Q1 2023 Canadian Pacific Earnings Call
Speaker 1: That has been a major change inone s s s
Speaker 1: Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero.
Speaker 2: Good afternoon, my name is Rasa and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's first quarter 2023 conference call. The slides accompanying today's call are available at investor.cpr.ca. All lines have been placed on you to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press the star, then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Megan Albertson, Vice President, Capital Markets, to begin the conference. Megan Albertson, Capital Markets, Capital Markets, Capital Markets, Capital Markets,
Speaker 3: Thank you, Risa. 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.
Speaker 3: The risks, uncertainties and other factors that could influence actual results are described on slide two in our press release and in the MBNA filed with Canadian and US regulators. This presentation will also contain GAAP measures which are outlined on slide three. With me here today. We'll all the rate.
Speaker 3: is Keith Creel, our President and Chief Executive Officer, Nadine Villani, Executive Vice President and Chief Financial Officer, John Brooks, Executive Vice President and Chief Marketing Officer, and Mark Redd, Executive Vice President and Chief Operating Officer. With that, I will hand things over to Keith.
Speaker 4: Thanks, Megan. Listen, it's been a journey. We're finally here today. It's an honor to speak for the first time.
Speaker 4: is the CEO of the newly formed CPKC family. You know, it's reflecting the last 11, 12 days of go by fast.
Speaker 4: We're not quite at the two-week mark since we drove that historic final spike, solidifying our combination. But I can tell you the energy and the passion and the pride that I'm seeing from employees across this entirely new form network is energizing. The conviction that I have personally for what this company will deliver for our customers.
Speaker 4: for our employees, and North American commerce has never been greater.
Speaker 4: I'd also like to take a moment to thank and commend the CPKC team on all the work that's been done to this point to ensure a smooth start to integrating these two great companies, which I can tell you is no small feat. We intend for history to show that we integrated successfully.
Speaker 4: So let me move on to our CP final first quarter results. Most importantly, on the safety front, I'm proud that the teams built on last year's record safety performance, continuing a strong performance in the first quarter, with FRA personal injuries down 10%, train accidents down an additional 6%.
Speaker 4: Running a safe and reliable railroad is a key ingredient to what successfully running a PSR operating model is all about, and it's something that we take tremendous pride in at CP and now CPKC. On the financial side, in the first quarter we produced revenues of $2.3 billion, an operating ratio of 62.9, and core EPS.
Speaker 4: the key ingredient to what successfully running a PSR operating model is all about and it's something that we take tremendous pride in at CEP and now CPKC. On the financial side, in the first quarter we produce revenues of 2.3 billion and operating ratio of 62.9 and core EPS of 90 cents.
Speaker 4: On the labor front, we continue to make progress with our labor agreements in the quarter. We ratified recently a collective agreement with the TCRC Maintenance of Way employees here in Canada. Also ratified the negotiated hourly agreement with the Sioux Line employees represented by the L.E.T. on the U.S. side as well as several other agreements.
Speaker 4: You also notice in our numbers we continue to hire and train with head count up about 10% year over year, preparing for the volume growth that we expect to deliver. A couple comments on the transaction. John is going to talk about it a bit more in a minute, but I'm extremely excited about the customer response to this service opportunity.
Speaker 4: CPKC is going to create with our two most recent announcements that we've made this this week and last Partnerships with Snyder and night Swift are only the beginning more to come in June So with that said over to you John to provide some color on the markets. All right. Thank you Keith and good afternoon Everyone so that I'm very pleased with our first quarter performance
Speaker 4: the volume growth that the team delivered throughout the quarter. Well, certainly we saw pockets of softer demand. Our unique business initiatives served us well and give us momentum as we head into this exciting new chapter of CPKC.
Speaker 4: Now looking at the first quarter, I'll speak to the standalone CPA results for the last time. Total revenues were up 23% on the quarter.
Speaker 5: Volumes were up 11% while FX and fuel combined to be a 10% tailwind.
Speaker 5: The pricing environment continues to be strong with inflation plus renewals across the book of business.
Speaker 5: Now taking a closer look at our first quarter revenue performance, I'll speak to the results on a currency adjusted basis. The rate of volume is up 26% on the quarter or revenues are up 37%.
Speaker 5: We saw another strong quarter in Canadian grain, posting our second largest February on record and breaking our January record of 2.3 million metric tons.
Speaker 5: The strength and Canadian grain was partially offset by softer demand for U.S. grain corn exports.
Speaker 5: as well as challenging compares from last year.
Speaker 5: Looking ahead, although in the first few weeks we've seen challenging crop conditions and grain movements in Canada, with favorable compares relative to last year's crop, I still expect our grain franchise to provide a stable base layer of business as we move through 2023.
Speaker 5: Finally, although it's only in the early days, I'm excited to see a number of new grain flows emerge on the CPKC system, with recent movements from the upper Midwest in Canada to markets such as St. Louis, the Gulf, and into Mexico.
Speaker 5: Further, the CP team is working hard with multiple customers to expand infrastructure development of our industry leading 8,500 foot high efficiency train across the new CPKC network.
Speaker 5: This network development will enable new grain movements into the South U.S. markets and down into Mexico.
Speaker 5: On the pod-ass front, volumes are up 10% on the quarter, while revenues increase 22%.
Speaker 5: We delivered a solid quarter in Padaesh as we saw volume growth in both export and domestic movements.
Speaker 5: As I look ahead, although reduced China volumes could impact near-term shipments, I continue to expect growth and export potash as Campotex has effectively expanded its market share across its diversified customer base.
Speaker 5: And to close out the bulk business, coal volumes were down 2% on the quarter, while revenues were up 11%. Despite a modest decline in Q1, I expect to see growth in coal through the remainder of 2023.
Speaker 5: Moving on to merchandise, the Energy Chemicals plastics portfolio saw volumes grow 5% and revenue by 13%. Our plastics and LPG portfolios performed well this quarter, driving significant volume growth.
Speaker 5: along with strong volumes of gasoline and moving to our transload and distribution facilities in Ontario.
Speaker 5: Our force products volume increased 1% while revenues are up 13%.
Speaker 5: Despite some fears and demands of this sector, we worked closely with our customers to find opportunities and deliver record Q1 volumes in forest products.
Speaker 5: The metals, minerals and consumer products portfolio grew revenue 23% with a 16% increase in volume.
Speaker 5: The strong growth in this book was driven by higher volumes of fraction and steel year over year, as well as continued strong pricing in this carload book.
Speaker 5: Automotive revenues were up 32 percent, while volumes were up 18 percent on the quarter.
Speaker 5: Demand and automotive remain strong as the industry has moved path park shortages and Inventory restocking continues at an accelerated pace
Speaker 5: We saw strong performance in our automotive segment as we executed the field of demand and we also ramped up volumes into our new auto compounds in Edmonton and Timers will focus on cleaning in full.
Speaker 5: Now finally on the inner modal side of the business, quarterly volumes were up 9% where revenue was up to 8%.
Speaker 5: International intermodal volume led to growth in this space as our self-help wins with CMA and also growth we are experiencing at the Port of St. John more than offset softer demand in this segment. worst case scenario its AD cheering!
Speaker 5: On the domestic side, we saw softer demand from many of our retail and wholesale customers. However, we were able to partially offset this by continued strength in our food segment.
Speaker 5: And of course as Keith spoke to, you've seen our recent press releases, we are extremely excited about the unique partnerships that we've created with Schneider and Swift.
Speaker 5: who will ride our new 180-181 train pair that will launch service on May 11th between Chicago and Mexico. I can tell you being at the table with these customers and many others over the months, it's been a lot of hard work to not only understand these customers' needs, but also to understand their needs.
Speaker 5: but also the multiple interline trials that we've taken place on our network to help refine the single line haul operating plan that will be in fact the fastest service in this marketplace. So let me close by saying we're 12 days into
Speaker 5: C.P. Casey and the team is energized and we are focused on delivering sustainable, profitable growth.
Speaker 5: There's no shortage of job opportunities in front of us and my team is staying focused and in lockstep with our operating team to pick the right business partners for CBKC.
Speaker 5: We are excited to launch new products. We will continue to sign up new customers, and we will build on the success that these two historic companies.
Speaker 5: to launch new products, we will continue to sign up new customers, and we will build on the success that these two historic companies as we move into the future.
Speaker 5: We are looking forward to showcasing all of these opportunities and many more when we present our commercial playbooks at Investor Day in June .
Speaker 5: So with that, I'll pass it over to Nadine. All right, thanks, Sean. Good afternoon. And please, with the results, team produced this quarter and extremely excited about the path ahead for the combined CPKC family.
Speaker 4: Looking at the quarter, the adjusted operating ratio came in at 62.9%, a 690 basis point improvement from last year's challenging Q1.
Speaker 5: Taking a closer look at a few items on the expense side, I'll speak to the variances on an FX adjusted basis.
Speaker 5: Common benefits expense was about 18 million or 4% versus last year.
Speaker 5: Increase volume training and hiring as well as wage inflation where the main drivers of the increase. These were partially offset by lower stock base compensation expense and lower current service costs in the DB pension plan, resulting from higher discount rates at the end of 2022.
Speaker 4: Fuel expense increased 38 million or 13% driven by higher volume and a modest zero-over-year increase in fuel price versus last year. The zero's expense was up 14% or 9 million driven mostly by increased maintenance activity across the networks and cost inflation.
Speaker 5: Equipment rents were down 19% or 7 million as a result of increased receipts from the use of CD assets by foreign roads.
Speaker 5: Depreciation expense was $225 million, an increase of $11 million as a result of a higher acid base.
Speaker 4: Percent services came in at $334 million, and increased the $35 million or 12% of what adjusted for acquisition costs. The main drivers of the increased for lower land sales and fixed in last year, increased casual pay expense, and some third-party costs and prices, including pickup and delivery fuel to search large costs.
Speaker 5: Moving below the line, we actually pick up from KCS in the first quarter was 256 million, when adjusted for KCS's acquisition related costs and purchase of counter. Other components of net periodic benefit recovery decreased 15 million, reflecting higher discount rates compared to 2022. That interest expense decreased by 6 million versus last year.
Speaker 5: the CPS expected CPKC effective tax rate to be approximately 25.5% in 2023.
Speaker 5: Running of the income statement, core adjusted EPS was 90 cents in the quarter. 34% higher when compared to last year.
Speaker 5: We continue to generate strong cash flow, with cash provided by operating activities of $881 million in Q1, and increase the 44% versus the first quarter of 2022.
Speaker 5: Our first call on uncapable remains a business. In the quarter, we green that the just over 400 billion. In the first quarter, we were seeing the final dividend from KCS to the end of 300 million Canadian, which we used to continue to be level of our value sheet.
Speaker 5: Hang down close to 490 million of debt in the first quarter. You'll also see in that following the end of the quarter, we successfully completed the debt exchange we launched in March, replacing 7KVM notes with the ERC notes on the same financial terms.
Speaker 5: Additionally, in April , we purchased and subsequently, there were hopefully approximately 650 million in government security to satisfy and discharge a 2023 KCS notes that were ensuring in May and November .
Speaker 5: or combine leverage is down to 3.5 times on our path-acts or target leverage.
Speaker 5: Person 5 clients netted off to adjust to digital
Speaker 5: In close to the Biketia Civettin, we generated 495 million and pre-cash flow on the quarter.
Speaker 5: Well, it's been a long pass to get to this point when I look at the opportunity set in front of us, it's certainly being worth it. We're at a historic point in this industry and with a unique story to tell. I look forward to providing you more, more full-smart data on our investor day at the end of June . That'll turn it back over to Keith's resting zone. Thank you. Thank you.
Speaker 4: I can tell you this is my 31st year of railroad and I've never been more excited about the path that this nearly four companies create for our employees, for our communities.
Speaker 4: Very sure, holders of the commerce in North America.
Speaker 4: Commerce in North America. The report is showcasing...
Speaker 4: Now we're going to start that journey in June and May I come together, but for now the opening after questions on our first quarter results.
Speaker 4: We're going to start that journey in June and May all come together. For now, let's open up for questions on our first quarter results. Let's go ahead, operator.
Speaker 2: Thank you. If you would like to ask a question, simply press the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. As previously highlighted, you can limit yourself to one question.
Speaker 2: Our first question comes from Fadi Chimu with BMO. Your line is open.
Speaker 6: Good afternoon, everyone, and a congrats team on clothing, this induction starting exciting. But I have a couple of quick things. First, if John can you give us an estimate of what the
Speaker 6: revenue synergy that you're expecting from Schneider and Knight out of the gate just I'm guessing some load are going to transfer to the CT network out of the gate and ultimately you're anchoring these customers to grow faster after but
Speaker 6: what what what does that look like and Keith You mentioned the integration in your remark and I just wanted to get your thought that this is not kind of overlapping Network and probably it doesn't have the same challenges we've seen with
Speaker 6: prior mergers, but what are you focused on in terms of, you know, a key, you know, aspects of this integration to ensure ghost movie? Is it the quality that people online that if you can give us an idea about what is your key focus to, I can't be sure that this is...
Speaker 6: But what are you focused on in terms of, you know, a key aspect of this integration to ensure a ghost movie? Is it the technology that people online that if you can give us an idea about what is your key focus to make sure that this is going to...
Speaker 4: Go through those who aren't pulling. Let me take care. Welcome back to Foddy. It's been a while since we've had a leader who speaks to him. He's called so glad to have you back on the call. Let me start with the integration piece. This is a process.
Speaker 4: An issue itself, it doesn't have a really good history at our industry and we've known that going into it. I am I in my rowing time, I've left through some integrations.
Speaker 4: It history shows did not go well and I participated in some that have. So with that said, I can tell you we did not underestimate the magnitude of this. This team has been hard at work, but there are counterparts at the KCS when they're in trust focused on integration. So we integrate well because the last thing we need to do obviously is not provide safe and efficient service for our customers as we bring the two roads together. So.
Speaker 4: We hit the ground running. We have an integration management office that I chair that we've created the last time months. We have a cadence we need every couple of weeks. We have integration champions. We've broken down our disciplines in our business into eight different groupings. Those are full-time assets committed to that.
Speaker 4: I think of over 168 processes that we have acted plans against that all define integration from the way we pay employees to the way we work with our customers.
Speaker 4: To the way we manage the real estate, everything is covered for the lack of a better term. So very thought out, very disciplined approach. So we trigger that, obviously, day one. We had a day minus 30 countdown. We had a day one hit the ground running. But I can tell you this, we were all in Kansas City, no day one. We decided that we're going to celebrate the story that it was in a real world in history. I think it warranted that. So we're going to celebrate the story that we're going to celebrate.
Speaker 4: So we celebrated in a very, I think, reflective, positive way. And then we went to work, and we've been there ever since. I've been there every week except this. Obviously, I'm in Calgary this week. But I'm going right back there next week. John Brooks is located there now. Our chief operating officer, Mark Rett, is located there. My US office will be there.
Speaker 4: And I'm going to be there 75 to 80% of my time focused on most importantly culture. To make sure that we bring these two cultures together. I've said from the beginning they're very similar cultures. Very like-minded people that are customer focused. That love railroading. That quite frankly, you know.
Speaker 4: CP and KCS have been the smallest for a long time. We now have a level playing field. We have a franchise and a network that I believe will become the most relevant in North America. And it's fun to come to work. We just got to make sure that we integrate well, we lay the business on correctly. We don't oversubscribe the network.
Speaker 4: And we sequence the business with these opportunities so that we can deliver this service in a safe and efficient manner as we've committed to. So that's what my attention is on. That's what it's going to be on for the next. Six, eight, 12 months next year, the following year, we're going to stick with this thing.
Speaker 4: to get it right because there's one thing I'm committed to and that's history reflecting that we've done what we said we're going to do. It's reflected well on us and it's reflected well on us and trusted us to bring these two great companies together be it board members, be it shareholders, be it regulators, be it the communities we operate in and through. So welcome back, Fattie. Is John here?
Speaker 5: service in this marketplace or excited, you know, Schneider over 30 years of experience of operations in Mexico. The Nightslift team, you know, very excited about the convelling value proposition that you could make even if you are not having access to the specific discipline in these displays being the Sweet- clinician or even the German beret, the liver of the ?? App????, the outcome believes its connectivity with the
Speaker 5: the new C. P. K. C. And then the new C. P. K. C. Single line hall will bring from you know, Canada, U. S and into Mexico. I'll tell you both both of those shippers are going to be on the doorstep of our terminals Day one May 11th. They will be on that train. And you know, bringing volume and
Speaker 4: We'll rent that business up, but you should expect it to be a hundred million dollar plus line of business for us. And that's just the start of filling that train party. So I can tell you there's going to be some more exciting.
Speaker 5: uh, announcements on the horizon in markets that, um, you know, not only deliver and can utilize best our service that's in a modal service, but most importantly, take trucks off the road. Um, we have been very focused on opportunities, uh, that, you know, can capitalize on the 60 to up to 75...
Speaker 5: the power of what this network can do. I can also tell you these customers are excited and compelled with the capacity that we offer. It's been a tough couple years of railroading for the industry and a lot of these customers are ready for a differentiator.
Speaker 5: and I truly believe come May 11th of what this service will bring. Great, thank you. Your next question comes from Ben Nolan with Steve Ol. Your line is open.
Speaker 5: Yeah, thanks. I guess my question really is, we heard from your competitor and candidate that they are expecting or already seeing a recession in their numbers. Haven't seen it in years and even so far in April , haven't seen it in years. Are you guys?
Speaker 5: Under the impression, or are you seeing a recession or an environment, or is this just something where you're finding other ways to supplement your volumes despite what may actually be recession?
Speaker 4: I'll let John provide a bit of color. But as we said from the beginning, we have a very unique story in this industry, and this combination only makes it even more unique. We're not recession proof. Obviously, if the macro was bad enough, anybody could be impacted, but I can tell you we have some very unique recession insulators that know of the rail network has.
Speaker 5: in North America. So, you know, I would say then we definitely, we're not completely immune to some of the sectors, you know, in the international and a modal space, certainly the volume through all the ports in North America are down. To your point, this is a self-help area. We are.
Speaker 5: been aggressive, we've been able to grow, we've been able to find some customers that you know wanted to shift some business to our best in class service out of Vancouver with CMA. You're familiar, we've had a ton of success out of the port of St. John in growing that business and I'm actually I'm very excited, you know half-agged, started up a new service.
Speaker 5: with their alliance partners here a few weeks ago through the port. So albeit that area is being hit by volume pressures, we've been insulated by it. I would call out not only the KCS network, but also most recently our network for domestic...
Speaker 5: So we're not immune in those areas, but I think the key point, there are self-help initiatives that are helping keep us slow to a little better. Obviously, CPC and these synergies, and every day my expectation and my team reports out to me where we're at in converting some of these...
Speaker 5: on the new CPKC network.
Speaker 7: All right, appreciate it. Thanks.
Speaker 2: Your next question comes from Walter Sprackland with RBC Capital Market.
Speaker 4: Yeah, thanks very much, Operator. I think I'm taking my call, I'm not my question. I really want to come back to Schneider, but look at it a little more conceptually. I think Schneider was an example of where KCS had to kind of interchange with UP to bring it to Chicago and converting that over to a single line now makes a lot of sense. And you know, you know, is, is, uh, what they call an easy win, but it's certainly a very attractive proposition to that, to that customer. And that customer.
Speaker 4: Can you bench or can you ballpark for us? How many how much more in revenue dollars is Out there where KCS was interchanging with a partner that you can now deliver a single line service to and perhaps You know get some easy proposition wins right out of the gate along those same lines Walter so
Speaker 5: So I can't go into a lot of details there. I will tell you this though.
Speaker 5: Certainly, I think what you described extending that haul and that single line haul value proposition was important to a Schneider and that reliability of capacity and service.
Speaker 5: that's a good thing. And I think that's a good thing. But again, I'm going to point more to, um as much as that story is about that. It's about taking trucks off the road and. And if you look at the value proposition we're going to create in terms of Laredo to Chicago, a third day delivery and into Monterey on a fourth day delivery and down in the
Speaker 5: savings opportunities with their own truck fleet. And to go after some of those pieces of business that I think the rail sector has long sought to get after but just haven't been able to demonstrate the service to really compete. So we'll get into those details also.
Speaker 4: as part of our investor day story. Yeah, I want to add a little color to that Walter. You know, I think about this in talking to.
Speaker 4: Talk in the Schneider and Swift both, you think about what this enables. You think about asking in that same question, you know, what freight, do their competitors all over the road today that this service reliability and this single line reach into Mexico, be it going south, be it going north?
Speaker 4: gives them to be able to go compete for. So there's revenue out there that's moving across the road that's not moving in a Schneider vehicle, that's not moving currently in a Swift. It's gonna be able to be competitive for them to bring to our rail network in partnership with us to get it into Mexico and to get it out of Mexico. So there's such a, I would call.
Speaker 4: Maybe the conversion is the tip of the iceberg for the lack of a better term. It's what we don't know yet that it sets me so much. And once we put this product in the marketplace, it's not spin, it's not rhetoric, it's truly best in class service, connecting it seamlessly, Chicago to Mexico, Mexico to Chicago and those locations in between. That's a game changer.
Speaker 4: It's a new market, it's markets. We don't know about its markets that we're going to enjoy uniquely with the people that are with us and I'm super encouraged that Schneider and Swift see the value in that.
Speaker 5: That's fantastic color. I look forward to hearing more about it in June . Thank you, Rob. Our next question comes from Kunaar. Good day, Ms. Goshakapital. Your line is open. Thanks a lot, Peter. And with us from the Runaway, I call my Congress on Nandu's historic moment.
Speaker 6: I just wanted to begin to be the intemoral contracts, the Schneider and I took a month more. My understanding is your line, single line, between tax-max and Chicago is probably a little bit longer in terms of mileage compared to your competitors on the best-go-strap. How is that? You are getting service faster and they are compared to those cars.
Speaker 4: set from the very beginning this combination will create new competition. It's going to create new options for shippers.
Speaker 4: And that's exactly what this is. So that announced what it was made to Falcon Express or Premium Service that I heard about yesterday. You know.
Speaker 4: How could that my friends in Montreal they finally validated our case for consolidation? We knew it from the beginning, the facts with support and I think history is going to show the STB got this right because of this very specific issue. But then you get to Saaronic, I was sitting in this same seat two years ago and I made a comment that the
Speaker 4: which is the CPCC ramp that serves the monitoring market.
Speaker 4: Yes, it's true that the Falcon Service is 194 miles shorter.
Speaker 4: However, the reality is we delivered in four days and we run 194 miles longer versus their advertised 5.9. We're beating them two days to the market. Now let's go closer to Mexico City. It's a Porto, which is our CPKC terminal versus the FXC Solayo terminal that's advertised with the Falcon service. And actually there, it's 76 miles shorter.
Speaker 4: the CP casing network, because what happens in US where UP enjoys as a crow flies?
Speaker 4: A short-order link to Paul, it's the reverse to the same market when you get across the border in Mexico. CPKC calls that back, but from a service standard, from what we delivered to the customer, it's 4.6 days on the CPKC 181 service versus this premium service that
Speaker 4: I heard yesterday aspirationally was untouchable at 7.9. So perhaps it is today, but on May the 11th, it's going to be touched with a much superior service. Again, the facts matter, rhetoric, we're just people of fact here and people of truth. We're about to launch a train service that's unparalleled in this industry.
Speaker 4: And those that partner with us are going to be winners in this game of service reliability. They're going to be winners in the game of serving our environment, taking trucks off the road and making everything we said to be true about this perfect combination, fact-based truth. Not rhetoric, not spam. History is going to show that. So we're ready to compete.
Speaker 4: We're ready to get after it. That meant some great kind of, thank you so much. I'll let you know tomorrow, what we're going to name it. It won't be felt, and we're going to come up with something that truly exemplifies the superior surface that this is. Okay, thanks. Our next question.
Speaker 5: out, in terms of sequencing the next either couple of days, weeks, months, however you think about it in terms of things that you can kind of get going operationally or from a cost perspective or otherwise, kind of right out of the gate, I would see that there could be some changes now that will pass that year for 14 pages. I curious how you're thinking about that. Now let me say this, Chris, there was a lot of thought in planning ahead of time and the guide that's responsible for executing the
Speaker 5: just prior to control. And what we'll focus on is really just back basics. You'll look at our PSR metrics. We'll make sure that our car fleets are leaned out in both areas, both railroads. We'll look at focus around dwell speed, yard speed, locomotive optimization in the yards, and also just inventory reviews.
Speaker 5: So we'll just, really, we'll just get the number two pencil out and just start railroading and stay focused on just the metrics themselves but also just getting into the details of how we railroad on LCP. I think Chris the other point that I can be in Mark on is, you know, from...
Speaker 4: Right out of the gate, Dave, one, it's about cross-pollinating. It's about best practices as well. We've got some KCS's talent in Livingston as new to St. Paul. So he's on the former CP network. We've got Tracy Miller, who is in St. Paul. That's standing tree port. We've got Mark Gralasco, who is a very talented operating officer. It's in Canadian Pacific. It's in tree port as well. So Mark went through a very methodical well-thought-out plan to make sure that...
Speaker 4: We've got an opportunity to drop change on both networks to create a better outcome for CPKC. So they're well into it. I'm encouraged with the progress they hit the ground running and we're gonna accelerate. That's helpful. Thanks very much, appreciate it.
Speaker 5: Our next question comes from John Chappell with Evercore ISI. Your line is open. Thank you. Good afternoon. Keith, I want to tie a couple of things together from a little bit earlier. I mean, on the integration, it's very clear you don't want to take on more than you can to as to maybe bottleneck things in the early.
Speaker 5: today, how do you think about pricing for that?
Speaker 4: Well the reality is the way we manage it is the way we've managed our business as far as the CP for the last
Speaker 4: five, six years. You know, my form is key to that relative to our modeling. We've got John on the marketing side of the opportunities. We've got Mark on the operating side of the execution and they've got to deal with me in the middle.
Speaker 4: So we are very well, all of us connected to help assess in these opportunities, sequencing, this business. I'm not going to allow this network to get oversold. So as much as, you know, if we could, we would take it all tomorrow, we can't and we will not. The last thing I'm gonna do is disappoint the customers that have an obligation to today, be they former.
Speaker 4: CPV, they form a KCS, and especially those that we're starting to partner with. So we've got a commitment and obligation tonight, swift as well as to Schneider to bring them on the right way. We're going to launch this train each way. It's going to be a seven day a week service. That's where we're going to start. And then we're going to see what's next. Next.
Speaker 4: And all the while we're doing our infrastructure work, we're continuing to build out our sightings, we're continuing to execute the merger plan that we gave the SDB again so that we could be men and women of our word. And every bit of that was thought out in sequest and line with these business opportunities.
Speaker 4: So we're not going to get ahead of our skis. We're going to be methodical about this. I think our customers as much as they would love to benefit to this network tomorrow. I think they would much rather appreciate our honesty and say, not yet. We're not ready yet. Then we just bring them on and we fail them. We're going to get one kick at the can. We're going to make this thing right. And we're not going to fail by letting
Speaker 4: are aggressive aggressiveness and are wrong for revenue over, subscribe, our ability to execute. That's just not what true PSR is about. We've got to make sure the network can handle the business to be able to execute our operating model. And that's exactly what we're going to do. John , I might add just a little more color to that, this John Brooks.
Speaker 5: I can tell you the excitement to just sell, sell, sell was impressive. It made me excited. But to Keith's point, there was also a lot of temperament around. We're going to sell to the right customers. We're going to look at those opportunities that can really value our capacity and our service. We're going to work closely with...
Speaker 5: with Mark and the operating team and I can tell you, we have a very distinct process that we've used at CP with my foreign, that any sort of incremental business that we consider to bring on the network. We make sure it fits our trains and ultimately what we sell, we can deliver to the customer and we layered that process.
Speaker 5: I'm going to the KCS network. I guess that would have been about our 40 of control. So I'm quite comfortable that the team understands this mandate. They are like thoroughbreds though. I got to hold them back. But nonetheless, we're not going to oversell this network as keeps that.
Speaker 5: Appreciate that. Thanks, John . Thanks, Keith. The next question comes from Scott Group with Wolf Research. Your line is open. Thanks, afternoon guys. So I know we'll get the longer term guidance in June . So I'll stick a little bit shorter term this quarter. Any thoughts, color on how to think about Q2 from a RGM revenue operating ratio standpoint and then either core?
Speaker 8: Volume mode looks, some of the headwinds, some of the opportunities, and we've been reporting our equal RTM, so let me just leave it at that one.
Speaker 9: Yeah, Scott, I mean, I think a lot of the challenges and April that the other roads have identified were not completely immune to those, but I know means, but I can tell you, you look at the numbers, we have ferred a little better. And again, I do think we've got some upside is
Speaker 9: the next few weeks. And we will continue on that pace. Um Nick says has shifted a little bit negative on us as we've seen a bigger, you know, um, part of our bulk franchise move. Uh and naturally with that, uh, you know, for a longer haul business here, you
Speaker 9: I don't see that being that alarming of an issue as I look forward. You know, a little bit of headwind and other freight on the accessorials, but again, I would say smaller relative to the others in the industry, and we actually view that as a benefit of CP as we begin to see.
Speaker 9: operating upside in our terminals at the result of some of that lactic congestion related to the adversorials.
Speaker 5: Thank you guys. Yeah. Our next question comes from Tom Waterwoods with UBS. Your line is open. Yeah, good afternoon and congratulations on the skill and persistence in giving this deal done and approved.
Speaker 9: What I wanted to ask you is just thinking about operating changes and some things that have been done in the past. It's probably not a good analogy, but I think 10 years ago, C.P. was doing something called whiteboarding and the idea that you were just reconfiguring the flow of traffic on the system.
Speaker 9: Is there an exercise like that is there a process like that that eventually will take place for CPK as you and what might be the timing. And I guess if not we better be better to think about it as you know you're really just adding train starts as you bring on new business. Thank you.
Speaker 5: That's part of the way we do business. We still white board on the former CP network. It's part of our discipline, part of the rhythm of making a plan, executing the plan, stress testing the plan, adjusting and tweaking the plan. So as the ebbs and flows of business occur, it's never going to be static or should be static unless we're not growing or shrinking. And then we still have a responsibility to adjust. So I can tell you that.
Speaker 4: John Org did quite a bit of whiteboarding himself when the company was in trust. Mark and his team were going to be able to find that. You know, there's always something that a new set of eyes and ears will see in here. That perhaps the previous didn't. That's true about me. That's true about Mark. But that's definitely part of this playbook that he'll be executing with his leadership team. And that's part of...
Speaker 5: When you talk about cross pollinating, when I talk about bringing Tim Livingston and his abilities and skill sets for leadership impact in the same poll, and we're taking Tracy Miller Livingston as, it's kind of a replication of that. Both of those gentlemen will see things the other bit, and it's nothing to be ashamed of, it's nothing to apologize for, to meet us up and celebrate because it creates new opportunities for us. So white boarding in railroading that way, that is what PSR is. That's a key ingredient to it, and it will be part of our DNA.
Speaker 5: As long as I have anything to do with this railroad or anything to do with the people that run this railroad, I'm going. The only thing I would add, I would have with that is really May the 8th, we'll bring the KCS team up to Calgary. We'll have that alignment meeting, we'll talk about what good looks like, we'll talk about the standards and expectations.
Speaker 9: That's what we'll glean out of the out of the conversations. We'll make sure that we time every job that we have the connections Understand what freight goes where and just align ourselves on how what good looks like.
Speaker 9: That's what we'll glean out of the conversations. We'll make sure that we time every job that we have, the connections, understand what freight goes where, and just align ourselves on what good looks like. This is Alex WorkmanCosmont trying to put together the latest update for us.
Speaker 9: Yeah, I'm sorry. Yeah, I'm sorry. I was just going to say so we should think of it as more a process, not like in some of the PSR stuff in the past, you know, you do a lot of work to plan a new schedule and then you implement broadly the new schedule. But it sounds like this is more of kind of a process and a gradual thing than a...
Speaker 5: you know, point in time where there's a big change to the schedule. Yeah, the schedule itself, the service design team, teams did a phenomenal job having it ready to go day one. So literally to say that we had a system schedule, day one is unfair allowed. I don't know that any railroads have ever been able to do that. So there was a lot of pre-work into that, so we could hit the ground running. But it's these.
Speaker 5: These whiteboarding sessions, you go out and you stress test that schedule. You make sure that the local jobs are right. You make sure the road performance is right. You make sure the stops and the times you switch your customers are correct and you're properly resourced to optimize that plan. And I can tell you, I'll give you a case in point. I walked in Mark's office this morning and we got to a discussion about inspecting locomotives. And listen, they're good railroaders. And I'll tell you, I'll give you a case in point.
Speaker 9: But we do a little bit different. It's about best practices. Right a little bit about the train master in Wally this morning. Yeah, so actually I don't know probably midnight last night talking to the train master in Wally Texas. And what we what I noticed was just a detail I'm asking for and he actually had a crew come on duty, walked through the locomotives, but also here that we had a mechanical inspection as well.
Speaker 9: So during that I learned that we spent about 20 minutes walking to the locomotive, make sure they're set up right, make sure the handbrakes are off, and the mechanical person just went through it. So all I've asked for is now let's get a card on the lead engine that says job reef and car that says this engine that's been sold off by Joe or Jane or whoever the mechanical person is. So when the engineer gets on the locomotive they can just leave. They don't have to do a brake test. They don't have to do all that whole nine yards. They can just leave.
Speaker 5: interpreted. You've got a qualified certified.
Speaker 5: mechanic that's been trained and is an expert at inspecting and servicing that locomotive that signs off on it and they hand it off to the locomotive engineer who's a trained expert at operating it safely. You know, if that qualified mechanical employee was not there, then of course the engineer would do that work. The work has to be done. This isn't talking about eliminating work that needs to be done to run a safe, deficient railroad. This is talking about eliminating...
Speaker 2: Great, thanks for the time. Appreciate it. Our next question comes from Ari Rosa with Credit Suisse. Your line is open.
Speaker 10: Hey, good afternoon, and I'll just echo everyone else in congratulating you on a historic combination here. Keith, it did seem like KCS had a number of operating challenges kind of leading into the closing of the merger. Just wanted to understand what accounted for some of those issues from your perspective and what does the timeline look like to fix those issues? Thanks.
Speaker 5: Well, the sixes began. I would suggest that John and the team did quite a bit leading up to the stabilized metrics. And I believe a lot of the duration was in Mexico. Specifically, the U.S. operation was running quite well. On the Mexican front, though, there was some congestion down in Mexico.
Speaker 5: There were some challenges with labor availability. John in the team or...
Speaker 5: are working hard to address the labor opportunity to communicate to our employees that are in Mexico that listen, they're a key piece to this. Those employees in Mexico and the growth that Mexico can enable, they're success enablers. And part of that, you know, getting out and making sure that they understand that is part of IU in them.
Speaker 5: the hearts and the minds of your employees. And John's about doing that, Marx about doing that. I've been down to Mexico myself. I went down up downtown Hall as a Mexico City twice. I went down just before control date. I guess it was maybe the day before, two days before. Did a town hall in Monterey? And I can tell you those employees down there have energy, they're engaged. They feel like they're part of something.
Speaker 5: I'm going to make sure that they know how important they are to that something. We're creating something special. And I think all that matters. I think as we progress this and we educate those employees and they feel like they're part of this, not just the officers, but most importantly.
Speaker 5: Equal of importance are the men and the women that operate the trains. In quite frankly, I think there's a big opportunity to do that to make sure they understand the opportunity before them and how important this is not only for Mexico and for their families but for the North American continent. And I think that's going to be a game changer. So you should expect to see the performance improve.
Speaker 5: The things that Mark's doing today with the team taking it to the next level, building upon that work, taking cars out of service that are just setting their dwelling, that are taking up valuable space that some are eating us up in car hire, getting them back to the road roads they belong to, leaning our fleets out so that we could be more efficient and turn our fleets and reduce dwells and yards. That's all about...
Speaker 5: Dots and the sides and the intricate nature of running a PSR railroad is about. It's about getting into the details. And that's what we're about doing. And as we do that, the performance will continue to improve.
Speaker 2: Next for those thoughts, Keith. Thank you. Our next question comes from Brandon Ocklenski with Deutsche Bank. Your line is open.
Speaker 4: This is Brandon, but I'm from Barclays, not to HF. But Keith and team congrats as well. Keith, you did mention culture. I think in the first question, when you're prepared to mark being the most important here, how are you aligning management incentive along these lines, especially? What does that mean to him?
Speaker 5: coming off that last question about the operational challenges that have been you know pretty much existing for a while now south of the border. Thank you.
Speaker 5: It's not lost on the, I'm a person that believes in working hard, but I'm also a person that believes when you create value, you should share that value.
Speaker 5: So something we've done as far as officer compensation, we are implementing a more CP-like compensation model. So the KCS...
Speaker 5: Had a different program, the KCS obviously they've been in trust, the kittens, you equity, all those things that create value. We're going deeper in their organization. The other thing we did and I was proud to announce day one, we're creating more shareholders. I want more owners in the company. The KCS former KCS employees obviously have not been able to enjoy or participate.
Speaker 5: inside could participate in CPKC share purchase program. So that went into effect. Since then, on the KCS side.
Speaker 5: We've seen in 10 days, 20% of their employees have signed up for the register for that. So that kind of tells you, and I believe in this, they're going to create the value they should enjoy the value. And as owners, I think they behave differently and perform differently than if they're not owners. On the cell side too, something that's very CP-like, we're introducing the cell and center plan. So the cell's force that are going to go out and sell this product, they're going to be motivated to meet in a theater budget, and they'll be rewarded hand-tuning for doing that.
Speaker 5: So we're trying to sweep out all the corners. We're not trying to bowl the ocean, but at the same time, create some CPKC-like motivational compensation measures out there to make sure that our employees' interests are aligned with their shareholders' interests so that we can get at creating this value faster, not slower.
Speaker 5: to sweep out all the corners. We're not trying to bowl the ocean, but at the same time create some CPKC-like motivational compensation measures out there to make sure that our employees' interests are aligned with our shareholders' interests so that we can get at creating this value faster, not slower. Thank you, Keith.
Speaker 2: Thank you. Next question comes from Amit Mirotra, the Georgia Bank. Your line is open.
Speaker 11: Thanks Dean can you just give us a sense of any expectations around RTM growth this year? I know there's just a lot of moving parts, macro, grain and then obviously some of these new business ones which are great but any sense of RTM growth this year and then just another topic on synergies.
Speaker 11: I assume you'll update the synergies at the end of June , but there's obviously a volume component to synergies and a pricing component to synergies and pricing is up a lot over the last couple of years. So, wondering if you could just give us a sense of if you marked the pricing to market where the synergies would be well, if you wouldn't have pushed it out. Thank you. Sure. So, I think we're still...
Speaker 8: It's been 12 days, we're still evaluating their plan, incorporating that into our view. And then obviously, as you know, it's a pretty volatile macro right now. So for me to give you an arc came out look for the rest of the years is not going to happen.
Speaker 8: I think we'll update, as I mentioned to Scott earlier, we'll update in a couple months at the investor day and you know a lot more visibility into the details of their plan and then as we you know go through our whiteboard process and so forth and and I'd say you know recall our whiteboard.
Speaker 8: processes and just on the operating side. It's also meaningfully on the revenue side. And so we spent some time this week with John and some of his sales marketing teams, some of my financial planning teams.
Speaker 8: our costing team and etc to look in at some of the revenue contracts and opportunities that are in front of us and that we've inherited. So I think that's an important point as well on the whiteboarding. We will
We'll give back to you on in terms of a revenue outlook for 2023 when we meet in a couple of months. It's said that the second half of the year looks like at that same time. We'll also give you a longer term view in that three to five year type of timeframe.
And we'll give you visibility into what the synergy outlook looks like in terms of execution. So we've given you some visibility in your term. John mentioned there's going to be more that come out between then and now. But I think at that investor day a big part of it is going to be visibility into the synergies that we laid out as part of our strategy.
as part of the acquisition and part of the application and give you more color. As far as the pricing environment, yes, it's certainly from the two and a half years ago and we entered the process of acquisition, the pricing environment said change meaningfully and that should be an opportunity as far as the overall revenue outlook. And so what we've said consistently the last few years is it's...
You know, the size of the pie is probably larger. You know, we're in the midst of a challenging macro environment, but I would expect that the size of the pie is going to result in super-scan reviews and then we'll be outlined. It might take a little bit longer to realize. It might take, and that's why we're going to give you a longer outlook as well on how we're going to execute that. Okay, we're helpful. Thank you very much.
Our next question comes from Ken Hexcher with Bank of America. Your line is open. Great good afternoon and congrats on closing CPKC as well. I'm certainly not a fan but I think the Patriots beat the Falcon so maybe I think Patriot Rail is taken.
Just watching from afar, I guess now that you're under the hood, you know, Amit just asked about the synergies. Maybe go on the other side. Are there some bigger projects where it might take a bit longer now that you look through and you know, you've been at this for a while, whether it's software.
you know, I remember when when UP and SP merged, you know, you know, the network almost came to a standstill and I know you don't have those issues, but are there some major projects that might take a little longer that you can maybe walk us through, Keith? Yeah, you know what, I've got James Clemence. He's our expert in that space. I'm gonna get him to speak to that, but before I turn it over, I, you know, I can't resist commenting. Can we? Can't be patriots. We got to be real chiefs. Trust me, Keith, I'm not a patriot fan. I'm a New Yorker.
we did launch some important tools. As Keith mentioned, we have the integrated operating plan that's now running for the combined entity. We've provided operational visibility to Mark and the team so that they can understand how the entire network is running. And we've also provided the information needed for the finance.
we're doing with SAP, what we're doing with our operating systems is more in that two plus year timeframe. But in between we will have incremental releases of different tools. Our carbon calculator as an example isn't integrated today. We see that coming in Q2 of this year as one piece. So we have a long roadmap and a very comprehensive plan and we're taking that measured approach.
so that we live up to the promises we make to the STD. So will that, just to clarify that process for SAP or something like that, does that change your timeframe on synergies? I know Nadeem just threw out maybe some of them might be longer now. Absolutely not. As an example, when you talk about the operating side, the VA is a very important part of the process.
be part of that ramp on the synergies. Yeah, and Ken, just to clarify, when I say it's going to be longer, I mean, you know, when we first assessed this, we gave a three-year view of when we're going to achieve our synergies. And I'd say that, you know, we kind of did a split of a third, a third, a third.
You know, we think the pie is, we've consistently said we think the pie is bigger. I'm just saying that we're not going to get the bigger pie in that three years. So this isn't going to be a three-year story. This is going to be an extended story and a larger one of delivering greater synergies. And to keep the point, we're not going to put our network at risk by trying to do everything all at once. We're going to take a measured approach and provide the best service in the industry that we're used to providing and do that.
a take on business in a sustainable, profitable way. Great. Keith, James, and Eve, thanks for the time. Appreciate it. Thanks, guys. We have reached our allotted time for Q&A. I would like to now turn the call back over to Mr. Keith Creel.
Okay, well, thanks for joining us today. Let me let me just close by saying this. I think this is critically important. You know, we just closed.
and combine two proud, iconic CP's 142-year-plus chapters, combining with KCS's 136 years. The story's not over. It's just beginning. We're 11 days into a forever story. I think that's the best way to look at it. We uniquely and only and solely bring three nations together. It's never been done before. I would suggest it will never be done again.
And we're about creating the most relevant rail network in North America to create those nations. So, again, the next three years are extremely exciting, but it's what's beyond that that excites me the most. We look forward to talking more about that in June . Have a great day. This concludes today's conference call.
That is first far.