Great. Let's kick off day two of Laguna Conference. Thanks so much for joining us early, and I promise you, we got you out of bed early for a good reason, because we have with us Keith Creel, CEO of Canadian Pacific, arguably the best idiosyncratic growth story within all of freight transportation. Keith, thanks so much for joining us.
My pleasure to be here, and welcome back to the fall. I saw you started covering again last week.
Yes.
Congratulations.
It's been a painful couple of years forcibly on the sidelines, but yes, I'm glad to be back in the mix. Before we kick off, please note that for important disclosures on Morgan Stanley's relationships, please see Morgan Stanley's research disclosures website at morganstanley.com/researchdisclosures, or please read our research.
Keith, I'm gonna spend a bunch of time, most of my time, actually, talking about the long-term growth opportunity at CPKC. But maybe let's just kick off with a little bit more of a short-term view, kind of, how is Q3 tracking relative to expectations? Obviously, some noise with the strikes and the fires, etc., as well as the soft macro. How is it tracking versus expectations?
Let me start at a high level. Ravi, number one, overall, I think today I looked at the calendars. I always say this every time I speak, it's day 152 of a forever story. This quarter, and I'm learning through the quarter, with a network this large, there's always gonna be some choppiness.
There's always gonna be an opportunity or a challenge. This quarter obviously had some. The strike we did not anticipate in Vancouver. We had to navigate that. It created a bit of backlog in traffic, a little headwind. I think we quantified maybe $80 million of headwind from a revenue standpoint.
We wouldn't call it all back. We've called most. We're pretty much. We're caught up in Vancouver at both intermodal terminals. Still a little work left to do at Centerm, but Vanterm, Deltaport, we're square there. We had some fires, obviously. Fortunately, from a material way, we have not been impacted as much as perhaps maybe our competitor did or obviously as the environment has.
It's been substantial this year. But in all, all in all, messes your rhythm up a little bit, creates a little bit of extra operating costs that, otherwise you wouldn't experience, but again, it doesn't become an excuse. It's just a challenge and an opportunity for us to overcome, and I'm pleased with the way the team has performed.
The other area of the territory, we talked about this a little bit toward the end of the last quarter. Mexico started off strong when we started to integrate, and we started a little, saw a little bit of slippage, so we put a task force together.
They've been deployed now for about, I'd say, about eight weeks, and they're making a material difference. John Orr is leading the team, leading the charge in Mexico. Had a lot of experience, obviously, from his previous experience as the COO of KCS and KCS de México.
T hat's working well. We're seeing progress across all the operating metrics, train speed, terminal dwell, car miles per car day, locomotive productivity, service experience with the customer. T hat, that will continue to gain momentum and to improve, so very encouraged there. Other than that, from a demand standpoint, a little bit softer than we'd anticipated.
I think we're 4% down quarter-to-date, but that's getting stronger. The grain harvest is starting to come on this week. Last week, I think we had 5,100 orders. This week, 5,700. It's gonna be incrementally higher next week, and we expect that to be a strength as we go through the balance of the quarter.
We'll close strong this quarter. We'll go into the fourth quarter with a lot of momentum. I'll remind from a comp standpoint, fourth quarter last year, we had an outage with Elkv iew on the coal side. That, I think, happened third week of September.
From a compare standpoint, we're gonna move a lot of coal, we're gonna move a lot of grain and potash. So we're in a very good place to finish strong this quarter, carry that momentum into next, close the year as we suggested, and we still see line of sight to that single-digit, mid-single-digit EPS growth that we signaled to the market.
Got it. So you're already starting to see some of that, kind of you're working through that. That should be a nice sequential tailwind into Q4 as well. Kind of specifically in potash and intermodal, or kind of which end markets do you think will see that?
You're gonna see a nice tailwind on coal, on potash, grain. Intermodal, I think it's hit the trough, in all honesty. Domestic, we're starting to see a little bit more demand. It's still down from last year, but sequentially getting better, and we expect that to continue into the fourth quarter. A ll in all, the entire book of business, pretty solid.
The unique piece to it, though, which is unique to our industry, and you mentioned this, it's the self-help. It's the initiatives and the synergies that are being unlocked by this merger that are allowing us to be an offset to that macro headwind that everyone else is facing that's unique to our rail network.
Got it. I'm gonna get to the CPKC synergies in a second, but just kind of. You referenced the Mexico service issues. Can you just unpack that a little bit more? Kind of what exactly happened, kind of what's the path forward? Like, is it we know exactly what to do, and it just takes time to do it, or just figuring it out?
A lot of it gets down to process, and it gets down to a ramp-up of business. You know, I don't think it's a secret, the automotive industry has shifted a tremendous amount of capacity and demand to Mexico.
They're bringing online those investments, more cars to ship, a lot of cars that were produced during the time that we had no chips that were parked, you know, effectively everywhere they could park them. You get chips in, you want to move those cars, you get today's production, tomorrow's production, you get to a situation where you have a lot of pent-up demand, and if you don't have the exact right processes, then you can get a little bit behind.
T hat's what we started to see. We responded. And the other part, in clear transparency, I've said this from the beginning, we're gonna focus initially on making sure that we integrate a stable US and Canadian network. We're not gonna try to change dramatically anything in Mexico, and that's what we did.
We integrated well. Stable railroad. We didn't destabilize the network through our integration, which was the mandate, and it was time now to shift to Mexico, and that's what we're doing. So in line with that, I'll say this as well, we just announced this yesterday. Thinking about the talent that we have, and I've always said this, you know, we don't have a static operation.
PSR is about measuring, executing, and constantly striving to improve upon your execution by using your metrics to tell you where your opportunities are. W ith that said, looking at our metrics, what they were saying to us and what it said to me, it's time to modify the organization a little bit. W hen we initially rolled out, you know, Mark Redd is our COO.
I have every bit of confidence in the world, and Mark is a very talented operating mind. A lot of talent, a lot of bandwidth. I had John Orr, too.
You know, we retained John. John wanted to stay part of the story, wanted to stay part of the team. I've got a lot of history with John. Equally, John is a very strong operating mind. So I just said, "You know what? We're gonna divide and conquer.
Right.
He led the team to Mexico on a go-forward basis, as effective as yesterday. One of John's additional responsibilities is he's gonna focus on the Mexican operation with his support team. Mark Redd is gonna focus on the U.S. and the Canadian operation.
W ith the two of those working hand-in-hand together, hand in glove, bringing the focus on process, bringing the focus on culture change, on onboarding business, I think that's the exact appropriate leadership set up for this season. It's not gonna be forever, but for now, in our unique growth story opportunity, I think it's appropriate, and, and I know the organization is gonna respond well to it.
Got it. Just kind of on the synergies side of things. Obviously, you have the revenue synergies and the cost synergies as well. I'm gonna touch more on the revenues in a fair bit. J ust kind of on some of the cost side, the integration synergies, you know, how are those going? What have you achieved so far, and what's the runway or the timeline to getting to the final goal?
I would say they're on track. Obviously, I think we signaled over the multiyear period a couple of hundred million dollars in cost synergies. We're seeing headcount synergies already. We're starting to see some fuel synergies. Some of the Mexican synergies, we've not mined that yet.
I would say we're on track. A little bit of a setback with Mexico, but I'm not losing any sleep over it at all. With the momentum that we're continuing and gaining, I think that will become more of a tailwind, not a headwind. O n the revenue synergies, that's an area that, in fact, I'm pleasantly surprised we're a bit ahead of track.
Again, over the five-year plan, we got it to $1.5 billion of revenue synergy. We're at pace now after eight months. I think we said at our Investor Day, $240 to 250 million is what we saw. We're at a point where we've converted now. We'll close out December at about $350 million.
Eight months into it, I think that's a pretty significant achievement for the company with a lot of momentum and things that we're in process now that will come on in 2024. It's just gonna be accretive and keep adding to that number.
Got it. Obviously, the value proposition of the kind of MMX services is kind of undeniable, just given the speed and then the service and kind of obviously very truck competitive, if not actually quicker than truck, right? What has the customer reception to that service been so far?
Has there been skepticism? Has there been just universal excitement? What's the reaction been? How quickly do you think is it gonna take to actually deliver that or convert customers to actually move putting stuff on a train?
Well, I would say there's optimism. Skepticism, maybe from our competitors, perhaps, but from customers, the reality is the facts are the facts. You know, I'll talk about our Mexico and Midwest Express train, or MMX 180 and 181.
We put that train online. About a month into it, we said that we're gonna do four days, you know, from Chicago to SLP, which is just north of Mexico City. You're talking about a 2,100 to 2,150-mile length-of-haul. If you go to the Monterrey terminal at Salinas Victoria, that's about 1,800 miles from Chicago. We're doing it in a truck-like speed. We're beating what we advertised.
That train is 95% to 96% on time. I look at it every day, every morning. If it gets late, I know about it. It is really symbolizing the power of this extended length-of-haul network, and it's attracting business.
I can tell you next week, we just have finalized four contracts with new business with four different reefer shippers. Next week, we're gonna add, I think, run rate's gonna be about 250 loads a week between Chicago and Laredo, moving cold goods using those refrigerated containers that we purchased 1,000 of in anticipation of this. T hings like that. There's another move that's about to occur as well that should start today.
Actually moving automobiles, finished automobiles out of Mexico to US markets and Canadian markets in intermodal containers. That's gonna be moving on that train service. So again, it's a best-in-class, truck-like competitive, extremely reliable.
It is symbolic of the foundation of the service that we're building, so it's building tremendous market credibility. The other thing I'd say is when. You know, I've said this from the beginning, this automotive area is an area ripe for opportunity, given that the industry uses one reload pool. So the TTX reload pool, we share the assets. So if you're doing a two railroad move, you're only as good as your partner.
So if you, you can originate it, but if you don't terminate it, you don't control the end product, the cycle time. So I always have wanted, from the days back when I worked in Michigan, this is two decades ago, an ability to control my own destiny.
I can tell you, we had those conversations before leading up to. We said at our Investor Day that that's probably more toward the tail end of the story in our synergies. I can tell you with what's happened in this marketplace since we've taken control and the discussions that we've had, we're in final negotiations now, with more than one OEM to make that model possible.
To look at and to actually buy rail cars, to put in a closed loop, to create our own self-help, to create a cradle-to-grave, taking a facility plant that might be in Canada, a facility plant might be in Mexico, and running load.
L oads out of Canada going to maybe Texas markets or Kansas City markets, making empties for Mexican loads, coming back up into, be it a Texas market, be it a Minneapolis market, be it a Canadian market. So that's something that I've wanted to do for two decades.
It's coming to fruition. We'll be able to talk more about it, I believe, on our analyst call, that's coming up very soon, and we expect those movements to begin the first part of January 2024. T hat's that, again, just another proof point of what this model can do. And the other part, you know, we talked about Shell on our call last time.
We're ramping that up.
That's a hugely material change to our book of business with Shell. It's ramping up now. It's gaining momentum. But again, it's all about the story of the value that this extended network can bring to someone like a Shell that owns their own cars.
What OD pairs, what origins, what destinations, where does that additional reach give us an ability to better serve them and also create competitive leverage for them?
Right.
You know, they're not hostage to any other particular railroad because now we reach and kind of de-risk the ability for the other railroad to perhaps not give them great service or punish them in another lane. So at the end of the day, that is proving extremely well.
The customers that we're meeting with, there's not one, there's several that say, "Okay, listen, now with this extended reach, when you were just CP or just KCS, this is what made sense. We couldn't go to these other markets." Now that you can, you know, for instance, there's one, I'm not going to name it, it's a $40 million book of business.
We're on the verge of the discussions we're having. Here's another $40 million of lanes. How can you add value? And if you can add value, that, that $40 million is in play.
You put those two together, you start, you know... They're not billion-dollar moves, but 40 or 50.
Still adding up.
You do a couple of those, you start adding them up, those I don't call those singles, those are more doubles and triples. You start taking a large bite out of that $1.5 billion synergy apple.
Got it. You referenced your competitor, so I have to ask you this. Obviously, a few of your competitors kind of got together to launch a rival service, if you will. It's not as quick as yours is, but they did take one day out of that move, they announced yesterday.
D o you think that is close enough for this to be, like, a true competition service? Does that, I think the one or two-day gap that remains kind of, is that enough to tip it in your favor? And also, because you have this superior service, does that result in better pricing for you as well?
I think, I think better service is always and should, if you extract the value for it, to provide the value to the customer, mean better pricing. That's our proposition. That's what we sell. A gain, I'll liken it to, you know, if you've got a three-railroad move, you can take a day out of it, but you can't take the complexities out of three railroads run by three different operating groups, you know, being guided by three different sets of priorities versus one.
The complexities, historically, I don't care who you are, I'd never argue that a three-railroad move can be the same and achieve the same potential as a one-railroad move unless there's a huge material mileage difference.
In this case, in that three-lane move, you know, what UP has, and I'll speak to UP's network, they've got a great network between Laredo and Chicago. It's shorter than ours. It's as the crow flies. But when you get to Mexico, everything they have in Chicago in US., we pick back up in Mexico, and it's our terminals.
So at the end of the day, their best day versus our best day, I think there's a place for both, but I do think if we do our jobs, that the premium freight is going to be on our railroad because it's going to be the most reliable, the most consistent, and the transit time is going to be the best.
Q uite frankly, we're going to strive to be the best operators and do what we say to our customers we're going to do. S o far, that's exactly what has gotten us to the table, and that's exactly the recipe that's going to carry us forward. I wish them well. I think they'll grow. I think they'll do okay. But again, the premium freight, we get to do our job and do it right, it's going to be on CPKC.
Again, to that point, kind of you're saying that there's absolutely room for both, as you said, the truck opportunity is so large to drive truck conversion, that you think both can grow and kind of it's ultimately that truck that it's coming out of.
That depends. It again, depends on the lane. You know, a lot of, as I understand it, some of the, at least the first railroad in that three-road move is coming out of Toronto. We're not targeting Toronto, Chicago.
We're targeting Chicago to Mexico. T here's going to be some incremental business there. There's $1.5 billion of trucks that are running on the road that are convertible to rail. I don't think we'll get it all. I think there'll be some left, but at the end of the day, my objective is partner with the customer, provide great value, get paid for that, and create stickiness.
There's a lot of moving parts to this. It's not just taking trucks off rail, it's building intermodal facilities, it's creating cold storage.
It's those reefers that we've put into play that, quite frankly, that model doesn't exist in the US So we're creating an ecosystem, supply chains, that the stickiness and the replication model, it's never going to be apples to apples.
It is going to be the premium supply chain, connecting Chicago to Mexico or, or Mexico to Chicago.
Got it. Just shifting gears a little bit, obviously, nearshoring has been a big theme of this conference so far. Arguably, you're the executive that's closest to it than anybody else because you're doing nearshoring for so many different industries. How would you address the topic at a high level? Kind of, is it happening now? Is it happening at a pace that you expected, faster, slower?
How does it ramp over the next five years? Where does it go in terms of, you know, is it going to be a few industries that do it, and then it stops, or is it going to be broad-based? What do you think of nearshoring versus onshoring? Just kind of any broad thoughts you have on the topic quickly.
Well, let me start with. I'm not going to suggest or maybe guess what it might be beyond five years, but what I see over the next five years for sure is not less demand, more demand.
You know, you've got Tesla that's building a new facility. You've got BMW that's expanding. You've got Constellation that's building their facility at Veracruz. You've got our steel producers that are expanding their networks. You've got steel producers from the U.S. that are building new locations in Mexico. You've got Bosch. There's a long list, Mattel.
T he reality is de-risking supply chains, getting your product to market, to the shelves. I think we've all learned the risk of depending upon things that are produced overseas to get to our shelves and all the tsunami of challenges that we had, the cost inflation, all those things. I t's just a solution that works.
As long as we have trilateral cooperation between the governments, which we are advocates for, we're going to continue to advocate for that, and it just makes great sense, and especially the government between the US and Mexico that see the value of it. You know, I don't know if it stops at five or 10, but I don't see it slowing down.
Our challenge is to make sure we onboard it the right way, and much in line with what we've talked about with building our network out, we can't, you know, let our eyes and our hunger for revenue, for the lack of a better term, ever deter us from it. It has to be quality revenue, it has to be sustainable, and we don't have value if we don't do for our customers what we tell them we're going to do. Y ou cannot oversubscribe your network.
That's a philosophy that, you know, if I wanted to bring it all on tomorrow, there's a lot more in Mexico to come north, and that's part of John Orr's mandate, too. We're not going to oversubscribe the network. We got to connect all the dots. We got to sequence things right. We've got to make sure that when we tell a customer we're going to do this because we're selling value on cycle times.
You know, you get one shot at this.
These customers that are opening their books of business for you to effectively. Some of that is rail-to-rail share, some of it's road-to-rail share. They're not gonna give you two kicks at the can.
You know, we got to get this right from the start, and that's exactly what we're going to do. We're going to be very intentional about doing it. But from an opportunity standpoint, there's certainly nothing that's slowing down from our viewpoint.
Got it. You touched a lot on basically my next question, but just to follow up on that, I think for better or worse, growth is almost a dirty word in the rail space, and investors just get scared of that, just given some of the issues with it in the past.
How do you internally kind of make sure you don't oversubscribe the network? Like, is there an OR threshold that you aim for? Is it a planning, a route planning system kind of...? How do you balance that growth versus, you know, OR versus, you know, network optimization dynamic?
You know what, Ravi? We're going to do it the same way we've done it for the last decade. You run an efficient railroad, you understand your capacity, you understand what your weak points are, you invest strategically with your. Capital to create capacity so that you can grow trains. You know, you can't just run long trains if you don't have a network built to run long trains.
You can't build 10,000-foot trains in sidings or in terminals if you don't have tracks that are built to do that. So again, that methodical, operational focus first to understand what your capacity is and what you can do, and then you sell that to the market. That's the same approach that's gotten us to the table. That's, that's what allows you to get a valuable rate for your service. You give value to the customer, they give value back.
That recipe just works, and if you stick to the disciplines of doing that the way we have, it's a recipe for success.
The same way we've done it in the past at a larger scale is the same way we're going to do it at a smaller scale. Is the same way we're going to do it at a larger scale.
Got it. You gave us a pie chart of, like, $5 billion of revenue pipeline kind of divided into multiple buckets. There was nearshoring, there was, you know, truck route to conversion, there was, sharing it from on the rail. One of the segments there was self-help.
I'd say that's probably the segment that I think investors, you know, not have most questions on, but it's not as kind of obvious as what the other four are. W hat exactly is self-help? How much control like, how much self is that help versus what your customers decide for you? And again, what's the visibility into that over the next five years compared to the other segments?
Yeah. S elf-help is the way we think of self-help is what we can create from a supply chain perspective? What customer solution can we create that doesn't exist today that allows us to create new revenue streams? I t's not stuff that's out there moving today, it's stuff that's never been thought of, never been possible without this network.
O ne key piece of self-help, which I think is going to come online in next year, is, you know, opening up the Port of Lázaro Cárdenas as a gateway to America, as opposed to just a domestic terminal. That's been a domestic terminal since its inception. It should be domestic, and it should be international. You can do four million TEUs there, and they're not even doing half that.
You know, how do we get that done? We are creating now, using AI to help us do it. You know, part of, part of what we've heard from our customers, to bring product in at Lázaro, to bring it into the US product, it's, it's more complicated through Mexico because of their regulations. How can you, CPKC, help us make it seamless so it's no more painful or not that much more painful than importing at, say, L.A. Long Beach?
We have deployed and are using AI to create custom processes that make it more transparent for the customer, so they don't see a material difference.
Right
Between importing there and importing in L.A. Long Beach. That's all coming to fruition. We'll see that next year. The other thing from a self-help standpoint, you think about the land. Think about our strategy at CP. We're rolling out that same strategy, monetizing our land assets. We announced at the Investor Day that we're building an auto compound in Dallas by our Wylie terminal. That's going to be online first quarter of next year.
We already have three OEMs signed up for it, so it's going to be much like Vancouver. I think before it's even open, we're going to have it at close to capacity. But the beauty of there is we have 500 acres, so we can keep building as the business demands. The other place we're looking at is, there's a little terminal that KCS has never gotten a lot of traction to. It's more internal to Dallas. It's called Zacha Terminal.
We're looking at how can we, again, bring more revenue streams to the railroad by partnering with the right short line to build facilities, to bring more steel and lumber paper into this area for the Dallas markets. That's another area of self-help. T hose kind of things, the thing, you know, we're doing over the MNBR, the Meridian & Bigbee Railroad, that wasn't even conceived, when we started this journey.
We were able to get that deal signed, tri-party between Genesee & Wyoming, CSX, and, and CPKC. Now, that's gonna open up a whole another lane and options for CSX customers at CSX facilities, that are in the southeast markets to serve the Dallas market, to serve the Mexican market.
You know, NS provides that service now. We can grow with NS in their markets, but now CSX customers are gonna have the same thing. T hose kind of things, you start adding those up, you, you'll get to $1 billion of opportunity over a five-year plan, once you realize those value opportunities pretty quickly.
Sounds good. Any questions from the audience?
Thank you. It's pretty clear the demand component of the nearshoring, you have a lot of visibility to and line of sight. But how do you think about Mexico's capacity to meet that demand? Do you see any bottlenecks or pinch points that need to be worked out for that to really materialize?
Short answer is no. I think a fair answer is, the realities of Mexico, they're different than doing business, obviously, in the US and Canada, and I'm learning more and more about those every day. I can tell you that, the president of Mexico wants to grow good, you know, good-paying jobs. They want to bring more manufacturing. He's very, very in line with that. I've met with him.
I've spoken to him. I shared the vision of the rail network. He sees our network as an opportunity for him to achieve his objectives, too, which is very encouraging. I think the table there is fair. You know, obviously, you have to manage it, and you've got to maintain relationships and keep them informed and work with the government, and we have, and we will.
The second part is labor. Labor, again, a unique model in Mexico. There's one labor union for all rail labor in the entire country, not just our railroad, but also the competitors. Again, my approach to that is develop relationships, understand their needs, articulate what ours are. I was in Mexico City three weeks ago, and I sat down and I had a private meeting with the rail labor, with Don Victor, is the president.
He's been the president of that union for 28 years. He certainly understands the nuances, the collective agreements, what we can and can't do. I explained, again, to him, the vision, the opportunity, and I was extremely, extremely impressed and appreciative of his encouraging support, things that he said he would do with us.
Initially, you know, my concept and thought was, let's modernize the agreement because we have a very, compared to their agreement, modern agreement. And even at CPKC, ours is very progressive and modern, being an hourly agreement versus the standard in the industry. So importing some of those philosophies or thoughts is kind of what good customer service looks like. But the reality is, it's such a dramatic change from where they are.
You know, there's an opportunity to enhance their existing collective agreement. H e and I agreed, "Let's not focus on modernization. When you're ready and when the railroad's ready, we can talk about that." I do think it's a better model. I do think employees can make more money. I do think that they can have better qualities of life. All those, there's a value proposition in it.
In the meantime, you know, there's so many complexities that prevent us from being as good as we could be, providing service within the collective agreement. Let's pick two or three things. Let's negotiate. Let's get value for the employee, value for the, for the employer, and we'll kind of grow into this, and that's exactly the path that we're on.
W e've had some very positive meetings over the last two, three weeks, that, quite frankly, talking about things that in talking with John and talking with others that have history with KCS de México, weren't possible for the last decades. A gain, I think we're in a good place. We have to maintain that relationship and provide the respect that's due, that I would expect and that he expects.
But I think if we work together, again, there's no bottleneck that we can't overcome. From a capacity standpoint, I think we're moving to a much better place. KCS did a great job of mis-investing money in Sanchez Yard, have a lot of land to continue to grow. That's the yard that's just south of the border. We're building that second bridge.
That's coming online next year. We're gonna double the capacity to go across the river into Mexico at the single largest, busiest border point in America, between Mexico. Again, we're in a good place. We just double-tracked a bridge down at SLP. That project just finished a couple of weeks ago. From a track capacity standpoint, we're in a good place.
We just need to make sure we maintain the human capacity side, get a little bit of flexibility on the collective agreement that we pay for, continue to work with the government, size this the right way, and pace bringing that business on. We shouldn't get in trouble from any of those areas that keep us from realizing this opportunity.
Any other questions? Keith, some tremendous growth opportunities. I think people are very excited to see how it plays out. Thanks so much for joining us, and we'll keep track of the story.
Sounds good.
Thanks.
Always my pleasure. Thank you.