Q2 2023 Canadian Pacific Kansas City Ltd Earnings Call
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Good afternoon, My name is Leo and I will be your conference operator today.
At this time I would like to welcome everyone to see Pkc's second quarter 2023 conference call.
The slides accompanying today's call are available at Investor Dot C. P. K C. R dotcom.
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After the Speakers' remarks, there will be a question and answer session.
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Please limit yourself to one question.
I would now like to introduce Christa Brewing Assistant Vice President Investor Relations and Treasurer to begin the conference.
Thank you Leo good afternoon, everyone and thank you for joining us today.
We begin I want to remind you. This presentation contains forward looking information.
Actual results may differ materially the risks uncertainties and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and U S. Regulators. This presentation also contains non-GAAP measures outlined on slide three please.
Please note in addition to our regularly quarterly financials. There is supplemental Q2 combined revenue and operating performance data available at Investor <unk> Com, which some of today's discussion will focus on.
With me here today is Keith Creel, our President and Chief Executive Officer, Nadeem Delaney, our executive Vice President and Chief Financial Officer, John Brooks, Our executive Vice President and Chief Marketing Officer, and Margaret Our Executive Vice President and Chief operating Officer.
Formal remarks will be followed by Q&A in the interest of time, we would appreciate if you limit your questions to one.
It's now my pleasure to introduce our president and CEO , Mr. Keith Creel, Hey, Thanks, Chris and good afternoon, let me start by thanking our C. P. T C family a railroad is across.
All of North America, who had been hard working bringing these two companies together, serving our customers and while serving each other as you can imagine the quantum of work has been monumental.
Effort against that quantum looks like it's been inspiring so let's take a look at the results in the quarter in the second quarter produced revenues of $3 2 billion, an operating ratio of 64.6 and core EPS of <unk> 83, since you saw volumes down 5% on the quarter head count up 6%.
Versus last year, so no doubt a challenging quarter as we dealt with a softer demand environment, but john's going to speak more about that in a few moments. Despite the challenges in the quarter as we stated in our press release, we continue to expect to deliver on the guidance that we laid out at our Investor Day, Let me spend a few moments talking about some of the early wins.
So look on where we stand today, we're just over 105 days old a forever into this combination.
I'm extremely proud of the work. This team has done to get us to this point and what we've accomplished so far.
First and foremost a seamless transition operationally and combining the two networks, which is no small feat I think in historical terms, it's refreshing to see that the results versus most merger histories.
Understandably based on those history, there's been no shortage of skeptics that pointed to an industry with a history of merger related services challenges.
As I said, we would we've taken it a realistic a measured prudent approach a more humble approach to bringing these two networks together and it's paid dividends as we bring the networks together will continue to identify areas of opportunity to make the service better and to improve operationally.
In the second quarter, we were proud to announce several key customer wins Schneider Knight Swift Americold. These are deals that as we said before in some instances for 18 to 24 months in the making they utilize the advantages of this unique network, including our land holdings as well as the only single line service spanning U S, Canada and Mexico.
And again on March 11th we launched.
Our flagship 180, 181, Mexico Midwest Express service, which again is the only single line fastest transit time consistently across our three nations or I guess from Chicago into S. L. P. We've executed well beyond our advertised transit times of less than 100 hours each way.
We've also not been arresting.
Our laurels from a strategic point of view, we continue to expand the service offering and our reach within BR transaction that we announced connecting C. S X and Alabama, and creating a new gateway between Mexico, and Texas, and the southeast United States and on the sustainability front again, we announced a strategic partnership with C. S X to expand it.
Our hydrogen locomotive program and five.
Finally, we also announced part of our extended partnership with Teck in the contract that we just renewed plans to utilize the hydrogen locomotive in our western corridor.
Prior to and since day one.
To come out to this result, and listen this is not to say that everything's been perfect.
Certainly been challenges this a softer macro environment the strike at the port.
That said on the strike I'm encouraged that the long Sherman are back to work we've got a contract that's there.
Out for ratification, we should get a result from that if not today tomorrow and I'm anticipating a best outcome for everyone involved but the ratification of that agreement.
But heading into the combination of these companies. The last thing also that we were going to allow us to be short on resources, you certainly can't grow without the resources in place to accommodate it you'll see that reflected in our cost this quarter, but at the end of the day that is the absolute right thing to do.
This is a long game, it's not about the first quarter of the combined company, it's about ensuring that we're prepared to grow.
With the growth that we see coming and position this company for long term success.
So in closing we're in the early stages of this combination. Despite some short term headwinds the unique growth outlook that we laid out last what is unchanged.
C. P. K C is poised to be the most relevant rail network in North America, where you're not seeing a constant continent, we're enabling commerce amongst the United States, Mexico, and Canada, well that said I'm going to turn it over to Mr. Mark read to speak to the operations before John bring some color to the markets and they deem elaborates on the numbers.
Alright, Thank you Keith and good afternoon, I'd like to start, but I think in the C. P. Casey operating professionals can use to continue to work tirelessly to deliver best in class performance, while delivering on our service commitments to our customers.
As John will discuss the long term opportunities in the pipeline. My team has been working closely with the marketing and asset management teams to evaluate and onboard new business that fits within our net.
Turning to our safety performance on the quarter I'm pleased to report that during the first quarter has a combined company C. P. K C. We continue to build upon its industry, leading lowest train accident frequency, which declined at 48% to a 0.79 comparable to Q2 at a 1.5 watt.
From a personal injury perspective, our Q2 F. R. A reportable personal injury rate increased to 25% to a 1.25 is just a continuing reminder, that safety is as ongoing journey, we still have a lot of work to do in that space safety.
Safety and leadership development is critical to see PK see success, we will continue to be.
Continue to be a key area of focus in the first 90 days, we have rolled out our home save program across our C. P. C. P. Casey U S property and we are now in the process of introducing <unk> in Mexico.
Safe as an initiative designed to build on the safety culture by tapping into the humans out of safety, but also promoting both safety engagement and feedback.
We lost Tom say back in 2016 back on C. C. P property itself dropped record improvements and the reduction of personal injuries across our system.
This program this program along with our safety work about where we directly engage with our employees across the property is essential to building strong consistent safety culture across the entire network safety has been and remain our top priority.
I'm also pleased with the nearly 100 case ESR operating leaders, who have already gone through our two day leadership program before they expect to have U S. Based leaders through this program by year end.
Turning to the metrics I'll speak to our metrics on a comparison versus C. P. Casey we had if we combine during the 'twenty 'twenty 2022 year average train speeds, 1% versus last year average train weight is down 2%. Our average train length is flat versus last year our product.
Pivotal for locomotives improved 4% versus the Q2 2022.
Bringing two companies together and the size of the C. P. Casey is no fee.
We haven't spent a lot of time planning preparing in advance I am pleased to say that our network is running smoothly.
As part of that as Keith spoke to many heading into the merger. We're ensuring we are preparing for a resource perspective with hiring and training just puts us in a strong position to generate operating leverage as well as the volume.
Environment fruits.
We also continue to identify and implement opportunities to improve operating practices. We talk about Investor day I spoke about 130 locomotives that we reduce from the network 1000 cars that were reduced from the network by aligning operating models and improving efficiency. These efforts will continue to happen.
We'll stay focused on the recovery of the strike at the Port of Vancouver, which will take some time to achieve and in closing I'm confident the changes we have made in the first three months are continue to make will generate benefits in the back half of the year with that I'll turn it over to John .
Alright, Thank you Mark and good afternoon, everyone. So as Keith said were just over 100 days Dennis E. Casey I'll tell you I'm extremely proud of the work my team has done to begin to capture and deliver the growth that this new French franchise will undoubtedly unlocks.
We are certainly not immune to the broader economic headwinds and supply chain challenges are unique business and self help initiatives continued to serve us well compared to the industry and put us in a strong position as volume environment recovers.
Looking at our second quarter results.
On a reported basis versus <unk> Standalone in 2022 total revenues were up 44% in the quarter, while volumes were up 24%.
On a combined basis see PK fee saw a total revenue grow 2%, while volumes declined 5% versus pro forma CPE Casey a year ago.
FX was a 4% tailwind and fuel was a 3% headwind on the quarter. The pricing environment continues to be in line with expectations with inflation plus renewals across our book of business.
Now, we'll take a closer look at our second quarter revenue performance I'll speak to the FX adjusted results on a comparison versus C. P. Casey had the combination occurred in 2022.
Grain volumes were down 5% on the quarter, our revenues were down 2% Canadian grain volumes were strong on a year over year basis, driven by an improved harvest for the 2022 'twenty three crop year, however, that volume was offset by stronger or softer demand for U S grain.
Given by the challenging year over year comps, we faced by moving a lot of corn out of the U S into western Canada due to the drought.
As we move into this year's harvest I expect our grain franchise to return to growth on.
On the potash front volumes and revenue were down 18% on the quarter.
The decline in volumes in the quarter were driven by a major mechanical failure at Canpotex is Portland bulk terminal that happened in April .
We are not planning for the Portland terminal to come back online before the end of the year.
In the meantime, we are working hard with Canpotex to divert volumes to Neptune Thunder Bay, and a variety of other terminals across North America.
Looking ahead, despite the Portland outage and of course, the most recent impacts of the strike in Vancouver, I'm excited as ever about the long term opportunity for export potash, if canpotex has effectively and continue to expand their market share across the globe.
And to close out our bulk business coal volumes were up 1% on the quarter or revenues were down 3%.
With favorable compares in the back half of the year. Following last year's outage of tax <unk> mine I expect to see strong growth in coal in the back half of 2023 now.
Now moving on to merchandise the.
The energy chemicals, and plastics portfolio saw an 8% decline in revenue and volume, we saw crude and plastic businesses impacted by.
Core spreads in the market and maintenance outages, respectively. While also our L. P. Geez were lower due a warm spring across our network.
On the contrary our refined fuels have remained steady across their entire network driven by business growth leveraging our broader network service offering.
And we are pleased to announce today.
Our new material expansion of our deep partnership with shell through the execution of a new multi year contract that will unlock significant volume growth of new share across all lanes of the CPE Casey network.
Looking ahead as shell ramps up in August we expect to see upside in E. C. P. As we begin to move through the back half of the year.
Forest products revenues declined 4% on a 5% decline in volumes.
Although we are seeing the impacts of a softer economy on residential construction and related building products. We are very encouraged about the development of long haul lumber shipments from Canada down onto the legacy Casey S markets. This.
This is a prime example of where our new where network is connecting markets and creating opportunities that didnt previously fleet exist for our customers.
The metals minerals and consumer products portfolio grew 7% on a 5% increase in volumes the.
The growth in this area was driven by higher volumes of Frac sand and steel.
Which drove a record quarter for this area, we are particularly encouraged by growth in Mexico. As we recently added new steel products unit trains from Lazarus card net into the interior of Mexico.
We are also working closely with both turning them and FDI and their new industrial development opportunities that will further accelerate growth in this business over the coming months.
Automotive revenues were up 24% while volumes were up 11% again, an all time record for this area.
Demand for finished vehicles remains strong as the industry continues to play catch up on North American inventory shortages that would result, part shortages and of course supply chain challenges.
C. P. Casey is working with our key automotive partners to develop unique transportation solutions that leverage this unmatched benefits of this expanded franchise and also our development of new auto compounds.
On the intermodal side quarterly revenue was down 10% on a 4% volume decline.
Domestic intermodal was challenged by soft market demand high inventories across North America, and certainly a more competitive over the road rates.
However, we are extremely encouraged by their early success as Keith spoke to of our New 180, 181 Cross border train.
We have seen a steady increase in volumes as our partners begin to take advantage of our fast truck like service on this unique north South service offering.
International Intermodal helped insulate our intermodal business with a record Q2 volumes are self help wins with CMA and continued growth at the port of St. John helped to offset softer macro demand in the international space.
And finally, we're very pleased as Mark and Keith spoke to feed the strike at the Port of Vancouver, Finally get resolved.
We are working closely with operations and our customers to rebalance the network and move the backlog of traffic that could not move during this outage.
At this point, we are estimating the strike had a negative impact of about $80 million in revenue.
Much of which we will work hard to claw back over the remainder of Q3 and into Q4.
So let me close by saying we are just over.
100 days into this journey as C. P. Casey I can tell you my team is out on the Street. We're excited we're energized we're incentivized to get out and captured this unmatched growth opportunity.
As we laid out a few weeks ago at Investor Day, we have a very strong pipeline of opportunity in front of us and we are laser focused on locking in the REIT business for this network.
And delivering on our commitments to all stakeholders, so with that I'll pass it now over to Nadeem, great. Thanks, John and good afternoon.
I also would like to thank entire CP KC team for their work and dedication to bringing these two companies together.
<unk> was a challenging quarter financially I am very proud of the progress that we've made and extremely excited about the path ahead for the combined C. P Casey family.
Looking at the quarter C. P. K C's reported operating ratio was 73% and the core adjusted combined operating ratio came in at 64, 6%.
Earnings per share was $1 42, and core adjusted combined earnings per share was <unk> 83 sacks.
Taking a closer look at a few items on the expense side I'll speak both.
The reported operating expense on slide 14, and the combined operating expense on slide 15, our combined operating expense illustrates the estimated effects of the acquisition for the second quarter as if the acquisition closed on January one 2022.
Reported comp and benefits expense was $659 million or $690 million on a combined basis up 26% on an FX adjusted basis.
This quarter's comp and benefits expense includes acquisition related costs of $63 million, which have been excluded on a core adjusted basis.
Year over year results on an adjusted and combined basis include increased share based and incentive compensation driven primarily by higher stock price.
Wage inflation and higher G&A head count also drove the year over year increase as.
As I've mentioned at Investor Day, we have resource appropriately for expected volume growth starting in the back half of 2023, given some of the shorter term volume headwinds, we are carrying surplus head count and incurring additional expense in the quarter. However, as the growth comes on in the second half and into 2024, we will be prepared to handle it.
With strong incremental margins.
Comp and benefit increases were partially offset by lower current service costs.
In the DB pension plan, resulting from higher discount rates.
On the fuel side fuel expense on a reported basis increased $27 million year over year at the transaction occurred in 2022 fuel expense would've declined $144 million on an FX adjusted basis the.
The decline was driven by lower fuel prices on the quarter as well as lower year over year volume on a combined basis.
Materials expense was up $35 million versus Q2, 2022 C. P results.
On a combined basis materials expense increased $13 million on an FX adjusted basis, driven mostly by increased safety and maintenance activity across the network.
Equipment rents were up 51 million versus Q2, 2022 C P results or $22 million on an FX adjusted basis at the businesses being combined in 2022.
Equipment rents increased due to increased use of pooled equipment fleets inefficiencies driven by supply chain challenges along with lower locomotive refuse.
Appreciation expense was up $199 million on a reported basis or up in FX adjusted $21 million at the businesses being combined in 2022, resulting from a higher asset base.
Purchased services and other was 586 million on a reported basis combined <unk> came in at $615 million up 23% on an FX adjusted basis.
Orders purchased services expense includes acquisition related costs totaling $53 million.
The year over year increase was driven primarily by increased casualty expense of $45 million, which accounted for more than half of the variance excluding FX.
Assuming a more normalized quarter from a casualty perspective, and excluding acquisition related costs I expect personnel to land in the $530 million level per quarter in the back half of the year.
Moving below the line the equity pickup from case, yes for the first 13 days of the second quarter was $26 million.
Other components of net periodic benefit recovery decreased $18 million, reflecting higher discount rates compared to 2022 and other expense increased $14 million.
Net interest expense was $204 million.
Note also a $7 2 billion loss on Remeasurement of case, yes, resulting from the transition from equity accounting deconsolidation upon control this quarter.
The loss relates to tax attributes of the equity investments, which are realized separately isn't seven 8 billion deferred tax recovery.
These two items net together for a favorable impact to reported earnings of $657 million.
Our reported income tax recovery of seven 7 billion, which includes the outside basis tax recovery that I mentioned, a moment ago continue to expect to see PKC core adjusted effective tax rate to be approximately 25, 5% for the rest of 2023.
Rounding out the income statement, our core adjusted combined EPS was 83 sets.
We continue to generate strong cash flow with cash provided by operating activities of $892 million in Q2.
First call on capital remains the business and in the quarter, we reinvest at just over 600 billion.
We continue to expect to invest approximately $2 7 billion in capital in 2023.
We generated $431 million and adjusted combined free cash flow on the quarter.
In the quarter, we repaid 439 million U S in term debt and our adjusted combined leverage is down to three six times on our path back to our target leverage of two five times adjusted combined net debt to adjusted combined EBITDA.
Following the close of the transaction, we increased our credit facility for $1 3 billion to $2 6 billion, while also increasing our commercial paper program to $1 5 billion.
So as I sit here today, we are in a strong position from a resource perspective and have spent and invested to some degree when it comes to hiring and training John .
John's team continues to bring on centered synergies and as the changes mark in the grading team are making take hold I think we're set up well for the back half of the year to deliver on our guidance and curious into 2024.
We have some ground to make up from a prolonged strike at the port of Vancouver, the future certainly bright and I look forward to sharing our success with you going forward.
Keith I'll turn it back over to you.
Okay. Thanks.
John Mark and again why don't we just.
And the rest of our time to take some questions operator, if we could open up the line.
Thank you if you would 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 Star two.
As previously highlighted please limit yourself to one question.
Your first question comes from Ken Huckster of Bank of America.
Great.
Good afternoon, and thanks for taking the question.
Maybe a little Nadeem you ran through a lot of numbers, there and obviously a lot of on the combined accounting here, maybe just talk about the cost side right. It looks like costs got it maybe a little bloated.
Sure and I want to understand you kind of gave the purchased services and kind of run rate. There maybe just your thoughts on how we should think about that in the back half.
In terms of what costs are coming out, especially as you look at things like casualty expense. You noted was a little elevated are there things going on in the blended network now you look and you can see ways to continue to take expenses out.
And what we can see near term in that blended thanks.
Sure. Thanks, Ken So casualty, we faced a couple of one time items I would characterize tune of about $45 million one was a litigation settlement.
One was a very.
Very expensive derailment that.
Added to it so.
Part of the reason why I say normalized number of about $530 million.
These arent things that are going to occur on a quarter basis. So.
We feel very confident that purchase surfaces and other won't come down to a more normalized $530 million.
Certainly we're in the early stages.
Cost takeout from a synergy point of view.
You know we're in this for the long game. So as he mentioned we've hired.
Yeah.
Certainly the macro environment the volume backdrop.
Isn't as strong as we expected and you know kind of it.
It is by surprise that being said.
We weren't going to take a short term view and take headcount down just to kind of mitigate it.
Knowing what we have in the back half of the year.
On the bulk side and some of the market share gains that John mentioned and then as we enter into 2020 for what we have in front of US and then the the natural macro recovery as we expect so we see as a strong path to it's a volume recovery in the back half in Q4, the high single digits. So we're long piece.
Right now short term, but it's the right choice to make to maintain that level of people. It takes a long time to hire and train two also.
<unk> and retain employees and so it elevated our cost there's no doubt.
With the volumes that we had labor being up 5%.
That delta is at its peak that will normalize as we get through the back half of the year No I expect.
Labour to almost be flat to slightly down year over year and volumes to to inflict a positive high single digit so youll see a much better.
<unk> and productivity performance in the back half of the year.
If I could add a little bit of color to that can you use the word bloated I wouldn't say bloated I'd say that we had the one timers that Dave spoke to but above that hearing the head count that was an intentional decision. It's a timing issue obviously, if we didn't own.
This salt this would've been here, perhaps we would've hired a little bit later and trained a little bit later, but nevertheless, we have very unique growth opportunities that are counter to the macro environment that give us.
Great confidence that it doesn't make a lot of sense to lay a lot of employees offer risk, losing them and not having them.
Four weeks and now five weeks now when you've got potash moving a very strong demand you've got the harvest that's came in and we've got some of the self help initiatives that we've got that we talked about coming online you know I don't John has it got into a lot of detail.
But there is some pretty exciting.
Business share shift wins that we're gonna get start benefiting from in August .
That's going to help cover some of those intestinal cost that we carried at the other point I would say on the operational front Mark and team.
We said this in the beginning we're going to make sure we get the U S network and the Canadian network stabilized we've done that now we're turning our attention to Mexico. If you look at Mexico and the numbers you see the same numbers I see there's a there's a lot of opportunity for some improvements in Mexico and the way we serve our customer the way we control our costs the way we manage the business.
So and in preparation for that effectively net actually next week, we've got John or in a team of about 50 55 officers that are going to go to two locations in Mexico implant in sales there from a holistic business approach standpoint from the commercial side from the customer transactional side the operational side.
So we're going to spend a lot of time with our brothers and sisters and family members in Mexico.
Getting that operation to a point that at the end I fully intend and expect to see our velocity improve our train speed improve some of those costs that are tied to.
Excessive car dwell indoor not getting it to where it needs to be is going to be able to complement the productivity, we're already starting to see on the locomotive side.
Mark and the team are producing so more to come on that but certainly again bloat. It is not the right I would say word I would say intentional and expect more improvement over this next quarter as we start to realize the benefit of those initiatives.
Your next question comes from Tom Waterworks of UBS.
Yeah. Thanks, good afternoon.
If word.
Maybe John I could ask you a question just in terms of kind of demand framework. We are generally hearing from.
Think transports and the other railroads about caution on market conditions, maybe intermodal improvement being pushed into next year.
Maybe forest products. So some areas of weakness in chemicals, how do we kind of think about that.
I guess impact to that underlying weakness.
Your optimism on that relative to some of the things you're talking about that obviously are now maybe idiosyncratic good news or maybe on the bulk side. So just kind of trying to figure out how to think about the combination of those two and volume looking like <unk> and beyond that.
Yeah no. Thanks, Tom.
So.
Yes, there's no doubt I think we're in the same boat as what you've heard from from the other rails.
In terms of the intermodal business.
I'll tell you we saw sort of are.
Valley or trough point, the last half of April .
Beginning of May but on a week over week basis, we've started to actually see a little bit of improvement.
Frankly, if you look at legacy <unk> legacy Casey asked the combined companies.
Over these last eight eight to 10 weeks.
Again.
A very hockey stick looking improvement.
But but at least that the numbers are starting to to improve a little bit I do believe a certain amount of that is self help Tom.
I've got the team I'll tell you right now.
We are on a three week Blitz over 3000 Cold calls, we got boots on the ground, where we're blitzing all our major territories.
We're not sitting idle.
I do see the intermodal challenges persisting.
But we're going to make self help we got the fastest intermodal service in our north South Super Highway we're going to continue to put more footage on that train.
Mark's been giving me a hard time that the trains are too small.
And in the mandate is the team to go out there and that business to that.
I see upside opportunity, Tom as you think about the automotive business.
There's a lot of vehicles that remain on the ground down at Mexico.
And we are working closely with those Oems to create new solutions that I think initially we felt were long term plays.
But I think there is some opportunity there given the situation, where we're going to see some benefit in the near term.
With with some of those opportunities our frac sand business continues to be strong our steel business as I spoke to.
It's quite strong in and out of Mexico.
And you know we're no dissimilar there were not dissimilar to the other rails.
As you think about the forest products in the lumber business.
It's hard for me to see a major rebound in that that space in the near term, but I can tell you. We're doing a lot on the self help initiative front in that space to repair. So are out working with these customers to create these long haul cycles with our center beams.
And opening up new markets, we're deep into.
Kind of in my mind, creating a whole new mousetrap in the in the Texas and Dallas market around trans loading.
Again stuff that probably you won't see a lot of needle moving in that space in the near term given given the headwinds, but as this housing construction area bounces back.
Scenario, we're going to be ready and I think we're set up set up for success when that comes back.
And then finally, maybe the other thing I'll point to is.
We went out and we bought 1000 reefers.
Not that long ago, we announced the Americold development and I can tell you that that.
Progress in terms of.
Getting a spade in the ground and getting that building built in Kansas City is well underway, but that's not the start of that journey that journey has started now and we're already starting to see a building of our reefer product on that 180, 181 train pear and again beyond just the dry opportunity as we look.
To the coming months, I think you're going to we're going to see a nice buildup of that opportunity.
Of reefers down to Laredo, and ultimately down into Mexico to service that that market. So.
Again, that's I think an opportunity as you think about this unique franchise that we're in.
The only one doing it out there in the marketplace and and if the intermodal domestic market remains soft there's another area, where I think we can we can potentially outpace it to some degree as we build this reefer product.
A lot there, but I hope that helped.
Your next question comes from Walter <unk> of RBC capital markets. Your line is open.
Okay. Thanks, very much operator, good afternoon, everyone. So I wanted to focus in on bulk, but John you you highlighted a few things that have happened in your your key franchises within bulk that have created a lot of lot of volatility here in particular that the.
At <unk> mine, and and and the other jet Canpotex is terminal.
We've also seen a pretty significant crop this year that now the conditions look a little less favorable for next year. So I'm trying to put it all together here to see what what the layout for next year looks like given some of those significant outages is it is.
Is it possible that we see kind of.
High single digit low did double digit.
Increases in your coal and potash business, just based on simply lapping those outages and.
On the flip side as you see the crop that's developing from where we are now is just a risk of kind of high single digit downside risk on the crop side.
As we go into 2024 Big Big items here in your bulk franchise lots going on just wanted to make sure we're modeling it correctly.
Yeah, Walter It has been noisy and at six months ago. If you would if at all that would transpire in our bulk franchise I wouldn't have believed yet at all it's been frustrating.
But nonetheless luck.
As I said I remain very bullish on the outlook for potash.
We've actually got a very big plan for Q4, we've worked our tails off to diversify some of the ports were crossing our fingers that may be Portland can get opened a little early.
And I think our belief in and frankly canpotex is belief around.
Their position in our CPE Casey as being their number one transportation provider look strong for 2024 so.
I would expect.
I think double digit as you look to 2024, given what we've seen is is definitely a reasonable expectation as you think about potash.
On the coal side, we're gonna see strong compares to close out the year.
That <unk> mine issue that took place Q4 right at the end of Q3 Q4.
Last year.
It will give us.
Good comps and and as you look to 2020 for I don't know if you see a big is a jump as it relates.
That space.
But you know what we're optimistic that.
Tax outlook.
Our discussions with Teck. So far next looking to next year look to be positive in terms of growth probably not as extensive as you described relative to potash.
And on the grain front now look if this crop comes in closer to 60.
65 million metric tons of what I think is kind of in the middle point of what our customers are saying you got to remember we've got a much bigger carry in this year, you know call it maybe close to $10 million.
Trick tons, so I really don't see any impact as you think about the gut slot.
Q4, and in that time period, we're going to run hard we're going to run hard right probably into the spring.
And then we'll see and if it's not we'll see because I don't think there'll be grain out there.
Yet to move.
But as we saw this year.
You know this sort of the weather issues in the dryness that did persist certainly put the farmer on the sideline more than we expected to happen.
I am pleased with our year over year compares as you look at Canadian grain in Q2, but I actually I'll tell you I thought it would be much bigger.
And certainly I think the Canadian farmer, and the U S farmer to some extent got spooked.
And in fact on the sideline a little longer to see what would transpire in that space, So look where.
We're a greenhorn railroad and now with the combination of the Tcs network.
To create more markets.
As those developed I, certainly expect 2024 to continue to be a growth area for us in grain and and maybe I'll just throw one more comment out there because he got me going on grain Walter.
You know if we see some dryness in in some crop further deterioration in our southern territory.
Southern Alberta southwest Saskatchewan.
That actually began its at present that opportunity for that corn hall into that area.
To feed those cattle markets and I can tell you just over the last three weeks, we've seen a pretty significant uptake.
And those markets connecting and some train volume beginning to build for that market again, that's an area that we didn't have in the calculus, a few weeks ago, but certainly could provide a little further upside.
To the U S part of our franchise if that further develops.
Thanks, Robert and John if I could add just one key point is from the operational side. It's allowed us to open up the engineering work when does a bit more west west of Calgary. So when we do get it in the Q3 Q4, we won't have maintenance maintenance gangs on ways, we can cycle the strained sold certainly potash.
To the West coast.
Yes.
Your next question comes from Chris Wetherbee of Citi.
Hey, Thanks, good afternoon.
I was wondering if maybe we could kind of run through some of the assumptions around the mid single digit EPS growth for the year, particularly in the back half maybe get a sense of the arc of the pace of Artyem recovery in the back half and then maybe some thoughts around the operating ratio and even if possible.
Well, if you think about the Chris the B R. T M piece.
As we sit here today ended July were.
We remain slightly positive on.
On a full year our T M basis.
We got ourselves dug into quite a hole here in July with the strike.
But I think youre going to see and my expectation is we're going to claw our way back.
As we move through the quarter, and certainly I expect improvement versus where we sit today and then there's upside as you think about.
Q4, so I think ultimately we see value, we see volume growth.
And so Chris just in terms of.
When we think about sequential or and earnings.
Given we see a stronger Q4 as we get some of the.
The share wins and the synergies starts getting.
Up to their full run rate the first year the synergies.
Q4, we see a much larger.
Performance than that in Q3 for example.
The.
Sequentially.
Certainly, we see an improvement in the or sequentially from Q2.
Q2.
I think Q4 is going to be the.
The breakout quarter, and I think it set us up well for.
For 2024.
But we have confidence in in that mid single digit EPS guide otherwise we wouldn't have we wouldn't have kept it there and reiterated it I think we just have.
Some catch up to do from from the strike.
But the volume is there our bulk franchise and from the synergy perspective.
Your next question comes from Brandon Machlinski of Barclays.
Hey, good afternoon, and thanks for taking my question Nadeem I guess, maybe following up with that.
And maybe John can chime in too. Unlike these self help contracts that you guys are talking about but does that set you up for potentially.
<unk> 2024, just given some of the headwinds that you've had early in 'twenty three.
You look at that 24 through 28 outlook.
Yes, absolutely I mean I think.
Some of what John has described today and I know you couldnt get into much detail confidentiality perspective, and a customer perspective, but you know we.
We've had some some wins.
Since Investor day that we that we werent factoring in to be quite Frank So.
So I feel very good about 2024, I feel very good about Q4, it would be actually to be honest.
And like I said is we're long people we've found a peacock from a if you think about the volume.
Its workforce, we have a peak of a delta in nonproductive way not only start eating in itself out in Q3 and into Q4 and it sets us up well to the operating leverage we talked about both into the back half of this year, but 'twenty 'twenty four looks very strong.
And so we see that path to recovery.
This investment.
<unk> and hiring and training I think it's going to pay dividends as well as the work we're doing on the capital front on the network as well as the work we're doing on the capital front on acquiring railcars.
And then we'll start seeing some benefits of the synergies on the expense side from that operating leverage in and.
The work that's taking place to improve operations further south on the network. So so I'm pretty excited although we've seen obviously.
Very tough reporting quarter for us and all the rails I think we have a pretty.
Optimistic view on on this year and into 2024.
And Brandon I might just add that.
I mean, you're right at the macro environment and some of these broader challenges have been a.
Very frustrating but.
The the fact that we're planting the seeds right now I think you are right. When you say you begin to see some of the benefit of of some of these project I just think about our efforts right now to get <unk>.
All set up for Lazar Road Carton is as you look to 2020 for I think about our announcement on the auto compound down.
Down in Dallas that'll that'll be up.
Quarter ish in 2024, do you think about the Toronto fuels terminal.
And Milton and aging court Kobe spoke to at Investor Day that will all come up in 2020 for the Dallas Trans load that support the lumber.
Market down there coming up in 2024.
All of those things I think supports wet <unk> spoke to and if we get a little bit of tailwind and the macro background.
And I think again, we're off to the races.
I can't help it out a little bit more color. So is an operating CEO I've been I've been dreaming about it hasnt visions of.
The closed loop automotive network since my days of servicing automotive manufacturing facilities.
Back in the late nineties.
Going through the pain and suffering of not having enough empty car supply to keep your production lines going and being the guy or the gal to get yelled at because of that when you could control the destination lease cars that you don't ever forget and it created opportunity. So we said from the very beginning division what are the visions of this network. This extended.
Breached network when you connect the bookends for the manufacturing in Mexico manufacturing in Ontario, and automotive compounds in between and create this closed loop network is powerful.
I can tell you that we have made some significant progress there to the point.
That were close to ordering cars.
To serve this closed loop network and those that we partner with.
In this space that have taken this step of faith with us we're going to have.
Their own guaranteed car supply about turning those assets and it's going to allow them to get more vehicles from their manufacturing.
<unk> to the to.
To the dealerships that need to sell them and create our own empty car supply to feed the opposite end of the loop.
So that's not a dream anymore, that's coming to fruition.
To be showcasing itself in a very powerful way in 2024 and that is ahead of my expectation. So we're super Super excited about that development.
Your next question comes from Scott Group of Wolfe Research.
Hey, Thanks afternoon. So just a couple of things that the high single digit growth in Q4, maybe just some color on which overall segments. Do you think will do best and then Nadeem. Just wanted to clarify are you, saying that labour costs come down sequentially from here or actually come down year over year that'd be a pretty.
Big sequential drop and then.
All the other rails have talked about some big fuel headwinds in the back half of the year.
Are you any different or should we assume the same kind of headwinds there. Thank you.
Yes, Scott so.
As Keith spoke to I think our auto sector or frac sand sector steel sector.
We'll see.
Fully I'm going to push marketed theme to see that materialize in our grain business our coal fleet.
Got easy compares there and strong demand.
So I see a lot of upside.
In coal we had a decent potash Q4 last year, if we hit the expectations of.
Of our partners will you'll see you'll see good growth in potash so.
I call out those areas.
And then you know.
This shell contract win.
Is is significant and that's going to start up.
In an August for us and I think that will only help.
Not only insulate potentially show some good growth in our in our ECP business also.
Scott just on head count should.
It should be flat sequentially in terms of our workforce and so forth and we will see what stock based comp does is just in terms of what the stock price does that's been a headwind for us.
So my point is.
Productivity volumes will increase head count will stay relatively flat so.
And then year over year I think in Q4, we see a benefit on head count year over year, so that will be.
Meaningful.
Efficiency for us.
On the fuel side I.
I wouldn't say.
See a meaningful headwind.
On that front for us.
Your next question comes from Fatih Shimon.
BMO capital markets.
Yes. Good afternoon, thanks for taking the question.
Just one quick clarification first though.
The guidance is basically $3 95, you've earned $1 73 year to date, so where.
We're talking about a 28%.
On a sequential improvement in the second half versus the first half I just wanted to make sure where we are.
On the same page on that but my question is.
And then maybe.
Marc or Keith.
It.
The speed.
Is 18 miles per hour in our CP did 'twenty two 'twenty three.
<unk> in the past the same thing if we look at locomotive productivity train lengths in all of these metrics.
What does this ratio look like three four years down. The road is this is this.
Yes.
Step up that we're going to see consistently and what's going to drive the revenue mix as you take on that business that you highlighted in June or is it investment in the infrastructure that you need to do that I'm, just trying to understand kind of what does the network look like once you're done doing some of these key kind of.
Graham that you highlighted it in June .
But certainly for all of the synergy volume that we're talking about bringing on fatty we're going to need those investments.
I kind of look at it right now the CP standard is something we're working to that's what this merger is all about so as we integrate the operations what we've seen.
Which we expected is on the former case, Yes network train speed has improved fluidity has improved we put this operating plan in place and it's working on the Mexican network at this point, that's that's what's diluting the overall improvement opportunity and Thats exactly why phase II, we're focused on Mexico. So when we get to 'twenty three I haven't done that.
Yet and will they prove in a material way you should expect so.
And Youll see from that are driving of our synergies youll see call higher savings because we're going to need fewer cars to move the same amount of business. Those assets are going to turn youre going to see revenue improvements.
Not enough car supply to feed all the demand we have for automotive as we speed the network up in Mexico, we're going to create our own car supply, we're going to get more loads, it's going to drive more revenue. So you get it on both sides on the bottom line and on the topline and Youll start to see some material impact to our results, but again is it going to be 23.
It's not going to be 15, maybe it's not 'twenty three but it's certainly going to be somewhere between 17 and 18.
Do the math later I haven't at this point.
I have a very firm expectation that it will improve in a material way.
And fatty yes, we're guiding to.
295 core adjusted combined diluted EPS.
Your next question comes from Konak Gupta of Scotiabank.
Thanks, operator, good afternoon.
Just wanted to ask you John any color on the shell contract contribution annualized and wondering if it is a result of merger synergies and it's an island you know do you do you expect any more conversion of opportunity pipeline heading into 'twenty four.
Alright. Thanks for the question I know, it's probably coming from somebody and I can't provide any.
Further details.
I will I will say this.
Shell is a great partner of ours and they have been a number of years.
One of those customers that identified that early on that this combination was going to be meaningful to them and it's just again the culmination of a lot of work between our teams to create the right package and an opportunity and you are exactly right leveraging the entire C. PK.
Seat.
Network. So again, you'll see the results come through our ECP areas, we begin to ramp that that business up.
Once we get into August here.
Your next question comes from Brian Austin back of J P. Morgan.
Hey, Thanks for taking the question.
Just wanted to ask a couple of clarifications Nadeem can you just walk through what the FX exposure looks like right. Now. So there is a line item on I think slide 15 in terms of the work. So you can just maybe talk about hedging or how we should be thinking about modeling that and then just on the Mexico. If you can elaborate.
Since you can in terms of what's actually the challenges there.
How long do you think it will take and generally what you are trying to work through to get that network, a little bit more fluid.
Hey, Brian I'm, just gonna have Ashley and Chris follow up with you on the FX piece or just.
Pretty late in the call here, So give me a detailed and I think we have some.
Posted as well or.
Website, but.
Ill pass it to Scott I think the main focus on Mexico was getting our inventory reduce so that we can get the terminals more fluid.
We're also taking a.
Concerted focus on renewing our existing contract at this moment until we can see benefits in the operation overall.
There's no sense to distract ourselves trying to create any kind of potential conflict.
Integrating a more modernized agreement that's not to say that we're not still interested and it's not very compelling that's going to be a more phase two as opposed to a phase one.
Our employees need to warn our deal it's much better for the employed they'll make a lot more money they will have a better quality of life.
But right now the first order of business, making sure that we optimize our network and fluidity with the existing contract, we have which were seized and focused on and then step two will be to discuss modernization. When the time is correct.
Yeah.
And your next question comes from Jon Chapell of Evercore ISI. Your line is open.
Okay. Good afternoon, just talking about the yield side, a little bit Nadeem, you already pointed out that youre not going to have the same fuel surcharge headwinds that most of the others will.
The portfolio of both the core business and then the combined business is there's a lot of kind of step up opportunity in the second half of the year from a yield perspective to kind of help you get to that guide to the back half.
I think.
John There is certainly.
The discipline that you've seen from a I guess legacy <unk> in how we approach.
Contract in our pricing.
The step function is how we sort of overlay that disciplined approach.
To the <unk> network and some of those those contracts.
Yeah.
Quantum leaps no, but I think that's a lot of singles and doubles.
We're still seeing renewals.
In the.
I would say.
Low high single digit.
Type range, which I'm quite positive about I don't foresee that changing as as we move through the remainder of the year and there are some legacy.
Legacy contracts and opportunities out there that we're working with a variety of customers on around re pricing for the value of our capacity in service and in some of those could create a larger step function in some areas.
But I don't I'm not going to call that a major driver in terms of as you think about Q4 and actually that probably creates a bigger benefit for us as you look into the 2020 for renewals.
Your next question comes from Ben Locke, Poirier of Daishowa, Dan capital markets.
Yes, good afternoon, everyone.
Looking at intermodal, obviously, it's an important part of your growth story going forward.
Wondering if the current softening environment brings more fortunate fees and an increased number of discussion with customers and what would be your average length of all on the intermodal side for the combine and I would be curious to know whether.
The lower fuel expense and lower spot rates, bringing more competition from from the truck right now thanks.
Meanwhile, maybe maybe a couple of comments on that I do believe and I've said this before.
These type of depressed markets typically the transportation buyer becomes more aggressive in terms of looking for options to lower their prices that is a buying opportunity for my my marketing and sales people as.
As I said also.
We're not sitting by and waiting for the phone to ring.
We're out pounding the pavement looking to fill that train up that we need to we need to continue that train length.
To that 180, 180, 81 pair and frankly get the business going back on our <unk>, our legacy franchise across Canada.
Train length, I think about if you think about our legacy network in that 14 to 1700 mile sort of wheelhouse between Toronto and <unk>.
In Calgary I look at that very similar as you think about.
Specifically, Chicago down to Laredo, and down to San Luis Potosi area or Monterey area, very similar length to end and I do believe.
Historically, where we're more insulated across Canada, and I think so in this quarter to some extent.
Against that shorter haul movement that might be more conducive to flip quickly back back to truck.
So I think that makes us a little more sticky.
And again, our focus island.
<unk> today is is is adding density of that corridor.
Okay, but that said it's been a long call we can't get to everyone I apologize for that but I would encourage you. If you have any other points to address touch base with our they will make themselves available for any follow up and we look forward to sharing our third quarter results in the meantime, we're going to continue.
To focus on integrating well growing uniquely as we build out this network very methodically and obviously stepped function improvement when it comes to operational performance. Most specifically in Mexico with that said have a safe day. We appreciate your time this afternoon and we'll talk soon.
This concludes today's conference call you may now disconnect.
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