% on the quarter and declined 18% on the year. An outage at Tech's Elkview Mine in September impacted volumes through much of the fourth quarter and lasted longer than we anticipated.

We lost over 100 trains in the fourth quarter due to these challenges.

Looking ahead in coal, given the disruptions we faced in 2022 combined with a solid macro demand environment, we have a good setup from the compare standpoint as we move into 2023.

So when I look at our bulk franchise, which makes up 40% of our book, it is extremely well positioned in 2023. Whether it's through strong demand fundamentals, favorable compares, or both.

We have a set up to deliver double-digit growth in this less macro-sensitive portion of our book of business.

Moving on to merchandise.

The energy chemicals plastic portfolio some volumes grow 4%.

We saw increased volumes in our droogit during the quarter, as well as plastics from our new IPL Petrochemical Facility, single served by CP in the Alberta Heartland.

Despite macro uncertainty, I expect ECP volumes to remain resilient as we start off 2023.

Forest products were down 4% while revenues were up 17%.

Despite the Q4 decline in volume, this caps a record year for CP and forest products.

While housing starts our expected decline in 2023, CP's demand is softer compared to our record 2022. Our lumber, panel and pulp volumes have stabilized and we are working with our customers to maximize new market opportunities.

Automotive revenues were up 27%, while volumes were up 11% on the quarter. On our Q3 call, I talked about over 7,000 vehicles sitting at CP origin waiting for final components. I'm pleased to see that we are seeing definite improvement in part supply in more vehicles.

are moving towards shippable status. We have also began moving to new Ford business that started up January 1st, and I'm pleased with the startup of our new auto compounds at both Edmonton and Vensonville.

Looking ahead, demand for finished vehicles remains fairly strong, and we are working with our customers to replenish inventories at dealerships across our network.

Those fundamentals, combined with the new business we brought on, have positioned our auto business well for 2023.

Finally, on the intermodal side of the business, quarterly volumes were up 17%, while revenues were up 29%. Despite demand coming off record levels that we've seen the past two years, our unique market wins have differentiated us in international and intermodal.

with volumes up more than 40% on the quarter. With favorable compares for the first half of 2023 driven by new business that started out the back half of 2022, and the continued port expansion at the Port of St. John , we are well positioned to continue to outpace the industry in this space. file 140

Port of St. John continues to see tremendous growth.

eclipsing 150,000 PEUs in 2022, more than a 70% increase year over year.

Our partners at DP World are in the midst of deploying super new post-Panamax cranes, and this, coupled with the new berth and track at the port, will result in a doubling of the capacity by April 1st.

The Port of St. John remains on-plan to grow its total capacity to 800,000 PUs in 2024.

On the domestic side, although demand with our core retail customers have come down from their recent highs, our temperature control products continue to be strong.

CP is a leader in the temp-controlled space across Canada, and we look forward to paving the way into new markets across North America with CPKC should the SDP approve our merger.

We are continuously working hard with a variety of customers on test moves on an interline basis, which are going very well. We recently completed a southbound test shipment from the U.S. Midwest Market, Florado, carrying temp control products in about three days.

which is competitive with a single driver truck.

Further, we've also been testing the Northbound lane, focused on those service sensitive products to market to cross the Upper Midwest, the US, and into Canada.

These markets are 100% served by trucks today and presented from Mendes Conversion Opportunity for the combined CPKC to provide truck competitive single line service.

pending the FUB murder of our...

approval of our merger.

So let me close by saying, as I look out at 2023,

With the broader macro environment certainly remaining uncertain, CP's strong bulk franchise, our self-help business wins, and anticipated opportunities as part of CPKC have us in an advantageous position.

My team is focused on staying close to our customers and selling the value of our service. With that, I'll finish up and pass it over to Nadine. Thanks, John , and good afternoon. Great to be back and speaking to the results of the VP team for this quarter.

So, I'm a viewer aware of being out of the office a lot in the field the last five months. It's been a very energizing time on the railroad and I'm thrilled to see the passion and pride from our people firsthand. I had the chance to spend a few months in our Woolf Class Training Center getting conductor qualified along with a strong pipeline of the rail rotors.

that will enable us to deliver on our growth agenda safely and efficiently. Let me take a moment just to thank four specific trainers that helped me, Jeff McLean, Nate Blunt, Mark Merriam, and Joe Wensick, who shared their collective 140 years of...

of rail experience with me and I'm very grateful. I too also want to thank Megan Alberston and Ian Gray for their support and backfilling for me and doing a wonderful job. So thank you to the two of you.

Now looking at the quarter, the adjusted operating ratio came in at 59.1%. Taking a closer look at a few items on the expense side, we'll speak to the variances on FX adjusted date basis. As usual, COMPEN benefits expense was up 1 million versus last year. Increased volume and wage inflation worked.

largely offset by lower accruals for incentive and share-based compensation.

Fuel expense increased 153 million or 62%, primarily as a result of higher fuel prices, which were up 43% on the quarter versus last year and roughly flat sequentially.

materials expenses up to 33% or 17 million as a result of cost inflation largely in non-locumative fuel.

Equipment rents were up 43% or 13 million as a result of higher car and higher payments resulting from stronger volumes of intermodal and automotive.

depreciation expense was $219 million, an increase of $9 million as a result of a higher asset base.

Purchase services came in at $310 million, an increase of $54 million, or 21% when adjusted for acquisition costs. The main driver of the increase was higher pickup and delivery costs and other third-party services.

Moving below the line, the equity pickout from KCS in the fourth quarter was 287 million when adjusted for KCS's acquisition related costs, purchase accounting, and a game KCS had from an interest rate hedge online.

Other components of net periodic benefit recovery increased 6 million, reflecting higher discount rates compared to 2021.

Net interest expense was up $32 million versus last year as a result of a higher debt balance related to the KPS acquisition in Q4 2021. Income tax expense decreased $49 million, excluding KCS related items, and the reversal of a previous provision for an uncertain tax item. The effective tax rate was approximately $2.5 million.

On the year, Core EPS was $3.77 flat versus 2021.

We continue to generate strong cash flow with cash provided by operating activities of $4.1 billion in 2022. We continue to reinvest in the railroad and finish the year with a capital spend of just under $1.6 billion. I anticipate a similar level of investment for CP Standalone in 2023.

In the fourth quarter, we received dividends from PCS to link 450 million U.S., which were utilized to pay down short-term debt. Over the course of 2022, we received a total of 880 million U.S., or approximately 1.2 billion Canadian, dividends from cash flow and excess of the capital, PCS, has invested in their railroad.

target leverage. Looking at the year ahead, despite uncertainties with the macro environment, inflation and interest rates, I couldn't be more excited. We have a transformational merger with Kansas City Southern and a strong pipeline of opportunities for the team to deliver. With that, let me turn it back to you, Keith. Just wrap things up.

Okay, thank you for comments. The color both John and the Dean so operator on here open up the line for questions

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. As previously highlighted, please limit yourself to one question. Your first question comes from John Chappelle from Evercore ISI.

Thank you. Good afternoon. John , I know that you guys clearly didn't put out any guidance targets for all the obvious reasons, but when you hear you walk through all the different segments, you know, bulk being 40 percent, double-digit volume growth, tailwinds on auto, et cetera, et cetera, when you look to 23 and a CP standalone basis, understanding the macro headwind.

Does it seem to you that you can have volume growth that's not just at or better than GDP, but substantially better, almost like a multiple of that, just given all your idiosyncratic tailwinds that you have on your own network?

Well, yeah, I'm luck. I definitely see a path to growth. You know what we're unique in that 40% of our book is, is our bulk franchise. And I'm leaning heavy on that, as you said, certainly the macro environment is

is uncertain and we're not going to get too far over our skis and trying to predict what that's going to look like. But the Canadian grain franchise is set up well. You know Campitex gets through their contract negotiations with China and India. We believe there's a path to a double-digit.

growth opportunity there and as I said, you know tech Get a tough year between the weather and some of the mine challenges they had There's a I think a significant upside and a good market market demand environment in the metallurgical coal area.

If you sort of build that out, John , and you can make your own predictions on where those more industrial and consumer markets go, it definitely leads to a past some growth.

Understood. Thank you, John .

And our next question comes from Tom Waterwood from UBS. Thanks, good afternoon.

I wanted to see it. I think you've given us quite a bit of color over time about the opportunities for growth when you get the approval with KCS. Is anything changing or is there anything that's kind of new and developing as we wait for that STB decision?

Or is it pretty stable and it's kind of the same pipeline, same opportunities that you've been talking about?

I'll just say this in short, number one, I can't get ahead of the STD. The STD is the authority here and ultimately we need their

their stamp of approval. Now, I do think that our facts are very strong, and it's a very compelling value creation for all stakeholders and enables growth and all the things that we have said all alone remain to be true, but ultimately they have to decide when they do. Nothing is.

is it all?

needed our optimism for the opportunities and all the discussions we've had continue to find that approval uh... they have

an opportunity rich list that we're going to be able to execute that we're looking forward to get to work on.

Right.

Okay, great. Thank you.

The next question comes from...

Our next question comes from Chris Weatherby from City Group.

Hey, thanks. Good afternoon, guys. I think as we're looking out into 2023 and thinking about sort of the combination of this business, I guess maybe curious your thoughts on the ability to improve the OR from what was obviously a bit of a transition year or a tale of two halves as you mentioned, Keith, in 2022. So I don't know if you're willing to sort of think it.

We look forward, there's a lot of moving parts, obviously we don't know what the economy is going to do, but we do know our story is unique and we know we're going to control what we can't control and I do see a path to our improvement. So let me leave it at that.

We work for, there's a lot of moving parts obviously. We don't know what the economy is going to do, but we do know our stories you need. And we know we're going to control what we can't control. And I do see a path to our improvement. So let me leave it at that.

Your next question comes from Walter Spracklin, RBC Capital Markets.

Yeah, thanks very much. Good afternoon everyone and great to have you back. My question I guess is on St. John and you mentioned going to 150 this year.

You know obviously up from a less than 90 run rate and now you're You're pretty much running at a 300 run rate. So probably double that again in in 23 you're pointing to 824 Just curious, you know when you get to that level How long do you think it'll be that you could fill that 800 capacity in 24 and is?

Is LA Long Beach and the shorter queues and the less congestion over the west coast, does that hurt your ability to get up to 800,000 on a quick basis in 24 or beyond?

Well, Walter, I don't think so. In the thesis all along, if we think back to when we bought the CMQ, number one, there was only one competitor in that marketplace. We identified a route.

that with our investment, with our partnership with the Urbans and the NBSR, we're able to create a service package that ultimately long-term we believe is the enabler of the growth. We can get to Toronto, Montreal.

Chicago on a 200 plus mile faster route. That's not undeniable. And I think that's given us opportunities to talk to these steenship lines maybe a little differently than we have in the past. And I think the other point is I think about your timeline in 24, 25, and

the Gulf and also you know potentially Lazaro down in Mexico gives us a really nice menu to be able to work with our customers on and as part of that I see that enabling you know customers to not only

look at the West Coast, but grow that East Coast port of call with us, but then also, you know, potentially further diversify themselves by potentially going down and utilizing the ton of capacity that we're going to have available coming in through Mexico.

That's a great story. Appreciate the time. Thank you. Thank you, Walter.

The next question comes from Ken Hexter from Bank of America.

the rest of this process as you go through here. It's an exciting time to follow it. Um can you talk about the past ones? I think you talked about some of the lanes you're testing with the KCS on a commercial basis. Is there anything you can kind of talk about in the interim? You mentioned the lane was 100% served by trucks. I think you talked about the past. I think

Maybe can you quantify that specific opportunity or the potential there? Well, Ken, I'll say this at this point. As I said, these are interline test moves that we've put together to, I guess, somewhat replicate or begin the sort of proof of concept.

with these customers. As I said, they're moving 100% truck today. So part of the sale is helping the customer understand what that process and what that opportunity could look like. You know, obviously in the future, if we're blessed with single line service, we're going to be able to get the customer to the right place.

you know, between Toronto and Chicago and Laredo and ultimately down into Mexico, we wanted to begin to prove that we can compete head-to-head with trucks and ultimately provide that the liability that those customers are going to require.

I can tell you the second part of the story that's kind of neat around some of these opportunities is in these couple examples I spoke to, we've done some work with the customers to identify the greenhouse gas emission savings.

at about a 60 to 75 percent clip versus their current mode on those specific moves.

And it's really become a unique and exciting sales tool that maybe far more than ever in the past. Some of these customers have stood up to say that, beyond the price and the savings and the reliability in the service, this is an important story for us.

So I understand 61 sort of not the CP standard. So do you think maybe is this a year where we can get back to that 5758 OR we had in 21 and then just in terms of like the consolidated results. Now I know we can't give specific guidance yet but last year you gave us

directional commentary, low single digit kind of earnings growth. Anything you could say, double digit earnings, the street's got high teams earnings growth, any sort of directional color you can share. Thank you.

Hey Scott, I appreciate the question. You know, I'd just say if we wanted to give guidance, we would have given it. It's difficult in this environment. We're waiting, you know, a decision from the STB. So, I'd respect for that. I think we should hold off on guidance for a consolidated entity.

In terms of the OR, I think Keith said it perfectly, I mean, 61.4 is not something that we write home about. There's opportunities, as John highlighted this year, in terms of the volume, but there's also uncertainty on the macro front.

We think and we expect to see improvement, but to give you a quantum, I don't think it's appropriate right now, Scott. We'll update you as the year unfolds and as we progress on our potential transaction. You know, you can expect an investor day.

from us later this year and I think that will be time, plenty of time to give you a more formal kind of guidance when the time is appropriate.

All good, totally fair. Thank you guys.

Our next question comes from Jason Seidel from Cowen.

I wanted to touch on pricing a bit. I think you guys know that it's continued to be strong. I was wondering if you could sort of compare it to where we were at in 3Q, and then does it need to actually get better from here given cost pressures?

You know Jason, I would say we sustained and maybe even improved a little as we moved through Q4. You know I'd go as far as saying that high single digit type pricing on renewals, certainly inflation plus.

And just looking out so far, Q1, Q2 expectations in 2023, I'd say it pretty well lines up in that similar space. So I remain optimistic on our pricing and as we've always done in the past, certainly we're very conscious of this.

that wave in the marketplace.

Appreciate the color understood and look forward to the next big announcement.

understood and look forward to the next big announcement. As do we.

Thanks Jason.

The next question comes from Brandon Orgonski.

The next question comes from Brandon Orgonski from

ente

Thank you.

But you talked about new progressive hourly agreements with the smarts and the BLET unions. How important is that towards working toward a quick integration and what advantages do these hourly contracts have versus maybe senior competitors?

Well, it's critically important. It's a success enabler. I can tell you that, and I don't know if we have enough time to go through this on this call, but think of one collective agreement, think of a conductor, think of an engineer, think of no complexities from yard rules and road rules where we have two classes of employees. So you have...

one class of conductors and engineers, they make more money, they have scheduled time off.

And as a result of that, we have more predictability. And when you offer a better quality of life, especially in today's world, you pay more money and you let people know when they have to come to work, in the rail industry, that's a very unique and compelling value proposition. So to be able to expand that, we've benefited from that on the C&D and ME properties.

We've had a unique outcome even through last year and the year before, so that's been part of our

recipe for success and to be able to leverage that and give something that our employees will be proud of, their families will be proud of. And I think it's part of the recipe not only to succeed in realizing our revenue synergies and the growth that we've committed to as well as operational synergies.

But most importantly, I think it's necessary in today's world to be the employer of choice. Employees in the real industry have to work their tails off. It's not an easy job. They have a choice of where to work. All the road to hiring, CPKC, painting of course the SDB's approval of our transaction.

I believe has the potential again for the employee to create unique experience in this industry and that's what I'm most excited about.

potential again for the employee to create a unique experience in this industry and that's what I'm most excited about. Thank you.

Next question comes from Connor Gupta from the Scotiabank.

Thanks, Avi. Good evening, everyone. Welcome back, Nadine. I wanted to ask on the comments you made on the largest hiring and CAPEX programs you undertook in preparation of the opportunities ahead, how much hiring and CAPEX are you expecting to unleash once the transaction is fully approved?

Well, from a, I'll tell you from a CP standalone, our CAPEX is 1.6 billion. So, you know, tell me comments on on.

on Kansas City Southern's capex, but they've had a number of Initiatives call it, you know, whether it's from a bridge point of view Or from you know other land acquisition and so forth. They're they're hitting record capex levels as well

From a hiring point of view, we hired starting in the spring of 2022. We've had a strong pipeline in anticipation of the grain crop coming back. So we saw our employee counts, I think, get up to almost 13,000 people at the end of the year. And so we hired, I think, close to...

2,500 new people were hired and trained. So that was certainly a significant expense in 2022, and it will be a significant expense this year as we prepare for growth. So those RTMs that we expect to come along, the GTMs, you know,

assuming a positive response from the STB that the synergies that one day will realize will take some people. So you know we're hiring a few thousand at a time and we're spending capex at record levels on on our property and KCS is on their property.

Just a bit of color. Hopefully that helps, Karnak. That helps. I appreciate it. Thank you, buddy. Thanks.

Our next question comes from Steve Hansen from Raymond James.

Good afternoon, I appreciate the time. We've noted that KCS has faced some of its own OR headwinds in the past couple of quarters here, even stiffer than the CP core. Just to the degree that you can comment at this juncture, just curious how addressable you think those headwinds are and how quickly they can be reined in upon a successful SDB decision.

Yeah, it's hard to put a number on that, Steve. The thing I think about, you know, obviously I can't stick my hands into the business. You know, John and Pat and the team are...

very competent and capable and talented railroaders and they're managing those situations now. Pending STB approval and we have an ability to get our hands into it, then obviously when you put the combined network together, as we come together as a team, you create fluidity, you take out handling, you do a lot of those things that...

whatever challenges they're dealing with is going to get better from a fluidity and operational standpoint. And the other thing is as we win this business that we're talking about and we create these new markets, you understand the illegal people and you don't do the Helena Net data on the internet. It's just that I don't care about everybody looking at that. It's definitely not good.

Take out some of the complexity of cars being handled back and forth with a single-on-new versus an interchange move. That's true for CPTACS, that's true for an inter-on-new, perhaps that might be going UP, BN, CN, all the above. Single-on is part of the value of this for the customer.

It's part of the efficiency as far as the asset term. You control the new cradle to grave. You charge a fair price for it. You create capacity. And as a result, you have a more efficient.

Railway which produces a lower operating ratio. It's just the way you effectively run the business. So I can't put a number on it.

I can tell you that you should expect improvement naturally because of all those reasons, and I can tell you that this is going to be a team committed to driving that improvement.

Appreciate the car. Thank you.

Our next call comes from Brian Osenbeck.

from JP Morgan.

You know there's a change in the paid time in Canada start at the end of last year. It was called out to be $100 million, Edwin, as your peer. Just wanted to see how you're thinking about that at your own network here in the next year. And then maybe for John , if you can comment on just the price mix, and I guess other was a 200 basis point, Edwin, this quarter. Yes, thank you.

putting it together, it looks like it might be facing similar trends in the first half of next year just based on the comps and the winds that are coming on the network. But I wanted to give some high-level color in terms of how to think about mix and how that impacts you next year.

similar trends in the first half of next year just based on the comps and the wind that are coming on the network. But I wanted to give some high-level color in terms of how to think about mix and how that impacts you next year. Thank you. Bye now.

I'll say a few short words about these new regulations in the paid sick days.

I'm not thinking in tens of millions of dollars, I'm not thinking in hundreds, I'm thinking about the practical application of this. Number one, those sick days have to be earned through 20.

So really they don't come into play until 24 full year effect. Number two are manpower models. And I don't care if it's mechanical group, running traits group.

group, the main survey group, we model because employees obviously get sick, sick days that are already in our manpower models. So to suggest it's going to go from zero to whatever to ten, a multiple of ten would be to me irresponsible in my part.

Our employees, if I look at running trains, for instance, we've got average sick days in a year. I think the rough number is four or five. So that's already kind of baked into the manpower model. Now, if I've got to pay them for those four or five days, there's some impact. But at the end of the day, it's not going to be material. I don't know exactly what it will be, but we won't have full effect.

in 23, I know that for a fact, and when we do, I don't think it's going to be a material. Brian , you know what? You're right. I kind of see similar trends evolving as we move in the first half of 2023. You know.

Typically our bulk franchise just by nature a little lower on average sense for our TM basis relative to the rest of our book. That will kind of maintain or keep some of the pressure relative to the max that's of you described.

Okay, thank you for your time.

Okay, thank you for your time.

Next, our next call comes from Erie Rosa from Credit Suisse.

Great, good afternoon. So thanks for taking the question. I just wanted to see if Nadim or Keith maybe could talk about the expectations for the progression of the debt pay down. How are you seeing that play out over the course of 2023 and maybe into 2024 and what kind of impact might that have on your interest expense? Thank you.

So yeah, we're generating a significant amount of free cash as well as the then payments from Kansas City Southern. So we're kind of on pace to continue to get back to our 2.5 times target leverage.

So, you know, we've gone from kind of a little bit above 4, 4.14.2 down to 3.7, 3.8 levels. As we speak, you know, I would expect that to get in the high twos by the end of the year. And so, over the course of...

of 2024, we should be back in target leverage, keep it at that level. And as far as the interest payment, I just follow up with Megan and Chris Post-Call. I'm back in the office three days so far, so you call me on that one, then so it's better to...

Thanks, operator. Hi, everyone. I joined the call a little bit later, so apologies if these questions have been asked. But one, Nazeem, I was wondering if you could talk about non-fuel costs. Obviously, there's inflation. I assume you have some visibility if you could help us kind of think about.

I guess, I'll separately with Kansas City's LR, you know, there used to be a time where they provided USOR and Mexico LR. And I assume that, you know, based on where they are today, it may be safe to assume that they're kind of in the 70s now in terms of the US business. I don't know. Alright, all the best early in terms of local?ne green. And so I'm communicating with you and only as a poor state in the U.S., the world is not using this.

You want to comment or talk about that, but just trying to understand the gap in terms of where they are in the US business and where CP is.

Thanks for those questions. You cut out a little bit, so forgive me if I don't get the full...

full question and respond you correctly but I think you mentioned about inflation ex-fuel and we were running close to you know high six almost seven percent in Q4 so you know significant inflation that we haven't seen in.

environment, we'll see what happens with inflation. Certainly we've seen it kind of slow down in some areas, some of the latest economic indicators that seem, you know, hopefully peak inflation and we'll see that come down through 2023. But irrespective, we're protected from an operating income point of view.

In terms of OR, you know, KCS versus KCSM, yeah, not appropriate for me to comment. And I couldn't even tell you the answer if I wanted to. So if I knew it. So, you know, more to come on that and not something that, you know, I'm going to answer on this call. Yeah.

Yeah, I thought I'd try anyway. Thank you very much. Appreciate it. I'm going to say heck to the try and meet you. Thank you.

All right, next question comes from Justin Long from Stevens.

Thanks and good afternoon. I guess to follow up on some of the questions about pricing, can you talk about what percentage of your business is getting repriced this year? And as you started to pursue some of the new business opportunities as a result of the KCS merger, are you seeing any of the other rails respond to that with more competitive pricing and so on

you're thinking about that risk? If not, how are you thinking about that risk as you integrate the deal? So Justin, we should see, um, roughly 40% of our book roll over in 2023. And that's I would characterize that is what we're hunting for.

I fully expect that they're going to do it. They need to do in areas where we're going to go head to head and again assuming the SCB approves their transaction. That being said, I'll also say this. You know, a lot of the examples I've provided today and I've spoken to in the past are really not

looking at potentially out of Mexico up in the markets that that's moving short see or other alternatives that aren't head-to-head versus rails so so look well we're going to compete where we we compete and I fully expect you know the US rail competitors

to do what they need to do on that front and we'll do the same and again we'll try to focus on those growth opportunities that are

that are more maybe non-competitive with those and moving by a truck or other modes.

Understood. Thanks. We have reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.

Okay, thank you operator and thank you for joining us again this afternoon as you could sense. These are unique opportunities that you meet time in this company's history obviously contingent upon the S.D.B. approving our merger application. We are pleased and ready for a historic year for a combined entity, C.P.K.C. historic for our customers, for our employees, for the communities we serve.

We'll be in a position to be able to come together and share all these facts and answer a whole lot more questions and provide some color as to what the true opportunity lays ahead of us for 2023 and beyond.

So thank you for that. Stay safe and we look forward to talking again on our next call. This does conclude today's conference call. You may now disconnect.

Have the n five.