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.
Accompanying today's call are available at Investor Dot C. P K CR dot com.
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After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question simply press. The Star then the number one on your telephone keypad.
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Please limit yourself to one question.
I would now like to introduce Christa Berlin Assistant Vice President Investor Relations and Treasurer to begin the conference.
Thank you Neil good afternoon, everyone and thank you for joining us today.
Before we begin I want to remind you. This presentation contains forward looking information actual results may differ materially.
The risks uncertainties and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and U S regulators.
Presentation also contains non-GAAP measures outlined on slide three.
In addition to our regular quarterly financials. There is supplemental Q2 combined revenue and operating performance data available at Investor <unk> got CPE, JCR Dot com, which some of today's discussion will focus on.
With me here today is Keith Creel, our President and Chief Executive Officer, Bill <unk>, Our executive Vice President and Chief Financial Officer, John Brooks, Our executive Vice President and Chief Marketing Officer, and Mark Greg, Our executive Vice President and Chief operating Officer.
<unk> remarks will be followed by Q&A in the interest of time, we would appreciate if you limit your questions to one.
Now my pleasure to introduce our president and CEO , Mr. Keith Creel.
Thanks, Chris and good afternoon, let me start by thanking our CPC family of railroad is across.
All of North America, who had been hard working bringing these two companies together serving our customers.
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 six and core EPS of <unk> 83 cents, we saw volumes down 5% in the quarter head count up 6%.
Versus last year, so no doubt a challenging quarter as we dealt with a softer demand environment that 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 at where we stand today, we're just over 105 days old forever into this combination.
I am extremely proud of the work stream has gotten 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.
Historical terms, it's refreshing to see the results versus most merger histories.
Understandably.
Based on those histories, there has 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 a realistic a measured prudent approach and more humble approach to bringing these two networks together and it's paid dividends.
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 are proud to announce several key customer wins Schneider nights with Americold. These are deals that as we've said before in some instances for 18 to 24 months in the making that 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 <unk> hundred 80, 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 <unk>, we've executed well beyond our advertised transit times of less than 100 hours each way.
We have also not been resting.
On our laurels from a strategic point of view, we continue to expand the service offering and our reach within VR transaction that we announced connected PSX and Alabama, creating a new gateway between Mexico, Texas, and the southeast United States and on the sustainability front again, we announced a very strategic partnership with <unk> <unk>.
And our hydrogen locomotive program.
Finally, we also announced part of our extended partnership with Teck and the contract that we just renewed plans to utilize the hydrogen locomotive in our western corridor.
Solicited a lot of tremendous work leading to this combination and I applaud the great Railroader that's made this possible.
Prior to and since day one.
To come out to this result, and listen this is not to say that everything has been perfect.
Certainly been challenges this 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.
Alpha ratification, we should get a result from that if not today tomorrow and in <unk>.
Dissipating the best outcome for everyone involved with 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, we 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 are in the early stages of this combination. Despite some short term headwinds and unique growth outlook that we laid out last night is unchanged.
CPE Casey is poised to be the most relevant rail network in North America, where youre not seeing a constant continent, we're enabling commerce amongst the United States, Mexico and <unk>.
Canada, well that said I'm going to turn it over to Mr. Mark read to speak to the operations before John breaks some color to the markets and they deem elaborates on the numbers.
Alright, Thank you Keith and good afternoon, I'd like to start by thanking the CP Casey operating professionals.
People continue to work tirelessly to deliver best in class performance, while delivering on our service commitments to our customers.
John would you discuss the long term opportunities in the pipeline that team has been working closely with the marketing and asset management teams to evaluate and onboard new business that fits within our network.
Turning to our safety performance on the quarter I am pleased to report that during the first quarter has a combined company CP Casey we continue to build upon its industry, leading lowest train accident frequency, which declined at 48% to a 0.7 hundred non comparable to Q2 at a 1.5 watt.
From a personal lenders perspective, our Q2, FRE reportable personal injury rate increased to 25% to a one to five is just a continuing reminder, that safety is 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 with <unk>.
<unk> to be.
Continue to be a key area of focus in the first 90 days, we have rolled out our homesite program across our CP CP Casey U S property and we are now in the process of entities again at Mexico.
I'll take that as an initiative designed to build on the safety culture that tapping into the payments out of safety, but also promoting both safety engagement and feedback.
Tom say back in 2016 back on C Zone, CPE properties helped drive record impairments and the reduction of personal injuries across our system.
This program this program along with our safety walk about or 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 will remain our top priority.
I'm also pleased with the nearly 100 K CSR operating leaders, who have already gone through our two day leadership program. We fully expect to have U S. Based leaders through this program by year end.
Turning to the metrics of each of our metrics on a comparison versus CP Casey.
Combined during the 2000 22022 year average train speeds, 1% versus last year.
Average train weight is down 2% our average train length is flat versus last year, our productivity for locomotives improved 4% versus Q2 2022.
Bringing two companies together and the size of the CP 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 manage heading into the merger. We're ensuring we are prepared for a resource perspective with hiring and training.
This has been a strong position to generate operating leverage.
As the volume.
Environment improves.
We also continue to identify and implement opportunities to improve our operating practices, we talk about Investor day I spoke about.
Locomotives that we've reduced from the network 1000 cars that were reduced from our network by aligning operating models and improving efficiency. These efforts, we 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 am 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 Jeff.
Alright, Thank you Mark and good afternoon, everyone. So as Keith said were just over 100 days and as 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 unlocked.
While we are certainly not immune to the broader economic headwinds and supply chain challenges are unique business and self help initiatives continue to serve us well compared to the industry and put us in a strong position as the volume environment recovers looking.
Now looking at our second quarter results.
On a reported basis versus CP stand alone in 2022 total revenues were up 44% in the quarter, while volumes were up 24%.
On a combined basis CP Casey saw total revenue grow 2%, while volumes declined 5% versus pro forma CPE Casey a year ago.
Fax 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.
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 CP Casey and combination occurred in 2022.
Grain volumes were down 5% on the quarter, our revenues were down 2%.
Gideon grain volumes were strong on a year over year basis, driven by an improved harvest for the 2022 23 crop year. However that volume was offset by stronger softer demand for U S grain driven by the challenging year over year comps, we faced by moving a lot of corn out of the U S.
In the Western Canada due to the drought.
As we move into this year's harvest I expect our grain franchise to return to growth.
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.
Can you ahead, despite the Portland outage and of course, the most recent impacts some of the strike in Vancouver.
Excited as ever about the long term opportunity for export potash is 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 core 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 moving on to merchandise.
The energy chemicals, and plastics portfolio saw an 8% decline in revenue and volume.
Our crude and plastic businesses impacted by.
Core spreads in the market and maintenance outages, respectively. While also our LPG were lower to a warm spring across our network.
On the contrary our refined fuels have remained steady across our 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 multiyear contract that will unlock significant volume growth of new share across all lanes of the <unk> network.
Looking ahead as shell ramps up in August we expect to see upside in ECP 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, where I'm very encouraged about the development of long haul lumber shipments from Canada down onto the legacy <unk> markets.
This is a prime example of where our new network is connecting markets and creating opportunities that didnt previously fleet exists for our customers.
The metals minerals and consumer products portfolio grew 7% on a 5% increase in volumes to.
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 Lazar Oak card net into the interior of Mexico.
We are also working closely with both turning them and FDI on 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 remained strong as the industry continues to play catch up on North American inventory shortages that will result, part shortages and of course supply chain challenges.
<unk> is working with our key automotive partners to develop unique transportation solutions that leverages 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 have 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 the 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 SaaS truck like service and 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 are 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 clawback over the remainder of Q3 and into Q4.
So let me close by saying we are just over.
100 days into this journey of FEP 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 or Canadian.
Thanks, John and good afternoon.
Also we'd like to thank entire CP KC team for their work and dedication to bringing two companies together.
Although it 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 CP Casey family.
Looking at the quarter see Pkc's reported operating ratio was 78, 3% 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 with <unk>.
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 expenses 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.
This quarter's comp and benefits expense and acquisition related costs of $63 million, which had 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 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 a growth comes on in the second half and into 2024, and we will be prepared to handle it.
Strong incremental margins.
Comp and benefit increases were partially offset by lower current service cost.
In the DB pension plan, resulting from higher discount rates.
On the fuel side Youll expense on a reported basis increased $27 million year over year at the transaction occurred in 2022 fuel expense would have declined $144 million on an FX adjusted basis.
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, <unk> 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, <unk> 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 purchases.
Depreciation 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.
The quarter's purchase 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 <unk> to land in the $530 million level per quarter in the back half of the year.
Moving below the line the equity pickup from <unk> 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.
You'll note also a $7 2 billion loss on the Remeasurement of Jcs, resulting from the transition from equity accounting deconsolidation upon control this quarter.
Loss relates to tax attributes of the equity investments, which are realized separately.
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 $7 7 billion, which includes the outside basis tax recovery that I mentioned a moment ago.
<unk> 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 <unk> 83.
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 for 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 for $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 .
<unk> team continues to bring on centered synergies and as it changes marketing 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 carry us into 2024.
While 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 going forward.
Keith I'll turn it back over to you.
Hey, Thanks, John .
Mark and I do want to spend the rest of our time to take your questions. Operator, if we could open up the line.
Thank you.
I would like to ask a question simply press Star then the number one on your telephone keypad.
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 Hector.
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.
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 know there 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.
Sure. Thanks, Ken So casualty we faced.
One time items I would characterize tune of about $45 million, one was a litigation settlement.
One was a.
Very expensive.
Irrelevant.
Added to it so.
Part of the reason why I say normalized number of about $530 million.
These are things that are going to occur on a quarter over quarter basis. So.
We feel very confident that purchase surfaceness, another won't come down to more normalized $530 million.
Currently we are in the early phases.
Cost takeout from a synergy point of view.
We're in this for the long game, so as we mentioned we've hired.
Yes, certainly.
Certainly the macro environment the volume backdrop.
And as strong as we expected.
Kind of hit us by surprise that being said we.
We're 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.
Certainly on the bulk side and some of the market share gains that John mentioned and then as we enter 2020 for what we have in front of US and then the natural macro recovery as we expect so we see as a strong path.
Volume recovery in the back half and in Q4, the high single digits. So we're long people right now short term, but it's the right choice to make to maintain that level.
People.
It takes a long time to hire and train to also attract and retain employees. So it elevated our costs there is no doubt.
Is that 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 I expect.
Labour to almost be flat to slightly down year over year and volumes to inflect positive high single digits. So youll see a much better.
Expense and productivity performance in the back half of the year.
Yes, 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 here in the head count that was an intentional decision.
The timing issue, obviously, if we didn't own.
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.
<unk> are counter to the macro environment that give us.
<unk> confidence that it doesn't make a lot of sense to lay a lot of employees off the risk, losing them and not having them at four weeks and now five weeks now when you've got potash moving.
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.
We talked about coming on line.
John has it got into a lot of detail.
But there is some pretty exciting busy.
Business share shift wins that we're going to get start benefiting from in August .
It's going to help cover some of those <unk> costs that we carried the other point I would say on the operational front Mark and team as 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 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 actually next week, we've got John or in a team of about 50 to 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 speeds 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 the boat. It's 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 <unk> of UBS.
Yes, thanks, good afternoon.
Maybe John I could ask you question just in terms of kind of demand framework. We are generally hearing from.
I 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.
I guess impacted that underlying weakness or 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.
Yes, there's no doubt I think we are in the same boat as what you've heard from from the other rails.
In terms of the intermodal business.
I will tell you we saw sort of are.
<unk> 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 <unk> the combined companies.
Over these last eight eight to 10 weeks.
<unk>.
Not a very hockey stick looking improvement.
But but at least the numbers that 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 call, 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 persist Inc.
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 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 in 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 opportunities there given the situation, where we're going to see some benefit in the near term.
With some of those opportunities our frac sand business continues to be strong our steel business as I spoke to.
Is quite strong in and out of Mexico.
And.
We're no dissimilar there were not dissimilar to the other rails.
Do you think about the forest products in the lumber business.
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 prepare so are out working with these customers to create these long haul cycles with our center beams.
Opening up new markets, we're deep into.
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 those housing.
Construction area of bounces back.
Scenario, we're going to be ready and I think we're 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.
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 payer 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 debt market. So again thats.
And opportunity as you think about this unique franchise that.
We're the only one doing it out there in the marketplace.
And if the intermodal domestic market remained soft there is 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.
Thanks, very much operator, good afternoon, everyone. So I wanted to focus in on bolt.
Johnny you highlighted a few things that have happened in your key.
Key franchises within bulk could have created a lot of lot of volatility here in particular.
The outage at <unk> mine.
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 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 thats developing from where we are now is just the risk of kind of high single digit downside risk on the crop side.
As we go into 2024.
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 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 and ours.
Casey as being their number one transportation provider look strong for 2024, so I.
I would expect.
Double digit as you look to 2024, given what we've seen is definitely a reasonable expectation as you think about potash.
On the coal side, we're going to 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.
We'll give us.
Really good comps in and as you look to 2020 for I don't know if you see.
As big as a jump as it relates in that space.
But we're optimistic that <unk>.
Tax outlook or.
Or at least our discussions with tech. So far next looking to next year look to be positive in terms of growth probably not as extensive as he described relative to potash.
And on the grain front look.
If this crop comes in closer to 60.
65 million metric tons right. So let me think is kind of the middle point of what our customers are saying.
Got to remember we've got a much bigger carry in this year call it maybe close to $10 million.
Metric 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 it's not we will see because I don't think there'll be grain out there.
You have to move.
But as we saw this year.
The third of the weather issues in the dryness that did persist certainly put the farmer on the sideline more than we expected to happen.
I'm 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.
Sure.
Greenhorn Railroad and now with the combination of the Tcs network.
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 you've got me going on grain Walter.
If we see some dryness in in some crop further deterioration in our southern territory.
Other than Alberta southwest Saskatchewan.
That actually began at the 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.
On on 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 windows are bit more west west of Calgary. So when we do get it in the Q3 Q4, we won't have maintenance maintenance gains in ways. We can cycle. The screened so 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 and maybe get a sense of the arc of the pace of our TM recovery in the back half and then maybe some thoughts around the operating ratio in the past.
The ball.
When you think about the Chris the <unk> piece.
As we sit here today ended July were.
We remained slightly positive.
On a full year RPM 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 is upside as you think about.
Q4, so I think ultimately we see value, we see volume growth.
And Chris just in terms of.
When we think about sequential or and earnings.
Given we see stronger Q4, as we get some of the.
The share wins and the synergies starts getting.
Their full run rate the first year the synergies.
Q4, we see a much larger.
Performance than that in Q3 for example.
But.
Sequentially.
Certainly, we see an improvement in the or sequentially from Q.
Q2.
I think Q4 is going to be the.
The breakout quarter, and I think it set us up well for <unk>.
For 2024.
But we have confidence in that mid single digit EPS guide otherwise, we wouldn't it 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 look landscape 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 unrelated 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 and I know you couldn't get into much detail confidentiality perspective, and a customer perspective, but.
We've had some some gains.
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, where head count about a key comp do you think about the volume versus workforce, we have a peak of a delta in a non productive way.
Start to even itself out in Q3 and into Q4 and it sets us up well to the operating leverage we've talked about it both into the back half of this year, but 2024 looks very strong.
And so we see that path to recovery.
This investment in hiring and training I think it is going to pay.
Dividends as well as the work we're doing on our capital fronts on the network.
As well as the work we're doing on the capital front.
Sorry on railcars.
And then we start seeing some benefits of the synergies on the expense side from that operating leverage in.
The work is taking place to improve operations for yourself on the network. So so I'm pretty excited although.
Obviously.
A very tough reporting quarter for us and all the rails I think we have a pretty odd.
Optimistic view on on this year and enter 2024.
So Brandon I might just add that.
I mean, you're right.
The macro environment and some of these broader challenges have been.
Very frustrating but.
The the fact that we're planting the seeds right now I think youre 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 Rocard nodes as you look to 2020 for I think about our announcement on the auto compound.
And Dallas settled that'll be up.
<unk> quarter.
In 2024, and if you think about the Toronto fuels terminal.
And Milton and aging core Kobe spoke to at Investor Day that will all come up in 2020 for the Dallas Trans load that support the lumber that market down there coming up in 2024.
All of those things I think support with <unk> spoke to and if we get a little bit of tailwind on 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 as an operating CEO I've been I've been dreaming about it hasnt visions of.
Our 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.
Gal to get all of that because of that when we control the destination police cars that you don't ever forget and it created opportunity. So we said from the very beginning division one of the divisions.
This network.
Extended reach network when you can connect the bookends.
Manufacturing in Mexico manufacturing in Ontario than automotive compounds in between and create this closed loop network is powerful.
I can tell you that we've made some significant progress there to the point.
We're close to.
During cars.
To serve this closed loop network and those that we partner with.
In this space that have taken the step of faith with us.
Half.
Their own guaranteed car supply about turning those assets and it is going to allow them to get more vehicles from their manufacturing facilities to the.
To the dealerships that need to sell them and create our own empty car supply to feed the opposite in.
The loop.
So thats not a dream anymore thats coming to fruition.
To be showcasing itself in a very powerful way in 2024 and that is ahead of my expectations. 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.
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 would 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.
Or 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 of Frac sand sector steel sector.
We'll see.
Fully I'm going to push market as being to see that materialize in our grain business our coal.
Not 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 Youll see youll see goods growth in potash so.
I call out those areas.
And then.
This shell contract win.
<unk> is significant and that's going to start up.
And in 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 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 of head count year over year, so that'll be.
Meaningful.
Efficiency for us.
On the fuel side.
<unk> say.
We see a meaningful headwind on that for us.
Your next question comes from body Shimon.
BMO capital markets.
Yes. Good afternoon, thanks for taking the question.
Just one quick clarification first so and then the guidance is basically $3 95.
<unk> earned $1 73 year to date.
We're talking about a 28%.
Sequential improvement in the second half versus the first half I just wanted to make sure we're.
On the same page on that but my.
My question is.
Maybe marc or Keith.
Yes.
The speed.
18 miles per hour at Mt. <unk> 'twenty through 'twenty three consistently in the past the same thing if we look at locomotive productivity train lengths in all of these metrics.
What does this regular look like three four years down the road because this is this.
A.
Step up that we're going to see consistently and what's going to drive it 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 to I'm just trying to understand kind of what is just not growth look like once you're done doing some of these key kind of.
Programs that you highlighted it in June .
But certainly for all of the synergy volume that we're talking about bringing all of that is we're going to need those investments that we are.
Kind of looking at it right now.
<unk> standard is set and we're working to that's what this merger is all about so as we integrate the operations.
We've seen.
We expected is on the former ACS network train speed improved <unk> improve 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 will it get to 'twenty three I haven't done the math.
<unk>, yet and we will improve in a material way you should expect so.
You'll see from that are driving of our synergies youll see car hire savings because we're going to need fewer cars to move the same amount of business. Those assets are going to turn you're 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 top line 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 I will do the math later I haven't at this point.
I have a very firm expectation that it will improve in a material way.
In fact, yes, we are guiding to 395 core adjusted combined diluted EPS.
Your next question comes from Konak group of Scotiabank.
Thanks, operator, good afternoon.
Wanted to ask you John any color on the shell contract contribution out of life span wondering if it is a result of merger synergies and that's what elements 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 now I can't provide any.
Further details.
I will say this.
So the great partner of ours and they have been in a number of years and one of those customers that identified that early on that this combination was going to be meaningful.
To them and it's just again, a 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 CP Casey.
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 JP Morgan.
Hey, Thanks for taking the question.
I just wanted to ask a couple of clarifications Nathan can you just walk through what the FX exposure looks like right. Now. So there is a minor item on I think slide 15 in terms of the bulk. 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 collaborate to.
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 the network a little bit more fluid.
Hey, Brian I'm, just going to have actually in principle up with tiara.
<unk> piece there.
Pretty late in the call here. So they will give you details and I think we have some posted its lower.
Upside 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 could see benefits in the operation overall.
There is no sense to distract ourselves trying to create any kind of potential conflict.
Integrating <unk>.
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 better for the employer they will make a lot more money they will have a better quality of life, but we're.
Right now the first order of business, making sure that we optimize our network and fluidity with 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 most of the others will.
Pricing the portfolio of both the core business and then the combined business is there 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 I guess legacy P&L, we approach contracts in our pricing.
The step function is how we sort of overlay that disciplined approach.
To the Casey's network and some of those those contracts.
Is that quantum leap.
No, but I think that's a lot of singles and doubles.
We're still seeing renewals.
No.
I would say.
Low high single digit.
Type range, which I'm quite positive about I don't foresee that changing.
As we move through the remainder of the year and there are some.
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 when 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 data are then capital markets.
Yes, good afternoon, everyone.
Looking at intermodal, obviously, it's an important part of your growth story going forward.
Wondering it.
Current softening environment bring more fortunate than an increased number of discussion with customers and then what would be your average length of all on the intermodal side for the combine on I would be curious to know whether.
The lower fuel expense and lower spot rates, bringing more competition from from the truck right now.
Yes.
Maybe a couple comments on that.
And 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 I said also we're not.
Not sit by and waiting for the phone to ring.
We're out pounding the pavement looking to fill that tradeoff 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> and.
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 a wheel house between Toronto.
And in Calgary I look at that very similar as you think about.
Specifically, Chicago down to Laredo and down to <unk>.
San Luis Potosi area or Monterey area, So very similar length and I do believe.
Historically, we're 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 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 touched base with our they'll 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.
Okay.
Yes.
Okay.
Yeah.
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Okay.