Canadian Pacific Kansas City Ltd. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Operational Challenges: Overcame a derailment in early July and a strike in August, with strong recovery efforts from the team.
• Safety: FRA train accident frequency improved 8% year-over-year, and personal injuries improved 17% year-over-year. Safety remains a focus for continuous improvement.
• Initiatives: Engineering team reducing slow orders and train delays; leveraging autonomous geometry testing for preventive maintenance; interoperability upgrades for legacy KCS fleet; capital investments in sidings, crossovers, and track-rail alignment in key areas like Laredo and Kansas City.
• Strategic Developments: STB approval of the MBNR transaction with CSX for a new competitive rail service; demonstration of the first high horsepower hydrogen locomotive in Western Canada; MMX 180/181 cross-border service performing well despite challenges.

Segment Performance

• Bulk: Grain revenues up 10% on 7% RTM growth; US grain volume grew 11%, Canadian grain volumes grew 3%. Potash revenues up 7% on 20% volume growth. Coal revenue up 8% on 2% volume decline.
• Merchandise, Energy, Chemicals, and Plastics: Revenue grew 10% on 6% volume growth.
• Forest Products: Revenues and volumes down 1%.
• Metals, Minerals and Consumer Products: Revenue down 3% on 8% volume decline.
• Automotive: Record quarter with revenue up 27% on 37% volume growth.
• Intermodal: Domestic intermodal volumes down 5% on 2% volume growth; international intermodal volumes up 12%.

Guidance

• Full Year: On track to deliver full-year guidance with double-digit earnings growth and volume growth better than initially projected.
• Fourth Quarter: Expect sequential and year-over-year improvement in operating ratio, driven by operating leverage from bulk growth and the absence of one-time items like the work stoppage and derailment-related costs.
• Synergies: Anticipate synergy numbers to continue growing with momentum from initiatives such as the MBNR transaction, hydrogen locomotive program, and MMX service expansions.

Risks

• Labor and Operational Disruptions: Impact of work stoppages and derailments on volumes and operating ratio, with one-time items in Q3 affecting the operating ratio.
• Macro Environment: Softness in certain markets (e.g., forest products, metals, minerals, and consumer products) posing challenges to revenue and volume growth.
• Regulatory and Tariff Uncertainties: Potential impact of Mexican rail reform and tariff changes on operations, volumes, and competitive positioning.

Question and Answer

Q: Chris Wetherbee asked about Mexican rail reform and Q4 operating ratio improvement.

A: Keith Creel expressed encouragement from Mexican developments; Nadeem Velani discussed one-time items in Q3 and operating leverage in Q4.

Q: Walter Spracklin inquired about volume growth and synergy pipeline.

A: John Brooks spoke about bulk growth, intermodal performance, and future opportunities from various strategic initiatives.

Q: Jon Chappell questioned yield and segments.

A: John Brooks explained length of haul impact on yields and ongoing pricing efforts across segments.

Q: Fadi Chamoun asked about Gemini alliance and synergy pipeline.

A: John Brooks elaborated on the Gemini partnership and expected synergy growth from various opportunities.

Q: Scott Group asked about 2025 earnings and buyback.

A: Nadeem Velani discussed the multiyear outlook and buyback benefit in 2025.

Q: Tom Wadewitz inquired about 2025 growth markets.

A: Keith Creel highlighted opportunities in international intermodal, MMX service, and capital investments for growth.

Q: Ken Hoexter asked about OR impact and tariffs.

A: Nadeem Velani broke down Q3 OR components; John Brooks discussed tariff navigation and customer collaboration.

Q: Brian Ossenbeck asked about grain and MMX service.

A: John Brooks spoke about grain opportunities and MMX service maturation through sales efforts.

Q: Steve Hansen followed up on grain and MMX.

A: John Brooks provided updates on grain progress and MMX service maturation.

Q: Ravi Shanker asked about MMX service.

A: John Brooks explained MMX service maturation through customer testing and sales expansion.