Q3 2023 Canadian Pacific Kansas City Ltd Earnings Call
Hello.
[music].
Good afternoon. My name is Travis and I will be your conference operator today at this time I would like to welcome everyone to see PK six third quarter 2023 conference call. The slides accompanying today's call are available at Investor Dot C. P. K C. R. Dot com all lines have been placed on mute to.
Prevent any background noise. After the Speakers' remarks, there will be a question and answer session. If you 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. Please press star two.
I'd like to introduce Chris de Bruin, Vice President capital markets to begin the conference. Please go ahead Sir.
Thank you Travis and good afternoon, everyone and thank you for joining us today.
Before we begin I want to remind you. This presentation contains forward looking information actual results may differ materially the risks uncertainties and other factors that could influence actual results are described on slide two in the press release and in the MD&A filed with Canadian and U S. Regulators. This presentation also contains non-GAAP measures.
Outlined on slide three please note in addition to our regular quarterly financials. There is supplemental Q3 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.
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. The formal remarks will be followed by Q&A in 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, Alright, Thanks, Chris Let me start by thanking the C. P. Casey family of 20000 railroad is across our three great nations.
<unk> been hard at work, providing service for our customers and the effort and passion. They demonstrate each day as we integrate and execute is truly commendable. So let's take a look at the results for the quarter. The second quarter produced revenues of $3 3 billion on volumes that were down 3% versus last year with an operating ratio of 61.7 core P. S.
P S.
92 cents.
So no doubt a challenging quarters, we dealt with a softer demand environment and supply chain impacts from the strike at the port of Vancouver, but I'll, let John talk more about that in a few minutes as you've seen in the press release, given the more challenging environment further stressed by the labor strike for adjusting our 'twenty three guidance accordingly.
Certainly not the outcome, we had planned but it's the prudent thing to do at this point.
That said, it's not the challenge is to define it but rather how we respond and I'm very proud of how this team our collective CP Casey families responding to the challenges.
A few things about the Mexico tax task force, that's an excellent case in point to how we respond and the task force you'll recall back in our second quarter call. We talked about an enhanced focus on operations in Mexico. Shortly after that we deployed a task force to Mexico that was led by John or John.
John who many of you are familiar with is a lot of experience in Mexico from his previous role as EVP opposite Casey S. In case, you see them and I can tell you. This effort was monumental brought together railroader. Some every part of the organization nearly 100 employees across information services network services marketing engineering and mechanical.
Many others came together to support John on the task Force.
Objectives, and we're seeing the results from that effort, you've see noticeable progress across all the operating metrics train speed improvements terminal dwell reduction car miles per car day, improving locomotive productivity, improving and ultimately the most important part the service experience.
But the customer and this transformation is ongoing and the investment in people process infrastructure and technology in our Mexican operations as well as our.
U S and Canadian operations as a continual journey on.
On the safety front, we've continued to rise to the challenge from a safety perspective, Mark will speak to some of this in more detail in a moment, but I can tell on a combined basis, we've seen year to date improvement in EF already personal injuries of 12 per cent for E train accident frequency at <unk>.
37%, which is a tremendous result that I want to commend the entire team on as we continue to lead the industry. In this space safety is a never ending journey and it continues and will always be our number one priority here.
Few comments on the integration on the integration front integrating these two companies. Obviously is a challenge ended up itself, particularly so in today's world with an industry with a history of merger related service challenges, we certainly not been perfect. There are opportunities to improve that that we're mining everyday 24, seven but the teams from the like C. C.
P and legacy case, yes, you've embraced the challenge they've United working together to produce a unique outcome that will benefit our customers our communities and each other couple of points.
M N D R. While we continue to make progress integrating these two railroads. We also continued to progress.
M N D. Our transaction that we announced in June please to announce that we filed our application for the deal with the STB on October six.
So in closing, we're a little over six months and this combination into our forever story.
Theres no doubt Theres, a few near term challenges from a softer demand environment.
Regardless of the different your differentiated growth opportunities, we've laid out and got it to remain unchanged. We're successfully integrate into its network. We maintained our commitments to our customers to the regulators and we're seeing momentum in our operating performance.
With that said I'm going to hand, it over to mark to speak to the operations before John brings some colors on the markets and they deemed elaborates on the numbers.
Thank you Keith and good afternoon, I'd like to start by thanking the C. PKC operating professionals, alright must work and dedication to safety and operational excellence. The first six months of the merger has been both exciting and challenging but this team does after the task and they're delivering on their mandate to integrate to Seabee and the case, yes network seamlessly maintain.
These safety Sep's top priority so far.
Look at safety for the quarter I'm pleased to report that we continued to build an industry leading record our Q3 FRE reportable injuries improved by 35% to a point 97, our train accident as reported.
Improving 9% a 1.3.
As I discussed on last quarter.
Stakeholder engagement is a core pillar of our safety performance, we regularly engage our employees our union leadership, our regulators to collaborate safety best efforts, ensuring alignment since day. One we have had two safety walk about or see PKC leadership and partners directly engage with the field employees.
The property.
Safety walk about are key to our strong consistent safety culture.
Now turning to the operating performance I'll speak speak on the metrics from a comparison to CP Casey with a combined.
Combination that occurred in 2022 locomotive productivity improved 4% versus Q3 last year.
Average train speed and links D declined, 2% and 1% respectively.
And average train weight was down 2% as we focus will remain on our aligning operating practices across our network. We feel very good about the progress we have made in the first six months, we're optimizing our train concepts to improve locomotive productivity and fuel efficiency to that fuel efficiency improve sequentially.
Q2 to Q3, and I expect that to continue in the area for opportunity.
As we look forward.
So if we're looking at where we sit today network wide dwell has improved 13% since the beginning of the third quarter. We have further to go but the metrics across the board in locomotive productivity Carmack car miles per car day, and dwell are all moving in the right direction, we feel confident that these gains are sustainable.
We look at our capital projects for the year, our construction in the second span of the Laredo Bridge is 35% complete we remain on target operationally should begin by the end of 2024, if we look at our $275 merger capital commitment. We may we are put in service two of the five sidings we look for the next.
Three signings to be within service within three months.
And as we in closing when we look at the early stages of the journey as a combined company I am very confident in the actions and the <unk>.
Taking the development of the network, Alabama operations. This will the story will continue and will continue to have continuous improvement and my team will be laser focused on delivering strong results with that I'll turn it over to John Alright, Thank you Mark and good afternoon, everyone.
So as Keith said, we're over just over a half a year and a C. P. Casey and I want to say that I'm really excited as ever about the unique opportunities that this franchise has to offer our customers well, it's certainly been a more challenging quarter than I expected nothing that we've seen this miniatures any of the exciting growth.
Opportunities that we've guided to over the long term.
The team has been hard at work at creating new markets, capturing new business I'm extremely proud of what we've accomplished to date, despite the challenging economic backdrop, CP Casey's unique footprint and our self help initiatives initiatives. Our differentiators in this marketplace and we are extremely well.
Positioned as the volume environment rebounds.
Now as they look to the third quarter results on a reported basis versus CPE standalone in 2022.
Total revenues were up 44% while volumes were up 31%.
On a combined basis total revenue was down 4%, while volumes declined 3% versus pro forma C. P. Casey a year ago.
FX was a 3% tailwind while fuel was a 6% headwind on the quarter the pricing environment remained strong with inflation plus renewals across our book of business now.
Now taking a closer look at our third quarter revenue performance I'll speak to the FX adjusted results on a comparison versus CPE Casey had the combination occurred in 2022.
Starting with bulk grain revenues were up 7% and 9% RPM growth Canadian grain volumes were up 13% year over year, driven by the improved harvest lapping the drought affected prior year U S grain volumes were up 6% and this year's harvest has been solid in our service territory.
And we are benefiting from our expanded destination market reach.
We continue to see new and unique grain flows emerge on the <unk> system customers are taking advantage of the opportunities to connect grain origination and destination in ways never available to them in the past.
Now looking forward projections for the current Canadian grain crop harvest has come down since our Q2 call.
Our customers are now estimating the crop size to be in the 60 to 65 million metric tonne range.
Currently in Canada, we are seeing customer demand to start this crappy year at levels below our resource planning, giving us available capacity to offset some of this headwind with shipments of U S grain.
As a reminder, the CP Casey combination has further diversified our grain franchise in the U S grain markets now make up more than half of our grain revenues.
On the potash front revenues were down 22% on a 28% volume decline.
Our potash volumes were impacted in the quarter by the strike at the port of Vancouver.
Continued outage of Canpotex Portland terminal.
This has been a challenging supply chain year for our export potash volumes with Canpotex is a true understatement now looking ahead, although we do not expect the Portland terminal to come back online before the end of the year. We do have a strong demand outlook for Q4, and we're working hard to maximize our volumes through all of.
<unk> terminals to build some momentum with canpotex as we close out the year.
And to finish out on our bulk business coal revenue looks flat on 7% volume growth with favorable compares in Q4 following last year's outage of tax you mined and higher met coal prices as we sit here today I see a strong a very strong growth in coal as we finish out the rest of this year.
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Now moving on to merchandise the energy chemicals, and plastics portfolio saw a 3% decline in revenue and a 5% decline in volumes.
Lower volumes were driven by a decrease in crude business as a result of a facility maintenance and less demand and L. P. G <unk>.
However, this was partially offset by growth in our refined fuels, including new business with shell that began in August and continues to ramp up and plastics growth out of Canada into the U S and all the way down into Mexico now as we move into the fourth quarter I expect positive RPM growth in energy chemicals.
<unk> driven by continued strength in refined fuels as shell continues to ramp up and we onboard new share wins.
Forest products revenues declined 6% on a 4% decline in volumes well, we are seeing the impact of a softer economy and slower housing markets. We are very encouraged about the quick development of long haul forest product shipments from Canada down to our southern markets.
The combination of our seamless route to market and the development of our trans load network will position us well to capture synergies in this market as it rebounds.
The metals minerals and consumers products portfolio was up 2% on a 1% decline in volumes.
Performance in this space was mixed as consumer products and Frac sand were down but metals continues to have a strong performance we.
We are particularly encouraged particularly encouraged by continued growth from the Mexico steel space production is ramping up to support strong demand for the auto industry and for infrastructure construction projects in CP Casey's footprint in Mexico.
Equally positioned to service this growing market.
Automotive revenues continued to be strong up 21% on 11% volume growth a record quarter.
Demand for finished vehicles remained strong as the auto industry continues to be challenged with high finished vehicle ground counts exceeding available supply chain capacity to move these vehicles to market.
We are working with many of the Oems to create unique solutions to improve rail inflation fees that will increase capacity and help clear this inventory.
I'll note that as of now we do not expect the auto strike to materially impact our business as we are focused on servicing the strong demand from our production facilities in Canada and in Mexico.
And finally on the intermodal side revenue was down 19% on a 10% volume decline domestic intermodal auto volumes continued to be pressured by soft market demand higher inventories and competitive over the road rates.
However, we remain we remain extremely encouraged by the uptake of our new 180, 181 Cross border service.
The opportunity in the cross border intermodal space is significant our service is consistent and truck like and we are in the earliest stages of developing this premium rail market.
Moving over to the international intermodal area volumes were challenged in the quarter by the Vancouver Port strike and soft softer demand.
Although we are excited as ever about this space and we will look to continue to expand our services out of the port of St. John and to glow grow Lazar Oak hardness, we expect near term headwinds as ocean carriers continue to blank sailings and rightsize their capacity in reaction to this.
Drop of softer demand.
In closing so certainly well we are not immune to the headwinds impacting the economy and certainly the entire rail and transportation sectors. We remain uniquely positioned to deliver long term differentiated growth. This powerful combined franchise is creating new opportunities for our customers to <unk>.
Grow and our synergy gains and the opportunities ahead of us continue to exceed our expectations. So with that I'll now pass it over to Nadeem alright, Thanks, John and good afternoon I.
I would like to first thank the entire CP KC team for its hard work focus and resilience. This team of railroad railroad or is making history and I'm very pleased with their perseverance and dedication in the face of a more challenging operating and macro environment.
Now looking at the quarter CDK six reported operating ratio was 64, 9% and the core adjusted combined operating ratio came in at 61, 7%.
Earnings per share was <unk> 84 cents and core adjusted combined earnings per share was <unk> 92.
Results this quarter were impacted by the change in fuel price on both revenue and operating expenses the impact of fuel price was at $95 million headwind to combined operating income.
This includes a $72 million unfavorable lag effect on combined fuel revenue.
The $95 million impact the combined operating income translated to a 70 basis point and <unk> <unk> headwind to core adjusted combined operating ratio and EPS respectively.
Based on where fuel prices sit today, we expect our fuel price headwind from Q3 to be a slight tailwind in Q4.
Now taking a closer look at our income statement our reported operating expenses provided on slide 14, and combined operating expense on slide 15.
Similar to what we shared last quarter, our combined operating expenses illustrates the estimated effects of the acquisition for the third quarter as if the acquisition closed on January one 2022.
Reported comp and benefits expense was $598 million down 4% on an FX adjusted basis, when compared to combined comp and benefits expense a year ago.
What's driving the FX adjusted decline was lower current service costs in the DB pension plan, resulting from higher discount rates and lower stock based compensation.
That decline was partially offset by wage inflation.
Count was down slightly sequentially in Q3, we expect head count to be down sequentially again in <unk>, which will continue to give us improved operating leverage as volumes accelerate into the end of the year.
Fuel expense was down $86 million or 21% on an FX adjusted basis, when compared to combined fuel in Q3 2022.
The decline was primarily driven by a $93 million or 16% decline in combined fuel price along with lower GTS versus prior year.
As I mentioned, a moment ago that reduction in fuel expense due to prices more than offset by a $188 million headwind from a decline in combined fuel surcharge revenue.
Combined materials expense was down 4% on an FX suggested basis. The decline was largely largely driven by reduced locomotive maintenance material spend.
Equipment rents were up $24 million on a combined basis or 34% on an FX suggested basis equipment rents increased due to higher car hire payments, resulting from automotive volume growth.
Our use of CP Casey intermodal equipment by other roads and increased use of pooled equipment.
Combined depreciation expense was up $32 million or foreign FX, adjusted 6%, resulting from a higher asset base.
Combined purchased services and other was $506 million were roughly flat year over year on an FX suggested basis are.
Business interruption insurance recovery in the quarter related to 2021 flooding and wildfires in British Columbia, offset increased casualty expense and cost inflation.
For Q I still expect <unk> to come in around $530 million to close the year.
Moving below the line other components of net periodic benefit recovery decreased $17 million, reflecting higher discount rates compared to 2022 and other expense was up $6 million in the third quarter on a reported basis.
Net interest expense was $207 million or $202 million on adjusted basis. The decline was driven by our reduced debt balance.
On a combined basis income tax expense was $258 million, we now expect to see PKC core adjusted combined effective tax rate to be approximately 25% for the year a reduction of 50 basis points from the outlook provided in Q2.
Turning to slide 17, we are generating strong cash flow with cash provided by operating activities.
1020 $7 million in Q3.
Our first call on capital remains the business in growth and in the quarter, we reinvested over $700 million in line with our expectation to invest approximately $2 7 billion in combined capital in 2023.
We generated $454 million and adjusted combined free cash flow on the quarter and just under $1 4 billion year to date.
Our combined leverage is three six times on our path back to our target leverage of two five times.
In review of the quarter. Despite challenges John themes continue to bring on synergies and our operations are gaining momentum, especially in Mexico, we remain well positioned to deliver on our long term guidance and I'm extremely confident in this team's ability to execute I'm excited about what this franchise can deliver and I look forward to sharing our success with you going.
Forward.
Keith Let me turn things over to you.
Okay. Thank you gentlemen, let's go and open it up to questions.
Sure.
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.
Previously highlighted please limit yourself to one question.
Our first question comes from Chris Wetherbee Citi.
Hey, Thanks, good afternoon guys.
I guess, you just mentioned that you've been able to capture some of the synergies from the deal. So maybe if you could help us sort of understand what you think from a synergy perspective, you'll be able to realize here in 2023, and then I guess, what it will take to maybe Reaccelerate earnings growth back towards some of the longer term targets that you have is it simply just getting into a better <unk>.
<unk> environment or are there some inc.
Incremental cost actions or others that you can take sort of early in 2024 to kind of reaccelerate the earnings growth profile.
Well, maybe I'll start Chris on the synergy piece this is John.
So as I said I'm I'm I'm really pleased.
Despite the challenges we're facing.
Certainly in the macro and all the geopolitical things going on that we're all facing.
The team has been laser focused on the synergies and certainly delivering on a lot of things we laid out at Investor Day, I think we said at Investor Day, We you saw an immediate run rate of.
$240 million.
Sort of annualized I can tell you I know, we pushed that to $350 million that we talked about at some conferences and I'm comfortable in telling you that we're beyond that now.
I'm not going to peg quite a number for you at this time, but I am quite comfortable where we're going to end up north of a number like that so I'm quite pleased and I will tell you.
There's a number of of contracts and opportunities that are ready to go but we will start up in 2024, but that will continue to add to that story.
Chris I'll, just add a little color on the cost side. We're ahead of.
Net of our target on the cost side as well, Matt if we talk about accelerating what I expect to see in 2024.
We debottleneck to continuing to prove upon even numbers that Mexico is experiencing.
Back to November of last year.
That momentum will continue we've got the investments that we've made this year and the physical infrastructure. That's tied to the merger application I think we've got five sidings that are fewer online now to two more come on with.
Was it about a month and then we've got one more to close the year out so we'll get the benefit of that in 'twenty. Four so what I expect is the railroads continue to incrementally improve improve from a fluidity standpoint locomotive productivity standpoint, and ultimately you put those two together you are going to turn your assets faster, we will have better car productivity car miles per car day and Youll see.
Operating expense tied to the synergies of putting these two networks accelerated a bit from the run rate that we.
So we've been after the last six months and again I'll finish where I started we're exceeding our expectations. No. There are some puts and takes to that but as far as where we thought we would be or where we should be.
To realize the synergies that we committed to you on the cost side. We're in a good spot getting better every day and Chris I'd, just add you know running a fluid network, which we're we're seeing clearly today is going to help us on the operating cost side ex synergies.
We had talked about finishing the year with a lower labor head count number and that's certainly going to be the case I think we'll have incrementally sequentially about a thousand person reduction in head count and that's just attributed to two timing of of some of the works projects and also.
Just your normal seasonality so.
Youre going to see is a C.
The benefits of operating leverage we do expect to see growth in this quarter from a volume standpoint, so that operating leverage is going to naturally provide us some the ability to take our cost down and improve our margins and I fully expect and I'm sure. We're going to get the question, sometimes I'll hit it now I fully expect a sub 60 or in this quarter.
Okay. That's very helpful. Appreciate the time thank you.
Our next question comes from Scott Group Wolfe Research.
Hey, Thanks afternoon. So Nadeem you got me on the LR question already so I won't I won't ask it again.
Our next question Travis.
Just kidding.
Go ahead Scott.
How are you thinking about RPM growth in the quarter and then I know, it's early but when I think back to the analyst day, you talked about.
High single digit revenue growth mid teens kind of earnings growth.
Do you do you have visibility to getting to those kinds of growth rates in 'twenty four or is it just too early to tell at this point.
Now let me take the <unk> were slightly positive now for the quarter. Scott. We continue to expect a ramp up in November December and I fully expect the quarter probably.
Mid single, 4% to 5% RPM growth versus last year.
Yeah, and Scott I mean, when we gave our guidance I guess three or four months ago now.
We had talked about the five year plan.
Nothing's changed on that front when you look at it from a long term perspective.
We didn't expect it to just be.
Without some level of cycle and during that timeframe and so we're seeing that that macro challenge now.
I think we will see a bit of a softer grain.
Crop in Canada next year, I mean, we've diversified our franchise as John pointed out we're.
We're not as reliant on Canadian grain, but it's going to affect US probably Q2 of 2024 that being said you know I fully expect when we when we give guidance in January.
Consistent with what we've described in June that we're going to have double digit EPS growth is in our.
Our sites.
We always said that over that four or five year period guidance, we're going to ramp up the synergies and in the outer years youre going to be at that.
At stronger levels, not only because of the ramp up in synergies, but also the benefit of some.
The ability to buy back shares and lower the share count and what that provides from EPS accretion. So.
From our perspective as we stand here today, I, certainly expect double digit EPS growth.
Thank you guys.
Got it.
Yeah.
Our next question comes from Brandon Glinski Barclays.
Hey, good evening, thanks for taking the question.
John I think on the last earnings call here, we were talking about incremental business wins that have you guys pretty <unk>.
Relatively bullish on the volume outlook and your network for the fourth quarter is that still coming through the way you thought back in and can you talk to some of those specific opportunities that we should be looking for coming online in the near term.
Yes, Brandon So certainly we've seen we've talked about the the winning the ECP area with shell, we have definitely seen that volume ramp up and we and that frankly is caused the ECP area to inflect positive.
I will tell you that that's an area, where I continue to see ramp up there's two or three recent contract renewals in that area that I feel really good about the share growth that <unk> and the team has delivered in that area. So I think you'll continue to see upside in that space.
I have said, we're just getting started on that 180 and 181 train pair north south.
There is a number of pieces of business that you should expect to see startup.
On that train pair.
Chicago, Kansas City down to and into Mexico and at Laredo.
We're projecting nearly.
Let's say, 10% growth in our reefer business this year and a year where much of intermodal down.
Been an area of growth and it's going to be an area of growth youre going to see to continue to come on to that north South train pear and and then maybe last I'll leave you with this as you look across all of the North American ports.
Im quite pleased with where Lazar row Cardinal sits today, it's Scott, we're seeing import export growth of about 26%.
At that terminal and you think about La long Beach minus 20, Rupert minus 30, the east coast ports minus certainly double digits.
<unk> seen growth and I'm, not suggesting we got a long ways to go and a lot of work to do.
In a challenged international area.
But we are making some headway we're doing a lot of <unk> business thing, where we're working with have egg I don't know if you saw but them recently announced a new port of call into labs ROE that's going to start up November 9th or not only domestic Mexico, but for also shipments into the U S.
Yes.
So that's another area that I, just think youre going to see.
US continue to to position ourself, well and when things rebound, we're going to be in a really good spot there.
Thanks, Sean.
Yes.
Our next question comes from Fatih Shimbun BMO.
Thank you good evening.
John I'm not sure if you're willing to take a stab at like 350 million what would that number.
I know, you'll hope to look like kind of a year from now.
Given the pipeline of all these kind of opportunities that you seem to.
Have your argon.
Just to follow up on some of the cost commentary and Nadeem.
10% decline in your ex fuel costs kind of Q4 Q3 versus Q2 on slide volume, which is which are impressive obviously, but.
Are there any unique items in there or I mean, you're you're calling head count going down again going into Q or like is this the new level that we get to improve from or are there. Some unique items, maybe in the second quarter than the third.
Third quarter that we should take into account.
No. This is.
This is a new base now we're going to expect some some volume growth in Q4, so youre going to have some some volume.
Related to volume ramp up.
We did have an insurance recovery and purchase services now we also had higher casualties. So.
The net of two was a small benefit in purchase services and other and Thats why I mentioned that we'll ramp that up a little bit from from $5 six question of $5 30.
Certainly we expect a <unk>.
Labor costs come down as the head count comes down.
Backfill attrition does its job on that front so.
And Patty.
I'll, just say that I continue to.
See us exceeding in our revenue synergy area and I would say that we.
In our Investor day, we guided to sort of our what our multiyear plan expectations would be annually, we're right on pace for that or or even again, some upside as I as I look to that.
Okay, great. Thanks.
Okay.
Our next question comes from Steve Hansen Raymond James.
Yeah. Good afternoon, guys. Thanks for the time.
John question for you, perhaps the disruptions that constraint seizing potash have been significant thus far as you've described you've now got some constraints in the eastern direction.
The seaway as well I mean, if you wanted to maybe just give us a sense for how the potash volume outlook looks through the next quarter or two as we get through some of these constraints.
Yes, Thanks, Steve.
Also right.
And for taxes has a pretty good sales book on for Q4, it's just their ability to execute.
Without the Portland terminal, which is a significant work course for them and a good route for us.
It's been horribly challenging.
So I'm optimistic that we're going to sequentially improve.
The numbers are so low we better sequentially improve as we move through Q4 in potash.
And we'll get that terminal back up at the end of the year and as I said I'm, hoping we gained some momentum in November and December and really hit the ground running as you look to 2024 I know canpotex.
Has ambitious plans to sort of gain back the market share that they've lost.
Over 2023 into 2024 as a result of a number of these challenging.
Challenges they faced.
That's great.
Our next question comes from Tom <unk>.
UBS.
Yes, good afternoon.
So I know you've had a couple of questions on 24, I want to kind of circle back to that a little bit.
I think the broader theme for transports has been.
Somewhat weaker freight markets lowering of expectations for 2024.
Just to reflect that kind of lower momentum I think you have a lot of puts and takes right like clearly the conversation on potash you would think thats easy comps.
In 24, but I know, you've got Canadian grain down a little bit so maybe.
Just at a high level as you go into 'twenty four do you view that as kind of a.
Low base or easy comp. So you can have kind of stronger growth than normal and then maybe gets you up towards where the street is with 20% earnings growth or do you think that it's like hey, let's be a little careful because there is enough weakness thats kind of macro weakness in the markets that we ought to be.
Careful on expectations. Thank you.
Tom I'll make a couple of comments and then maybe Jim you want to make a comment or two but look I got bit.
In 2023, I thought I was had easy comps for potash coming into 2023 and.
Well frankly, the numbers are I saw 10% growth in potash and we're at a 10% decline in potash. So it's fool me once but.
So we're going to be a little more cautious.
On that front again in that area I expect to be set up well.
We're going to move a lot of Canadian grain U S grain over the next.
<unk>.
A couple of quarters here, and we will watch what materializes.
Tom as we move into Q2 and beyond with this crop.
Certainly more challenged than the southern part of Canada.
Maybe my last comment is.
Overall I feel.
Hopefully good about the synergies in that ramp up as they look to next year I do believe this pricing environment.
Continues to be favorable as I look to next year. It's it's all about the macro in the basin and how the intermodal business and some of these.
The heavy consumer driven areas rebounder or not and where it is.
It's going to be very prudent about how we how we look at those volumes in the 2024.
Yeah, and so I am not not to get into too much detail I mean, it is still October here about 24, but I think just fundamentally you should think about it.
The usual way of how our how we've been successful in the past which is some.
Pricing.
We've been hurt by inflation, it's been a call. It a significant impact I think in transportation in general in 2023.
But I think the ability to price above inflation comes back in 'twenty four.
Which will be positive and accretive I think currency is going to be could be supportive as well and so.
Factor that into and you can get to that kind of mid <unk> mid to high single digit type of revenue number.
And then I think the more important thing is the operating leverage.
This network starts humming as we start to continue to invest.
Capacity sidings that Keith mentioned and Mark mentioned, you get the benefits of running a better network as a whole you get the benefits of some of the synergies.
Both on the top line and on the operating costs I think it formulates, a pretty decent EPS growth number so.
I'm not backing off we're not backing off what we think we can achieve.
Sure there is going to be some some challenges on the macro side that we are fully aware of and we'll get into that in January and have a better view of that but as we stand here now I don't think were changing the kind of the the earnings model of how we.
We've been successful in the past both at CP at Tcs.
Okay.
Okay, great. Thank you.
Thanks, Tom.
Our next question comes from Jon Chappell Evercore ISI.
Thank you and good afternoon.
John or Nadeem about six months in where do you think you stand on the unique pricing true up opportunities that you had across the entire portfolio is that something that's easier to do once you've integrated for a full year. When you have more of a demand tail wind at your back or was that something where you can enact pretty quickly and we should start to see the benefit of that as soon as the fourth quarter.
Yes, I would say, we John we've attacked that pretty aggressively.
I feel good.
In terms of where we are.
We're still discovering things.
I don't know maybe were in the <unk>.
Mid innings of that story as well as a whole.
I can tell you I think youll start to see some of those.
Those benefits.
Probably Q1 of next year, but we still have a number of areas of opportunity that we're going to work over the next certainly this quarter and into Q1.
Okay.
And I do believe that that's given us.
That does give us a little bit of tailwind as you think about.
Some of our pricing in <unk> as you look to 2024.
That makes sense. Thank you.
Yeah.
Our next question comes from Cherilyn Radbourne TD Cohen.
Thank you very much good afternoon.
As everyone is aware the industry is facing a softer freight demand.
NAND environment and.
Curious, whether or any capital projects that you would contemplate accelerating to take advantage of lowering network activity levels and better condition. The company for synergy capture once we got into an eventual recovery scenario.
Sure I would say that from a sourcing standpoint, maybe materials, we will look at that but as far as actually executing.
Capital projects uniquely in this industry, we've got a pretty full plate across our network in line with the commitments we've made to the STB. The Laredo bridge the expansion bensenville the sidings so for us to have too much of an aggressive appetite.
I don't think would be the right thing to do because we certainly don't want to size up and start laid a bunch of people off.
I don't think Thats a cycle, if we want to get into so we'll be opportunistic.
On material purchase perhaps on steel, perhaps maybe look at locomotives. We are looking at our locomotive fleet and developing the overall long term strategy relative.
Two our demands our unique industry demands for the business growth as well as some of our ESG objectives and commitments.
So those two together may give us some chances.
The leverage, but again I think there'll be opportunistic and not anything large scale, helping some of our to your point that the overall capital efficiency on what we can get done in terms of the fundamentals of changing tide, and putting ballast and getting access to the network. So so that's where we're seeing the benefit overall cherilyn.
Thank you for that Tom.
Thank you.
Our next question comes from <unk> Gupta with Scotia capital.
Okay.
Thanks for taking my question just on the Q4, John wanted to figure out mid single digit RPM growth.
Currently you are down about maybe flat to down in the first three weeks of October call potash are doing fine there easy comps, but.
Intermodal and Green is too, but soft here do you expect some sort of rebound in grain and intermodal as we head into November December and any new contracts, you can point to which might start this month.
Yes, so as I sit here today actually were.
We're slightly positive.
From an RPM perspective tower in <unk>.
Tober I do expect acceleration as we move into November and December I think the grain outlook.
Not only Canadian grain, but also our U S grain franchise.
It looks positive as I said.
Frankly, the potash area Couldnt have been more troubling.
I'm optimistic we're going to gain some some rhythm to close out the year with.
With potash and <unk>.
Dan.
We're just really ramping Matt.
Met coal prices are high Tech is really strong demand, we're lapping that outage. So we've got pretty strong growth in not only our met coal, but also some of our <unk>.
Thermal coal in the U S.
We do believe.
As I said, you'll continue to see us.
Add strategically volume to our 180 181, we will continue to ramp up some more ECP synergy wins and share wins.
That all helps sort of carry the day to get us to that low mid single digits for poor fourth quarter, let's say the last bit of color I would add to that is don't underestimate.
The power of revenue and our team generation with the pent up demand that we have in Mexico, that's obviously been subdued because of.
The lack of capacity in the operational challenges as we continue to free that railroad up in fact I think.
Right now we are at an all time high <unk> level in the Mexico franchise.
With no shortage of demand so the automotive market the metals market.
Those are two key economic drivers and demand drivers that the more capacity, we free up the more that we get to move.
I appreciate the color guys. Thanks.
Our next question comes from Walter Spratlin RBC.
Thanks, very much operator, good afternoon, everyone. So I wanted to actually come back to John on the West Coast West Coast Port volumes and the strike that you had alluded to there.
And it's.
The July the strike occurred in July and you cleared out your your bag.
Backlog pretty quickly, but the volume declines have continued quite substantially here into August.
And now September and I'm, just wondering if youre concerned at all that.
Given some of this is discretionary into Vancouver, and certainly we saw the decline, though it doesn't affect you up in Prince Rupert very.
Very strongly this discretionary aspect of these volumes going into Chicago have they found another route.
Are you concerned that that's going to be a while to come back do you have any view on how long it comes back and as Mexico enough to have an offset I know when you look at those port volumes. They are off the charts for Mexico, which is which is great.
September and is that enough to offset if there is some more.
Let's call it structural impact.
Impact from the strike that happens in Vancouver can you entirely offset that by Mexico or is it just not big enough to offset that kind of decline if it were to continue.
Yes, so maybe to answer that question first Walter I think Thats, a fair call out no. I mean, we expect growth that allows ROE and I said I'm excited about the future of what we can do at that point, but.
To ramp that up so that is not a one for one by any means.
I do believe structurally there has been somewhat of a change on.
The West Coast ports.
Bye bye far and you just look at our train length and are and where our volume import volume is going it's all domestic Canada.
And <unk> got very little little volume going into the U S.
No.
It'll be a function of two things one is how quickly this market actually does rebound I just had.
My team visiting all the steamship carriers over in Asia, and also in Europe, and they didn't painted a very bright picture.
Certainly it's going to be through 2024.
As we see that ramp up.
And then.
We'll have to watch certainly there is a reason why Vancouver, and Prince Rupert and that had success.
We have a portfolio we have some economic advantages.
As things tightened back up and as the volume improves in La long Beach that has that is really it will be.
B the Tel.
One on if you see that freight moves back up there, but in the meantime, I can tell you we are.
We're focused on.
The business that we're handling within domestic.
Canada.
We are laser focused on on how we grow this and leverage that port with a ton of capacity.
Don It Lazar ROE and again it will be a one for one offset but I am confident we will grow domestically into Mexico and also into that Texas market.
I think a very encouraging comment about the port of <unk>, We just had the <unk>.
And the team two weeks ago in Kansas City. So that's a that's a local government. The state government that is motivated for economic growth. He understands the potential of that lateral has and I can tell you. This historically casey's had challenges I think structurally perhaps.
They didn't go deep into the U S and have an opportunity to provide.
Competitive interline rates to a west coast alternative that's not the case now we do and I think the other challenge was the reliability of the gateway there was a lot of issues with with.
With the teacher strikes with blockades and I can tell you that governor was proud to tell us that they met with US two weeks ago that was <unk> 702. He is committed to keeping that track open he is committed to growth over that port and.
And not just that fourth there are many other products once you create the ecosystem.
In the transportation the reliable.
Trains back and forth to take products that are grown in that state that are consumed in the Midwest and consumed.
Parts of Canada that this new reefer ecosystem, we're creating can benefit from and serve so more to come on that again does it ever replace all of it no, but it's certainly a unique growth opportunity for us coming from Mexico, both on a domestic move as well as leveraging the international opportunity.
Appreciate that color Keith and John Thank you.
Our next question comes from Ken Hester Bank of America.
Hey, great good afternoon.
Keith and team.
I think Nadeem just a quick numbers question then a long term question just the $51 million.
Is there a reason why you didnt take that out of that million dollars here and there and 22 million numbers just want to understand why that was left and if it was a historical thing and then long term you got it.
It's kind of a tale of two cities here.
I guess prepared remarks, it was a bit more sanguine about the economy and it was it was maybe even more negative than what we heard from your Canadian peer or the eastern rail that we just heard from but now youre talking about kind of mid single digits in it.
Seems like a much more upbeat I don't know Q&A, it's just a very different.
Position I just want understand the message.
That you're trying to send here in terms of the outlook as nadeem talking about sub 60 or into the upper 50% or just maybe delve into the thoughts there.
Yes.
We answer them like we see them.
Ken you've known us for a long time and that's that's the visibility we have on near term.
What we expect for 2024 or so.
That's that's our honest and transparent answers of what we think we can deliver and what we hold each other accountable for.
So I'll leave it at that.
I don't.
There is cause for.
Concerned with the macro environment, we're not we're not of the view that it's a.
The economy by any stretch, but we think that what we can control we're focused on controlling and we'll we'll deliver and the visibility that we have on the top line.
As John mentioned in the near term over the LTM of call it 3% to 5% I think is.
Is this is genuine.
While we didn't strip out.
The insurance.
We had I think a $40 million.
Increasing in casualty made up of a bunch of one time items through the year.
$20 million jury settlements in and such.
The same reason I guess, we didn't strip out when we had about $150 million impact from the flooding and costs associated in 2021. So we're just being consistent with how we approach that would be how we thought about that insurance recovery.
Great and if I could just squeeze in a follow up.
Again, you were just talking about Mexico, you sent a team of 50 or 200 down there.
I guess Keith is there any update on that or have you changed any operations around.
Yeah of course of course, we have we've tweaked and adjusted but yes.
We initially started Ken with a 50 52 officers that were down there around the clock.
It was a group of every discipline within the company from engineering to operating to the.
Customer service.
To kind of D scrambled the egg for lack of a better term we were locked up we were congested. So we've debottleneck. We've now shifted from a response phase two and enhance and build phase we made structural changes from a leadership standpoint, John or who led the team is now focused day to day. He is responsible for all our Mexican operations and actually.
I have to Beaumont, which is the crew change points, where the <unk> to take the train south through Houston, That's a natural break and then of course, Mark has everything north of there.
So structurally we've got a very focused team is continuing to develop talent.
Got to place running smoothly again, we're making progress with labor, which is very encouraging its not the kind of progress that creates monumental quantum change like we've experienced in other parts of our network in our history, but I will tell you. This to make the change that we're talking about relative to what's been changed in the past.
It's a testament to the understanding and commitment of the Union leadership I met personally with the president of the Union explained.
Explained our journey explained our opportunity and how we can do uniquely partner with our employees as members and I can tell you he and our members are excited and energized by it so they're structural change theres progress thats ongoing and what I would say is expected to continue.
Thanks for the time I appreciate it.
Our next question comes from Brian Austin BEC.
J P Morgan.
Hey, good afternoon. Thanks for taking the question. So just wanted to ask maybe John about the closed loop automotive.
<unk> it looks like you've been making some significant progress more recently I don't think we heard an update on this call, but just if you go back to that are you close to the or.
During the cars with what's been the to get the guaranteed car supply what's been the uptake and the interest level from some of the Oems obviously, some noise with the UAW right now but.
Is that something we could see perhaps coming forward in 2024. Thank you, yes, Brian it's been strong.
Maybe as far as an update we've got construction underway in the Dallas market for auto compound there, we expect to see that up in active and frankly sold out.
By mid next year, so quite excited about that I would say the closed loop we've got.
Currently receiving new bi levels right now I think we will receive upwards of 200 or so.
Over the coming months to really be targeted at that closed loop model. So.
We've got some good early wins, there and I expect you to see that being fully deployed as we move into the start of 2024.
Okay. Thanks, John.
Mhm.
Our next question comes from Ben Nolan Stifel.
Yes. Thanks I appreciate you guys spent man.
John I remember as it relates to potash you remember a couple of years ago or last year, maybe you mentioned that there might be some opportunities to move potash to the Gulf Coast, just given everything that's gone on in Portland is that something that's materializing or is there an opportunity maybe to do that.
Yes, Ben I think right now given everything that's gone on there is a little bit of pause in terms of that I don't think anything's changed in terms of.
We believe the opportunity to create sort of a what I would consider a true third outlet for export potash out of Canada.
Whether it's K plus S canpotex future BHP.
I think we continue to see that as a as a long term opportunity in terms of.
Timing on that is probably pushed out a little bit further than when we're thinking about it about a year ago when I spoke about it.
Alright, I appreciate it thanks.
Pat.
Our next question comes from Justin Long Stephens.
Thanks, I was wondering if you could provide an update around your expectations for the level of inflation youre seeing in the business. This year and how that compares to your early expectation for inflation as we move into 2024, and when you think about that kind of price versus cost.
<unk> GAAP, how you see that trending in the quarters ahead.
Okay.
Sure I'll take that Justin So we've seen all in inflation closer to that 7% level.
And as you know I mean, it's been pretty.
Pretty apparent a lot of that has been on the labor side. So the biggest.
Cost buckets.
We have seen also.
Up north.
Impact of some of the <unk> rule changes that have also impacted comp and benefits. So overall inflation has been a challenge and it's been a headwind.
Much higher than we anticipated at the beginning of the year, that's partly the reason I think that.
Margins have been where they are.
I would I would say that some.
We expect in 2000 and for that to moderate I think as some of the rate hikes in and some of the action by the fed and bank of Canada kind of moderate I think we should start seeing that subtle I think we should start seeing you know even some of the recent inflation numbers.
Moderated so.
I think we'll be closer to call it a 4% level rather than that 7% level and I think thats, what gives me confidence in our ability to price above inflation.
We're still getting strong pricing John and his team have done an excellent job. It's just it's been a high bar. This.
This year in particular, just because of the call it onetime nature of some of the labor increases.
Okay.
Got it thank you.
Yes.
Our next question comes from Ben Wyatt poor yet.
Discharge <unk> capital markets.
Yes. Thank you very much good afternoon gentlemen.
Keith you provide great color about the opportunities and John about the obviously in Mexico, but you're also great rationale around Vancouver with Stephanie could you maybe provide more color about the eastern part of the your network. If we look at the port of Montreal Bears the upcoming labor agreement with the dock work.
So I'm just wondering if you're having any discussion with shippers about some potential cargo diversion and wetter the port of St. John.
Get some volume uptick and with respect to contract kind of expansion. We have seen some announcement lately I know, it's a very long term, Unfortunately, which is having some challenges, but how do you see the potential of fortunate piece for CPUC longer term. Thank you.
Kevin.
I would say yes.
I had the team just recently.
Overseas meeting with all the various ocean lines and certainly in Montreal in the.
I don't know it seems like annual struggles there with labor certainly is a big topic.
Unlike years past, we really didn't have an option, but now we've got a ready made option with a lot of capacity.
New equipment in.
Eager partner and DP world to get after it.
So.
I do believe.
Those backstops in terms of if freight does need to move out of port of Montreal, St. John per presents US now a great opportunity that to to move that freight.
In terms of constant currency.
As of right now.
Its not a facility or a port.
That we will be looking to serve now who knows.
Those discussions and Nuvaring of access to that port is ongoing but our frankly, our efforts are focused on continuing to.
Service part of Entre, all and grow St. John is absolutely growing.
Okay. Thank you very much gentlemen.
Okay.
Our final question comes from David Vernon.
<unk>.
Hey, good afternoon guys.
Thanks for taking the call I wanted to dig in a little bit to the head count commentary sequentially. It looked like we had head count growth and Nadeem I think you mentioned, we're going to be coming down in head count can.
Can you help us understand kind of what we should be expecting in sort of Q4 for our cost per employee and where the heads are shifting and what's driving sort of a shift as this in the transportation function. As this overhead functions is just moving jobs up and down the bigger network here Im just trying to get a central what's happening with the Choppiness in head count.
No fair question so.
We had anticipated this for some time kind of pointed to Q4 as.
So need to see that that inflection.
We've been ahead of the curve in terms of hiring and training just given the.
The challenges I think the economy is seeing in terms of getting.
Qualified employees and servicing customer that doesn't that doesn't change but.
As you see attrition.
Through our industry and work through our system and as volumes don't materialize. The same way that you can expect.
Grain for example, we know that it's going to be.
Less robust next year than this year, you can make a call in terms of what you do from a hiring and training.
So there is some seasonality as well as I mentioned earlier in terms of head count and then when you think about some.
The the opportunity as far as.
Sure.
Synergies, we're going to have some natural opportunities as far as head count on the synergy side and then.
As you get operating leverage so as you turn to.
Being able to run.
Longer trains more density and so forth you need less employees per GCM and for the volumes are moving.
It's a combination of all those factors.
That's going to drive a bit of a reduction in head count sequentially.
And as far as comp per employee somewhat dependent on stock based comp now.
That's been a bit of a tailwind near term, who knows where that's going to end.
At the end of the year, but kind of mid single digits.
It is probably a fair estimate as we stand here today.
Alright, thanks, very much for the other color guys.
Thanks, David.
We have plenty of time for Q&A, yes, Sir I'd like to turn the call back over to you.
Okay. Thank you operator, Melissa and thanks for everyone, taking their time to spend with US. This afternoon I can say in closing that.
We're six months into our forever story, and I'm extremely proud of the progress that we're making both integrating and executing.
We're realists, we're not immune to the macro challenges that we're all facing with this economy that I can tell you. We're focused on controlling what we can control and that is to operate safely always efficiently and continue to sell to what is a very unique three nation network that we've created that's allowing us to grow in a unique way at a micro level.
Be it share shift via customer solutions with new markets take trucks off the road in spite of the microenvironment and when the macro comes back in terms favorable now it gets siding. So we look forward to sharing our fourth quarter results next time, we talk in January.
Thank you.
This concludes today's conference call you may now disconnect.
Yes.
Okay.
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Hum.
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