Canadian Pacific Kansas City Limited

Good afternoon. My name is Gretchen and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's third quarter 2022 conference call. The slides accompanying today's call are available at investor.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'd like to ask a question, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to introduce Chris DeBrun, Managing Director, Investor Relations and Treasury, to begin the conference.

Thank you, Gretchen. 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 3. With me here today is Keith Creel, our President and Chief Executive Officer, John Brooks, our Executive Vice President and Chief Marketing Officer, and Megan Albiston, our Vice President, Capital Markets, who is standing in for Nadim. 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. All right.

Thanks, Chris. Listen, before I get into the results, as Chris mentioned, and I'm sure you'll notice, Nadine's not with us here today, but he sends his best from Boston where he's attending a program at Harvard, which obviously is a part of our commitment at CP to invest in our most precious assets, which are our people. And I'll tell you, I've always felt that the measure of the impact of a leader is felt best when he's not around or she's not around for a prescribed period of time. I'm sure that he's proud to see the great job that Megan, Ian, and Chris are doing in his absence. It certainly reflects well for him. Some might suggest, how in the world could Nadine be at Harvard in these times that we're facing? I would suggest there's never been a better time in this lull before what we hope is an expected ramp-up as we get into what we expect to be and hope to be a favorable ruling from the SDB. He'll be back, finish the course, I think, end of this month. After that, though, don't tell him. He may not know this yet, but he's going to be out on trains in the coldest of winters learning a bit more about the operation. I know that he's going to step into that and be a better railroader as a result of that. So we'll get him back in the saddle, I would suggest, end of January, just in time for funner times ahead. Now to our results. I want to start with a special thank you to Mark Redd, the operating team, and our 13,000 railroaders that continue to evolve our safety culture, allowing our more folks every day to go home safe. Their efforts in the quarter produced a remarkable 76% reduction in our train accident ratio to an all-time record low of a .37 FSU and equally impressive performance on the personal injury side with a reduction of 12% year-over-year to a .86 personal injury ratio. On the financial side, Second quarter revenues of $2.3 billion, an OR, offering ratio of 58.7, and core EPS of $1.01. Speaking to the metrics, on the operating side, with 6.2% of RTM growth, the network remained fluid, no degradation to train speed, weights increased, which spells productivity. Lengths increased, respectively, 3% and 4%. Cruise starts in spite of 6.2% additional business a modest 1.5% increase, and even crew recruits improved as well year over year. So the railway is running well, it's running safe, and that's the key to our success is you run a truly successful precision scheduled operating model. On the resourcing side, we said all along this is going to be a tell the two halves. We've ramped up our hiring to make sure that we're resourced properly for this great grain harvest that we're about to be taking to Tidewater. We're certainly, you'll see it in the numbers in the third quarter. The largest demand, though, obviously coming into the fourth quarter. We've hired about 1,500 conductors year-to-date, all in about 2,000 craft employees. We're investing in our physical plant. We're accelerating some capital into this year, again, to make sure our physical plant is ready for future opportunities in 2023. So suffice it to say, overall, we're in excellent shape from a resource standpoint. The network is ready and willing and able to handle this this very encouraging grain crop as well as the strong demand in potash and intermodal that John and his team are winning and bringing to the operating team to convert day in and day out. Let's say a couple of words on the CPKC transaction. Obviously, it's been pretty exciting the last couple of weeks, last month. You know, I'm extremely pleased that I had the opportunity to personally sit in through the public hearings in Washington, D.C. John and I were there, obviously Pat, as well as John Orr and our regulatory team, James Clements. It was a pleasure to be able to lay out in detail our facts and our very compelling truth-based case on this very transformational merger that we're pursuing. You know, some have suggested in some of the readings and maybe some of the talks that I've had that the hearings stretch out certainly longer than they expected. And I'll tell you, I've said this to the SDB, and I'll say this publicly now, I applaud the the seriousness and the thoroughness in which the SDB handled these hearings. I know for certain they take their job seriously. They want to make sure that the facts are heard and make sure they get this right. And I can tell you that was a fair process that allowed all parties a fair chance to share their facts, to share their perceptions of what they believe to be true, as well as anything they had to say positive or against the transaction. And I'll tell you, having listened to all the testimony, I'm never more convinced that about the benefits this merger will create for all stakeholders, for the public interest, for our employees, for our economies of these three nations, for our customers, for the environment. Check all the boxes. You know, perfect is a high stand, but I tell you, this is an ideal merger and a very unique way, unlike any in the rail industry's history in the past or in the future. So in terms of next steps, as we all know, we filed our final brief. All parties did this past Friday. We continue to anticipate a decision sometime in the first quarter of 2023. So with that said, let me turn it over to John. I'll let him provide a bit of color on the business and then Megan to cover the numbers, and then we'll transition to taking your questions.

All right. Thank you, Keith, and good afternoon, everyone. So let me start by saying I'd say overall the quarter played out much like we expected. Looking at the results, as Keith mentioned, revenues were up 19% on the quarter, volumes were up 6%, and FX in fuel provided us about a 13% tailwind. The pricing environment, as we'll talk about I'm sure more, continues to be very strong. Contract renewals for us in Q3 trended toward the high single digits. I'll take a look at the second quarter results now, and I'll speak through the results on a currency-adjusted basis. So let's start with grain. Grain volumes were down 2% on the quarter, while revenues were up about 9%. We saw this year's grain harvest really start to begin the last couple weeks of the quarter, and volumes have quickly now ramped up as we move into Q4. The most recent expectation for the Canadian grain crop size is around 75 million metric tons. This would make it a top five all-time crop and about 7% better than the five-year average. This comes at a great time, certainly following a lot of investment into the supply chain by not only Canadian Pacific but many of our grain partners. This will be the first year we have a critical mass of our new high-capacity grain carts. As you recall, back in 2018, we announced a multi-year plan to purchase 5,900 new high-capacity grain cars, and we're going to receive the last little bunch of those later this year. So if you look at that investment, we are seeing on average about a 5% lift in our loaded tons per car. And by the end of this year, I can tell you we'll have over 50% of our origin elevators capable to load 8,500 feet. As grain typically makes up about 20% of our book of business, as I look ahead, we are well positioned for strong performance across our grain network on both sides of the border. On the potash front, we had a record third quarter with volumes of 31% while revenues were up 48%. Although the record pace has slowed some as we've moved into Q4, the long-term outlook for potash remains extremely strong, and we continue to work closely with our partners to drive more resiliency and efficiency into this supply chain. And to close out the bulk business, coal revenues were down 2%, while volumes were down 11%. An outage at Tech's Elk View Mine in September has impacted our volumes on the quarter and is expected to remain a slight headwind as we move into November. On the merchandise front, the energy, chemicals, and plastics portfolio saw revenues decrease 10% while volumes were down 1%. The decline in ECP was driven by less conventional crude by rail partially being offset by increased volumes of our DRU crude. I'm extremely pleased with how this non-hazardous pipeline competitive product is performing. This unique product now accounts for nearly two-thirds of our crude by rail business, providing stability in this historically volatile business segment. The third quarter also saw IPL begin to ship from their newly built Heartland Petrochemical facility that is single-served by Canadian Pacific. Our partnership with IPL expands CP's plastic service to both export and domestic markets, and this volume growth will be a tailwind for us as you look to Q4 and into 2023. In the forest products line of business, volumes were up 5% while revenues were up 18%. Increased velocity across our lumber network, as well as higher volumes of newsprint and pulp enabled by our CMQ acquisition in close partnership with the Irving companies, drove record Q3 volumes. In MMC, revenues were up 22% and volumes increased 8%, setting an all-time quarterly volume record. Pricing and demand for frac sand remains robust as we continue to see strong drilling activity resulting from higher WTI prices. In automotive, revenues were up 31%, while volumes were up 4% on the quarter. We continue to see pent-up demand in this space and ongoing inventory replenishment. Although the OEMs are making progress on this backlog, vehicles built shy holding at CP origins remains well over 7,000 bins. I'm excited to announce today that CP and Ford Motor Company have again partnered on a long-term contract to expand our relationship in the development of new supply chain solutions. Similar to our strategic development of CP Land to create the Vancouver Auto Compound back in 2019, CP is excited to welcome Ford into our new Chicago Auto Compound located in Bensonville. Additionally, I'm also pleased to announce we are reopening our Edmonton Auto Compound to provide more service options to Ford as our anchor tenant for shipments of trucks and SUVs into this northern Alberta market. Both of these facilities will be open January 1 and will provide new capacity for over 200,000 VINs in these marketplaces. Finally, on the intermodal side, quarterly volumes were up 18% while revenue was up 44%, both all-time records. International volumes were up more than 30% in the quarter as our strong service, capacity, and CMQ acquisition continued to drive growth. domestic intermodal continued to be strong as we saw good growth with our anchor customers and continued strong renewal pricing. With our market share wins and expansions underway at the Port of St. John, I expect our intermodal franchise to have a strong finish to the year. So let me close these remarks by saying, as I look towards the remainder of 2022, With the new business we have brought on over the course of the year, of course, with this strong Canadian grain cost, we are on pace to deliver double-digit RTM growth, the back half, and volume growth for the year. As I look further ahead into 2023, while we are all still watching the broader macro environment, my team is staying close to the customers and our operating team and will navigate any changes appropriately. We remain laser-focused on executing our playbook and making our own luck through delivering our unique self-help initiatives. As you think about it, with our strong bulk franchise, a pipeline of new growth opportunities, and CPKC only gaining momentum, we believe we have a truly unique position as you look to 2023. So with that, I'll pass it over to Megan for her remarks.

Thanks, John, and good afternoon. I'm pleased to be standing in for Nadeem today and to speak to the results that the CP team has produced this quarter. Looking at the quarter, the adjusted operating ratio came in at 58.7%, a point better sequentially and 70 basis points better year over year. Taking a closer look at the expense side, I'll speak to the variances on an FX adjusted basis. Comp and benefits was up 2% or $8 million versus last year. The primary drivers of the increase were higher volumes and training costs, as well as general wage inflation. I would note on a sequential basis, stock-based compensation was a $19 million headwind. You'll also note average headcount was up quarter over quarter by an additional 4% as we continued to resource up for the fourth quarter. Fuel expense increased $153 million, or 75%, primarily as a result of higher fuel prices, which were up 60% versus last year. Materials expense was up 29%, or $15 million, due to higher non-locomotive fuel costs, as well as higher locomotive and track maintenance-related expenses. Depreciation expense was $213 million, an increase of $8 million, as a result of a higher asset base. And purchase services and other was $294 million after adjusting for acquisition costs, an increase of $2 million. Moving below the line, equity pickup from KCS was $221 million on a GAAP basis, or $275 million after adjusting for KCS's acquisition-related costs and the impact of purchase accounting. Other components of net periodic benefit recovery increased $7 million, reflecting a higher discount rate compared to 2021. Net interest expense was up $62 million versus last year as a result of higher debt to fund the KCS acquisition in Q4 of 2021. Income tax expense increased $27 million, or 16%, excluding KCS-related items and a one-time deferred tax recovery, the effective tax rate was 24.25% on the quarter. Rounding out our income statement, core adjusted EPS was $1.01, up 15% in the quarter. Core adjusted net income was up 60%, partially offset by a higher share count year over year. On the free cash side, you'll see we received a $200 million US dollar dividend from KCS in the third quarter. To date, CP has received a total of $465 million US in dividend payments from KCS. Both CP and KCS continue to reinvest in their respective businesses. As we prepare for the growth, we expect to be able to deliver upon a favorable ruling from the STB. Beyond what is needed, By the business, we're using our free cash to pay down debt. Year-to-date, we've repaid nearly $1.2 billion Canadian in debt and have several maturities coming due in early 2023. With 100% of our term debt at a fixed rate and with no near-term financing requirements, we're on a strong path to return to our target leverage of 2.5 times net debt to EBITDA. With that, I'll turn things back over to Keith to wrap things up.

Thanks, John and Megan. Surmise it all to say the bottom line, CP is in an excellent position to execute a very strong fourth quarter and carry ourselves into 2023 with tremendous momentum into an opportunity-rich environment that represents, I think, an industry-unique, strong value creation story in 2023 and beyond. So with that, Operator, let's stop our comments and open up for Q&A.

Thank you. If you'd 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 the pound key. As previously highlighted, please limit yourself to one question. The first question comes from Chris in Weatherby City. Please go ahead.

Thanks. Good afternoon. Good afternoon, guys. Hey, Chris. Maybe if I could start a little shorter term and think about the sort of cadence for the back part of the year. So in particular, the fourth quarter, I guess the RTM acceleration is happening to get as double as your RTMs in the second half. How should we think about the operating ratio improvement? You've made some improvement from 2Q to 3Q. Should we expect a significant amount more improvement as we get into the fourth quarter? I just want to get a sense of how we should think about the cost scaling as RTMs ramp up.

Yeah, Chris, fair question. You know, I'd say that we're certainly on track in terms of our OR progression. We talked last quarter about being in, I think it was the high mid-50s from an OR perspective, and we remain convicted in that view. So you will see further sequential improvement on the operating front as we get into the fourth quarter and continue to see volumes ramp and that operating leverage flow through.

Yeah, you should see an exit rate in the mid-50s, Chris.

Okay. Okay. That's helpful. Thank you.

And our next question comes from Shadi. I'm sorry. Our next question comes from Fadi Shamoon from BMO Capital Markets.

Okay. Thanks. Good afternoon. I'm curious if you can kind of, you know, dig maybe a little deeper into some of the comments you provided about 2023. I guess, you know, you have a lot of strategic business wins and specific opportunities, I guess, and a big grain crop. But what does 2023 look like to you? you know, based on what we know right now. I know the economy is a little bit all over the place, but can you grow volume? Can you kind of give us framework how we should think about 2023 for you from a volume perspective, given all these kind of help?

Yeah, let me take a first run at that, and I'll ask John to provide a little color. And, you know, unfortunately, I'm not in a position to give guidance, but I can say this. We're set up well for the first half. Obviously, From a comp standpoint, you know, grain versus last year, potash strong versus last year, Port of St. John coming on for the first half. You know, we didn't have that. IPL is online now. So the first half, I think we're in a really good position. And then you get in the second half, some of that carries into the second half, obviously. But then you start layering on these new market wins. You start laying on these self-help initiatives. You start laying on with a favorable STB decision, some pretty exciting synergy there. storylines and fact points that obviously we're not in a position to discuss yet, but rest assured it's going to be exciting. So, John, if you want to – but, you know, bottom line, before John speaks, I'll say all things being equal, you should certainly expect volume growth in 2023 at a pretty exciting level.

I will echo that. That's the last part I was going to add. We fully expect volume growth. Obviously, we're watching the macro environment closely, but I'd say so far we've been able to buck a number of those trends. Others speaking about declines in international and refined products, we've seen some acceleration in some of those areas and trends. And not that over time the macro won't impact some of that, but, again, some of these initiatives that we've been talking about for quite some time continue to sort of propel our volumes as we move, you know, into 2023. And, you know, just building a little bit on CPKC, and, again, assuming we get the favorable response from the STB, I've talked a lot about just, how that propels not only opportunities for the new railroad, but how it even makes some of those conversations and opportunities different with our existing franchise. And, you know, part of that, just look at the announcement of these two new auto compounds. We've talked about Bensonville for a while. Edmonton's going to play an important part in our future also. And so that in itself in 2023 is a pretty big opportunity for this company.

Yeah, I think – let me add a bit more color, Fadi, just to put things in context. You know, you're thinking about a world where a lot of shippers – not all, but I'd suggest most – have experienced supply chain constraints. Obviously, there's been a unique demand environment that perhaps doesn't sustain itself, but I'll tell you there's lessons learned in every crisis that you go through. And, you know, having new alternatives, new choices, not putting all your eggs in one basket, diversifying – These supply chains that we're going to be creating with the power of this combination, if it's approved by the STB, you know, when I say transformational, they're unique, end-to-end, single-line opportunities that simply don't just allow us to be competitive. I would suggest that supply chains need the resiliency, never more so than before, and that this solution, this combination, creates a whole lot of solutions to a lot of the shippers' problems in our nation that they've experienced. And we're excited to get into the solutions Providing business, that's exactly what we're focused on, and that's exactly what we're going to do with this larger-scale network pending the STB's approval to serve the public interest.

Great. Just one follow-up on this. On the automotive opportunity you talked about with Chicago and Edmonton, this is a new Ford business coming on CP starting January. Did I get that right?

Yeah, that's correct. It's new organic growth.

Okay, thank you.

Thank you, Patty. Thank you, Patty.

Our next question comes from John Chappell from Evercore ISI.

Thank you. Megan, I don't know if you're best to answer this. When we look at the KCS contribution in the third quarter, it's effectively flat from the second quarter, despite the fact that their volumes, car loads were really strong. I see in your appendix here that their OR actually deteriorated. Is there any information you can give us as what was happening there? Was that a cost issue? Was that a pricing issue mix? Any info as to why they had some OR deterioration while you and the Core CP network did so well in the third quarter?

Yeah, so I'll let Ashley and Mike speak to KCS's results. You know, having looked at the numbers like you have, the one thing that I would highlight is that they did have a a $9 million prior period adjustment related to the labor agreements embedded in those numbers. And certainly I know that from an operating standpoint, you know, they weren't immune to some challenges in the quarter. So I'll leave it there and certainly would encourage you to reach out to the KCS team if you want to dig into it in a little bit more detail.

Okay, just really quickly. Do you know if there is any of these prior period, all these rails in all the rails prior period stuff that we've been stripping out kind of apples to apples? I can follow up with Ashley, but if you happen to have the number on any prior period accruals that we can strip out right now, that'd be helpful.

Yeah, so they had 9 million in the numbers this quarter, and I believe going into 2023, they're expecting an increment of $6 million going forward into 2023.

And our next question comes from Walter Spracklin from RBC Capital Markets.

Yeah, thanks very much, operator. And good afternoon, everyone. I wanted to zero in, John, on intermodal. And I know you've got a number of new lanes that you've been developing and just love to hear an update on your St. John route, on the Lazaro-Cardenas route that you were testing out there. And wondering if the Mississippi, and I know there's been some media reports about low water levels, if that's sustained as a long-term trend with KC now as part of your network subject to the ruling, would that be another area of upside for you on that north-south route?

Yeah, Walter, I'll start with the water levels first. You know, I think near term this is going to provide itself to be a rail opportunity. Now it's a little early for CPKC to enjoy in some of that, but I think some of those north-south routes will see the natural gravitation of those grains that would truck to the river, find railheads and want to rail down to the Gulf for export. So I do see this as a potential rail tailwind. As we look to the future, CPKC, I certainly think there's an opportunity for us to play in that space. I think there's a origin elevator development piece of that component that will compete in that sort of territory that would be impacted in the future. And then as we gain access into that golf market in Texas and also down into Mexico. I believe it's right in the wheelhouse of the new organization. Back to your prior question, we've had a ton of success. I couldn't be prouder of our intermodal team this year. The asset team that works with our intermodal group, the terminal operators, Our operations group and Mark's team and my marketing and sales team, I can tell you that supply chain is still not real clean across the U.S. and in Canada, but we've navigated it, I would say, as good or better than anyone in the industry. There's still challenges out there. We've got a lot of tonnage in St. John. We've had a lot of success. We're putting a lot of good pressure on. on that port and that fluidity and opportunity is only going to continue to grow for us. We've got the best route from the Atlantic tidewater, not only into Canada, but also down into Chicago and beyond into the future down to Kansas City. I'm super excited about that. You raised Lazaro and I can tell you my enthusiasm around that opportunity is only building. I actually believe we've got some more test and trial containers on the water right now that we're working on an airline basis with the KCS team as sort of this ongoing proof of concept and I think the feedback relative to the optionality it creates for shippers, not as a replacement for certainly LA Long Beach or some of those other gateways, but to diversify their portfolio is going to be a tremendous opportunity for CPKC.

And our next question comes from Tom Wadowitz from UBS.

Yeah, good afternoon. John, I wanted to ask you about the pricing. I think you said that you had, like, high single-digit renewals in the quarter. I believe that was the comment. And I don't know if I recall you having a comment about renewals quite that high before. So I'm wondering, is this, you know, should we be anticipating even stronger pricing the next couple quarters relative to the kind of, you know, maybe 5%, 6% that I normally think of as being favorable, and then I guess just related, do you think that there is, it feels like there's just a more favorable pricing dynamic in general in the rails, maybe Canadian rails? You know, if you think that's true, is there maybe some persistence to that that could last more than a couple quarters? Thank you.

I do, Tom. I'm actually quite bullish on the pricing front. You can ask my commercial team as we're working on our plans for next year and their targets. I do think fundamentals have shifted a little bit on that front in terms of just how all carriers are thinking about the value of their capacity and their service. And I'll tell you, I think we have remained consistent in this space, and the narrative has been, as always, we are consistent. in good times and bad times, going to price to the value of the service Mark and his team provides. And I believe capacity is more valuable than it maybe ever has been in the past. So I do believe there's even in a maybe tighter demand environment as you look forward, potentially in, you know, if there is some recessionary pressures, I think that discipline sticks. You know what, I think I said to somebody in my 28 years of railroading this last quarter, the renewal pace, you're right, was about as strong as I've seen. And I think that opportunity, we'll see how it plays out into Q4, but I think my expectations kind of fall right in line with what you saw in Q3.

Our next question comes from Justin Long from Stevens.

Thanks. And I guess to start with the follow-up on that last question, John, when you look at the gap between pricing and inflation, how has that gap changed? Because it sounds like pricing is very strong, but obviously inflation is moving higher. So just curious if that gap is changing at all. And then I think you had previously talked about adjusted EPS growth in 2022. Is that still something you expect?

Yeah, I'll maybe start off with that first question. So we're certainly on pace to see adjusted EPS growth for the year.

And on the pricing thing, you're right. That inflation plus renewal spread always kind of moves around a little bit. I would say you're right. It is – well, I don't know how you – what you measure inflation exactly as and all the various components of it. But I'd say we have definitely hit the mark here most recently. And as I said in Tom's question, I think it's the same in Q4 to have that definitely be in inflation plus. And then again, we'll see how the pressures you know, how they change as you think about 2023. But irregardless, again, I'm going to fall back on the value of our capacity I think has never been as important in this sort of environment that we live in today. And a big part of that is making sure when we do work with our customers and whether it's bringing on new ones or working on the renewals that We're being certainly fair on what that value is and ultimately what that pricing looks like. And I just don't see that changing as you look into 2023.

Our next question comes from Ken Hexter from Bank of America.

Great. Thanks. Good afternoon, Keith, John, and Megan. Just before I get into my question, Megan, just to clarify what you just answered, that was off a 376 normalized last year and 263 have reported normalized so far this year, right? So you're talking at least $1.13 for the fourth quarter, just to clarify that?

That's correct.

Okay, perfect. So, Keith, a lot to unpack in front of you. Once you turn into 2023 and post-approval, maybe you could talk a little bit about how the process unfolds. Is this a year of resetting train schedules and things get messy up front, and so first quarter or second quarter can get a little messier? Are there services you're able to launch right away? Maybe understand the flow of what we should expect as a synergies to what you've talked about already in terms of now they're only a few months away.

Yeah, it's certainly not a case where we're planning for any messiness, Ken. As you can imagine, we're pretty adept at planning. We're taking some exhaustive steps with an integration management office that we've created and a lot of pre-planning. We've got about 165 processes of change that we've got mapped out across, you know, each discipline of the business. We've got... discipline leaders that are full-time assets. If you look at it all together, either full-time or part-time, in part, there's over 1,000 people that are involved in the planning process for this integration. So the operating plan itself, we've got everything mapped out from leadership change, what's going to happen the first 30 days, 60 days, 90 days. The operating plan changes on the operating side, you know, we've got that laid out. So we're going to pull everybody together. We're going to get aligned quickly. And I can tell you this is the beautiful part about this transaction that I think is very unique. Number one, it's not a horizontal merger. It's not a horizontal integration. So the horrors that some have suggested in the past, failed executions or painful executions, simply it's just not that complex. You don't have lines that are redundant. You don't have a bunch of rerouting and traffic. You don't have a tremendous amount of stresses coming onto the network all at one time. This business that we're talking about, and I've said this, it's in our application, and it's part of the way you run a PSR railroad. You don't get ahead of yourself with business and oversubscribe your capacity. I've taken inspection trips this last week. I took a look at all the infrastructure that's going in from up at La Crosse at River Junction down into Kansas City. A couple of months ago, I took a trip over the KCS from Kansas City to Laredo. So I've laid my eyes on each one of these sidings, these locations, The work that's being conducted now, and I'll tell you, the choreography will be strong. We've got an operating plan that will allow us to layer this business on, and we're not going to disappoint our customers. That's the worst thing in the world that we could do is overcommit and underdeliver. We're going to have to motivate our customers. They've got choices. We're not eliminating one choice. They get to maintain all the choices they enjoyed today. but they get to get inspired and motivated about the new option we're going to give them. And for them to get motivated and inspired, it's got to be good. So rest assured we're going to do that. We're going to be resourced upright with people, resourced right with assets, be it rolling stock, be it locomotives, and the physical infrastructure to get out here and get this done. And I'll tell you, I'll be boots on the ground. I'll be in Kansas City. I'm in Kansas City today. I came down to visit our terminal. We had our board meetings. So rest assured, there are plans being laid. You know, it's not going to be perfect. We're not perfect human beings. The operating world is not perfect. But we certainly are doing all of our homework up front and plan to exceed expectations. And you'll start to see synergies both on revenue as well as on the cost side as we grow this railroad going forward. You'll start to see in second quarter, they'll start to ramp up third, fourth, and that momentum will continue in 2024.

Our next question comes from Scott Group from Wolf Research.

Hey, thanks. Afternoon. Keith, just wondering, coming out of the hearings, anything surprising or anything that you think that we need to be thinking about from a concession standpoint? And then just as we think about 23, obviously it sounds good, volume, price, synergies. Any initial directional kind of thoughts on on how we should think about operating ratio next year?

Well, sequential improvement. You know, I can't give you guidance, Scott, but certainly when we layer this volume, you know, first half to CP standalone, it's a pretty compelling opportunity with that density that we'll have next year that we didn't have last year. And we start to combine these networks and take out, you know, train handlings, car handlings, car hire savings, locomotive savings. It leads to a natural outcome of margin improvement next year sequentially and And I think moving to a place that's going to be very exciting to allow us to continue to create cash and invest in the network and reward our shareholders. And that's what it's all about, I think, at the end of the day. As far as the hearing, Scott, my only surprise is where there's some very creative minds and creative lawyers that some of it was so overreaching and unreasonable. Some of it I found it to be a bit shocking. But the thing that to me was encouraging is most of that shock was compounded It was completely unsubstantiated by fact, and I think this is an STB board of board members that take their job seriously. I don't think that attempts to pull the wool over their eyes will be taken lightly. I think they do their homework, and I think they want history to show they got this right. You know, it's the first major transaction in two decades. I would suggest arguably it might be the last one, Scott. In all honesty, I think it could be the one that solidifies the industry and creates the most impactful and meaningful rail network in this nation for our future's growth. So again, everybody made their best case. I think our facts are better. I think our facts lead us to an undeniable case that says this is in the public interest. And ultimately, I believe based on fact and based on a belief that this STB body takes their job seriously and makes decisions not on rhetoric, but on fact-based after doing their homework, I think Our facts are in a great place, and we look forward to getting to work, again, pending their aligning with what my view of the facts are. But to me, the truth's the truth. I've said that from the very beginning, and I think that's what's going to carry the day in this merger application.

Our next question comes from Stephen Hansen from Raymond James.

Yeah, thanks, guys. Appreciate it. Just a quick question on the staffing levels, if I may. Keith, I think you referenced the big uptick in conductors and trade employees in anticipation of this back half traffic surge here. Just curious if you're sort of at a standstill now or where you need to be, or should we continue to expect to see that roll higher?

Yeah, we ramped up in the third quarter, you know, to train ahead. You'll see it slow down in the fourth quarter, and we'll finish full year just a little above flat, maybe about 1%, a little less than 1% is where you should model to.

Okay, perfect. That's great. And just a follow-up, if I may, is just on the corridor capacity issues in your prior commentary. Just curious about the western corridor in particular, given the surge in bulks we've been seeing. How do you feel about the corridor capacity, whether it's infrastructure or rolling stock related?

You know, in all honesty, I feel good. And let me tell you why I feel better than I have in a long time. And I'm extremely – I never was able to get this done when I was the head operating guy. Mark has, and And the team, the engineering team, they've just done a phenomenal job. You imagine that's the most dense part of our network. We're facing a bumper crop. We've got a lot of expectations. We're going to meet expectations. So the last thing we need are extended work blocks and what I call capacity. So typically you strive to get it all done so that you can get out of the way for this big surge of demand. I just never really got it done the way Mark has in his team. They've got all the major capital work buttoned up. They finished in September. You're starting to see it in the momentum. The record numbers of grain cars, they've gone a couple of weeks where they've hit all-time highs. I think you had 6,900. Yeah, two weeks. Two weeks of 6,900 going to the West Coast for export. So I think at the end of the day when it's all said and done, we've never been in better shape, Steve. Now, listen, I don't want to get – arrogant here at all. Mother Nature can humble us tomorrow. That's a tough railroad to operate in, but I'm very, very pleased and happy to say that Mark and the team have done all they can do to control what they can control short of that and set us up for great success. So we're in a good place.

Our next question comes from Jason Seidel from Cowan & Company.

Thank you, operator. Afternoon, everybody. Keith, can you give us maybe an update on any puts or takes for some of the revenue synergies that you guys had previously talked about with the KCS transaction? Just like to see how you're feeling based on what you said before and what we're seeing now in the marketplace.

I'll let John provide the color about the puts. I don't know too many takes.

Jason, Keith stole my comment there. It's definitely been more puts. As I mentioned, Lazaro earlier in the call, that continues to be a bright spot and a huge opportunity to have a team over in in asia here the last week or so in the feedback that we're receiving from a lot of those steamship lines and frankly even more so the beneficial cargo owners around you know having that supply chain optionality uh to the current options today continues to be a powerful opportunity I spent the better part of today working with Keith and my intermodal team and Mark on our north-south strategy and what that domestic train looks like and what the key opportunities are on that. And I continue to be very bullish on that front. I think somebody raised the water issues. Earlier, but the bulk franchise in the grain opportunities into Mexico, we've talked a lot about that, but ultimately also into that Gulf region and Texas and competing into some of those feeder markets continues to be a bright spot. You've got this renewable sector. diesel phenomenon that is rolling across, bringing crush plants to life across our territory and certainly the Canadian franchise that presents itself as a unique opportunity for CPKC. So, again, I would tell you, you know, I even foreshadow a little bit this whole the auto compound in Bensonville and Edmonton. There's a reason we're opening those now. You know, assuming we get the STB approval, those are going to be important cogs in, you know, those negotiations with the automakers and the parts opportunities, too. So there's no slowing down. I can just tell you we're – We remain super optimistic that we're going to get this over the finish line, and then, as Keith said, we'll begin to ramp up, and you'll see us capitalize on this stuff.

And our next question comes from Conor Gupta with Scotia Capital.

Thanks, and good afternoon, everyone. So, John, I just wanted to ask you on the intermodal contracts you have won so far this year, how are you performing versus your expectations in light of the recent macro uncertainties we have seen? And if somebody can speak on behalf of KCS, perhaps there's a recent sort of USMCA energy dispute going on with Mexico, and there are talks about tariffs on Mexican cross-border traffic. How does that play into your sort of synergy books for the next couple of years?

Well, on the intermodal front, how the volumes are trending, I would say specific to the Port of St. John, they've exceeded our expectations. We've got a lot of freight out there to the hall, and obviously we're working very closely with the NBSR, the short line railroad out there, the Port of St. John, DP World, the operator. Those expectations on those volumes have, again, exceeded our expectations in no real slowdown. You know, we also brought CMA onto our franchise this year. I would say the majority of that has come through the Port of Vancouver, and those volumes have lived up to everything that they've said. I think, you know, if the question's really around are we seeing any sort of macro slowing in that volume, You know, I would say maybe a little lane segmented. We might be a little left to the U.S., but certainly I would say our Canadian franchise is held in there very strong, and I see nothing that would impact sort of how you should view the sort of finishing out the year, and then we'll look to next year on that front. I don't know if Megan, you have any comments on that?

On the USMCA? Yeah. Yeah, on that topic, Konar, you know, we have a general belief that free trade benefits the North American economy, and the movement of goods across the border is beneficial for all parties. So CP and, you know, CPKC, by extension, would be uniquely positioned to benefit from USMCA and free trade, so STB willing. You know, we look forward to providing great service for all three nations.

And, you know, it's not like we've got this massive bucket of synergies tied to that. We've sort of known through our due diligence and being into this for well over a year now in this effort that there's some volatility in that space. So, you know, certainly if things work out Great. Did we see some resolution in that space? We're just going to benefit. I would consider that all incremental on top opportunity as you think about synergies.

Our next question comes from Ari Rosa from Credit Suisse.

Hey, good afternoon, and congrats on the strong momentum here. So I wanted to ask a question about the CPACS transaction, and just thinking about the extent to which it has the potential to maybe alter the competitive dynamics between the rails. We've seen some of the rails kind of raise some complaints, certainly at the STB, about the transaction and potentially take some kind of retaliatory actions in response. Just wanted to hear your thoughts on the extent to which you see yourself as kind of competing with them versus maybe taking some volume away from trucks and if that's really where the true opportunity comes from. Thanks.

I'll maybe start. You know, I'd say this. There's certainly a part of the revenue opportunity for CPKC that is flat head to head against the competitors that are in that lane. in those lanes. And what I've heard from the customers is they want another option, that maybe service in some of these lanes hasn't been up to expectations. They're looking to, just like you would on your money, they want to diversify their books. And there's going to be, I think, a natural opportunity for some, call it share shift, in some areas. But the flip side is, I think the bigger opportunity is some of these products that don't exist today, maybe some new creations and initiatives of new lanes that the service markets that don't exist today. And then you said it yourself that the truck piece of this business is actually, I think, bigger than we even know. I can tell you the discussions around the value of trucks off the road and the, you know, scope three emissions, greenhouse gas reductions that we can bring to the table by providing a truck-like service north-south through that corridor, I think it's compelling to shippers. So, you know what, the competitive response is what it is. It's it's going to be out there. The other rails are going to do what they need to do in that front, but we're going to compete hard just like we have in the past, and we're going to find the areas where we can drive success with our customers.

And our next question comes from Brian Ostenbeck with J.P. Morgan.

Hey, thanks. Good afternoon. So a quick follow-up for John first. One of the The puts I didn't hear about was potential second bridge at Laredo. I think those of us been watching that, waiting that for a long time, and it seems like it's actually moving forward a bit faster than at least we initially had anticipated. So curious to hear your thoughts on that. And then a broader one for Keith. I clearly hear your thoughts on the CPK CTO standing on its own merits, but as you mentioned, there's a lot of other interested and potentially affected parties. Do you think there's going to be any Settlements or agreements, do you reach with any of them, whether freight rails, shipper groups, passenger rails, before it goes in front of the SCB? Or do you think that the board is able to handle all that and you would rather the mayors speak on their own without doing any additional deals before then?

Thank you. Let me start with the latter. Listen, I've always believed that you can do a better deal yourself and expect the government to do a deal for you. We've been reasonable from the very beginning. We've said we're open to reasonable settlements. You know, a lot of the arguments that we heard, unfortunately, don't represent reasonable. So if those positions remain the same, then I would suggest there's not an opportunity for us to reach a reasonable settlement. But I'm hopeful. and optimistic that some of the parties, after they've weighed all the facts, and perhaps better understand the assurances we provided, the positions that we take, and our commitment to keep gateways open, our service assurances, we're going to be good partners. Listen, we're not doing this to go to war with every railroad. We're doing this to create value for all stakeholders. We're doing this to benefit our employees, our shareholders, the environment, the North American Rail Network. and we're going to, after the dust settles, we still have to be great partners. We'll be competitors and partners at the same time with some of these railroads. So all that being said, reasonableness matters. We're going to stay reasonable. And if we can come to an agreement, and I'm optimistic we might, you know, it's to be determined. But at the end of the day, if we don't, it's because we've exhausted all reasonableness and we have nothing, no choice but to Allow the STB to rule because what we will not do is allow unrealistic expectations to impede our ability to deliver the public interest benefits that we've committed we're in business to deliver. That's part of our thesis, those are the facts, and we're going to protect that. The other point you made about the bridge, super excited. You're exactly right. Pat and the team have done a phenomenal job. They're actually having a groundbreaking ceremony, I believe, on Monday down at Laredo. The time to get the bridge built, as Pat shared with me, is going to be about a 15- to 18-month process. So, again, when it comes to strengthening the North American network, resiliency, capacity, all those things that allow commerce to flow freely over that border between Mexico and the U.S. on to or from Canada, we're going to a better place. So I'm super excited about that enhancement to the physical plan at the border.

Our next question comes from Bascom Majors with Sus Quahana.

Peter, Megan, the complexities both practically and from a legal standpoint of the KCS transaction have kept you from guiding and updating the street in the way that you normally would this year. As we get into next year, is there an opportunity to give a more traditional CP annual guide in January, or is that in maybe some form of an investor day after the transaction closes more likely as far as the updates that you can give and expect to? Thanks.

We will get as traditional as the facts allow us to. Obviously, there might still be some uncertainties, but certainly more clarity than we were able to provide today and And I'll go ahead and let you know as far as an investor day. We're certainly planning one. We haven't landed on the exact date, but we're targeting likely the first part of June.

And we have reached our allotted time for question and answer. I would now like to turn the call back over to Mr. Keith Creel.

Okay, well, thank you for your time this afternoon. I know you sense our enthusiasm and our optimism, and I tell you, you know, I've done a bit of reflecting. It's hard to believe. I used to be the young guy in the room. I'm not anymore. I'm about to close out my 30th year in this industry. I've had a lot of good years and been blessed to work with a lot of people and to collectively create a lot of success in this industry. But I'll tell you, I've never faced a team more ready or talented and equipped in a combined CPKC. And I'm talking about the team at CP. I'm talking about the folks at KCS, to put these two teams together to create a CPKC family equipped with an opportunity-rich environment that is unlike any I've ever experienced in my history, and certainly I believe unlike any that exist in the industry. Extremely, extremely exciting times for value creation for all stakeholders. There's something in it for all of us, our nation included, and we're ready to get to work. So everybody stay safe. We look forward to sharing our results after this quarter soon. Take care.