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spk01: Good afternoon. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's second quarter 2021 conference call. The slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star then number one on your telephone keypad. And if you would like to withdraw your question, simply press star followed by number two. And I would like to introduce Chris DeBrin, Managing Director, Investor Relations and Treasury, to begin the conference.
spk12: Thank you, Sylvie. 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 as outlined on slide three. With me here today is Keith Creel, our President and Chief Executive Officer, Nadine Villani, our Executive Vice President and Chief Financial Officer, and John Brooks, our Executive Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.
spk07: All right, good afternoon. Thanks, Chris. I want to begin my comments by saying that my thoughts and my prayers remain with those affected by the wildfires in British Columbia, and specifically those in Lytton. You know, our hearts at CP go out to everyone that's been impacted, the village of Lytton and Lytton First Nations, and several members of the CP family who actually lost their homes in the Lytton fire. Next, I want to continue to thank the more than 12,000 strong CP Railroaders that are truly the drivers behind the unique story of sustainable, profitable growth at CP. Bar none, it's the best team of railroaders in the industry. We continue to prove it. It's a team that I'm extremely proud to be railroading with. So let's spend the time, let's focus on the results. Needless to say, extremely proud of what the team has delivered this quarter. Through the collective efforts of our railroaders, the quarter we delivered record second quarter revenues of nearly 2.1 billion, record second quarter operating ratio of 55.3, and earnings growth of an impressive 27% to a record $1.03. Behind those numbers, obviously, is a very impressive operating performance. Special thanks to Mark Redd and the industry best team of talented railroaders that he leads and serves with daily, able to produce train weights, train leads, continue to improve, built on last year's records up 1% and 3% respectively, record second quarter car miles per day up 4% on the quarter. Trip and compliance for our customers better than 80% continues to improve. And most importantly, safety results for the quarter, both all-time lows for this company. Records on both reportable injuries as well as reportable derailments. Personal injuries were down 34%. And train accident frequency decreased 70%, 7-0%. This is only attainable with the right safety culture. It's one of focusing on getting stronger, something we're continuously focused on. It's a pursuit of excellence. You never really arrive. You pursue perfection. Again, through an ongoing continuous improvement process, focusing with a commitment to investment in technology, people in process continues to show our efforts through the results of constant improvement. The financial and operating results this quarter are undeniably a continuation of our unique, persistent, scheduled railroading story at Canadian Pacific. It truly shows what a proven, seasoned PSR model can accomplish. Sustainable, profitable, top-line growth, margin improvement, earnings growth, running the network efficiently and safely, and creating significant value for our customers and for our shareholders. It's truly a balanced approach and a balanced outcome. This is a team that has a track record of producing results, creating value, no excuses to make. The results here in these areas, be it managing on the downside or being at the rebound post the pandemic, prove that in spades. So with that said, let me say the balance of my comments for our Q&A, and I'll turn it over to John to provide some color on the markets.
spk16: All right. Thank you, Keith, and good afternoon, everyone. So as Keith said, I'm extremely pleased with the record results this team delivered this quarter. We achieved all-time record second quarter revenue at $2.1 billion, up 15% year over year. And I can tell you, despite a choppy supply chain environment, we grew our top line by 4% versus 2019. Now, looking specifically at the Q2, RTMs were up 9% in the quarter. Fuel and FX combined to be a 2% headwind. Price and mix combined to be positive 8%. The pricing environment, as many have talked about, remains very strong, and our mix was driven positively by moving more autos and carload merchandise volumes. Now, taking a closer look at the second quarter revenue performance, I'll speak to the results on a currency-adjusted basis. Grain volumes were down 1% on the quarter, while revenues were up 4%. Our U.S. grain volume was up close to 40% on the quarter, as our PNW export demand continued to be strong. In Canada, I'm pleased to report that CP has moved over 30 million metric tons of grain and grain products this crop year, setting an all-time company record. I want to thank all the members of the CP family and our customers that relentlessly drive every day to make records like this happen. In Q2, we did have lower volumes in Canadian grain driven by a combination of factors, including high grain prices and record movements resulting in lower grain supply and carry out. Now looking ahead, we're monitoring the dry conditions across the prairies. We see a high likelihood for an early harvest and are forecasting normal peak demand levels. As we close out the crop year, our grain franchise development has been impressive. We have added 13 more elevators upgraded to our unique 8,500 foot model. We have eight more upgrades coming online by the end of the year, and we'll add three more 8,500 greenfield elevators to our network in the next six months. Additionally, we have at this point now over 4,300 of our new high capacity covered hoppers in service. Moving on to the potash front, volumes were down 9% in the quarter. The decrease in volume reflects the impact to export volumes as a result of infrastructure upgrades going on at our ports. We are pleased with Campotex investment at their Portland terminal that enables greater supply chain resiliency and increased throughput. The Portland facility will now be able to land 388 car trains at their terminal. We continue to see strong demand fundamentals for potash use. We expect upside to our potash franchise in the back half of the year and into 2022. And to close out the bulk business, coal revenues were up 32% while volumes were up 12% as the supply chain executed well and we lapped COVID-related challenges. We expect strong demand from tech into the second half of the year as we look to recover volumes impacted from the recent fires. Moving on to merchandise, the energy, chemicals, and plastics portfolio saw revenues increase 16%. Now, excluding crude, ECP volumes exceeded expectations to be up 18% as demand for products such as gasoline, asphalt, LPG all rebounded from 2020 lows. I expect strength and ECP to continue as recovery does into the second half of the year. I'll also note we're very excited about the forthcoming launch of our first DRU train from the USD terminal at Hardesty, Alberta for ConocoPhillips. This train is destined for USD's facility in Port Arthur, Texas, and we expect this business to ramp up to 15 to 20 trains per month in Q3. This marks the beginning of a long-term shift from traditional crude by rail to drubit, a more sustainable, environmentally friendly, and pipeline competitive product. It is CP's honor to be partners with Gibson Energy, USD, and ConocoPhillips as we're delivering this innovative, safer rail solution. Moving on from ECP, our forest products revenues were up 22% as lumber prices hit record highs, pushing our volume and revenue to an all-time best in the quarter. We expect to continue to see solid demand as inventories remain relatively low and housing and home improvement start continue to be strong. In MMC, revenues were up 49% and volumes increased 51%. largely driven by higher volumes of frac sand as drilling rebounded with the oil markets. Further, we are seeing a good recovery in steel and metals related markets. I would note that we are adding 150 milgons to our fleet to support strong customer demand for finished steel and scrap. On the automotive front, revenues were up 216% while volumes were up 259 on the quarter. So while we lapped easy comps, our business wins with the OEMs like Glovis, FCA, Honda drove our outperformance in this space relative to the industry. Now looking again, we do expect to see ongoing chip challenges during Q3, but with dealer inventories remaining low and demand continuing to be strong, we expect increasing production levels as the auto industry tries to catch up. And moving on finally to the intermodal side of the business, quarterly volumes were up 9% while revenue was up 27%. We have now had three consecutive record quarters in domestic intermodal. With our reliable service product and capacity for growth, we continue to perform well in this space anchored by our strong retail franchise. I'm extremely pleased with our intermodal growth into Atlantic Canada through our acquisition of the CMQ. Since the startup of this service, we have moved over 10,000 containers in this market, and we're on a current run rate that exceeds 20,000. Our service from St. John is the most direct, fastest rail option for customers to Montreal, Toronto, Chicago, and beyond. On the international front, we had record revenue while managing through significant supply chain challenges with well-documented port congestion, vessel delays, and container imbalances across the industry. I'm pleased to announce that we've expanded a new strategic partnership with Costco and OOCL. This multi-year contract will deliver new growth on our core intermodal lanes originating from both Vancouver and Montreal utilizing existing train capacity. We expect this contract will generate over $100 million annually in incremental revenue. The partnership is grounded in and reflects the value that CP can uniquely offer in terms of capacity and service for Costco OOCL and our mutual customers. And finally, Maersk International volume continues to onboard successfully. And we look forward to the opening of our domestic transload facility in Vancouver in September. The transload facility, as a reminder, uses CP's land capacity to offer a unique service solution and stickiness for our intermodal customers. Additionally, this service product alleviates congestion in Vancouver by taking thousands of trucks off the road by using direct rail service from the port to the customer. So let me close by saying no different than how this team outpaced the industry on revenue and volume through the pandemic. Now halfway through 2021, we are leading the industry again compared to 2019, and we expect to continue to execute our playbooks and deliver on our self-help initiatives. Looking forward to the balance of the year and into 2022, we have a strong pipeline of initiatives. and we expect robust demand environment to continue as economies around the world continue to recover. You can count on the CP team to continue to deliver sustainable, profitable growth. With that, I'll pass it over to Nadim.
spk14: Great. Thanks, John, and congrats on yet another contract win. I'm proud of the exceptional results this team has produced in the quarter. As John mentioned, we achieved a Q2 record in revenue, did that while effectively managing resources and controlling costs. The outcome of the solid execution by our 12,000-plus team of railroaders was a Q2 record adjusted operating ratio of 55.3%. The team executed on all fronts with 15% revenue growth, 19% operating income improvement of 170 basis point decrease in EOR, and grew adjusted diluted EPS 27%. Looking at the results, you'll note that we have adjusted a total of $308 million in costs related to the KCS transaction, $99 million from PS&O, and $209 million below the line in other expense. I will speak to the adjusted results today. Taking a closer look at a few items on the expense side, I'll speak to the results on a currency adjusted basis. Comp and benefits expense was up 13% or $44 million versus last year. The primary driver of the increase was higher volumes and increased training costs in support of the improved demand environment. Recalling Q2 last year, we were furloughing employees, so most training expenses were on hold. Headcount was up 6% in the quarter as we successfully bring on resources to accommodate the improved demand environment. Fuel expense increased 98 million or 82% primarily as a result of higher fuel prices and increased volume. The lag in timing of recoveries in our fuel surcharge program was an $18 million headwind in the quarter. Equipment rents was down $2 million, or 7%, as efficiency improvements more than offset increases in rent expense from automotive contract wins. Depreciation expense was $200 million, an increase of 6% as a result of a higher asset base. Purchase services was $256 million, adjusted for the acquisition costs. an increase of $3 million or 1%. The main driver of the increase was the increase in volume. Moving below the line, as expected, other components of net periodic benefit recovery was up $10 million, reflecting lower interest costs related to a decrease in the discount rates. Income tax expense increased $68 million or 36%, primarily as a result of higher taxable income, partially offset by a lower effective tax rate. Rounding out the income statement, adjusted diluted EPS grew 27% to $1.03 in the quarter. A reminder, we executed a 5-to-1 share split in the quarter. Moving on to free cash to wrap things up, we generated very strong cash flow in the first half of 2021, with cash from ops excluding the termination fee increasing by 28%. Our balance sheet and liquidity remains very well positioned with leverage of just 2.0 times adjusted net debt to adjusted EBITDA at the bottom of our targeted range. We have repaid all of our commercial paper and our credit facilities remain undrawn while our share buyback program remains paused. We currently have approximately $900 million in cash, which is available to return to shareholders through buybacks, dividends, or strategic options. We continue to reinvest in the railroad and are on track to meet our $1.55 billion guided capex spend for 2021. We remain disciplined stewards of capital with our industry-leading adjusted ROIC of 16.7%. I spoke last year about the improvements in our capital efficiency and how we proactively increased our capital spend to take advantage of the softer volume environment during the height of the pandemic, which in hindsight, has laid the foundation to support our safety and growth agenda. I'm proud to say we've continued to build on the efficiency gains we established last year. Our year-to-date per unit cost of rail ties is down 7% versus last year and down 10% versus our three-year average. I'm proud of the team and culture we have at CP, where the team will meet challenges like the pandemic head-on and look for ways to turn them into opportunities, and then we build on those gains. It's a relentless drive to find efficiencies, to do better, to generate value. So while the start of Q3 has had some challenges, the network has recovered well and we see a clear path forward. We have a strong demand environment and the team in place to manage resources, control costs, and ultimately deliver for all stakeholders, the communities we operate in, customers, and our shareholders. With that, I'll turn it back over to Keith to wrap things up.
spk07: Okay, thanks, Nadim and John, for that color. You know, to sum it up, volumes came in strong against 2020, but also very importantly, John made this point, uniquely exceeded our 2019 volumes, and the team brought it to the bottom line, driving operating income growth, earnings growth, and margin improvement safer than ever before. It has set us up well to close out a very strong 2021, enjoying a very strong demand environment, which we see continuing well into 2022 and partnership with our self-help initiatives, you can continue to expect to see outperformance by this team at Canadian Pacific. So with that, let me open it up to the operator for questions and commentaries.
spk01: Thank you, sir. If you would like to ask a question, simply press star then number one on your telephone keypad. And if you would like to withdraw your question, press star then the number two. As previously highlighted, please limit your questions to one. There will be a brief pause while we compile the Q&A roster. Thank you for your patience. And your first question will be from John Chappell at Evercore ISI. Please go ahead, John.
spk02: Thank you. Good afternoon, everybody.
spk07: Hey, good afternoon.
spk02: Keith, you've been pretty... passionate about the merger activity thus far this year. And, you know, maybe you've said everything you want to say, and it's in the STV's hands at this point. But I would have thought maybe with the executive order earlier this month and the house transportation letter that you guys published earlier this week, you might have been even more emboldened with some updates there. So maybe you can just kind of catch us up to speed on what you're thinking, you know, post some of those important letters that have been posted. and how you think things proceed from here.
spk07: Well, thanks. You know, I can tell you my conviction about the beliefs of and the strengths of the proposal that we successfully negotiated with KCS initially has not changed, has not wavered at all. In fact, it's grown stronger. The facts are very compelling. It's the only class one combination that presents Pro-service, pro-competition, pro-growth, new lanes. Essentially, it's all winners. There's zero overlap. There's no losers. There's no debits and credits. It's not about trying to suggest that you enhance. It's about preserving and enhancing. So it's very unique in the facts. And with that said, you know, we think that, obviously, those facts are being weighed on. Obviously, it's in the SBB's hands. We expect a decision. in the coming weeks, and we stand ready to re-engage with the KCS. We're gratified by the outpouring of support that our deal, even not signed up, still continues to garner. We've got over 1,050 support letters, and yes, CN has support letters too. I think their number is over 1,750, which they have proudly communicated. However, they've forgotten that there's also over 340 opposition letters to their combination. Customers, Amtrak, NITLE, TFI, ACC, labor unions, certainly not just what has been discussed this week. But with all that being said, you think about the executive order, how does that affect our beliefs and the way we look at this? I can say this overall, we're not fans of more regulation. I'm not going to suggest that. We think competition is the best way to assure good outcomes for our customers and for the North American economy. But with regard to the specific executive order, we think that, in fact, it emphasizes the importance of competition. It emphasizes the importance of Amtrak access, both of which are unique facts speak well to, without the need for the SDB to enforce through any new promises. So we think that proves and sits well for our proposed combination. And I think in reading and listening to the statement Chairman Oberman spoke to, and I believe even CM perhaps spoke to it last week. Consolidation can be beneficial under certain circumstances. We firmly believe that our facts satisfies and compliments those certain circumstances where consolidation can be beneficial. So again, we feel very strongly about this. Ultimately, you know, it's up to the STB. It's in their capable hands. And I'll finish where I started. We stand ready to engage, re-engage with the KCS should the SCB rule in opposition to the Canadian Nationals Trust. So we'll see where it goes. We're in a wait-and-see just like everyone else.
spk02: Got it. Thank you, Keith.
spk07: Hopefully that addresses the question.
spk02: It does. Thank you.
spk01: Thank you. Next question will be from Fadi Shamoon at BMO Capital Markets. Please go ahead.
spk10: Good evening. Thank you. Keith, I mean, you've laid out quarter after quarter here, very compelling kind of organic growth story for CP and you continue to execute on that front. But just wanted to get your thoughts. If the M&A pass becomes harder for whatever reason, and thinking kind of three, five, 10 years out, what are the levers? What are the things that CP can do to kind of stimulate the growth story for CP on a long-term basis? Are there things that you can do as peers in the industry as far as commercial agreements go or a marketing strategy that could kind of enhance your access to markets and enable you to kind of produce that kind of gross outcome longer term that would have come in an M&A transaction?
spk07: Yeah, let me, you know, Patty, you're right in target with the line of thinking. Let me start, though, in our own backyard. We still have over 1,000 acres of development land currency, so to speak, across our network, which is very unique in our competitive space. It has been table stakes for For our success, it's been part of our strategy. If I take you back to our investor day three years ago, four years ago, the time's flying by. So there's still several opportunities for self-help initiatives, be it CMQ property, build that out, be it build out capacity in the Chicago Gateway, be it build out additional land assets in Vancouver. So there's still many chapters left of that growth story that in and of itself is going to drive organic growth that's unique, we believe, to the industry at Canadian Pacific. When you think about replicating M&A, obviously, I don't need to speak to the attributes of, you know, the unique opportunity that a combination would create for us with KCS. We've spoken enough about that. But in the absence of that, Patty, I think with our unique origin strengths, our unique assets, access to some of those markets, shortest length of haul, in partnership perhaps with marketing alliances like With the Western rails, you can make a case to different markets for both and even some of the markets east of the Mississippi as well. So we'll continue to look at those opportunities. We've never been bashful about doing what's best for the customer to try to create new supply chain solutions. Obviously, if we can give them the origin and give them the destination, we can do it controlling our own destiny and controlling the product the best. outcome, but in the absence of that opportunity, we're certainly going to leverage the way we run the railway, the origins and strengths, the shortest length of power to the markets to get into some of these additional growth markets that M&A would allow, and again, leverage it with our unique capacity at our terminals, be it in Chicago, be it in Toronto, be it in Montreal, be it in Calgary, be it in Winnipeg, be it in Vancouver. We have a very unique opportunity, unlike anybody else in this industry, to enable that. So again, priority one, we think the best outcome comes through M&A, but in the absence of M&A, we're going to make the best, and I think do better than the balance of the industry with a very unique outcome.
spk10: Okay, great. Thank you.
spk07: Thank you, Bonnie.
spk01: Thank you. Your next question is from Allison Landry at Credit Suisse. Please go ahead.
spk00: Thanks, Catherine, and I appreciate you taking my question. So, Keith, I mean, obviously, CP has set what's arguably a new bar for what the industry can achieve from an OR perspective, especially seeing the 55 in Q2. Granted, that's just one quarter, but could you address how much further to improve you have in terms of the productivity metrics, train length, weight, fuel efficiency, and what that may tell us about the trajectory of the long-term OR, and maybe just, if I could ask that in a different way, if this is a better way, since you do have a demonstrated track record for growth, is there a point where you think the OR bottoms out and the focus then shifts to growing EBIT dollars and improving ROIC?
spk07: Well, let me start with the ROIC. We've got the best in the industry, so I'm pretty proud of where it's at. I think it's at a healthy place. Again, I think if you get fixated too strongly on any one particular number, you don't optimize all numbers. And then I'll go back to the operating ratio. We don't have a focus on the operating ratio. It's a natural outcome of running the business the proper way. When you bring on sustainable, profitable growth, that's key. You have the assets and the resources properly in place to create a fluid network. You're going to be controlling your costs. That's going to drive your operating income. That's going to drive your earnings growth. And the output out of that is a very impressive operating margin. So we're at industry best. You know, how much further do we have to go? I can tell you now that until we have every train length optimized, we haven't converted all the 8500 foot facilities. We don't have a perfectly organic fleet of high capacity drain cars. We don't have flawless equipment. We don't have Part of our network, if I go to, um, I'll give you a, for instance, it's much better than it was, and it's been a journey of constant improvement, but even for Campotex, you know, if I go back a year and a half ago, we were running 130 car train sets to Portland, uh, with partnership to the UP. That was pre PSR on UP. And that was part of our, you know, part of our evolution. Uh, we're now running 188 car trains to Portland, but that still is not the same as Vancouver where we enjoy. The efficiency of running a 200-car train. So there are gaps all the way across the network as we continue to strategically invest. You should expect us to continue to make incremental improvements in train length, in train weights, in locomotive productivity, in terminal dwell. You know, that's truly what PSR is. It's a continual pursuit of excellence. Yesterday's records become your floor, your benchmarks, and you pursue improvements. You don't accept excuses. You create constructive tension. You have a list of opportunity areas. You have a, in simple terms, a top 10 list. And once you accomplish those top 10, then guess what? You've got another list of 10. So it's an imperfect science. It's an outdoor sport. You're never going to fully get perfection. It's just a constant pursuit of that and an ability to understand how to manage the business flows. how to manage it when the business goes down, when you go into a pandemic, how to adjust resources, and how do you adjust those resources so that you're positioned well when the rebound comes so that you can avoid some of the lumpiness and some of the challenges that, quite frankly, until you have gone through those cycles and truly understand how to manage it as well coming up as you down and vice versa, you can't have the kind of results that CP is producing. So again, it's work in progress. We're going to remain humble. We're going to continue to work hard. We're going to identify opportunities. We're going to invest in our people to develop the culture. We're going to invest in our process and our technology. And at the end of the day, you'll see continued improvement, I believe, on margins. I believe bringing it to the bottom line and, to your point, driving pretty impressive earnings growth As a result, I just think it's a recipe for success. It's a gift that keeps on giving. If you truly know how to run a PSL railroad, you can satisfy the shareholder in a very unique way. You can satisfy the customer, and you can do it in a safe and efficient manner day in and day out. It's just the recipe for how to run a railway successfully.
spk00: Thank you.
spk07: Thank you.
spk01: And your next question will be from Chris Weatherby at Citi. Please go ahead.
spk13: Hey, thanks. Good afternoon. You know, maybe if I could ask you to sort of take that answer and then pull it down into maybe the second half of the year and maybe give us a little bit of sense of how you think the potential on OR maybe looked in the back half. Obviously, you've made some great strides in the first half. The comps are a little uneven for you, 3Q versus 4Q, one being a little bit easier than the other. I just want to get a sense maybe what the full-year operating ratio looks like and sort of how that plays in with what's obviously a pretty robust top-line opportunity. It seems like a better pricing environment, but there are some inflationary costs out there. So, put that all together and give us a sense of how the margin opportunity looks in the back half. That'd be great. Thank you.
spk14: Chris, let me take that. Obviously, we're half of the year in. We had a bit of a challenging winter. I think we got some fuel prices which can impact the OR a bit negatively. We've been able to overcome that. We've got the wildfires that we're dealing with and some of the impact that that has in July. But these aren't excuses, I think, to us. You know, you pointed out some of the upside, some of the opportunities. You know, the railroad is never being run so effectively from a casualty and safety point of view. You know, to Keith's remarks and my remarks earlier, you know, continue to find ways to do things more efficiently. Mark Redd and the operating team are an outstanding group of railroaders and And the continuous improvement culture is driving opportunities to offset some of those challenges that present themselves. So to me, you know, our ability, we'd said at the beginning of the year that at least 700 basis point improvement off of 57.1. Not backing off of that. There's probably upside on that. You know, could we do 150 basis point type of improvements? Absolutely. So we're pretty optimistic. bullish on what we can do from a efficiency point of view in the back half of the year.
spk13: Well, thanks very much. Appreciate it. Thanks, Chris.
spk07: Thanks, Chris.
spk01: Next question will be from Tom Wadowitz at UBS. Please go ahead.
spk15: Yeah, good afternoon. I wanted to – I hope you don't mind, but I wanted to ask you one additional question on the M&A stuff. You know, If the SCB, I'll just give you a scenario, see how you respond to it. But, you know, obviously there's a scenario where SCB could reject the voting trust and CN deal with KSU doesn't expire to February. So there could be this kind of period of time where there's uncertainty about, you know, whether what would CN would try to do, but it also might be an obvious period for you to get engaged with KSU again. I'm just wondering if you could talk about your thoughts on the approvals that you achieved, the waiver in the voting trust? Is there an expiration date on those? You know, is time a consideration relative to the, you know, sizable break fees? Or just how do you think about, you know, how quickly you might want to re-engage if the scenario is that, you know, there is a rejection of the voting trust from SCB?
spk07: Tom, that's all, you know, it would be pure speculation on our part to You know, we've been clear on the strength of the facts. Obviously, it depends on what the STD says, and it depends on how they say it and what they're focused on. And, you know, at the end of the day, I guess the best question is to the KCS shareholders. You know, how much risk are they willing to take? So, you know, I think the best way to answer your question is we stand ready to engage. We've got a very compelling value proposition. We've got a path to approval, you know, to deal with certainty. We've got unique facts that are pro-competitive. There's so much uniqueness and strength and value creation in our story. Again, we think it's compelling, but at the end of the day, KCS made a decision to partner with Canadian National. We think Canadian National's facts are not supportive. We think they're bad. We think they're anti-competitive. We've not been bashful about saying it, but at the end of the day, what we think It's just our view and our opinion. Ultimately, the SDB is the regulator, and the SDB certainly holds the authority and has the experience, and I feel will make a decision. And when they do, we'll assess it. And again, it's going to be up to the KCS shareholders. You know, should they not allow it, it's going to be the question to be answered is how much risk is the KCS shareholder willing to take? Maybe if I just. Open a window for us. We'll see.
spk15: Maybe if I could just narrow it a little bit to give you a better chance to respond. Do you think there's any kind of risk the further time goes out that SCB would come back and say your waiver and your voting trust approval have expired? Or is your understanding that, you know, they're as good in a year as they were, you know, when they were originally granted?
spk07: Our facts haven't changed. Now, again, I'd be speculating because there's no precedence in this, Tom. So it's just my guess and my view is. based on the facts, our facts which uniquely allowed us to be granted the trust under the old rules, uniquely allowed us to be granted the old rule consideration. As long as those facts don't change, and they don't, it's pro-competitive, it's end-to-end, for all those reasons, I would only assume that we'd get the same consideration. But again, there's not a precedence, and I don't want to get ahead of my skis here. Ultimately, the SDB is the decision maker. But I do believe our facts are compelling, and I would suggest or assume that we get the same consideration.
spk15: Sure. Okay. Thanks for entertaining the question. Appreciate it.
spk07: Thank you, Tom.
spk01: Next question will be from Brian Assenbeck at JP Morgan. Please go ahead.
spk06: Hi. Good afternoon. Thanks for taking the question. I wanted to switch over to the end markets for a minute. Obviously, it's been quite a few challenges on the network, as we've talked about earlier. But you're still reiterating the guidance for double-digit EPS growth. I'm assuming that still has the high-simple-digit RTMs in there. So maybe, John, you can just walk us through where you feel more convinced in terms of hitting that target, where you expect to see some growth. I know you gave us a few commentaries before. But maybe you could put a finer point on that and kind of what underscores the confidence. And then separately, just how you feel about staffing up and resourcing to that level of growth. Thank you.
spk16: All right, Brian. So, yeah, definitely standing by strongly our guidance of double-digit RTMs. I can tell you that first half of 21, as everybody's seen, it feels like we've been through dog's breakfast of issues, cold snaps, chip shortages, mine outages, fires, supply chain disruptions, strong demand, and now droughts, and we've delivered. And, frankly, as I look across... all of our business units. Maybe grain being a little bit uncertainty around the drought, but my experience in the grain side of the business is as you approach harvest and you get into harvest, we're going to see probably pricing moderate and farmers wanting to monetize their success and what they have produced on the crop will produce a strong push during harvest. So I feel confident that's going to give us a strong grain book towards the end of the year. As I said, I see no change in the consumer side of our business in terms of the domestic intermodal. We've set records. We're going to continue to set records. Our retailers are strong. Our reefer business is growing strongly. The international side of the business is there for the taking. I think all the things that The other roads have talked about, you know, we've felt some of those pressures, but I also think we're going to not only catch a tailwind in that space as some of those things improve as we move through the back half of the year. You couple that with our market wins, and I see a significant upside in our international business. Frankly, I see upsides. If you think about all the challenges the U.S. ports have had and some of the challenges into Chicago, you know, we're open for business in Vancouver and St. John. You know, we've taken a few additional add-to-plan vessels at those ports to feed the Chicago market, as others have had challenges. And I can see some of those opportunities continuing into the back half of the year. You know, we're blessed by an automotive book. that makes up the mix of the automotive products that our OEMs produce are strong. They're the top-selling vehicles. So they're getting, I think, in most of those companies' areas, they're getting the chips versus maybe other models aren't. So not that we won't face challenges in the auto space, but I continue to feel very strong in that area. We've got potash upside. We've got makeup from the from the fires and the coal. So, and frankly, I don't see the forest products and steel business slowing down either, Brian. So, you know, I'm completely bullish. We could use a little luck in some of these supply chain issues, but if we don't get it, we'll continue to make our luck. Oh, and then second part on resourcing. Yes.
spk06: Yeah, I don't know about resources given all that.
spk16: Yeah, yeah. You know, maybe I'll say it this way and Keith might want to add, but frankly, we've built this railroad with the capacity to bring on business. We do it in a lockstep way. You know, my team's constantly tied to hip to Mike Foran and Mark Red on understanding those flows. So, frankly, I don't have concerns. And as I said, we're actually – chasing some opportunities that we see in the intermodal spaces because we have the capacity.
spk07: Yeah, I would only add on the resources side, there's no concerns at Canadian Pacific. We're ready for the business. We ramped up last year. We had a pandemic. If we think about back in the days when we thought crew was running away and there was a big demand, we pulled forward capital. We've got over 100 locomotives in storage ready to engage as we need. We're fine on Workforce. We did some very unique things back during the pandemic to compensate our employees in a way that we didn't have to do. In fact, to help them get through the pandemic, those that were laid off, we enhanced the benefits and in exchange for that, our employees have stuck with us. They're committed to us and we've not had the same ramp up challenges perhaps that the industry has had. We're in a good place on training and we're prepared for the business. So we're going to work closely with our customers to continue to to bring it on or bring it to the bottom line in a very efficient manner so that we satisfy our customers' needs.
spk06: All right. Thank you, guys.
spk01: Next question will be from Justin Long at Stevens. Please go ahead.
spk03: Thanks. Good afternoon. I wanted to see if you could comment on truckload conversions and how they've trended recently on the network. You've talked a lot about the truckload conversion opportunity related to the merger, but when you just think about the organic opportunity for truckload conversions going forward, any way you can help us think through what that addressable market looks like?
spk16: Yeah, Justin, so maybe a couple comments there. I was working with my team earlier today focusing on a couple of those areas, specific to truck conversion. You know, our major retailers across Canada have felt the trucking pinch similar to what, you know, maybe at a little more intensified pace have faced, the U.S. side has faced. So there's a fair amount of effort there. to look at how we can convert and dive into the book of our major retail companies in Canada to convert those truck options. In particular, a focus on some of the cross-border opportunities. Not only between, say, eastern Canada in the Chicago market, but also looking at how we work with our eastern carriers. NS and CSX, they're very focused on truck conversion and looking at those opportunities to utilize our capacity up into the upper Midwest, up into the Twin Cities markets, and ultimately maybe even into western Canada. So I'm always having a $20 million to $30 million road-to-rail conversion target. For my domestic intermodal team, those are some of the areas that we're focusing on.
spk03: And is there a way to think about the opportunity outside of domestic intermodal as well? If it's $20 million to $30 million there, if you look at merchandise traffic, what would be a reasonable target on that front?
spk16: You know what? I look at specifically, I can tell you, we just converted a significant piece of steel business, I think about $8 million a year, through our new St. Luke transload. Previously business that was trucking, believe it or not, all the way down into Mexico and down into the Minneapolis market. We've converted that to where it will be trucked now into our transload. and railed down to those marketplaces. So it's a little hard to quantify, Justin, big picture, but it's really the foundation of, you know, why we've created these trans loads across our network to go after that type of business. It wouldn't be surprised if it's similar type numbers. Okay, great.
spk03: I appreciate the time.
spk01: Thank you. Next question will be from Scott Group at Wolf Research. Please go ahead.
spk11: Hey, thanks. Keith, I wanted to ask you a question. You referenced the capacity challenges in the industry, and I know you said you're not seeing them, but I'm sure it doesn't help you with respect to your interchange business. And I just want to get your perspective here. What's the fix for the industry? Is it just as simple as more people and more equipment? Does it mean maybe The other rails didn't do PSR in the right way. Just curious your thoughts about how to fix this.
spk07: Yeah, you know, that's a pretty global question. It'd be a very global answer. I think it's different stories, different railways. I mean, I can imagine. Think about the tidal wave of the tsunami of traffic that's came in on the West Coast. You know, if you're a Western rail, to have to digest that all, bringing it in, East and having things out of balance. That's the key here. While we reset in this economy, PSR and no PSR, there's going to be a lot of noise. You've got supply chains that are completely out of sync. You know, I think about our network alone. I think about all the empty moves I've made on intermodal equipment and all the lost revenue because I'm hauling air just to get those containers back to the West Coast ports so they can get back over seas to get the next load to bring the next tsunami. So it's going back and forth. It's like splashing up, you know, water splashing back and forth inside of a big tank. Some of this is inevitable. You know, I think if I look at overall the way the industry has handled this, you know, for the customer experience and the pain of it, I'm not going to suggest that it's pleasant. But at the same time, overall, I think the industry has done well. And if not for PSR, the outcome, I believe, would have been a whole lot worse. given all the additional resources in cars, in congestion, in terminals, that quite frankly we've had to depend upon now having more fluid operations to get a better outcome. So I don't think it's a matter of any of the railroads not doing a good job. I think that PSR is a learning process, obviously. Those of us that have been doing it for 20 years, we've learned a lot. We've learned a lot over the years, and we apply it. We're frankly pretty efficient. Our results speak for themselves. I don't want to pound our chest, but we know how to manage it coming down. We know how to manage it coming up. We know what to look for. And sometimes you just don't know what you don't know. So overall the industry I think has done well. I think the outcome because the PSR is better than it would have been otherwise. What I see the other railroads doing and the hiring that they're doing and the investments that they're making, Once you get some of this choppiness out of the supply chain, I think you're going to see an extremely impressive outcome for the customers and for the industry. So, again, I know for those that have been adversely impacted, it's not an easy answer, and I'm not going to minimize that. But at the same time, we trust this process. We go through it, and you're going to see, as we all get better at doing this across the industry, a much improved outcome.
spk11: Thanks for the thoughts.
spk07: Thank you, Scott.
spk01: Next question comes from Stephen Hansen at Raymond James. Please go ahead.
spk04: Yeah, good afternoon, guys. Just a quick one for me is in relation to the grain side again. John, I know you've already spoken to it to some degree, but I'm just trying to get a sense for how you think that grain move starts off. We've obviously got a dry period. We're calming up against a dry period. and early harvest last year as well. But you still think that the back half can be quite strong as the farmers move the product they do have. I guess we'll see the derivative benefit, the derivative hit in the 2022, I guess, is the way to think about it.
spk16: I think that's the right way to think about it, Steve. You know, obviously we're staying super close to our customers. There's no doubt yields are going to be impacted by this. You know, it frankly could be a pretty strong sort of quality crop in terms of proteins and different things, which will bring some uniqueness in terms of maybe needing to blend in some different movements. But I think the message we're getting is that the peak will be as close as normal as we've seen in recent years, and then the impact will be more in 2020. 22, depending on what the total size ends up being. I think the other thing to keep in mind is we're going to see some unique movements. The U.S. has some deficits in some areas where I think it's going to present actually the Canadian farmer and producer some good pricing opportunities right out of the chute to to feed the U.S. markets. So we're doing the things we need to do to be nimble to be able to handle this crop once it starts up here. Okay, very helpful. Appreciate the time. Yep.
spk01: Next question will be from Jason Seidel at Cohen. Please go ahead.
spk17: Thank you, Arvinder, Keith, and team. Appreciate the time. As we look in the 22, a lot of companies are starting to say, hey, we see strength out into the year. Could you talk a little bit on the intermodal side that you mentioned about restocking? How long do you think that's going to continue, and what are your customers telling you in terms of where they want to get their stock back to? Is it back to prior levels, or are we looking at even going beyond that because people are rethinking the supply chain?
spk16: Well, I can start, Jason. Actually, Keith and I just met with a major international shipper last week, And they were extremely bullish that this is going to push right on into 2022 and probably be the better part of the whole year. They were quite bullish on the contracting opportunity that they see sort of the, you know, the demand profile and, frankly, some of the challenges that continue at the overseas ports continuing and that just creating this longer and longer tail. They had recently met with a number of their big BCO retailers, and that was the exact same sediment. This has really pushed itself. A couple months ago, I would have said just right past maybe the Chinese New Year, and now the sediment is this is likely to push well through 2022.
spk17: And just for clarification, was this an immortal shipper that you met with?
spk16: It was, yes.
spk17: Okay, perfect. That's great, Collar. Appreciate the time. Nice quarter. Thank you.
spk01: Next question comes from Konat Gupta at Scotiabank. Please go ahead.
spk08: Thanks, operator. Good afternoon, everyone. I just wanted to dig into the pricing and mix. So you guys mentioned pricing mix was combined, I think, 8%. Seems like very good support from Mix as well. But just kind of looking ahead, how do you see or what kind of visibility you have on same-store pricing, given the supply chain being tight here? And then how does Mix evolve over the next couple of quarters with Parash coming back and Green obviously being a little bit volatile in the short term here, as well as DRU starting up? Thanks.
spk16: Yeah, so, you know, I expect – The pricing to remain strong. I now probably sound like a little bit of a broken record here, but we started to see an uptick into what I consider the upper range of our guidance on pricing actually all the way back in Q4. of last year, it accelerated in Q1, and it has hit even stronger levels in Q2. I don't see that changing. Just looking at our book of renewals for Q3, particularly our intermodal and our merchandise carload business at the top end of our high-end range in terms of pricing. On the mix front, It was quite strong here in Q2. I expect it, as you described, as maybe the potash picks up to moderate a little bit, but I do expect mix to remain positive over the next two quarters. And we probably, you know, we're still seeing a little bit of a headwind on FX and fuel combo, and we probably expect that to moderate a little bit as we move through the year, too. So that gives us, I think, a little bit of a tailwind on that front as we think about our sense priority going forward.
spk08: That's great. Thank you.
spk16: Yep.
spk01: Next question comes from Benoit Poirier at Desjardins. Please go ahead.
spk09: Yep, thanks for taking my question. It's actually Jeff on behalf of Panama. So I just wanted to come back on the contract with Costco and W OCL. Congratulations for this new one. Could you provide a bit more details about the timing and kind of the seasonality of this contract, please? Thank you very much.
spk16: Yeah, so the contract actually starts up immediately. We're actually seeing some freight convert over to our rail lines this week, and I expect it to ramp up through August. And we should be at a full run rate at some point here in Q3. um you know it's a it's a partnership that that just flat out works it uh we've got good capacity coming from the south shore um this will allow us to to use that train capacity um and and frankly takes our share at our center terminal which is on the south shore which we serve um up to over 50 percent and and why that matters Is the Marist business, a lot of that will flow through Centerm. This Costco OOCL business will run through for that terminal also. And it allows us to begin to really leverage and build direct trains out of there into not only eastern Canada, but also the Chicago market. So we're quite excited about the service product. that we're able to provide Costco, OOCL, Maersk, and our other customers coming out of that terminal.
spk09: Thank you very much. Congrats again.
spk16: All right. Thank you.
spk01: Next question comes from Brandon Oblensky at Barclays. Please go ahead.
spk05: Hey, guys. Good afternoon, and sorry I got disconnected, so I hope I'm not being repetitive with my questioning here. But Keith, you know, I think in response to earlier, you were talking about how, you know, marketing alliances with other North American carriers could help, you know, drive further organic growth for CP. I guess, you know, maybe this question is to John as well, but do you guys, you know, really look beyond your network for the next five to 10 years of growth? Or do you think some of these organic opportunities you guys have been driving the past, you know, three to five years can continue well down the road here?
spk16: I can start, Brandon, John. So, Two things. One is Keith nailed it on the head earlier when he said our land capacity has, you know, something we talked about previously. It's a currency that can continue to provide growth on this network as I look ahead. And you combine, I think, that with the ability to convert the truck business. You know, there's, I think, an extensive focus particularly in the U.S. with U.S. roads, to look at how they can bring more to the rail. And I think the opportunity, if you think about alliances and other marketing partnerships, as Keith spoke to, is how we take that inner line rail move and make it truck competitive. A lot of the opportunities we always talk about, are focused on just maybe our long haul single line shipments. But if you really think about as more and more PSR evolves on the U.S. roads, you get more like-mindedness in terms of opportunities and service. how can you combine networks to really drive, you know, that truck conversion? So, you know, look, it's a combination. We're constantly looking at what we got to do with our own network and where those opportunities are and how we use our land. But also you begin to think about, well, you know, if M&A doesn't happen, you know, what are these areas that you can create this seamless model to potentially better service, you know, those truck markets?
spk07: Thank you. Well said, sir. Thank you.
spk01: We are now out of time. I will turn the call back over to Mr. Keith Creel. Please go ahead, sir.
spk07: Okay. Well, let me wrap up with where I started, thinking everyone should join us today to go through our results. Certainly extremely proud of this team's execution during the quarter, but even more excited about the balance of the year. We're going to finish 2021 strong, meet. expectations meet or exceed guidance and carry that momentum into a strong 2022 looking forward. We look forward to sharing our third quarter results soon. Have a safe and productive day.
spk01: Thank you. This concludes today's conference. You may now disconnect your lines.
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