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

Okay. I think we're live. Good morning, everyone. Welcome to our third report session here at Barclays 41st Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst, and thanks to everyone for being here. Up next, I'm very excited to host moving to host Canadian Pacific Kansas City and with us from the company, Keith Creel, CEO; and Mark Redd, EVP, Chief Operating Officer.

I know we're going to have a great chat here. But just like every presentation, if we could do the audience response question #1 here. I guess we're going to find out how many people own your stock. [Operator Instructions] Question number 2, please. What's your general bias towards Canadian Pacific Kansas City right now, positive, negative, or neutral? All right. And then question number 3. In your opinion, 3-cycle EPS growth for Kansas -- Canadian Pacific Kansas City will be above peers, in line with peers, or below peers? Thank you all for participating. All right. Keith and Mark, thank you guys for being here. We've just gone through -- rails are always an exciting sector. In these past few weeks aren't letting us down. But from your perspective, we closed on Kansas City, drove the final spike in April of last year. What's been the outcome in the past 9 to 10 months with the merged networks?

Well, I'll tell you, everyone, thanks for having us here again. I'm honored to have Mark. The guy that makes my life a lot easier to do when our operation is one of the best operating chiefs, if not the best in the industry. I'm blessed with 2 very strong operating minds and very proactive. Thank you for doing every work. Let me say this. I say this all the time and I kind have to pitch much. We have created something extremely special. We're 10 months into ever story, not a multiyear plan store -- rolling out the network and #1 is unparalleled and it is on a path to becoming the most relevant North America. Not only because we connect and move around and did ever will. We know on -- sort of Canada, US, and Mexico. But because what's happened even before a transaction and since the proceed of our transaction in the nearshoring and ally shoring. The growth of this is unmarked. By allowing the sewer line network to become the backbone and the infrastructure that allows manufacturing to come to Canada the last product to be produced in Mexico to come to the US vice versa. The creed of ecosystem to serve kind of the spine of industrial growth at a time or grow through a revolution is truly unique. So our team, overall, not a vocal eye complex, if you think about this, putting 2 large companies together takes a lot. And history says we always haven't done too well with it. Out of investing of time, energy, money, effort to make sure that history shows we got it right. So we take a methodical approach. The team has worked countless hours and while we work countless hours to integrate. We've also had to make sure that we kept rolling right rotor customers. So that the STB who quite roughly took a lot of risk in approving our transaction from a political standpoint, we've got to do well on both parts. In Mark and John Lantin in Mexico done a phenomenal job of doing that. We've got a stable railroad. The marketing team is going to work creating -- converting the synergy pipeline, creating solutions for customers, they are quite frank about the sixth in the network had never been possible. And that's the overall conversion, that struck to our conversions, that's ad product that we're moving in a more efficient way that's international intermodal optionality with approach that we can act. That's a domestic opportunity, making that order more seamless. So obviously have been occurring for us. We kind of progressed the view at the fourth quarter, and we started to see the potential in spite of the macro, in spite of before Legacy DP, Grain is king, we were a grain railroad. We're experiencing a drought, we still closed last year as beyond the railroad with positive growth. You get into this year, that momentum that was created, we had 3.5% growth year-over-year in the fourth quarter. That momentum pulling into the first quarter, same opportunity, still a macro challenge but in spite of that and in spite of the weather, I think with the weather that we had in January, we finished the minus 70% on an RTM basis down. We've now today, like quite dependent, we're just a little over 2% down and we get into next month with this increased demand, with these synergies coming online that we've converted last year. We'll get to a place more in the quarter with strong operating performance, controlling costs, turning assets from a top-line standpoint, will be from an RTM standpoint effect be a little bit positive. Which sets up extremely well to meet or exceed our expectations for the year from a guidance standpoint. So overall, this railroad is becoming more and more relevant at the day parting of their customers and improving these new supply chains that have never been needed more in this industry's history.

Well -- and Keith, it's a great segway for Mark. Given your past history with the network, I think under Kansas City Southern, I covered it a long time, always operating challenges out of the border, never quite coming to plan. That was my perception for quite a period of time. What have you guys done differently now with operations in Mexico?

Well, I would say that as we learn the railroad as CP, certainly, John has done a lot of work on offshore, a lot of work in the south of the border with some of the unions, some of the -- you know, the way they do business, but it come apparent during the summer as we focused on the U.S. operation. Strengthen up the KCS product. Mexico, we need to get boots on the ground of Mexico. We put the task force in place. John led it. It was really about just not major changes, but understanding who does what roles and responsibilities, how you execute in the yards, how you teach people to execute at a greater level like CP would do in the terminals. Boots on the ballast. We've talked about the auto industry. We talked about a couple of the major key customers that we had in Mexico, but it was boots on the ballast understanding how they did business. Are they working 7 days a week? How are we cutting minutes out of the day? How do we elongate the time that we have to switch the market car make the cycle, make the turns, how do we get different type of equipment out of those systems, so we can get inventory down. Obviously, dwell goes down, obviously, the velocity increases as a result. It's just really just basic blocking and tackling is what we did. We still have people going in and out today just to understand business pros, understand products of customers, and how we can mutually make each other better.

Well, and I agree, Keith, because the history of network combinations historically across transport networks has been pretty shake AFS, but it seems like you guys have done this pretty seamlessly. Mark there's a lot of additional resiliency costs that you guys maybe work through productivity looking forward?

Moving forward, yes. I mean we still -- I mean you hear me talk about these train master stories I have today as I talk about just switching a boxcar, just getting a locomotive office service track. And if I look at it just from an engineering standpoint, we talked about it on the first quarter call, that -- or the fourth quarter call that we talked about how we could do more in-house for engineering. We can pull tens of millions of dollars out just by the way we look at rail, the way we source our at our top plant that KCS owns, how we have wheel shops and one of that, and we can be in synergies with each other because we're working together. Certainly, different things like that, engine overhauls that we can expand at Shreveport. Shreveport has a huge facility. And they can do more work and at this lowly, we can upgrade to a third ship, which we have done, we can create engine overhauls. We can do that type of stuff ourselves where we don't have the contracted. And when our employee gets a better job. There were 2 employee basis stag, once they stag a bit more, 365 every day, they can do the work 3 ships a day, and that's what we want. If we can in-house work as well.

Well -- and Keith, maybe if we can come back to the annual guide because I think well some of digit outlook. For volumes, is that correct for revenue?

Yes, that's correct. Volumes.

Right. I got a little bit of feedback from investors. Is that a good outlook for CP. And I think maybe looking back on the call, your outlook is still that you want to outperform industry volume outcomes. Is that correct?

Yes, that's correct. Kind of getting the nuts and bolts about your guidance as far as growth expectations. That low single digit is driven by synergies. That's the difference. That's the uniqueness of this franchise because like all railroads, we're in a very challenging macro environment. And if you look at our railroad specifically, grain is an excellent example, that's a 1% to 2% headwind total volume for the railroad that we having to overcome. So based on what we see a flattish type macro level. Based that we've always had been flat in spite of those headwinds, 23% of AR growth is driven by synergies and I get this positive RTM growth. In the second half, our expectations are based on a normal grain harvest. Those as we have in grain harvest, expect us to do that. If it's better, it's a tailwind. The other thing that's occurring where we see strength in that is offsetting some of the weakness on the investing status in international Intermodal. Lastly, if I go back to the fall, the stature plans have just taken one of their ships of the series that we're calling on Vancouver. [Technical Difficulty] The Alliance, 13,000 TEU ships. So they make these adjustments every 6 months. And based on what they saw, and of course, they had no idea about the Red Sea, they had no idea that all these geopolitical games that would occur, they saw less demand. Remodel now, and what we're seeing now is that the vision. I mean it's -- going through this business -- extremely been through this. One of that Red Sea, some of that, I think is -- I think this is going to smell the worry in anticipation for a potential track on the East Coast. We forget that strike or the potential strike we had in the West Coast, just in a lot of businesses was response to protect your supply chains through the canonical East Coast. No traffic now because of the same thing in the East is going to shift that to the West, you get the Red Sea, you get the streams, they consolidated the plan Vancouver more so than alternative works in Canada because there's more of a consumption market. So again, if that continues and right now, at least for the short term, we see that demand sustaining itself and again, a good macro, get a lot of tailwind, and we have an opportunity to do some unique things.

And I guess thinking beyond '24, how does the team deliver longer-term targets, Keith...

That's the beauty of this point as it all plays out. So again, I'll go back to our plan asset turns, network capacity fluidity. It's all part of the TruPS model. You can't do one without the other. So you can oversubscribe and real synergies on t-pass without the infrastructure. So Mark and the team, if you've got 6 items done last year of our emanated to the SCB a total of 30 we're doing. And this is essentially from the Cosmos content, we call it reprojunction CCP dem to Laredo border. We're going to get about another later this year. So as you layer this business on assets start turning faster, 180, 181 service gets better, automotive equipment turns faster, grain moves quicker. You start to layer that on top of these synergies and you start to see growth now. This year, what I call kind of a rhetorical conversion, the value proposition, a significant WAN and ECP. That contract is supported in September. We don't have a full year of it. Obviously, it's still ramping up. So ECP, you're going to see big growth this year. The automotive piece, we set a record last year. We combined networks. We'll do the same thing again this year. And then as you get into next year, there is one of those big 3 OEMs where there's additional opportunity that becomes available to compete for that this single line service network and our close concept that we're still under the marketplace in the automotive side, it all another tranche of business. And then we get into 26, they give them to stick in automotive. There's another very large contract that comes into play. And again, we will grab business. We're playing the streets with the network, that single-line served ecosystem. We just closed the part-time we create with the automotive industries has gotten lag, and it's gained a lot of traction. And in the way I kind of look at it. It gives you the liability to get your product to the marketplace gives those dealerships up. There's a demand for those cars and OEM that doesn't. They have the vehicles, they're liable, and they win market share. If they don't, they're in a disadvantage. So again, when one does it and it makes sense, oftentimes, the others going to be interested as well. And that's the demand we have. The compound that we talked about Investor Day, we needed a bookend or a destination terminal in the Dallas market. That compound goes a lot at the end of the second quarter. We really haven't sold out already. Do we expand it? Did we do something different? We'll see. We'll wait and see. But again, that becomes part of the sale, part of the value proposition to continue larger than normal industry growth that tends to taking this network and creating and optimizing the product that we're selling to our customers.

Well, it sounds like you're being quite thoughtful with capital market. Isn't there an expansion of the Laredo Bridge coming online later this year? What type of capacity is that going to open up for you as well?

So a couple of things. We touch just a siding capacity down the fields from the Laredo bridge itself, open up different locations where we can run trains but also just manage siting itself who meets trains, what trains they can theme. All of that increases capacity. So when you now -- when you get to the bridge into this year, we'll have the second bridge open. And what that would allow for us is today, we have a 4-hour window where we swap trains back and forth, we can get away from a 4-hour wind and run on demand. The work that John Oor, and KCS, and Pat has done in the past, with how you cross that bridge is phenomenal. The security work that they've done between those 2 yards. 18, 20 miles is just -- it has set us apart away from the other competitors, where we don't have the land block, we don't have tracks taking out of service because it's end risk. That layer on top of that the 4 sites that Pat's ought to build that bridge, we just -- in a double capacity across that bridge easily for us. [Operator Instructions] David?

You're going to have some audience in grain volume. We've been searching further. I think most impacted you guys significantly. What are the challenges in operating to try to deal with abnormal rain volumes and then ramp up until the back half of the year?

Yes. So yes, what I would say to that is there's a balance between some of the potash or some of the balance that we've talked about with international. It's understanding where the business flow may be increased that business flow. We making down a bit. It's all going to depend on the firm wants to sell at grain as well and why route that formal takes -- so yes, so we'll be certainly focused on what land. If I need to take locomotives, I need to do what I need to do operationally to pull costs out and then that's what we'll do to make sure we balance the revenue and the cycle of the expense. And that's what we would end up doing.

Can I ask you about culture? Because I think that's been a differentiator at CP over the years. And what's your priorities now with the combined business from a management perspective in a frontline employee perspective?

Culture was literally the expectation of everything we do. You can't execute your operating model, if you don't have the right culture. And culture is to find at the constant pursuit of safety and operational excellence. And if you do that, and you have a distinct view that you won't plan. You have a disciplined plan. You measure everything and you hold people accountable, then you can create a culture of execution. That said, coming into this merger, we've committed, I call it, construct attention, I call it accountability. We truly -- back in 2014 when we come to CP. There was a lack of vision and a common culture. It was kind of -- you had a culture in Montreal, you had a culture in Toronto, you had a culture in Calgary, the west there saw a different way than the Winter Packers, the Winter Packers stuff. And I kind of warned that in my previous slide, lifted all those locations. And the key to culture is making consistent, create a vision that people understand what you expect them to do when you're not paying your attention. It's that simple. But when we approach this, we spend a lot of time ready to deploy the leadership training. We call it -- it's consequence leadership. Let's call that. On projects for the name -- because the consequence can be a good thing or it can be a remedial expressive thing. So we took our training. We trained over 60,014, thousands of officers in the CP network. Mark and the team raised we have a training team. And as soon as we took control, we started having workshops. The way we do it, the way we did at CP, the way we're doing at CP we prioritize the operating first because that's 85% of what we do with an operating company. So we go to operating officers, typically a 2-day training. We go through, we participate, it's led, single officers. I speak to the groups myself. It's non-mandate, it's not optional. This is a good working railway, it creates a common language of common culture, common vision. We integrated started on the KCS, the legacy ES network in 2024, we're now pinging that into the Mexico network. So the vision will be at a very short period of time. You've got common vision, common language, common direction, it's a culture of accountability with the team that they understand, and this is the piece where those values come in. When you could tap in emotionally to somebody's pride, and I believe is a leader, you live it better. I believe as a leader that human beings are made aware by God. If you serve something bigger than yourself, that's more important than money. It just truly is. We want to know that we add values to human. We've created a network, tapping pride, and that's the one thing people ask me, what surprised you about. Well, maybe the politics are a little bit different in Mexico, arguably. The pride that's in that country and the people that work there. Their work ethic and the price they have to work with the railroad. And now you think about the backdrop of both legacy KCS, legacy KCM, and CP, both railroads, the 2 smallest for decades. We've been pushed around, kicked around, there's a mentality and can we kind of distort ourself, especially at CP, I take your rate pride and kind of running CP in the ground and walk to the other company. They didn't have the same product. They didn't have the same pride, but when I came there, that is a different way to do this, and we can't wear it in the marketplace. We start to create that success. People taste that, they experience that. It's not just about making money. It's about changing people's lives. And that might sound high welcome, but that's what it is. You've got an opportunity to work for a railroad with the network to build to, you never had your line. You don't have to project it. You don't have to worry about UP penalizing if you don't participate the way they want to participate. We have our own network there. We can partner with UP. We can compete against UP. We can partner with NS. We can compete against this. We can partner with CSX. I mean it's such a unique ecosystem that we've created. And to be part of that, especially back to Mexico, that is a growth engine, and it's going to continue to drive growth at the gym. You got to go to the politics, you got to do the hard work. But the opportunity for growth there is unlike anything in North America. And those people know you are part of that, from being the little railroad to being the only railroad that connects all 3 nation creating value for all stakeholders. That's a powerful, powerful motivated plug of application. So that's all about culture. It is the foundation. That's what you -- the way of the people we hold on top.

And then, if I could, I would add just another point to that because you give me the greatest compliment in the back of the room when you said, "Hey, I still have your coin that you gave me Mark." And it's about home safe. And it's about that it's that connection you have with individuals, connection with peers that you have at the Mallas level when you see something, you say something, you stop someone before they get here. We are the best railroad that's FTE by far. We have led that for 17-plus years now. But when you said that to me, it's just a smile internally because I think about the best of lives that you send to a whole. Our employees know that in spades. They understand what homesites means, and that's why we have that interconnection with our employees and the collaboration we had from day 1 as with the KCS union leadership and KCS leadership.

Excellent. And it isn't the thing that intangibles you put in the spreadsheet as to analysts, but definitely drive outcomes organizations. I think probably reflected in your valuation relative to others, too. Can you talk maybe more specifically though about some of your labor agreements. What's -- I think we have some negotiations going on in Canada. Correct?

Yes, we've got I guess, 2 stories. I can tell you, in Mexico, I'm extremely pleased that we just recently renegotiated our contract, and it included what some might give a small work concessions and changes to the mining network because history, there's never been done. Annually, you renegotiate annually, you just replicating with rate increase, with cost increase, with no productivity offset, you're telling them more lies in the future forever. That's been the Mexican model. With this network, with this vision, you created a relationship with the Mexico labor union with team that we're building trust. And in exchange for that trust, in exchange for a better opportunity to better themselves financially. We've got some recall we never have. How do I quantify that? You'll see an asset turns, you see locomotive productivity. You'll see it on the cost synergy side, which replicates to the service side. So that's a great story for us. Beginning in many, many chapters I think a progress. Now in Canada, it's kind of more of the same. We're facing negotiations, the thing that you need to contract with the connectors and engineers. For us it's 3,000 bottom employees that hard-working men and women to move this plan stay in the day up. To have a ton of respect for -- but unfortunately, leadership and vision is a challenge and changes a challenge with their union officers. History has shown in the last 9 -- 10, 9 of the last 10 negotiations have not been successful negotiation that went through back-to-work legislation, it's going through a strike into an arbitrator. And it looks like we're kind of on the same path in all honest. The thing that you need though, is that for some of my greater. I don't know it's been decades. I don't know what history would show in the same in Canada at all, both railroads are facing the same challenge. On our side, not only are they running trades employees, reconciliation now, which we triggered last week also the dispatchers which are represented by the TCRC. We tried to negotiate an agreement with the TCRC last year. We have a phenomenal relationship with them. But their internal politics said, no, we're going to wait, we're going to do it together. So they have with railroads aligned, which creates some risk, obviously, that is also a huge challenge for the country. And for the country's lead you're going to stretch the entire nation now. Are you going to shed a report there? Will they do it? Is that about -- is that a potential outcome -- sure it is, how long can they do it? The alternative is that people say, well, why don't you -- the reality is, at least for us, I can't speak for San. The demands they've asked for, exceeds $700 million of debate. If I were to say yes to that, it's not just cost implications that could take me out of market and not allow me to compete, which ultimately would cost them to lose jobs, not gain jobs. It's also the city -- we add more and more layers to work agreements that prevents you for running trains, running a scheduled railroad. And it bubbles over into what we've committed to our customers, which also could lead to either you don't realize the growth or you lose market share. So either of those outcomes is not a positive output. So it's kind of a choice of unless through this process, and I hope they do become realistic and understand that we're doing a fair deal, but we'd like to be held for ransom says you're better off -- it's the lesser of the 2 evils. You take short-term pain now? Or if you access, it's a big deal with the base forever, and we're not going to access. It's not in the best interest of the employees, it's not in the best interest of the country, the other unions that are impacted that are coming up to negotiate for our shareholders. So we'll see how it works out. The way we should expect it to play out. The way the layers work in Canada, the right to strike or the right to lock out are protected. Self-market is protected. So if you get to an in task, which we've negotiated for 5 months and there's the scribe cans back in all honesty was last Friday. We move them 2 alternatives, a traditional contract renewal with their wage increase, market rate increase, and then a more progressive agreement which we're getting scheduled to of a significant increase in exchange ports. They told they give us a response by Friday. Like Friday the response was, we'll tell you the next one. And if you think about what's playing out later this year with 2 of the unions, there's only enough risk as I know, we can't do that. So you have to serve once an impasse. It starts an analyst-fixed day clock. The government appoints a facilitator or mediator within 10 days and then you go through negotiations. And in the end, if you don't come to an agreement, this is going to take us probably the second week of May. You've got set me 2-hour notice that either serves them to lock them out as they serve as the topic. So again, I'm optimistic, but I'm a realist. We're going to come in good faith and continue to negotiate, and I hope with the help of the mediator we can get there. History says I'm might be more optimistic than realistic. I hope I'm wrong and I hope to get to good outcome. And in the end, if we don't we'll recover, if both railroads are on strike, the business is going to be there move, the customer is going to need to move it once we come back the line, whether it's a week or 10 days or 2 weeks, we'll bounce back.

I appreciate that update. We're almost out of time, if we could just queue up question #4 for the audience. This has been a great chat. In your opinion, what should CP rail do with that kind of cash, bolt-on M&A, larger M&A, servi per dividends that pay downs. Let me just go question 5. Your opinion what multiple 2024 earnings should CPKC trade? And then very quickly, question #6, our premium most share price have KC core growth margin, capital deployment, or execution? And Keith and Mark while we get these results, I really appreciate you guys coming down. You have a few interesting weeks ahead of you here, Keith, like definitely looking forward to the long-term potential of this network.

Thank you for the opportunity and thank our investors for their trust. We've got a unique story in this industry. If you care about this industry and understand the way we do business and how and what we're doing, it's special.