Canadian Pacific Kansas City Limited

Please stand by. We're about to begin. Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's second quarter 2024 earnings conference call. The slides accompanying today's call are available at investor.cpkcr.com. 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 the number one on your telephone keypad. If you would like to withdraw your question, press star two. I would now like to introduce Chris DeBruin, Vice President, Capital Markets, to begin the conference. Chris, please go ahead.

Thank you, Beau. 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 2 in the press release and in the MD&A file with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide 3. Please note, in addition to our regular quarterly financials, there is supplemental Q2 combined revenue and operating performance data available at investor.cpkcr.com, which some of today's discussion will focus on. With me here today is Keith Creel, our President and Chief Executive Officer, Naveen Balani, 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'd appreciate it if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Thanks, Chris, and good afternoon. Listen, before we get into the results, on behalf of our CPKC family, I want to extend our heartfelt prayers and condolences to Pat Ottenmeier's family and friends. Our family mourns his tragic passing. We extend our deepest condolences to his fiance, Deanna, his entire family, as well as many friends and former colleagues. Pat's vision and leadership played a monumental role in the great history of Kansas City Southern. He helped reshape the railway industry. We've lost a truly remarkable leader and a cherished friend. All we knew him as a professional and a railroader had nothing but respect and admiration for the material impact he made across so many aspects of our industry, and if you had the honor to have enjoyed a friendship with Pat as I did, words will never capture what a class gentleman and human being he was. Pat's legacy lives on and can be seen in the work we'll do every day at CPKC. I'm also pleased to be hosting this call in Kansas City at our brand-new state-of-the-art U.S. operations headquarters at Nokia Yard. This facility is just one small example of what would have never been possible without Pat's vision and strength as a leader. His contributions as a railroad and as a person will never be forgotten. And moving on to the quarter, I'd like to first start by thanking the 25,000 strong CPKC family for their efforts in the second quarter. As a leader, it's always my honor to represent the results we're going to cover on behalf of this team, which I'm extremely proud of. In the second quarter, the family delivered revenues of $3.8 billion, which is up 8%, strong volume growth, an increase of 6%, operating ratio of 61.8, which is a 280 basis point improvement versus last year, and EPS of $1.5, a 27% increase. Extremely pleased with these results. I can tell these numbers that I just walked through do not happen by accident but through execution. So on the operating front, I applaud Mark and his operating team for their continued strong operating performance across this network. They delivered significant improvement across a number of our key operating metrics. Unfortunately, Mark had an unexpected operating procedure he had done yesterday, so he's not with us today. So I'm going to cover his results and his body of work. Average terminal dwell declined 9% in the quarter, average train speed improved 6%, locomotive productivity up 10%, and fuel efficiency improved 2%. All of these results reflect a network that's fluid, that's running well, and delivering strong service to our customers as we carry that momentum into the second half. And from a safety perspective, train exits were down 4% and personal injuries an astounding 38% improvement. I'm extremely proud the team's continued focus on safety each and every quarter. Commercially, John and his team continue to bring on business that's going to fit our network well, working in close collaboration with our operating and service design team. And the team continues to price the value of the service that this new network uniquely offers. The team's executing on the vision we had when we first proposed putting these networks together, and it's leading us to a differentiated outcome. Well, it's been well publicized. The freight environment continues to be challenging. We're not making excuses. We're leaning into the challenge. We're creating opportunities that are uniquely enabled by this new network. So in closing, let me say I'm extremely pleased with the first half of the year, even more excited about what the second half holds. We're in a position of strength. We're turning momentum into the second half that we're going to build on it. As I said in January, we're positioned to deliver an exciting year of value creation, and that is exactly what this team is delivering. We're uniquely positioned to deliver strong value in 24, and more importantly, for years to come. So with that said, John, I'm going to hand it over to you to provide some color on the markets, and then Nathan will elaborate on the numbers. All right. Thank you, Keith, and good afternoon, everyone. I'm extremely pleased with the strong top-line growth the team delivered this quarter. This franchise is creating the unique opportunities we've talked about since day one. Our operations are strong, and we're pricing to the value of the differentiated service we are providing our customers. Now, looking at our results on a combined basis, we delivered freight revenue growth of 8% on a 6% increase in RTMs. Sense for RTM was up 2% with strong pricing and a slight tailwind from FX, partially offset by Nix. Now, taking a closer look at our second quarter revenue performance, I'll speak to an FX adjusted results on a CPKC combined basis. Starting with bulk, grain revenues were up 17% on 15% RTM growth. U.S. grain volumes grew 17% over prior year. Our franchise is benefiting from strong shipments of corn to the P&W Mexico, and Alberta, along with increased shipments of soybeans and wheat to Mexico, which remains a strong area of synergy growth for CPKC. Canadian grain volumes were up 13% on the quarter, as we saw a stronger-than-expected spring and summer sales program emerge if farmers reduce their on-farm inventory in preparation of the upcoming harvest. Now, looking forward, early indications are that this harvest will be more in line with our five-year average, or if not, stronger. That, coupled with our regulated grain pricing of approximately 6.5%, has us well-positioned in Canadian grain. Now, moving on to potash, revenues are up 24% on 11% volume growth. We moved higher volumes of potash with Campotex to their Portland terminal as we lapped the impact of their shiploader outage back in April of 23rd. Now, looking forward, potash supply chains are performing very well, and export demand is sold out for the second half of the year. We are on pace to set a record all-time tonnage with Campitex this year. Coal revenue was up 3% on a 2% decline in volume. Lower natural grass prices weakened demand for our U.S. coal franchise, and that weakness was partially offset by more export Canadian coal to Vancouver and Thunder Bay. On the merchandise side, energy, chemicals, and plastics revenue grew 10% on a 14% volume growth. The volume growth in the quarter was driven by higher crude as we lapped the impact of some outages last year and growth from synergies across just about all of the ECP portfolio, including LPGs, plastics, renewable diesels, and refined fuels. We are excited about the wins we've captured in this space as we are connecting markets from Alberta to the Gulf Coast and into Mexico with our single line haul service. Looking forward to the ongoing ramp up of these synergies, we are set up for a solid second half of 24 in ECP. In the forest products area, we're down 1% revenues on a 1% decline in volumes. Forced product volumes continue to be challenged by a soft macro environment impacting both our paper and lumber products. However, we are largely offsetting this headwind with synergy growth and extended line haul, shipping more lumber from Canadian producers down to our franchise in Texas and the Gulf markets. Metals, minerals and consumer products revenue was down 3% on a 9% volume decline. Volumes in the quarter were impacted by weakness in frac sand driven by the lower natural gas prices, but also a labor destruction we had at ArcelorMittal steel facility in Mexico. Now looking forward, although we expect the weakness in frac to continue, the labor destruction has ended and we expect Arcelor to ramp up production in the back half of the year. In automotive, we produced another record quarter, with revenues up 28% on 21% volume growth, an exceptional performance by the team. Our auto franchise is benefiting from higher, longer haul volumes out of Mexico as our closed-loop model service solution only continues to ramp up. I'm also pleased to share that our new Dallas auto compound located at our Wiley, Texas intermodal terminal opened in late June. This compound is part of our playbook that unlocks an entirely new supply chain model for the OEMs, giving them new competition, service, and capacity certainty like they've never had before. Our auto business continues to deliver differentiated growth, and we expect a strong performance as we move through the second half of the year. Now, on the intermodal side, revenue was down 7% and a 3% volume decline. Starting with domestic intermodal, volumes were up 3% despite a soft base demand environment. Our MMX or 180-181 cross-border service continues to perform extremely well and what I would consider a very challenging domestic market. Volumes on this service are up 50% since our exit rates at the end of 2023, and we have a strong pipeline of opportunities stacked up for the back half of the year. This includes new wholesale opportunities, new retail opportunities, temp control service operating, and new joint line routes into both the Southeast U.S. and the Ohio Valley markets. And moving on the international side, volumes were down 9%, primarily related to timing of the impact of lingering strike uncertainty and the timing of some share shifts in business. With new business ramping up and a solid outlook for demand, we are well positioned to cross all our ports for the second half of the year. To close, the volumes in the first half came in slightly better than we expected and we're off to a strong start in Q3. While the macro remains challenging in some areas, overall demand has stabilized, and more importantly, we continue to have line of sight, strong differentiated growth from synergies, self-help initiatives, and disciplined pricing. The operations team is delivering reliable, resilient service to our customers, and my team is laser focused on selling into that service and taking advantage of our expansive new network. I'm excited about what we've accomplished so far this year, and even more for the opportunities we have ahead of us. So with that, I'll stop and pass it over to Nadine. Well, thanks, John. That's a great report. So let me start by sharing my enthusiasm for the strong performance for the quarter. Our success is driven by the hard work and dedication of CPKC's railroaders, and I'm proud of what the team is accomplishing. Looking at the quarter, CPKC's reported operating ratio was 64.8%, and the core adjusted combined operating ratio came in at 61.8%. Earnings per share was $0.97, and core adjusted combined earnings per share was $1.05, up 27%. Similar to what we shared in previous quarters, our combined operating expenses in 2023 illustrate the effects of the acquisition for the second quarter as if the acquisition closed on January 1, 2022. I will speak to FX-adjusted combined operating results in these prepared remarks. Now, taking a closer look at our income statement, reported operating expenses provided on slide 11 and combined operating expenses on slide 12, where I'll focus my comments. Moving adjustments, comp and benefits expense was $610 million. The year-over-year decline in comp and benefits was driven by reduced stock-based compensations, as well as efficiency gains from reduced overtime, improved fluidity, and engineering productivity gains. This was partially offset by inflation, volume-driven increases from higher GTMs, and higher current service costs from our DB pension plan due to a lower discount rate at year-end 2023. Looking to the rest of 2024, we continue to expect average headcount to be roughly flat on a year-over-year basis, driving further labor products to be gained as we grow volumes. Fuel expense was $466 million, up 9%. The increase was primarily driven by a $24 million, or 4%, increase in fuel price, along with volume-driven increases from higher GTMs. Increases from price and volume were partially offset by a 2 percent improvement in fuel efficiency, which resulted in a $9 million in savings, another area where we are seeing network efficiency gains translate directly into margin improvement. Excluding adjustments, materials expensed was $95 million. The decline in the quarter was driven primarily by timing of locomotive and freight car maintenance as activity schedules across the network are aligned. Equipment rents were $82 million, down 5% year over year. The decline was driven by reduced car hire payments and receipts, along with efficiency gains from improved cycle times and increased network velocity. Depreciation expense was up 6%, resulting from a higher asset base. Excluding adjustments, purchase services and other expense was $581 million. Cost of inflation and terminal service costs were partially offset by a year-over-year decline in casualty expense. So overall top line growth in the quarter coupled with strong cost control and execution resulted in a 17% increase in core adjusted combined operating income and a 280 basis point improvement in our core adjusted combined operating ratio to 61.8%. Moving below the line on slide 13, Other income was $40 million, driven by higher equity income, along with a gain on some debt repurchases in the quarter. Other components of net periodic benefit recovery was $88 million in Q2. This reflects the lower discount rate compared to 2023, and partially offsetting the headwind to comp and benefits from current service costs. Net interest expense was $200 million, or $195 million, excluding the impact of purchase accounting. The decline was driven by a reduced debt balance. Income tax expense was $292 million or $328 million on a core adjusted combined basis. We still expect the CPKC core adjusted expected tax rate to be approximately 25% for the year. Turning to slide 14, we are generating strong cash flow and cash provided by operating activities of $1,278,000,000 in Q2. Capital investments in safety and growth remain our priority. In this quarter, we reinvested $808 million, in line with our expectation to invest approximately $2.75 billion in 2024. We continue to make strategic investments in capacity across our network, positioning us to continue efficiently absorbing the growth that the merger has enabled. On the quarter, we generated $526 million in adjusted combined free cash flow and continue to repay debt. Our leverage ratio is 3.2 times, and we still expect to reach target leverage in early 2025, at which point we will evaluate shareholder returns with our board. In review of the quarter, the team delivered another strong volume growth ahead of expectations, along with continued discipline on price and cost control. Synergies are continuing to ramp as the network is performing well. We continue to gain momentum on our expense synergies, improvements in velocity, as well as locomotive and car productivity are generating operating savings. We're also gaining procurement savings through consolidating agreements across the company, as well as savings in G&A through combining processes and functions. We're well on track to deliver double-digit core adjusted combined earnings growth, growth driven entirely from the business and without any help from shareholder returns. This network is delivering strong and profitable growth, and I'm excited for the opportunities we have ahead. With that, let me turn it back to you, Keith. That's great, guys. Let's open it up for questions. Thank you, Mr. Creel. Ladies and gentlemen, if you would like to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, again, press star two. As previously highlighted, please limit yourself to one question. We go first this afternoon to Chris Weatherby with Wells Fargo.

Hey, thanks. Good afternoon, guys, and condolences to the CPKC family and certainly to Pat and his family as well. He'll be missed. You know, if I could maybe start a little bit on the synergy side, the revenue synergy side, maybe if we could get a sense of how that's kind of progressing. And as we think about the back half of the year, could we see an acceleration sort of activity, you know, get a sense of kind of what we're thinking about in terms of revenue synergy progress and maybe what we think the exit rate could look like as we get through the end of 2024?

Yeah, Chris. So it's John here. Um, super pleased with progress. Um, we came out of the gates, you know, really strong last year and, um, a number of announcements and, and, and piled up a pretty good, uh, you know, exit rate in that three 50 range, which we've talked about at the end of 2023. And I mean, maybe just to get to the point, I fully expect, you know, we said we'd double that, but I fully expect that we're on a run rate that could get us closer to that 800 million type number as we exit 2024. And if you think about that, it's really spread pretty evenly across our book. Just to give you a sense, about half of that, I would bump in area of intermodal, so international domestic automotive. And then the other half maybe split pretty evenly between our bulk franchise, as we've really seen here this summer, our grain shipments down into Mexico accelerate. And then the other half of that being our ECP merchandise. So I'm quite pleased with where we sit so far here, and I expect, again, a pretty good ramp up as we move through the second half of 24. Great.

Thanks very much. Appreciate it.

Yep. Thanks, Chris. Thank you. We go next now to Walter Spracklin at RBC Capital Market.

Thanks very much. Good afternoon, everyone. So, John, speaking with you, you spent a bit of your time there on your prepared remarks, talking on the Dallas auto compound opening and some of the opportunity there. Can you talk a little bit about the capacity there, how much you could ramp it, how quickly it could come on, and if you could frame it quantitatively even better, but just curious to hear what the upside there is on that particular line.

Yeah, Walter, so I'm really excited about this one. You know, this is an opportunity, you know, similar to the playbook in Canada, right? We identified the land available down in Wiley and aggressively got after that opportunity. You know, in terms of capacity, we're looking at a facility that'll do, let's say, 160,000 to 180,000 gins annually. You know, we utilized about, 35 acres or so there. You know, right now we've got three OEMs that are signed on and actively shipping into the facility. um you know my my sense is those three probably a full run rate walter get us to 75 capacity roughly in in that neighborhood uh and then we've got two or three fish on the line uh that i'm i'm pretty excited about that i i could see coming on maybe even towards the end of this year but but certainly in the into 2025. And, you know, if you look to the future, the great thing about that location is it's expandable. We can add some capacity there. And it's really going to provide a pretty unique solution, I also think, as you see the production grow in the eastern U.S., with connections to the NS and CSX, that becomes a pretty big opportunity for the future. Yeah, I would just add to that, that entire opportunity, as well as we execute, is well beyond our investor day guidance. It wasn't in the base plan. You've got 430 acres left, water to expand into. So we have the capacity. We have the land. I think we're going to have the business opportunities. We've got great partners with CSX and with NS. to reach all their markets and feed traffic into that Dallas market and then down to Mexico. So I think it complements uniquely this network that we're optimizing. And if anyone's going to be in Dallas in September, we're going to be doing a tour there. Yeah, we're happy to show that facility off in September. All right. Thank you very much. Appreciate the time. Thanks, Walter. Thank you. We go next now to Fadi Chamam at BMO Capital Markets.

Yeah, good to hear my question. Keith, maybe can you give us an update? And I wanted to ask you, John, like, you know, typically your second half does end up being a little bit stronger than the first half from a volume perspective, like just typical seasonality, I guess. But how do you see some of the diversion issues that we have – experienced in the second quarter and you're experiencing now with stabilizing, do you think that there's potential for more kind of headwind on that front as we look into the third and fourth quarter?

You cut out on the question to Keith. Can you just repeat, please, for the first part?

Oh, the first part is just about an update on the labor situation, if you can just give us your latest thoughts on that.

Okay. Well, as we all know, we've been trying our dead-level best to make sure we keep our customers updated and all key stakeholders. The CRIB took hold of a question that the Minister of Labor challenged relative to potential threat to Canadian safety. We're waiting for a ruling on that question. They've committed to have that ruling come out by August the 9th. What we've asked for in return is essentially a little bit of time for our customers to plan so they can responsibly wind down their operation and not just have mass chaos. Because you can imagine the impact, obviously, of both railroads in the nation being shut down. That said, the parties, although we stay at the table, we're far apart. I'm just being transparent and honest. It's It's going to be a challenge. You know, we've offered to enter into binding arbitration given we understand the potential damage to the Canadian economy. We understand the damage and the pain and suffering on our employees, even those that might be out on strike, as well as those that aren't out on strike. So it's not a good outcome for anyone. But that said, at this point, I'll remain cautiously optimistic. It's most probable that we'll have a work stoppage, both railroads and My guess is, best guess, they release the parties by the 9th. That would put a work stoppage probably sometime the end of the month is what I would be guessing at and planning for. But, again, we won't know until that really comes out to the CRB at or on the later than August the 9th based on their commitment. Yeah, and, Patty, a few things here I would say. You know, certainly, I feel better about where I thought I was going to be at this point of the year. And I do have quite a bit of optimism around the run rate, if you think about the back half of the year. Now, that being said, I'll tell you, we still got to, as Keith just spoke to, we got to get through what is likely going to be a strike that brings a certain level of uncertainty. Of course, we've got an election year. We've got a macro environment that that is still not great in some areas. So that being said, maybe the counterbalance for that is, as I said, I think we're shaping up for a pretty good grain season. And we are really well positioned in the Western Corridor in terms of our capacity and being able to provide the service our grain shippers need in that region. In addition, I'm super excited about what we've been able to do in the U.S. and bringing Mexico into our portfolio of destinations. So I definitely see the bulks accelerating, I think, in a pretty sizable way as we move through the back half of the year. You know, we're going to keep plowing along on the domestic intermodal front. I'm pleased with the growth, but it's a tough market out there. There's no doubt about it. So we'll see how that unfolds. I'm excited about some things we have ramping up in that business unit. And frankly, some of those merchandise areas kind of present a little bit of a mixed headwind in some of those opportunities. As you know, that carload area is pretty strong since for RTM, but that's an area where in the forest products and steel and some of those areas where We're definitely not counting on a rebound the back half of the year. So hopefully that's a little bit more color. I think, Patty, there's one more thing I think is important that everyone takes away. Our guidance is assuming the worst topics. So unless it's one of long duration, when I say long, more than two weeks, we're anticipating that, we're planning for that, and it's not going to impact our guidance. Once we get beyond that, I think we'll be in a very good position to have a better response more responsible line of sight at the end of the year. We'll see how the labor situation plays out. We'll have a good picture of grain, I think, by then, and then we'll look at if we need to change it around. Thank you.

I appreciate that.

Thank you. We go next now to Steve Hansen with Raymond James.

Yeah, good afternoon, guys. Thanks for the time. Look, if I'm listening to your recap this evening, it's almost like you weren't operating in the Western Corridor. One of your peers talked about a lot of congestion problems in the West, and it raises a lot of questions about ultimate capacity out West here and how that's serviceable into the key corridors or key port terminals out here. I mean, how do you feel that you were able to escape the congestion issues that the other faced? And, you know, do you feel like the capacity into the key jurisdiction here is still sufficient for you? Any comments around that would be super helpful.

Yeah, Steve, let me focus our comments on TPKC. And, you know, I've said this all along. You can't oversubscribe your network. You've got to understand your capacity. You've got to understand your your limitations, and you sell to the strength of your franchise. You don't oversell it. You don't oversubscribe it. You've got to have the right number of locomotives, right number of cars, right number of crews. You've got to understand what the business is coming on. And at our railroad, we focus intently in a very disciplined fashion of making sure that we right-size our assets and we sell to that capacity. That's a discipline. You know, if you let your aspirations get ahead of your capacities, then ultimately, I know, that we would get in trouble. And as an operating CEO, I'm intently focused on that routinely. It's a discipline that's woven into our DNA, and as long as I have anything to do with this railroad, and or anyone that I train and work with has anything to do with this railroad, that's the way CTKC will be run in Canada, U.S., and Mexico. It's the recipe for truly running a true, precision-scheduled railroad that provides great service, controls costs, allows earned margins, and allows it to be sustainable for your customer because they're making their decisions based on our ability to keep our word and do what we say we're going to do. And the last thing I want to do is destroy that credibility because they have very short memories. Very helpful, Mike. Thank you. We go next now to Tom Wigwitz with UBS. Yes.

Yeah, good afternoon. Keith, I wanted to ask you how you think about, or John, how you think about capacity of some of the services you have, and also maybe how we think about the potential for 2025 to be a strong margin expansion year. I guess I think of just one example, but, you know, 180, 181, you probably still have a good amount of capacity, so you see some growth that should be pretty strong, incremental margins. You know, you've had some noise this year, kind of, I guess, anticipating the labor issue and so forth. So I just wonder if you have kind of a broad thought that, you know, potentially set up for a pretty strong margin expansion year next year and how you think about available capacity on some of the services you have. Thank you.

You know, we're well positioned from a capacity standpoint, Tom. It's a great question. 181.81 is a perfect example. You know, we're eating some margin because we've got that service out there. But to John's point, it's up 50% here since the beginning of the year. That train is running at half train length. So we still have additional capacity to sell it to, and the margin is only approved once you've got the base cost covered in that train start. So, again, all across this network. All these lanes that we're selling, we said this to the SPV and I'll say it again and again and again, we're building this network out to match these synergies so that we can onboard this business not deteriorate our service offering, not deteriorate our car cycle times, our locomotive productivity, all those things that allow us to run a successful business to be able to continue to pour records amount of capital into this network so they can grow in a responsible way that rewards the shareholder as well as provides the customer the reliable service they need. That's the recipe. It's not rocket science. The issue is having the discipline to execute it. And if you do that, you're going to continue to put yourself in a position of success that, quite frankly, has proven to be very unique in this industry.

Do you think the available capacity, it's fair to think it's broader than that particular service that you would have it across, you know, kind of multiple areas in the network?

I would say we're not capacity constrained in any way. That's probably the best way to say it. And think about the capital that we're spending. In line with our STD submission, we said we're going to spend about $275 million. We're well on our way. We've got seven, eight sightings in. We've got the Bridge of Laredo that's about to be completed. I was just looking at the progress of it a couple of hours ago. It'll be done. It'll be online. We've got six or seven capital projects we did not even plan that we added into the capital envelope in Mexico based on the learnings of last year when we put that task force down there that haven't came online yet. So they're at what I would call critical capacity points. Once that capacity comes online, you're going to see locomotives move faster. You're going to see cars move faster. You're going to see costs come down. And guess what? You're going to create capacity for more growth. So again, this network is not capacity constrained. It's our job to make sure that we don't get in that position as long as our customers work closely with us, they give us good forecasts. Now, I'm not going to say that we can go back to March of this year and we had a 40% increase in business on the west coast of Vancouver, and it oversubscribed that support. It actually did. We took decisions. We took steps responsibly responding to that in March to make sure we weren't oversubscribed. We allow contracts. clauses to be relaxed so the traffic could be diverted so that our customers could still continue to meet their customers' expectations. We also allowed contracts shifting to occur early in anticipation of the strike because we knew at that time we thought the strike was going to happen in May. And it was our responsibility to make sure we protected our capacity so that we could deliver for our customers and bounce back from that strike in very good fashion. And that's exactly the rhythm and the discipline that we've applied as we go forward Whether the strike happens in August, September, October, God help us, it doesn't. We need to get this uncertainty over. But this railroad is going to deal with what we can deal with, control what you can control, and you're going to have a very differentiated outcome if you do that. And, Tom, let me just add, we laid out a year ago guidance for 2024 to 2028 of high single-digit revenue growth. And we're right on track for that in year one, and we have plenty of capacity to support that revenue growth, and we're going to bring it on at a well-incremental cost.

Great. Thank you for the time.

Thank you, Todd. We'll go next now to Scott Group with Wolf Research.

Hey, thanks. Afternoon, and I echo the condolences on Pat from earlier. Nadim, at the beginning of the year, you talked about an inflation sort of catch-up. Can you just give us an update on how that's playing out and same-store price trends? And then maybe just, John, just some thoughts. Like the RTM carload spread is just so wide right now. I think it was like 10 points in the second quarter, similar spread in third quarter. Is this the right way to think about the business sort of going forward with the synergies, or is there something sort of unusual just given commodity dynamics? How should we think about this? What's the right spread, I guess, going forward?

Scott, you know, you're right on. I mean, we highlighted that there's going to be an opportunity to to have some some pricing catch up just the way the contracts the nature of the contracts and just the way that cost inflation that surged so much in the previous call at 18 months 22 and 24 months so we're starting to see on the cost side inflation uh moderate um you know kind of in that mid three three and a half percent kind of level um we're seeing the the strength of our service being uh being rewarded in the marketplace and we're seeing kind of the same sort of pricing in that north of five. So that spread of pricing versus inflation is widening. And I don't see that changing. In fact, I see that accelerating to an extent more so because I see inflation moderating further. I mean, we've seen that across the board of whether that's on the material side. You know, labor has been a bit higher. But again, that's going to moderate over the next year. And so I think we're going to see the benefits of strong pricing and lower inflation. I think that's going to be helpful to our margin story. And Scott, on the RTM and carloads question, I mean, RTMs to us, what we get paid for, they're the most important metric, even more so with this new expanded length of call network. So what you're seeing in the spreads today is accentuated or exaggerated because we haven't yet lost that loss of the short haul low-profit business that left us, I guess it was fourth quarter of last year. Order of magnitude, that's 170,000 carloads. So if you get caught up in the carloads, you're going to miss the power of what's really occurring. Every carload that we have with converting late to fall, whether it's 30% longer, 40%, 50%, your miles aren't going to catch it. So, again, RTM should be the holy grail when it comes to this railroad, not carloads.

Makes sense. And just so I understand your point, Nadim, even with the new labor deal coming, you still feel good about labor inflation, overall inflation slowing?

I do. I do. I think we've been accruing what we anticipate is a fair ruling and a fair kind of win-win situation between us and labor. And so I'm not concerned about that. I mean, in the near term, We're going to have a bit of a headwind. We had a significant casualty cost that we faced in July that we're going to feel in the third quarter. That being said, there's still two months left in the quarter and we're going to keep them on the rail and we can help mitigate some of those costs. And I think we've seen some additional stock-based comp costs that we're going to feel in q3 year over year outside of that the way the network's running um and the operating leverage that i see in front of us um i think more than offsets uh some of those costs, and I think we're going to have a very strong backup half of the year. So, you know, perhaps not sequential improvement in the OR in Q3 because of some of those headings I just mentioned, but I think in Q4 we're set up to have a record operating ratio for CPKC, and I think it's going to be a very strong finish to the year, and it's going to set us up for a 2025 that I think could be a very powerful earnings model. Scott, I just want to comment on the Carlos and RTMs, just to give you an example. Right now, I think Q2, our average length of haul is up about 6%, but if you look at our domestic intermodal, it was up over double digits on average length of haul. And again, that's just indicative of what exactly Keith described on that that shift in in business and frankly as i look out to the second half of the year as i see some strength in and i think our international franchise there's a you know a really good chance we can play catch up and kind of you'll start to see that that deviation come closer together as we move through q4 very helpful guys thank you

Matthew Scott.

We'll go next now to Brandon Ogulinski at Barclays.

Thanks for taking the question, and again, condolences to Pat and family and friends. Keith, or maybe John, I guess, you know, when you speak about the Laredo Bridge expansion, maybe we're overemphasizing how much capacity that adds to the system, but how do you approach that you know, with a balanced outlook for growth with customers, but also balancing the need to keep consistent service. And where do you think we're going to see the results from that expansion most immediately in 2025?

You're going to see the results to me would be about train speed and train velocity. You know, it's going to be singles and doubles. There's not going to be any big home runs. You know, you think about it today, you're running four-hour windows. So it's suboptimal when it comes to trains. You've got a number of trains that are going to be in queue, could be in queue for an hour, could be in queue for four hours before it gets to change. All that goes away. The queue disappears. We get to make meets on the bridge. We'll work well with UP. UP is going to work well with us. It's going to be a smooth transition. We're working out the details now for UP to have a crossover coming off that second bridge. So, again, we're both co-located on the bridge. We both will do better. The velocity is going to improve and our assets are going to turn faster. So, again, it would be baked into the metrics that World Beating Home runs, but it makes a meaningful difference in today's operation and most especially in tomorrow's growth. And, Brandon, it's a differentiator in the marketplace. It is what my team is using to sell to the customers expanding down in Mexico and really feeding that cross-border service. It's about security. It's about service. It's about capacity. And the second bridge – honestly just adds to that capability that differentiates us against other routes in and out of Mexico. And that's a strong selling point to our customers. Thank you both. We'll go next now to John Chappell at Evercore ISI.

Thank you. Kind of staying with that theme, John, we're getting a lot of, I think, concern or maybe even excitement, depending on who you are, on potential tariffs and what that means, especially in New Mexico. What are your customers telling you about potentially front-end loading or being more proactive as it relates? to imports, either the West Coast to Canada or to Mexico? And then also, where does the service stand right now? I know there were some maybe hiccups at the initial stages of the integration. I know Mark and his team made a lot of progress there. Where does the service stand on Mexico if there is a surge in the coming months?

Service has never been better. What about you, John?

Honestly, John, we just ran a number of tough loads, imports through Lazaro up into the Houston market. I think they're on our rails for three and a half days. That excludes time at the port in that. It's a really good customer experience. I would say it's been up. To your point, it's been a slug. It's been educating about what import-export freight can look like through Mexico and So it's been a pretty big learning curve with the customers, but we're starting to produce some results. And I'll just give you an example, and you've probably seen some of this, but we've actually had five new service calls recently announced at Lazaro, a couple of new mayor services, O&E, MSC, CMA. And I think what we're seeing is we're building confidence. The service level, as Keith said, is strong, and we're demonstrating that. And, frankly, there's good demand intra-Mexico. But that intra-Mexico demand brings with it the opportunity for space on those boats. to then flourish and provide capacity for cross-border. And you're right. You know, we certainly have some pending labor issues that could take place on the East Coast. And combined with these new services, we think it sets us up well for, you know, continuing to grow that Lazaro opportunity, the back half of this year into 2025. Thanks, John. We'll go next now to Ken Hoxter at Bank of America.

Hey, great. Good afternoon. And again, my condolences to the CPKC and Pat's family. I've known Pat for over 20 years and always brought definitely smiles to the room. So just to clarify, Nadeem, on your OR improvement, I guess you're not looking for OR improvement in the third quarter. And I think you said significant improvement. Is that like maybe 300 plus basis points to get to sub 60 in the fourth quarter to get to your double digit earnings? Does that sound right? And then is there clarification on the level of stock based comp return that comes back? And then lastly, just a quick one for John. It looks like the grain crop, I think you've got an average crop built in. It looks like we've got a decent one shaping up. Any thoughts on the size scale of the market at this point?

Ken, just sequentially, I don't see necessarily improvements in the OR, just given, like I said, some derailment costs in July and some additional stock-based comp in this quarter relative to a year ago and higher versus Q2. As far as Q4, you know, we had a very strong Q4 operating ratio in 2023. And I see year-over-year improvements in the OR, Q4 2024 versus 2023, which puts you at a very good operating ratio. Yeah, Ken, you know, being a grain guy, it's never made until it's in the bin. We are pretty optimistic in Canada, and I think what we're particularly optimistic about is if you think about last year's crop and even going back to the 21-22 drought crop, You know, our growing territory felt more of the effects of that. And as we sit here today, we certainly see significant improvement in the CPKC growing territory in southern part of the provinces. You know, in terms of projections, You know, we've kind of settled in, in our mind, in our modeling, at about a 73 million metric ton or so. But, you know, customers are talking about possibly 75 to 78 million metric ton type crops. So we'll see. We've got a little bit of time left to go, but certainly optimistic that it could be a strong rainfall. Great. Thanks for the thoughts and time. Appreciate it. Yeah. Thanks again. We'll go next now to Brian Ossendeck at JPMorgan.

Hey, afternoon. Thanks for taking the question. Maybe, Nadim, just to follow up on the OR commentary, I mean, that seems pretty reasonable that it would deteriorate if you're expecting a labor disruption, you know, here in the quarter. I just wanted to clarify that or if maybe the derailment is a bit bigger than than we thought. And then just for John, if you can give us some context around the end markets that are potentially affected by the peso. You know, we've seen a pretty big swing post-elections, probably going to stay a little bit more volatile in the coming quarter. So does that have an impact on those calls at Lazaro, be able to offset that with other maybe cost improvements or maybe price it on a dollar basis? Like how do you work through that volatility and what are the customers looking for?

Well, Brian, you know, honestly, I don't know if we've felt a whole lot of effect at this point, or at least I can differentiate what would be, you know, just sort of broader macro softness in some of the areas in and out of Mexico, that parlor business, particularly like some of our steel business down in that area. You know, I honestly, because we don't have a what I would consider regular cross-border import-export business at this point in Lazaro, I haven't really felt much on that. And, frankly, I would say just the opposite to customers' expectations. The seam ship lines we're working with, because of the strength from Mexico that we're seeing right now, have actually been pretty excited about what the cross-border opportunity could present. You know, I don't know if that's just forward thinking, Brian, in terms of, you know, expectations on the peso to moderate some or not. But nothing I can really call out to you right now that has materially impacted our cross-border flows. Brian, just reiterate on the OR. Yeah, we had near-term additional costs associated with some casualty. That is going to be a step up in costs in the quarter. And then, yeah, I mean, reasonably, we think we're going to have a labor disruption, and that's going to have an impact on the OR. So, I think from our perspective, I think it's responsible to highlight the fact that there's going to be costs associated with what we think is going to occur. You mentioned that maybe end of August, that that's a likely event. And so factoring that into what we think is going to be our margins in Q3 is responsible. You're going to get me in trouble with Tony Hatch for talking about the OR, so my bad.

All right, guys. Thanks very much.

Thank you. We'll go next now to Kevin Cheong at CIBC.

Hey, thanks for taking my question. Good afternoon, everyone. I'm just wondering, with the FNC halting this Gemini alliance, does that have any near or medium-term implications in terms of some of the growth you envisioned either later this year or into 2025?

Yeah, you know, it's a really good question, Kevin. You know, frankly, since COVID, the international business unit is the volatility in some of those freights and port flows, as Keith spoke to earlier, that we experienced in March, April, has presented more challenges. And I can tell you, we are strategically, as much as we say, very much into picking our partners and how we align, rethinking in a lot of areas how we think about that international space. Certainly, HAPAG is one of our largest customers, the most trusted partners. We also have a significant business with maersk um so i i would tell you generally speaking i'm excited about it um i think it presents opportunities from us for us coast to coast both vancouver and in um port of st john um and certainly then with apm terminals uh operating down at lazaro and frankly maersk announcing tuning services uh we're actually a new service and revised service where They're calling on Lazaro, the head of Manzanillo, I think presents a really good opportunity for us. Now, we'll see. It's not all done yet. I know they're working through a lot to get that completed. But if, in fact, that does what we think it could, it could present certainly a good opportunity in the international space in 2025.

That's great. Thank you for taking my question.

Thanks.

We'll go next now to Stephanie Moore with Jefferies.

Hi, Jeffery, and thanks for the question. I apologize that this was asked earlier, but just looking at the most recent weekly kind of RTM data, it does look like you're standing apart from maybe some of your peers as of late. So just curious if you're seeing anything kind of specific, maybe having to do with some near-term dynamics, Fire strikes the like just kind of curious who does seem to stand out a little bit or just have to do with maybe a big jump in Mexico. But maybe if anything you can speak to this some of the

Yeah, I mean, we are lapping the port strike from a year ago. That's been beneficial. But certainly, I mean, we're seeing strength across the board. And what have been some macro challenges, if you think about domestic intermodal, for example, that's turned into a positive. We're starting to see confidence in the new grain crop. So grain is strong year over year. So I think across the board, you know, I think we're up almost 14%. our PMs quartered to date. Now that's going to slow a little bit as we lap this strike benefit year over year or strike comp. But I think we're still set up for a very strong Q3 and back half of the year. So I agree with you. We are kind of setting ourselves apart from some of our peers. If you think about this transaction and what it provided we kind of did things a little bit backwards we saw the benefits of synergies on the front end in an environment where the macro was weak now we're going to continue to see the the synergies ramp up john talked about the exit rate closer to 800 million um on the top line but now we're also starting to see the base business that was weak in the you know last year and a half start to rebound So, you know, Canadian grain is a big part of our franchise. We're starting to see that recover. On the immobile side, we're starting to see the benefits of our domestic franchise and some of our market share wins, and we're starting to see the macro improve. So that's going to start being a tailwind. So some of the base business, and I can go on with coal and potash, is starting to recover. And so as that base comes on with synergies, We're seeing kind of that double effect of outsized growth that we talked about at our investor day last year, and I think that is going to create a lot of operating leverage and allow us to get that growth to the bottom line. That's why we're so excited about, you know, 2025 and beyond.

Got it. So you wouldn't necessarily call out any kind of short-term dynamics that you're seeing the last couple weeks because of some kind of some kind of outside event, so to speak. This is kind of you're running the playbook as you outlined.

Yeah, a little bit of the comps year over year, easy comps from the strike that occurred a year ago at West Coast Sports in Canada. That's the benefit. But outside of that, no.

Okay. I really appreciate the time. Thanks, guys.

Thanks, Sydney. We'll go next now to Sherilyn Radborn of TD Cowen.

Thanks very much. Good afternoon. Thanks for squeezing me in. John, I was just hoping that we could dig in a little bit more on the exit run rate on the revenue synergies, which sound like it could be up to $100 million higher than originally expected. Could you talk about where you're seeing that outperformance from an end market perspective and whether that's as evenly balanced as synergies overall?

Yeah, sure, Alan. So a couple things. You know, when we originally built this two, three years ago, like the world has changed and evolved now as we sit here today. And I've talked a lot about that, you know, Autos was an area initially we thought would be a longer-term story, but actually is with our Wiley compound and some of the opportunities out of Mexico has actually pulled ahead to be in an early story um if you think about the intermodal business and i'm going to say largely domestic intermodal and auto that's making up roughly i'm going to say about half slightly below half of of the synergies And then the other half is split between our bulk and our merchandise ECP franchises. Now, you know, an area I'll call out that we didn't expect to be quite as strong at this point with some of our grain into Mexico. But I'll give you an example. This month in July here, We've run, I think, 15 trains between corn, wheat, soybeans off of our traditional legacy CP franchise, whether it be southern Canada, North Dakota, Minnesota, down into Mexico. I think the prior month was nine. The prior month of that was six, if my memory calls. So we're seeing a nice ramp up in that bulk franchise. that may be coming on a little stronger than I initially had anticipated. I hope that helps.

That's perfect. Thank you.

Thank you. We go next now to Kunar Gupta at Scotia Capital.

Thanks, Samuel. Good afternoon. Thanks for speaking. John, I think you alluded to earlier on the call about some international intermodal shifts. There was some market share shift as well as some new wins. Can you please elaborate? And then, Nadeem, I think you mentioned about some cost impact. Is there any sense on the magnitude of those two items, casualty and stock-based farm? Thanks.

Yeah. Just on the share piece, just call it like it is. We shifted Costco partially out of our franchise at Vancouver, and we've brought on, you know, a corresponding piece of O&E business. And, again, this goes back to what I was talking around, really right-sizing our partners at the Port of Vancouver and also with an eye to what these partners can do with us across our entire franchise. So St. John, Lazaro. And as we kind of rework this book, you know, there might be more to come in how we do that. But rest assured, we're high grading the overall franchise value of the book. with those shifts and doing it with an eye towards using our entire network now that we have the leverage of CPKC. And, Kornar, just on the stock-based comp, I mean, as you know, we mark the market each month, so that amount is still to be determined. We'll see what occurs on, you know, September 30th when the quarter ends. And on the casualty side, you know, we had one incident alone that was in July earlier this month that was in the neighborhood of $45, $50 million worth of cost. So that's why I highlight just how how this is going to be a headwind. And so, you know, like I said, there's an opportunity to maybe avoid costs in the remaining part of the quarter. That's our goal and intent to keep them on the rails. But just given this cost occurred, I wanted to make sure I highlighted it. Thank you. You're welcome. We'll go next now to Ravi Shankar at Morgan Stanley.

uh thanks enough for everyone and uh our thoughts are also the cbgc family as well uh just kind of on that point nadine thank you for clarifying the size of those two items if i can ask you as well you said uh there are some strike related uh cost items in the guidances or in the or walk as well is that purely kind of a cost thing or are you also trying to quantify any diversion of volumes away that you're seeing right now and to come? And also, on that diversion, is that something that snaps back right after you have resolution, or does that take longer like it was last year with the port strikes, or how do you see that playing out?

No, so we've already faced some revenue headwinds in May before the The labor disruption was delayed, if you will. You know, I'm not factoring necessarily into the commentary about an OR sequential headwind related to that, anything tied to revenues. I think, you know, it's going to be a delayed revenue, if anything. So I think it's a cost element. I think we're going to start, you know, we will see the network be brought to a halt. And then to ramp back up, it takes some cost. It takes time. You know, you have these inefficiencies over a period of whatever, you know, the 72-hour notice, and then whatever period that the company is out. So that's how I would highlight the cost that had been associated with the strike. Well, you can't put a number to it to make Dean's point. You know, domestic intermodal, right, can be trucked, and certainly we'll face some of that. But the rest is kind of, as he said, delayed, and, you know, it'll push volume certainly into Q4 and likely into Q1 of next year, depending on how long the stoppage would be. And the uniqueness of this time is that you've got both railroads, right? That creates a a very different scenario than we faced over the last 20 years. And so, it puts a different pressure on the supply chain, and it has a different dynamic as far as the recovery for the supply chain and for Canada as a whole post labor disruption.

Robert Hopkinson- Understood. Thank you.

Robert Hopkinson- Thanks, Ravi. And we'll go next now to Ben Nolan with Stifel. Oh, thanks. I appreciate you guys getting in.

I wanted to go back a little bit to pricing. I know that it had, and you alluded to this a little bit ago, but there were still some legacy contracts pre-merger that were set to be repriced, and I think you were doing some of that in the third quarter. Curious if all of that has been worked through, if there might be a little bit more juice to squeeze on some of those contracts.

You know what? We are getting into the late innings of the base book. There's probably one big one out there that remains. But for the most part, we have worked through just timing-wise. They didn't have a lot of multi-year contracts. Most of them were annual. We've been at this now going on close to a year and a half or whatever since April of 23. So we've rolled a lot of that over now is the direct answer. All right. Thank you. Yeah. And we'll go next now to Benoit Poirier of Desjardins Capital Markets.

Yeah, thanks very much. Good afternoon, everyone. Could we maybe cut back on the overall labor issues and whether you believe it puts Canada's reputation at risk and Do you feel that there's a lot of business on the sideline that could come back in light of labor resolution? And also, if we look in the U.S., there's the port workers, the contract with the ILA port workers that is set to expire in September 2024. And I was just curious to see whether you see any potential benefits in light of positive cargo diversion. Thank you.

And then I'll take the reputational damage. It's undeniably present. You know, you think about what Canada's going through, the port strike last year, how long that lasted, how much pain and suffering that caused for customers, how much credibility impact. Some of that traffic's not came back to the West Coast. So undeniably, fast forward to this, you have both railroads shut down. At some point, customers, as much as they need our products in Canada, they're going to get labor unrest fatigue. So we've got to get beyond this. I don't have a magic bullet for this. I don't know what the secret answer is. All we can do is continue to be at the table. We have figured out how to negotiate successfully with every other collective agreement we have in Canada. This is the only group, TCRC, that we just can't get there. So we're going to not give up, remain cautiously optimistic, but we're not going to do a bad deal either. I'm not going to punish this company and let this company suffer because we don't have the discipline to say no and do what's in the best long-term interest for all employees that's fair across all employees, including the TCRC. then i'd say the answer is yes to your your question there regarding the east coast um you know potential strike there's ongoing dialogue with with the with the steamship lines on alternatives and frankly direct with bcos that are that are looking for i'd say we're we're kind of really aiming but some of these tests that i talked about over or Lazaro were specifically designed with the intent of traffic that is going through the canal and using the East Coast today, that, you know, could this be an opportunity to do something a little more permanent at Lazaro? And I also do believe it presents a potential opportunity up at Port of St. John. So we'll have to see how that plays out.

Thank you very much, Port of St. John.

Thank you. And ladies and gentlemen, we have reached our allotted time for Q&A. I would now like to turn the conference back to Mr. Keith Creel. Well, listen, let me close by thanking you for your time. I hope the comments provided some color on this unique network and this unique value creation that we're unlocking. You know, I think back, especially now in light of Pat's passing, I think about what we committed to and what we agreed to do. Pat and I combined these networks to enable growth and to create competition and and unlock unique value for all stakeholders across the entire supply chain. That means good paying jobs for our employees. That means great service for our customers. That means real network capacity for our nation to grow, for all three nations to enjoy prosperity and to increase trade together. And we're doing exactly that. So we look forward to sharing another chapter in that growth story when we report our Q3 results. And until then, stay safe. Thank you, Mr. Credo. Ladies and gentlemen, that does conclude today's CPKC second quarter earnings call. Again, thanks so much for joining us, everyone, and we wish you all a great evening. Goodbye.