Canadian Pacific Kansas City Limited (CP) Earnings Call Transcript & Summary

Okay. Good afternoon, and welcome back to Barclays 38th Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst. And next up on the transport track, we do have Canadian Pacific. The Canada's second largest railroad, but obviously not second in ambition, I'd say. They generated about $7.7 billion in Canadian revenue last year with a, nearly, 57.1% OR for the industry. And joining us from the company today is CEO, Keith Creel. He's been with the company since we had a turnaround back in 2013 and was promoted to CEO in 2017. Before that, he was COO at Canadian National and started his career, I think, almost 3 decades ago at Burlington Northern. And so I know we're going to have a great chat. And just as a reminder, usually, when we're down in Miami, we have the audience response system. For ownership and sentiment on Canadian Pacific stock. If you are a shareholder, we'd love you to take the survey on this webcast, just click through the 6 questions. The feedback is always appreciated. And then last but not least, if you have questions, please hit the question link or e-mail me, we'll try to work them in here. So Keith, I know you had a couple of things you wanted to mention before we get going in questions.

Brandon, thanks. Appreciate the introduction, and I always appreciate the opportunity to speak about our CP story. I also appreciate you reminding me that I'm not the youngest guy any more. 3 decades in this business is -- time flies when you're having fun. So let me start by saying and expressing a huge gratitude of thanks to our employees. We talked about this a lot last year. Our CP railroaders are 12,000 strong CP family created a very unique outcome in a very unique and challenging world, both locally and globally. And I'll tell you, their efforts and their sacrifices and their contributions make me every day proud to serve with them. And I'll tell you, especially, so I think about the past couple of weeks, and I'll speak to this in my comments, we're a Canadian railroad. It's an outdoor sport. We've been really reminded of that the past 12, 13 days specifically, and I count every day because, obviously, the weather has created some challenges for us. But with that said, we're not going to focus on the challenges we try to turn challenges into opportunities because at the end of the day, it's what you do with those challenges, it determines how you succeed. And I've got extreme level of conviction and confidence in our ability to produce as we have in the past. So with that said, let me say this. Today is a very special day. You may not be aware of this, Brandon. A lot of people likely or not, but today is our birthday. Canadian Pacific is 140 years old today. So I think our predecessors are forefathers for having the vision to incorporate this company on February 16, 1881, to give us this opportunity. We've got a rich history that we take seriously. There's a lot of private in this company prior to our past and also pride in our responsibility and what our shareholders and our customers expect us to produce as we go forward. So with that said, let me say this, the first quarter, I'm extremely pleased with the way it's playing out. Our RTMs right now are up low single digits in spite of the last 12 days of headwinds we've had with weather. I can tell you that January was a very strong month. We carried momentum from the fourth quarter into 2021. We exceeded expectations, both on the cost side as well as the revenue side, which created a bit of a cushion for us, which we're absolutely calling on now, but at the same time, it sets us up well as we go into March. So we've got from a compare standpoint, you probably saw some weakness in our numbers today with the RTMs that were reported. That's on a backdrop of this weather that I've spoken to as I look to next week and the following week. Two of our biggest weeks in the quarter, our two actual biggest weeks in the quarter from a compare standpoint. But in spite of that, the weather is broke for us, we're on the tail end of our coldest days, we're getting back to an ability, at least on 90% of the network today, we can run big trains, which is the first that we've been able to do that. Or I could say that in the past 12 days. And as I look forward over the next 48 to 72 hours, our entire network will be out of the deep freeze, we'll be able to get our rhythm back over the next week, and you'll start to see sequential RTM growth. We sort of hit the low point, I think, this past week. And then once we get beyond those tough compares, if you look at March, the first 2 weeks, we had fair compares, not as strong as these next 2 that we're up against. Then we get into the last 2 weeks of March, if I look at last year, and that's when we start to see the pandemic start to affect us. And of course, it dropped off in April. So we're set up well with the demand that we have. Overall demand across the entire book of business, I feel very good about our opportunity to overachieve in March. And I still feel very bullish about our year outlook. So with that said, let me stop with that, and I'll take anything else or any other issues or points that we may want to talk about in my questions. So over to you, Brandon.

Keith, yes, thanks for that intro. And I guess, happy birthday to you and all the CPRs out there. Not to focus on the near-term too much, but it sounds like whatever disruption you've got on the network because of whether it's nothing from a commercial standpoint, I mean as you just reiterated, your full year outlook still remains intact. That's correct, right?

Yes, absolutely, Brandon. And let me elaborate a bit. We've got a very strong list of initiatives that are, again, unique beyond what the economy has given us that are coming to fruition for us in '21 that gives us our bullishness in our guidance and our expectations for the year from a demand standpoint, and nothing's changed. The CMQ, the St. John, terminal expansion, capacity increase. We've got the Hapag-Lloyd that we talked about last year. That vision is coming to reality last week of February, we actually had the first shift that's going to land. And we anticipate that with performance there. And on a backdrop of a potential strike in Montreal that, that business is there to stay. So there are to the possible instead of that coming to us the first week of March and staying for the balance of the year. We fully anticipate one potential reality as it comes in February, and we keep it. So we get essentially a month early. So that's playing out well for us. Maersk, we're super excited about that as well. That's a transformational contract that we signed last year for a bunch of different reasons that we've talked about in the past. That's ramping up. We're -- full integration the beginning of March for that business. We've got a full year of automotive growth with Globus and FCA, which are both contracts that we did realize full year, last year that we signed that we'll get to enjoy this year. Continued strength in grain as we build out this 8,500-foot redefining what good grain movement looks like in Canada, this model, specific to that. We finished 2020 with about 30% of our elevators that can launch an 8,500-foot train. We've got more facilities that will either be new builds or expansions of existing facilities. They are going to get us to about a 45%, 46% of our origin network that can launch those trains. You couple that with our increasing profile and demographic of these high capacity cars that we're purchasing that's a needle mover for us. The DRU , that's something in 2021, we've been talking about for a long time. That comes to fruition. And I'll just remind our investors when that comes on a this summer, bullish nameplate capacity is 100,000 barrels a day. That's essentially 2 trains a day. We've got 1 of those 2 trains committed. That's going to come online mid-summer that's accounted for within our guidance. But that second train, we think, by the end of this year, we'll be able to talk about successfully selling that capacity as well. So from an energy standpoint, ECP, as demand comes back, that's another broad area for us with refined fuels as demand normalizes with the macro economy, which we feel strong about in the second half. So really across the entire book brand, and I could speak to any business unit. There's underlying strengths that gives us our conviction and our bullishness on our outlook for this year.

I definitely appreciate that and want to dig into each one of them, but maybe even higher level. I think at your Analyst Meeting a couple of years ago, and I'd love to come back to this, but the constructive tension, I think, is what you called it, within the business and your management team. This culture seems to really be delivering. Is that possibly your best asset? I don't mean this to be a softball question, but it does appear that you guys are performing a little bit better than your competition right now.

Yes. I mean, culture, at the end of the day, this is a people business. It's people managing processes. And quite frankly, the culture created in this company. I was blessed with a company of railroaders that had a whole lot of pride and wanted to do well, and we tapped into that. We tapped into that pride, we tapped into their ability and commitment to work and their talent and their skill set and what we've done, effectively turning the company around operationally, you took strategically that same discipline that culture of performance and accountability. That's the key word. And applied that to our marketing team, and we've created a culture across the company, where simply said, we know as leaders, we have to produce results. It's a culture of accountability. It's one that I'm not going to apologize for it. It's -- we're in a pursuit of excellence as cliche as that may sound, you have to keep recreating yourself continually. I say this, and I say this often internally, success breeds success but it also breeds high expectation. And when you have investors and customers that have expressed their trust in you, either voting in or buying your shares or giving you their business, we've got to work hard to protect that and to honor that daily. And then when you do that, as we've seen in the marketplace, shareholders are going to reward that trust that you learn in that respect. This as well as our customers have as they allow us to partner closer with them, building out these unique, what we call self-help initiatives, customer-specific solutions that allow them to win in their markets. And when you do that, you can continue to create the kind of success that we've created. But again, the culture is the bedrock and the foundation. There are no free rides. We all have to earn our seat at the table. But when you do that and you surround yourself with people and a team, that understand that value proposition and that are wired that way and that aspire to do something better than themselves collectively as a team. That's the secret sauce. It's hard to replicate. It's not easily replicated, but I can tell you, once you get it, once you create it and you continue to strive and sustain and protect that culture of accountability and performance and delivery, delivering our results. It is a difference maker. And it is what I think is very unique about this company.

Well, and I guess on those lines, John Brooks, your Chief Marketing Officer, I think he would say we work very close with network planning and operations to make sure that we're taking out the right capacity. Is that -- is this just a different way of running the business because you've been at a number of railroads through your career now?

Well, I'll tell you -- I don't know if it's I can't speak to what the other railroads do, but I think it's very unique for what I've done in my career, and it was very intentional. I've experienced PSR that works well, and I've experienced PSR that doesn't work so well. And I realize at the end of the day, if you overcommit your capacity and overcommit the ability for your operating team to produce what you sell to the customer, it destroys value. It doesn't create value. So I knew when I took over this position. Took over this job. For us to grow, it had to be profitable, sustainable controllable growth. It can be growth for growth sake. Because if you do that, you not only destroy your profitability you destroy your ability to deliver to your customers and then you destroy your credibility, which again, it's all woven together. So at the end of the day, it's what's worked for us. It's what will continue to work for us, and it is part of our secret sauce. And John and Mike Foran, who leads that for us when it comes to rightsizing assets, to look at it a business opportunity that comes, how does it fit the market? How does it fit our network? What train capacity do we have? What crude starts will we need? The last thing we're going to do is overcommit and underdeliver. And I personally take, as an operating CEO, a hands-on approach in these models. When we talk about these big contracts that we go and sell when we talk about a Maersk, when we talk about these needle movable transformational opportunities, at the end of the day, rest assured, we all set it as a table. We make sure that what we commit to, we can deliver -- we control the growth in that way. And I think at the end of the day, our customers that we've partnered with, and we learned a long time ago in this journey, we can't be everything to everyone. But the ones that we commit to, we darn well better deliver. We take that seriously. We approach every business opportunity that way, and it's worked well for us. That allows us to drive growth that allows us to get closer to our customers, allows us to protect our margins and to protect the fluidity of our network. And to me, putting all those together is what true PSR is all about. It's about creating a reliable service that's local cost that your customer values that allows them to win them in the marketplace. And if you overcommit and jeopardize your ability to do that, then you're jeopardizing your ability to succeed in my book, that's just the way it works it's simplest terms.

Well, appreciate that. And you laid out a number of initiatives this year. You called out CMQ, St. John opportunities and some intermodal contracts as well that. You've taken on as well as an automotive segment, grain, petroleum, are these all equally exciting to you? What is really driving these favorable expectations for the next year? beyond?

I mean, they're all, obviously, different quantums, but it's -- there's a couple of -- I wouldn't call them home runs, but I'd say this Maersk deal, opportunity for us, it moves the needle in so many places. It's not just a material revenue play for us. It's a material value play and the fact that we're taking existing resources. We're not having to spend a tremendous amount of capital. The capital we're spending is to support the business content overall in the facility that we're building in Vancouver and the transload facility, you speak specifically to that transload facility. Again, not only is it revenue opportunity, which, in fact, just this morning, I was talking to John Brooks, what we thought that represented the revenue opportunity that, that specific transload represented the demand for that is being received so well, but it's exceeding our expectations already, and we don't even have it open yet. So once that comes into play, and part of what's happening around us, we talk about ESG. You think about the ESG some that unique solution, the trucks that takes off the roads in Vancouver. The carbon footprint, it reduces, the capacity it creates, the supply chain stickiness it creates metric, checks all those boxes. So that deal in and of itself, especially with Maersk, customers. And I'm not saying I love one more customer than the other. I'm just thinking about the potential here with Maersk the scale that they have. They have similar ambitions. They care about ESG, they care about the environment in a huge way and their footprint is big. When they had the scale of the largest ocean carrier in the world to be able to partner with us in a strategic customer solution, I just think the opportunity there is exponential for this company, exponential for Maersk, for our customers, their customers and for the environment. So that one to me is something we're especially proud of for all of those reasons. But I can go across the other opportunities. The transload opportunities outside of that. Given that we've opened 3 trains loads. We haven't talked a lot about this, but just in the past 60 days. So last year, we built the transload facility in Montreal. We've got that above board. It's exceeding our revenue expectations with the potential to be 50% more than we thought it would be within the first year. That's something to get excited about. We just literally opened up a transload, a lumber transload facility in Bensenville, which is in a very strategic location in Chicago, which is where a tremendous amount of the economic growth and the expansion in Chicago, the North part and going north into Wisconsin is occurring that puts us in a very strategic location to benefit from that. And the demand for that is -- I don't want to say it's overwhelming, but it's exceeding what our expectations, and we just literally started to land lumber in there last week. So that's super exciting for us. We've opened a facility to transload liquids into transload propanes to Saskatchewan as well. So across the board, all these initiatives are resonating well with our customers as demand comes back in the economy. They all serve a unique customer solution that's allowing them to grow, and we're going to benefit from it. So literally, across the board, all of these we call them self-help initiatives that we've got. And we've got examples of one in every business unit, continues to give us enthusiasm and bodes well for our marketing strategy converting the capacity that we've created through implementing PSR, the reliability in our service, the low-cost margin position that we enjoy allows us to compete for business and earn cost of capital and make a great return for our shareholders. So it's more of the same in 2021. And these unique initiatives that are beyond what the normal economy is going to give us, again, continues to bode strength for this franchise and feeds our bullishness for what the year looks like.

I appreciate that. But I guess, on those lines, you guys have referenced better utilizing your terminal footprint. I think that was part of the Globus Auto deal that you have. Is there the risk that if we look out beyond 2021 or 2022, that those easy wins or the low-hanging fruit network that was underutilized before becomes that much more challenging to outgrow GDP? Or is this a multiyear opportunity?

Yes. I think there are many -- there are still many plays in this playbook. We still have other land holdings that we haven't monetized yet. We have a pipeline of initiatives. We've got some ideas that I can't talk about publicly that gives me conviction that you can expect more of the same from CP as we go forward over the next 2- to 3-year time frame.

Pretty bullish. On the grain side, it does look pretty robust right now, especially with U.S. exports to China. And I know that Canadian crop's been pretty strong. Is that maybe running above trend right now? Or should you be thinking this can continue?