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

Yes, absolutely. It's our wheelhouse. I've argued since I've taken this role that Canadian Pacific franchise for grain is the best in the industry and I truly believe it is. And to your point, with all the records being set and the focus that not only my team but our operating team puts on, on executing that business every day has produced these results. And I have no reason to believe, Chris, that they can't continue and I'll help you understand why. So I think our focus for the past couple of years has been less around, we need to develop a whole lot of different infrastructure in terms of new builds, new elevators on our property. Our focus has been truly around yield, efficiency, how do we create a pipeline in Canadian grain that, frankly, we believe is world-class, can't be matched and will really set the franchise up for the next 50 years. The old model of Canadian grain started at 56 cars and advanced to 112 cars. Our 8,500-foot model will really be this next evolution that, again, I think, sets Canada up on the world stage from origin to port to be the most reliable system in the world. If you think about it, I said on our quarter call, and I think this will help sort of really peel it back, what it means in terms of not only revenue and sustainability, but also the efficiency it drives, how it gets us to that double nickels that we talked about. But think about it this way. We've got 15 new 8,500-foot facilities that will come online in 2021. So that's a combination, Chris, of existing 56 car elevators, 112 car elevators or greenfield elevators, that are being either built new or expanded up to our 8,500-foot model. You then combine it with the car investment that we've talked about, and it becomes a powerful thing. So those 15 elevators, to run them under the old model, 112, smaller cars, will typically take about 430 train starts to run that business, okay? If you then take our 8,500-foot model, and our new bigger cars, to run that same amount of grain out of these 15 elevators, is going to require about 300 train starts, run the same grain. Your crews, the locomotives, the capacity, 130 train starts essentially being pulled out is a powerful thing. It's a huge yield margin capacity story for this railroad and you think about the majority of that being in our Western corridor, where we're seeing a lot of growth opportunity. Think about what that does for my team to be able to then go and backfill that capacity, whether it be with potash or intermodal or forest products. But also, if it's just grain, if we continue to sort of run at 430, but now there are these 8,500-foot trains, it allows us to move about 2 million more metric tons of grain from those same 15 elevators. This is why we -- Keith talks about it, I talk about, we get pretty pumped up.

Yes. I can see why. There's a lot of good opportunities there. And I think that's a pretty powerful dynamic, the idea of taking those train starts out. And I guess that's sort of is one of the factors that can drive this really strong incremental sort of margin model that you guys have developed over the years there. And -- okay. No, that's really helpful. I guess the one thing that I get questions about a lot that's always helpful to run through, if you could help us, is sort of the regulated grain piece, the pricing piece of this because I know this year, there's going to be a little bit of a give back because of some of the cost dynamics or the sort of anti-inflationary cost dynamics of 2020. So there's going to be a little bit of give back. Can you talk about sort of what that number looks like? And then, frankly, what it applies to as a part of your book of business in grain?

Yes. So as you described, we are regulated by the Maximum Revenue Entitlement in Canada for our grain business. Our regulated grain business is defined by, principally, we -- to dumb it, make it simple, it's our export grain. So it's export of Thunder Bay, export out of Vancouver, which is the biggest part of our grain book in Canada. So it's significant. The pricing for this 2021 crop year, which we're in right now, was set at a minus 7.2%. As you said, sort of a reset, recalibration. So we'll manage that like we do every year and -- so we'll hit that. The grain crop here ends at the -- in August and then it will be reset for the '21, '22 year. And we've modeled that a number of different ways. It's probably a little early, but I think we think that turns back positive as you look to this next crop year.

Okay. That's helpful. So let's see -- there's just so much to talk about. So I want to keep moving on here. So, you talked about that early in your opening comments and the transload facility that you guys are building out in Vancouver. When does that business start? What's sort of the size of the pie of that and sort of how does that sort of play into your RTM assumptions for 2021?

Yes. So as I said, it's a significant near-term opportunity and long-term opportunity for us. I think the partnership is cemented in a way that takes, what we believe, our best-in-class service, particularly in certain corridors that we focused on with Maersk and their breadth and their scale as one of the leading steamship lines in the industry and puts together that combination. So that business is actually starting up right now as we speak. We started to onboard some of it. The contract actually starts up March 1. So we'll see sort of the full volume ramp-up as we move through March. That will be principally what we call the intact business. So that will be the business that imports through the terminals in Vancouver, and then will go in train load into, whether it be Eastern Canada or U.S. franchise. So we're quite excited about that. I'm not going to talk about the exact revenue value of that, Chris. But I can tell you, it's significant and it would be sort of along the lines of what you see in a lot of these major international contracts. But that's only part of the story and, frankly, that's an exciting part of the story, but the transload and what that's going to do for our franchises on a number of touch points is what I think really gets us excited, I think what gets Maersk excited. That's going to come on. That construction is well underway, on schedule, on budget, and we expect to have that facility up, let's call it, September -- August, September time line and then that will bring in a combination of not only the international business that will go intact into Western Canada and the U.S., but also business that will go into the transload, be offloaded and then reloaded into 53-foot containers. And actually, it will shift from sort of an international move, in our mind, to more of a domestic intermodal move. And -- so we're currently working with Maersk. The uptake in that facility has been very strong. So we're quite excited. And as I said earlier, it's going to take -- it's got a great ESG story behind it, too. It's going to take a bunch of trucks off the road that shuttle these containers between the ports and intermodal facilities in Vancouver. So we're quite excited about it from that aspect also.

Yes. No, and that's an important one. We've been talking a little bit more about that over the course of the last a little bit. And I do want to touch on that in a second, the ESG angle here. But rapid ones, sort of the bigger picture revenue stuff that I wanted to kind of touch on, is the CMQR and its interplay with Saint John. So obviously, you guys have talked about sort of developing that. You want to get more out of that location. And there appears to be sort of the demand and the desire to serve that area. I know there's the potential, I think, also for partnerships potentially with some of the other railroads in the East. And maybe you can funnel traffic through Saint John and maybe kind of help satisfy demand in the Eastern United States. But can you -- maybe broadly speaking, sort of what are you getting out of CMQR right now and then how does that sort of play with Saint John?

Yes. So we -- I would say we are generally pretty conservative when we built the business case around purchasing that property. The eye of the prize there was reintroduction of CP into Atlantic Canada into the Maritimes and doing it, Chris, with a route that can't be matched. It's 200-plus miles at the end of the day shorter than our competitors' option out of that area. We're investing in, actually, maybe a positive of the COVID in the volume environment that we saw in 2020. We were able to pull capital ahead, and so we're deep into the process of rebuilding much of that line from Brownville Junction into Montreal. We're going to end up with a product that has been, I can tell you, overwhelmingly embraced by the customer base. They were starved of a real competitive option for 25-plus years from that region. So we're going to provide a service that is consistent, reliable, 24 hours to Montreal, 48 hours to Toronto and 72 hours into Chicago. And again, it's not just about -- although a big part of the story is, the Port of Saint John and the reintroduction of that really as a competitive port on the East Coast. That facility, Chris, today has the capabilities to do, let's call it, 150 TEUs. It will grow to 3 and we've got expansion plans in the works with those folks to get that up to 800. So we're going to take that facility and partnership with New Brunswick and partnership with DP World, up to what we believe can be a world-class competitive port. And as you alluded to, we're quite excited that one of our largest customers, Hapag-Lloyd, which we did a long-term extension on their contract recently, are going to join that effort and start calling on that port. And as I said, I think we're going to see a test later this month.

Okay. Yes. No, that sounds like an interesting opportunity. And obviously, getting sort of buy-in already and the potential to grow it, it seems like the demand is there. So that's going to be interesting. A couple more questions here before we wrap up. So we're getting a little late in the time here. So we talked a lot about revenue opportunity. And I think I wanted to sort of just touch on conceptually, how do you think about your growth opportunity in the context of sort of the competitive market? So I think there's always that question of, is there the ability for CP to sort of grow faster than the industry for a sustained period of time? Now you've just outlined a number of things that would suggest that you're at least on the right track to doing that but can you maybe talk a little bit about it? How does that sort of competitive dynamic play in with CN and the other rails in the United States? And how do you think your position is in terms of outgrowth relative to the group?

Yes. You know what, Chris, and here's the thing. The effort -- and we had to pause maybe on the growth element of this company during the early years, if you want to call them, the hunter years and when Keith first came to the company. We had to get the ship right. We had to get ourselves on a cost competitive and, you want to call it, OR, whatever you want to call it, competitive basis against our -- well, our #1 competitor in Canada had a significant cost advantage over us. I would say today, or even a few years back, we've evened that match up, maybe even moved ahead a little bit in some areas. So that set us up for this growth opportunity. I think there has been a, at least in the early part of this story, a natural share rebalance that just needed to take place. We didn't perform well. We didn't provide good service and, naturally, they gravitated to other rails that work. So it's -- a little bit of this initial story is about reintroducing ourselves to our customers, our markets, educating them on our service and our lanes and doing it a way that is, I think, different than maybe some of our competitors do. We've been very surgical and Keith talks about it a lot. You hear Nadeem talk about it. It's not growth for growth's sake. We've really tried to partner with customers that we believe our network matches most closely with, there's a tight fit. It's a partnership. And sometimes, Chris, that doesn't mean we go after 100% of every customer. It might be, I want 30% because that 30% I can do with you today creates the most value for both of us. So I talk to my team about it relentlessly. It's a surgical pro. It's how we grow sustainably and profitably at CP and I think that's a differentiator. I don't think others have deployed that level of maybe intricacy into how they've wanted to grow. It's a rifle shot, not a shot gun blast, in how we do it. So maybe to the root of your question, can we continue to grow at the pace we are, I'm super bullish. I think we've converted the things that we said we were going to convert, looking back to our initial Investor Day as we pivoted to growth. The pipeline of opportunities, I think, remains extremely robust for the next couple of years, for sure. And you know what? I can tell you, we're constantly looking for that next opportunity and how we can continue to extend our reach and create that unique product out there that is going to attract these customers to our rail line. And just maybe one final thought on that is we have this unique land profile at CP that just cannot be replicated. We've got land in major metropolitan areas across our network that, whether it's for terminal expansion capabilities or customer colocation capabilities, that I think allows us to create these solutions. So I'm very bullish on our opportunity to sustain this.

Yes. Certainly, it sounds like. It sounds like there's a lot out there for you. And I think you touched on sort of the service, the improvement, the cost dynamic that you guys have put a lot of hard work and effort into. And I guess you're showing us that there is the ability to do both, right? So you've been able to grow the top line, but also been able to manage the cost side of it to be able to leverage all of that growth into better margins over the long run. So I guess, maybe sort of the last quick topic I want to touch on is really kind of funny to think about, we've done 30-something minutes, and we haven't talked really about operating ratio. I think that does speak to some of the stuff that's sort of changed at your company over the last several years, right? We almost take the operating ratio as a given, not that we really questioned folks like Hunter and Keith in the past, but I think things have changed a little bit and there is this exciting revenue story to talk about. But listen, investors sort of -- always sort of start and then ultimately come back around and stop at operating ratio, and you guys are doing a really good job with that. So I guess the last question I'd have is what would be the dynamic? What do you need to see? What are you pulling and your team pulling for to try to get towards that 55 number? I know that's not the guidance specifically for this year, but it's sort of in the ballpark, I guess. And so how would you think about achieving that? What do you see?

No -- hey, I knew we would get there eventually, Chris, for sure. Look, Keith says it constantly and he reminds his management team of this, the OR is an outcome. We don't have that dart board where that -- it has this bullseye in the middle. It's doing all the things you and I just talked about for the last 30 minutes that produces this and there's a lot of fruit still out there to be picked. Just the power of what I described in the grain model is a primary example. But maybe to your real question is, how does it apply to me and my team, our contribution? Look, we got to price the value of our service. We got to remain disciplined in that area. And I think we've demonstrated that over the last years. We talk about how we create efficiency, how do we improve yield in our book. I think that becomes critically important. It's not an initiative for us to do that. It's in our DNA. It's the makeup of how do we go to work every day. It's making sure that our asset turns on our center beams are -- as tight as possible. We're keeping that constructive tension not only on our customers to load and bill and do the right things, but equally on our operating team to live up with what they said and what we sold in the marketplace. You just keep building and stacking those things on top of each other and that operating ratio takes care of itself.

Yes, absolutely. Okay. Well, we hit that mark perfectly. So that was a great answer, got us right to the 40-minute mark of our conversation this morning. So we'll have to leave it there. I know you have a busy day at the conference, and I know investors do, too. But John, thanks so much for joining us. And this was a great conversation. Appreciate your time. Appreciate your support for the conference. Thank you.

Absolutely, Chris. Totally enjoyed it. Have a great day.

You too. Thanks. Thanks, everybody. Take care.