Canadian Pacific Kansas City Ltd. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Remembrance: Paid tribute to Pat Ottensmeyer, noting his vision and leadership in reshaping the railway industry.
• Quarterly Results: Second quarter revenues $3.8 billion (+8%), volume growth 6%, operating ratio 61.8% (280 basis points improvement vs. last year), EPS $1.05 (+27%).
• Operating Metrics: Average terminal dwell down 9%, train speed up 6%, locomotive productivity up 10%, fuel efficiency up 2%, train exits down 4%, personal injuries down 38%.
• Commercial: John Brooks' team bringing in business fitting the network, pricing service value; synergy progress with revenue synergy exit rate expected near $800 million by end of 2024.
• Facility: New US Operations Headquarters in Kansas City highlighted as an example of Pat Ottensmeyer's vision.

Segment Performance

• Bulk: Grain revenues up 17% on 15% RTM growth; US grain volumes +17%, Canadian grain volumes +13%; potash revenues up 24% on 11% volume growth; coal revenue up 3% on 2% volume decline.
• Merchandise: Energy, chemicals and plastics revenue grew 10% on 14% volume growth; forest products down 1% revenues on 1% volume decline; metals, minerals and consumer products down 3% on 9% volume decline; automotive up 28% on 21% volume growth.
• Intermodal: Domestic intermodal volumes up 3%; international intermodal volumes down 9%, primarily due to strike uncertainty and business share shifts.

Guidance

• Core adjusted effective tax rate expected to be approximately 25% for the year.
• Reinvested $808 million in Q2, on track to invest ~$2.75 billion in 2024.
• Guidance assumes potential work stoppage, but planning for it with no immediate impact on current guidance unless of long duration.

Risks

• Labor Issues: Potential work stoppage affecting both railroads, uncertainty around resolution and impact on Canadian economy and customer traffic.
• Macro Challenges: Softness in some markets, labor unrest fatigue, potential impact of peso volatility on certain markets like steel in Mexico.

Question and Answer

• Q: Synergy progress and exit rate? A: John Brooks expects revenue synergy exit rate to be closer to $800 million by end of 2024, with roughly half in intermodal (domestic, international, automotive) and half split between bulk and ECP merchandise.
• Q: Dallas auto compound capacity? A: Facility can do 160,000-180,000 units annually, with 3 OEMs signed on, and potential for expansion with more OEMs coming on, aiming for 75% capacity with current sign-ons.
• Q: Labor situation impact? A: Keith Creel discusses potential work stoppage, waiting for CRB ruling by August, planning for it, and stating the company will not do a bad deal, remaining cautiously optimistic but committed to fair long-term agreements.