Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Third Quarter 2021 Conference Call. The slides accompanying today's call are available at www. Cpr.
And I would like to introduce Megan Albiston, AVP, Investor Relations and Pensions to begin the conference.
Thank you, Sylvie. Good morning, everyone, and thanks for joining us today. Before we begin, I want to remind you that this presentation contains forward looking information and that actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 the press release and in the MD and A filed with Canadian and U. S.
Regulators. This presentation also contains non GAAP measures, which are outlined on Slide 3. Today. Today, we're joined by Keith Creel, our President and Chief Executive Officer Nadim Filani, EVP and Chief Financial Officer and John Brooks, EVP and Chief Marketing Officer. The formal remarks today will be followed by Q and A and in the interest the conference call.
It's now my pleasure to introduce our President and CEO, Mr. Keith Creel.
All right. Thank you, Megan, and welcome back. So let me start by thanking the 12,000 strong CP family that Obviously, continue to drive the results that we're presenting today. As we're all aware, the industry has experienced some pretty unique volume challenges in the quarter. And as you've seen in our press release, we've updated our volume guidance to reflect those challenges.
But in spite of that, We've reaffirmed our guidance for double digit EPS growth in 2021. The team remains focused on the elements we can control, delivering excellent service for our customers and managing our resources and lockstep with our business, which obviously creates a compelling value for our shareholders. The results themselves, the collective efforts, 3rd quarter revenues more than $1,900,000,000 an increase 4% year over year and operating ratio of 59.4%, driving earnings growth of 7%. Continued improvement In train weights and lengths as we continue to become more productive at Canadian Pacific all time records in fuel efficiency in the quarter, Happy to say that we've improved our fuel efficiency by more than 20% just over the last decade, which Makes CP's ESD value proposition even more compelling for our customers and the time has never been more important to the customers or to the environment. So that's something We're certainly excited about.
John is going to speak to it, another record quarter in domestic intermodal, building on 4 consecutive record years. We certainly had a tremendous amount of success converting share from truck. We're looking to replicate that same success on a much larger scale obviously with our combination with the KCS. We've got capacity in our terminals, capacity in our network. We provide a truck like Reliable service in especially in today's market that's extremely compelling and value creating both for our customers as well as for our shareholders.
We're extremely excited what the future holds for Canadian Pacific, in particular, in combination with the KCS from an operational standpoint, a financial standpoint and an environmental standpoint. So with that said, let me say a couple of things about the KCS. Obviously, it's been a journey, an epic journey. It's been a great battle. I think one for the ages, but one we were extremely proud to participate in And extremely pleased with the outcome.
So speaking to the path forward, as we're all aware, September 30, the STB reaffirmed our trust approval, Which certainly we were pleased by that decision. We plan on filing a merger application with the STB before the end of this month. We continue to expect to close the transaction actually in the Q4. That's still a very Real potential outcome. We're making some progress with Coface, which is encouraging.
So assuming that continues to proceed Well as it is now. We've got our comments back from the SEC on our F-four. We intend to have our shareholder meeting December 8. We expect to have solid support from our shareholder base in support of this historic combination. With those things said, we do see a path to get closed in the Q4 and at a worst case that perhaps that rolls over into the Q1, but again we're focused on the 4th.
From there, the STB will begin the review process of the merger, which we expect to take 10 to 12 months. Obviously, we make commitments It's part of the application that we'll honor, but the facts of the combination are extremely unique. I know some have spoken to concessions And I'll say this now and happy to take it in questions. Significant concessions are required to offset losses of competition. Issues of network overlap, issues of predatory pricing or poor service, which this combination uniquely Does not represent any of those concerns.
We've got 0 overlap, 0 shippers lose an option. We're going to create new competition, New service options for our shippers, which are all very positive compelling facts that support this combination. The combination is going to unlock capacity And create the 1st U. S. Mexico Canadian Railroad at a time it's never been needed more.
So there's Certainly, challenges ahead as we look forward to our base business. We've got a smaller Canadian grain crop. We've got some supply chain issues, challenges that the balance the industry are also experiencing, but the macro environment is extremely strong. The opportunity set for CPKC is growing, Which continues to drive and increase our excitement about what lays ahead for our combined entity, for our employees, for our customers And for our shareholders. So with that said, I'm going to turn it over to John to bring a bit of color on the markets.
Nadim will elaborate a bit on the numbers and then we'll step into some questions.
All right. Thank you, Keith, and good morning, everyone. So as Keith said, the quarter certainly wasn't without its challenges. I would maybe characterize it as just Flat out frustrating in a few areas. But as Keith said, we remain focused on controlling what we can control.
I believe many of these supply chain issues that certainly we faced and frankly the industry faced are temporary in nature. Our pipeline of initiatives that I look at remains as strong as it's ever been. And frankly, overall Demand fundamentals as I go down through the commodities and many of our markets still remain favorable. Now looking specifically at Q3, Revenues were up 4% in the quarter. RTMs were down 4%.
Fuel and FX combined to be a 2% tailwind. Price and mix combined to be positive 6%. We'll talk about the pricing environment some this morning, but it continues to be strong. Now taking a closer look at our Q3 revenue performance, I'll speak to these results in a currency adjusted basis. Grain volumes were down 27% on the quarter or revenues were down 21%.
The challenges in the Canadian grain crop have been well documented With the crop size expected to be around 50,000,000 metric tons or about 40% lower than last year's record crop. On the U. S. Side, the crop is definitely looking less challenged. Although the harvest definitely is smaller, We expect high demand and we're seeing high demand given the Canadian grain shortfall and a fairly robust soybean and corn export markets.
Despite the challenging Canadian grain crop, I'm excited we continue to build out our franchise with our customers expanding to our 8,500 high efficiency product. We have 6 elevator upgrades complete in Q3 alone and many more to come in Q4 and into 2022. On the potash front, volumes were down 22% on the quarter. The decrease in volume was a reflection of ongoing port maintenance and upgrades At the Neptune and Portland terminals, we saw supply chain disruptions due to the wildfires and also with the early closure of Mosaic the Calanze mine. Despite that, we see demand fundamentals for potash continuing to be strong.
We see upside As we move into Q4 and into 2022 and beyond and further, we are excited about the prospects of renewing our Canpotex partnership For the years ahead, I can tell you we expect to announce the extension of a long term contract with Canpotex in the very near future. And to close on the bulk business, coal revenues were up 22% while volumes were down 2% as the supply chain rebounded well In August September following the fires. Moving on to the merchandise side of the business, The Energy Chemicals Plastics portfolio saw revenues increased 27% to a record Q3. Excluding crude, ECP volumes were up 10% as we continue to see recovery and strength and growth in our refined products and plastics. Drew bit started shipping in Q3 And ramped up quickly to more than 15 trains per month.
We are excited about this stable long term viability of this business In the pipeline competitive nature of this new product. Forest Products volumes were down 3% and revenues were up 10%. We saw volume decline sequentially as lumber prices fell off the record levels in Q2. In In MMC revenues were up 35% and volumes increased 30%, largely driven by recovery in the demand for steel and frac Sand. Steel capacity utilization and prices continue to drive growth in our steel and metals franchise.
Automotive revenues were down 8%, while volumes were up 3% on the quarter. We lapped our Globus contract in September And like all the other roads continue to see the impact from ongoing chip shortage. Q4 will be choppy on the automotive front As we see this chip shortage continuing and frankly it's volatile from week to week. Looking into 2022 though, Dealer inventories remain low, demand continues to be strong and we see good opportunity for the automotive business to bounce back in 2022. Finally, on the intermodal side of the business, quarterly volumes were up 4% Where revenue was up 16%, another Q3 record.
We have now had 4 consecutive record quarters in domestic intermodal With our reliable service product and capacity for growth, we continue to perform well in this space anchored by our strong retail franchise. The two things in particular that really excite me on the domestic intermodal front. On September 1, we opened our Pacific Transload Express, our new Vancouver Transload facility in partnership with Maersk. Direct the port to rail transload facility is one of a kind in Vancouver and will take approximately 100,000 truck moves per year off Vancouver roads. The customer support to this facility has been extremely strong and I can tell you we're already talking about expansion.
Secondly, I'm excited about the sequential growth we've seen in our domestic intermodal with our new Atlantic Canada service. We have driven a 39% increase in volume through St. John domestic intermodal versus Q2 2021. On the international front, we performed extremely well in the quarter as we onboarded Costco OCL And the Maersk volumes continue to grow. We continue to see strong demand and we are working closely with our customers to manage the ongoing supply chain congestion.
We expect challenges in the international intermodal space to persist into 2022. So let me close by saying, while we continue to battle some of these temporary supply chain issues and challenges and certainly We monitor and work closely around the Canadian grain crop. The CP team is focused on the things we control and making our own luck in this marketplace. We remain committed to delivering quality service for our customers, while at the same time improving our overall customer experience. As I look further out, the network combination between CP and KCS will create a new set of service and route options for customers While enhancing competition across North America.
The positive feedback from customers, transloaders, short line partners I'm bringing these two networks together has been overwhelming and the list of opportunities continue to grow. With that, I'll pass it over to Nadim.
Great. Thanks, John, and good morning. I am proud of the results this team produced on the quarter, especially given some of the challenges John mentioned. We faced some transitory headwinds on certain business segments and while some of those will persist in the near term, we will manage them in the same way you've come to expect from this team. On the quarter, adjusted operating ratio was 59.4%, which is a 120 basis point increase from Q3 2020.
Softer volume environment and higher fuel prices put pressure on the operating ratio, partially offset by the strong pricing environment John spoke to. Looking at the results, you'll note that we adjusted a total of $98,000,000 in costs related to the KCS transaction, $15,000,000 from purchase services and other and $83,000,000 below the line and other expense. This is largely pertaining to some pre issuance interest rate hedges. I'll speak to the adjusted results on a currency adjusted basis this morning. Taking a closer look at a few items on the expense side, Comp and benefits expense was up 2% or $6,000,000 versus last year.
The primary driver of the increase was additional training and head
the Q4 of fiscal 2020,
along with higher accruals on long term incentives.
Fuel expense increased $65,000,000 or 49%, 15% as a result of lower price paid for pooled equipment despite higher IMS volumes. Appreciation expense was $203,000,000 an increase of 6% as a result of a higher asset base. Purchased services was $288,000,000 Adjusted for acquisition costs, an increase of $19,000,000 or 7%. The main driver of the increase was increased casualty costs in the quarter an incremental spend from the British Columbia wildfires. Moving below the line, as expected, other components of net periodic benefit recovery Was up $9,000,000 reflecting lower discount rates.
Income tax expense decreased $20,000,000 or 11%, Primarily as a result of tax recoveries related to the Kansas City transaction and a lower effective tax rate. Rounding out the income statement, adjusted diluted EPS grew 7% to $0.88 in the quarter. Moving on to the free cash flow to wrap things up. We generated strong cash from operations in the quarter with an 11% increase. Year to date, we have over $1,200,000,000 in free cash generated.
We continue to invest in the railroad and are on track to meet our $1,550,000,000 guided CapEx the Q1 of 2019. We remain disciplined stewards of capital with our industry leading adjusted ROIC of 15.9%. Our balance sheet and liquidity remain very well positioned with leverage of 2.4 times adjusted net debt to adjusted EBITDA, Well within our targeted range. Our share buyback program remains paused, while leverage will increase with the pending KCS transaction, We remain committed to our BBB plus credit rating and we'll reduce leverage back to our targeted range over approximately 24 months. So while Q3 has some challenges, the network is running well and we remain on track to deliver on our guidance of double digit EPS growth.
We have a strong team in place and a transformational opportunity in front of us. So with that, I'll turn things back over to Keith. Thanks, Nadim and John.
I guess just to summarize, overall, certainly not a shortage of challenges, but No excuses. This team is controlling what we can control. We can't make it rain, but we certainly can stay in game shape, provide best in class service, control our cost, allow those customers with demand is there to actually grow in the marketplace and realize a better outcome and prepare for This transformational transaction that's going to unlock untold compelling long term value for our customers, With that said, let's open it up to questions.
Thank you. As previously highlighted, please limit your questions to 1. There will be a brief pause while we compile the Q and A roster. And your first question will be from Tom Wadewitz at UBS. Please go ahead.
Yes. Good morning. Keith, I wanted to ask you, you made some comments on the deal and on the timeframe. I wonder how are things going with the discussions with shippers and other railroads? Has that been something you've Spend some time on or does that come later?
And would you say that there is there anything of interest in those discussions In terms of going well or resistance, both from the conversations with other railroads and with shippers.
Great question, Tom. I can tell you this. Obviously, we're not a team It waits for things to come to us. We go to the issues and we've approached that. We've worked very progressively so far with Shipping organizations.
Obviously, we had an opportunity to have some discussions initially that we've rekindled since we've Become reengaged with KCS and they're progressing well. Obviously, they have concerns, but given our facts Completely unlock anything they've experienced in the past and our track record to actually integrate and run the railway well, Very well for us. We're going to address, we're going to be reasonable. We're having reasonable discussions and I expect those to come to a good place. Same thing with Our partners in the rail industry, obviously, we haven't spoken in-depth with all railways, but we have started some very in-depth discussions With a couple of very larger railways that the combined entity would have quite a touch point with when it comes to interchanging and being a part of their moves.
And again, those are very progressive encouraging discussions. And I think as long as we continue and we will to take a reasonable approach and That's met with reasonable expectations from customers and reasonable expectations from other railways and or supply chain partners. We'll get to good outcomes because again, these facts So compelling that it's unlike anything they've experienced in the past where Those same concerns just simply do not exist. The facts matter. We're going to speak to the facts.
We'll stay humble. We'll stay reasonable. And again, we'll get to a good place and We're going to create something that's going to be great for this industry, great for the customers, great for competition. And in the end, the U. S.
Rail industry overall We'll benefit from this, not be threatened by this.
Thanks. Okay, great. Thank you.
Next question
the call. Thank you, sir. Thank you, everyone. So I know looking at the volume changes, you've had some pretty significant moves on particular Canadian grain, Canadian grain being roughly 15% to 16% of your revenue and down 25% this year. Looking out to next year and some of the share gain opportunities that you've had, and I guess it's a question for John.
Do you think that those have been enough success on share gain, economy reopening and so forth to offset the decline in grain Such that you can achieve volume growth for next year. Do you think that's in the realm of possibility there, John?
Yes, let me I'll take the high level and I'll let John get into the color. Absolutely, Walter, we definitely see a path To positive RTM growth, we see a path to margin improvement. So in spite of those headwinds and when you think about that, you quantify the quantum challenge That Grain represents in this book of business to overcome that and still produce positive volume growth, positive RTM growth and margin improvement that tells you the compelling value of the work that John and his team have actually been able to convert in the marketplace with our service and our capacity. So I'll let John provide a bit of color to those strengths that quite frankly
are being muted by this challenging grain story that once that dissipates and Transitions out, it's extremely, extremely exciting. Yes, Walter. So as Keith said, we do see a path in 2022 to positive volumes despite the grain headwinds. And you know what, we're still sort of educating ourselves on what this all means. As much as we're frustrated, We've had a good ride in Canadian grain over the years and it's going to open up new markets and new opportunities for our U.
S. Grain franchise. And frankly, that may provide more of an offset to some of the challenges in Canada that then we fully realize at this point. To Beyond that, there's been a lot of good work, not only in terms of market share gains, But just creating solutions for our customers, adding new customers that I do think will provide us that tailwind. We've got In our pipeline, starting up next year, we've got this Costco OCL business that frankly is about 20%, I think stronger volume than we anticipated, that we'll get a full year on the MERS Transload.
As I said, we're already trying to figure out how we can squeeze more out of that facility and there could be an expansion in the future. There's a significant opportunity in the crush Canadian grain crush business As more and more of those oils want to move into the renewable fuels, the St. John CMQ opportunity, to We've already doubled that franchise business from when we acquired the CMQ and there's still a fair amount of meat on that bone. So DRU is ramping up. So I can go down the list, despite the challenges and in the Canadian grain headwinds, just About all the other commodity areas, I see a fair amount of upside and opportunity.
Great, exciting opportunities. Looking forward for the updates. Thanks everyone.
Thank you, Walt.
Next question will be from Fadi Chamoun at BMO. Please go ahead. Sari, please unmute your line.
Yes, good morning. Apologies, I was muted. So I wanted to ask on the pricing side. So can you help us understand a little bit the Sure. Price momentum that you've experienced maybe in the last couple of quarters and the opportunity to touch the business maybe in 2022 from a pricing perspective.
Fady, Really the team I guess number 1, pricing is always an initiative at CPP. Our team is disciplined. We sell to the value of our service and that's how we price. We've long talked about to The pricing environment in good times being that 4% plus and it may be more challenging times, slightly inflation plus On the lower end. We're seeing pricing has accelerated through the year.
We've got about 25% of our book roughly renewing here in Q4. And again, I expect to be On the upper end of that range, as I look to 2022, I don't know about you, but I don't see a lot changing, At least right now in terms of truck markets, in terms of capacity and sort of I think ongoing discipline Growing with the other rail carriers in terms of how they're valuing their service. So I'm looking to 2022 to be, to shape up maybe very similar to what we've seen in 2021.
Thank you.
Fadi, did that answer your question?
Yes. Thank you.
Thank you. Next question will be from Chris Wetherbee at Citi. Please go ahead.
Hey, thanks. Good morning, guys.
I I was wondering, Keith, if you
could talk a little bit about some of the stuff that we're seeing out of KSU in the last quarter or so, particularly as it pertains to some of the Mexican business that they're running. They had Teachers Strike, which I think has been sort of on and off for the last year or so and maybe some slowdown in the refined products, which might be related to some regulation dynamics going on there. Maybe not necessarily so deep into the specifics, but sort of bigger picture, how do you still sort of view the opportunity for the combined company in Mexico? Can you maybe sort of put some thoughts around what you see now relative to what you thought during the whole diligence process leading up to the initial bid? Has anything changed?
Is it still as good an opportunity in your
Yes. Chris, we can't deny there's some noise or transitory challenges they're dealing with to your point on the refined fuels, Which we see is working itself out. The issue with the teachers' strike, obviously, there's some politics there that we can't control. Ultimately, that 4th tier of Lazarus, once they get that resolved, and I believe they will, That is a very compelling opportunity with reliable service to displace cargo It has challenges getting into the interiors of the U. S.
Coming on a U. S. West Coast sport. So certainly, maybe not now, but that's a future opportunity for us that we certainly Intent to convert, but in the meantime, all the other positives in the discussions we're having, Chris, and if you think about and we've said this, but I mean, it's undeniable. If it made sense 6 months ago with all the pain and suffering that offshoring has caused North American Customers.
It's even more compelling today. So the discussions that we're having, I'll tell you, I had one last week In Toronto with a major Canadian retailer, the art of the possible to be able to Take more control of their supply chains to be able to source and not be exposed to some of these things we can't control that are happening in on the West Coast and there are so many different issues and moving parts in that to be able to stabilize your supply chain near shore or near source, The components that allow you to compete in business and succeed in business, it's an undeniable compelling discussion. So those issues that they're dealing with, the KCS, they've done a phenomenal job and continue to do so navigating those challenges. It's noise in the opportunity chain, but it's not noise that concerns me at all and it's certainly muted By the other opportunities that continue to develop themselves and present themselves. So we were just as bullish, if not more than we were when we stepped into this and We're going to take those lemons that the world and the life and the markets have given us and make lemonade with it.
Got it. That's helpful color. Thank you.
Thank you, Chris.
Next question will be from David Vernon at Bernstein. Please go ahead.
Hey, good morning, guys. Thanks for taking the time. Nadim, I wanted to ask you about the sort of transition here from an accounting standpoint. What should we be thinking In terms of the percentage of KCS net income to be sort of rolling up into the other line while it's held in trust. And then as you think about Sort of doing the merger accounting, have you started to put any thought into sort of asset write ups or marking up the value of the asset in a way similar to what Berkshire had done when they bought Burlington.
Yes. So take your second question first. So yes, we're working through the PPA process and A lot of work being done internally right now. So that's ongoing. Certainly, Given the value that we paid for it, there'll be lots of work as to what that asset write up will be and you'll see that through our appreciation and We will update that in Q1 in January.
As far as the percentage net income, While in trust, we'll have to get back to you exactly what that looks like. I don't have that necessarily in front of me. So Again, when we consolidate them, there will be an equity pickup, we'll hold the line Initially and then a year from now, they'll be fully consolidated once we get full approval. So that's how the accounting will work, but as far as what that equity pickup will look like, I don't have that for you right now, David.
Okay. Thank you. Thanks, Dave.
Next question will be from Ken Hoexter at Bank of America. Please go ahead.
Good morning and congrats on going through the process. Nadim, maybe some thoughts On your margin outlook, you were very early to say confidence in sub-sixty percent through the year and achieve that given what John was just talking about in terms of pure pricing, maybe your initial thoughts on where you head into 2022, excluding CAES, you're just kind of looking at your thoughts on the network. Thanks guys.
Sure. So we're still confident we're going to have margin improvement this year. So I think it gives you a good sense of what's left in Q4. And keep in mind, of course, that we're all all the rails we're all facing the impact of higher fuel prices. So certainly, it's not as Bigger margin improvement as we had anticipated at the beginning of the year given some of that the noise around fuel surcharge, but I think it's pretty strong performance to still get margin improvement.
As far as
2022, as John mentioned, Keith mentioned, we see The path towards positive RTMs and assuming 2022 looks similar to this year in terms of the macro, So fuel and FX, etcetera. I think we still have a good line of sight for increased improvement In the operating ratio. So margin improvement in 2022 is our view at this point and we feel very confident we'll be able to achieve that.
Any scale or target levels on that? Is it another 100 basis points just given the pricing? Is there a natural flow through or?
We'll have to wait 3 months for that answer there, Ken.
Thank you.
Your next question will be from Brandon Oglenski at Barclays. Please go ahead.
Hey, good morning, everyone, and thanks for taking my question. John, we've heard and seen so much about congestion on U. S. West Coast ports, Especially, can you talk about how maybe you guys are approaching the situation differently and how the situation is in Vancouver?
Yes. So Brandon, maybe a couple of thoughts on that is, and I'm just kind of going back to Keith Lemons to Lemonade. We a year ago, we were a one port railroad, essentially Vancouver. We've added through the CMQ East Coast, Atlantic Coast access with the acquisition we had, we had the Gulf In the U. S.
And then 2 ports on each coast of Mexico. And I think Given what we are seeing diversity and having that port diversity will matter. And I can tell you those discussions with our customers are robust on that They like the ability now that Canadian Pacific will have well today, but also in the future to diversify their books. I can tell you, and I was talking to my international team this morning early, We've got 3 extra loaders coming in on Q4. So that's the team working with our shippers to To define ways to get them to move out of the congestion in the LA Long Beach area And utilize the capacity we have at Canadian ports.
I can tell you we've got 2 or 3 Tunities with smaller chartered vessels, which we would look to also bring into either East or West Coast ports to To try to not only alleviate the congestion, but drive some revenue in that capacity we have in those areas. I think the bottom line is going to be hard. At least it's hard to quickly decouple for these steam ship lines to what they're facing, but we're optimistic that this will drive longer term change and with the ability Our new network to touch all these ports, we think presents a tremendous opportunity for the future.
Sylvie, do you want to address the next question?
Yes, please.
Please go ahead, Justin. You're next.
Thanks and good morning. As you've done more diligence On the synergy opportunity for KCS, I was curious if you have any updated thoughts on the cadence of those synergies over the 3 year period. And as we think about preparing for integration and those synergies, are there any incremental operating costs that we should be mindful of as we think about next year and how incremental margin should flow?
Well, I'll touch to the revenue synergy piece.
Sylvie?
Please stand by. It appears that Chris has disconnected.
We're okay without Chris. Let's get back to our callers.
Certainly, sir, please continue.
Okay, Justin. Sorry about that. So look, we've done a lot of work and we're actively meeting with Tuncay. And quantifying the timing of these opportunities as we speak, I can tell you we've got the team, CP team coming together next week to go through exactly what you just described. The good news is I'd say a lot of the initial revenue synergies I think are more becoming more front end loaded.
There's a lot of opportunity there. As we work with to try to line up their timing for these opportunities. At the end of the day, it'll probably spread Pretty equally through the 3 years as you think about that top line $1,000,000,000 in revenue and then we'll obviously work with Nadeem And the operating team to make sure that we have the capital and the products in place to be able to hit those synergies running.
Yes, let me I'll provide a little color on the cost side and on the capital side. I've been very involved in this and I'll continue to be. I can tell you now that KCS, the team, John Orr and his operating team, they're doing a better job every day of running the railway as they get further into their integration of Vatru PSR Railway. So we would expect that their cost will continue to improve, their service will continue to improve, Which increases capacity at the same time and in lockstep Mark and our team are working closely to make sure in the joint agency as well as in our network That from a partner standpoint, from an interline standpoint, any work that we can do to help them become more fluid and vice versa, we're going to take advantage of that and obviously through our planning for our operating plan, which is part of the merger application, We've uncovered several opportunities to be able to do that. So we'll do that now.
We've already started to implement some of those things and it serves us and puts us in a good Place. So as we integrate the 2 companies, once we get STB approval, the capital spending, obviously, we've got a plan over a 3 year period That will be in lockstep with the business. It's very prescriptive. It's planned for. There's nothing that's surprising in it at all.
But what it will allow in a very short period is a CP like in a CPKC pro form a environment operating experience with similar margins, similar train links. Once we get to the end of that 3 year period A lot of capacity to grow with our customers in a very reliable compelling value proposition. So we're excited about it. We're not resting on our laurels. We're actively engaged in that process and we'll continue to be as we go through the SDB review process and then pro form a as we execute and convert and exceed those synergies.
Next question will be from Kornack Gupta at Scotiabank. Please go ahead.
Thank you, operator. Good morning, everyone. So John, just wanted to kind of dig into your comment you had about how you are kind of easing supply chain congestion at Let's say Vancouver and how the St. John's and CMQ, they have increased the business. Can you speak to Are you seeing any discussions or having any discussions or seeing any interest from shippers or seam ship And incremental sort of west to east or west to south shift and shipping lanes Due to supply chain constraints perhaps or maybe other opportunities.
Yes, Kennard, we are. I think initially many of the steam ship lines were apprehensive to make Our attempt to make massive changes in terms of their flows, hoping that this would be Fairly short term in nature now that this has continued on and I think most expect will lead into 2022. I would say those discussions are accelerating. As I've said, we've worked with the steam ship lines to maybe reconfigure some of these boats in terms How they load or to in some cases where typically a vessel would come in to Vancouver and then drop down to Seattle Tacoma and then maybe head back overseas. Look, what are the opportunities to maybe eliminate that Seattle Almost stop, because it might take 20 to 30 days out of the cycle of that vessel And make a quicker turn.
So we're looking at all those options. And as I said, we're We're starting to see some, I would say, better momentum in terms of those opportunities. We're going to see some of that in Q4. And I think that accelerates As you move into 2022 as these issues persist.
Thank you.
Your next question will be from Jason Seidl at Cowen. Please go ahead. Jason, please unmute your line.
Sorry about that guys. Wanted to talk a little bit about your domestic intermodal and the long term opportunities of keeping some of this freight that you've taken off the highway because clearly right now We're probably in one of the most congested truck markets that I've ever seen. What percentage of this business that you've taken, let's say, over the last year, year and
a half, do you think
Jason, here's the interesting thing about the domestic intermodal I think we believe that the opportunity to convert this traffic, maybe not direct That is directly running on truck, but actually growing the rail wallet share with our base retail customers Has existed. We've got the shortest routes. We've got the best service. We control the capacity in our terminals that allows for quick turn of trucks. And I can tell you, since we've implemented our demand management program that we spoke extensively about back At our Investor Day, it's allowed our customers to really help manage their supply chains and when And frankly get the opportunity to potentially pay a cheaper rate or a premium rate depending on how they want The flow of their traffic into their distribution centers and that's allowed us to really smooth out our train lanes.
But I think it's also created a product that makes this business we've converted sticky long term.
So you think it's more
of a supply chain shift from your customers?
Yes. And again, as much as There is a nice pop we've seen relative to maybe some incremental loads given this environment. This isn't an overnight thing. This has been building the last 2, 3 years. And I think we're experienced in enjoying sort of the fruits of our labor.
And again, I do believe it stays sticky to CP and we continue to enjoy that freight.
Jason, I'll add a little bit of color to that. Just some recent discussions I've had with some of our key retailers, especially in the Canadian space. They've enjoyed because of our service, it's Part of their formula. It's a partnership and that's the way we've approached this. And you can say the words help your customer grow, so you can grow with them.
But when you're A key enabler in their meaningful growth and they're taking market share from their competitors. Then you become part of that recipe that It's baked in. So as long as you provide that reliable service, that value proposition, customers don't shy away from paying a fair rate increase. They don't treat you like a commodity, they treat you like a partner because again you're part of that formula. And especially and this is unique to our network in Canada, Given the long lengths of all, given the way the distribution centers are set up and all these key metropolises, these key urban centers, we have land capacities That we've used as part of that formula as well as terminal capacity and you match that up with our superior service running reliably From node to node, from town to town, from distribution to distribution center, again, you become baked in and part of the integral Recipe for their success.
That's the magic to this thing. So again, it's not transitory, it's fundamental, it's foundational, it's the way we Have built the book of business and it's the way we'll continue to grow the book of business.
That's great color and I appreciate the time as always gentlemen.
Thank you.
Next question will be from Scott Group at Wolfe Research. Please go ahead, Scott.
Hey, thanks. Good morning. So Keith, maybe any conversations you've had with the STB Regarding the expedited timeline for the merger. And then can you just remind us while you own KCS and Trust, What are the kinds of things you're allowed to do with either customers or operations or interchanges just so you can sort of hit the ground running post merger?
Yes. So let me start with the second question first. What you can do when you're in trust Is run the companies independently. So KCS has to run KCS, CP or run CP, like we could before. The combination or the marriage, we can discuss interline opportunities and we'll continue to do that.
We have done that. Obviously, to If you're one of those customers that participate in an interline move and you're looking to diversify your book of business, you're looking ahead, you're looking at Do I want a seat at the table? You can have those kind of discussions as far as planning, but as far as exercising control, you can't. As far as doing anything unnatural, you can't and we will not. The last thing we're going to do is put ourselves in a position Where we're going to violate indoor draw the ire or irritate the STB.
The STB is the regulator. They're going to regulate And we're not going to put ourselves in a position to give them any reason or justification to take exception to what we're doing. So we're being very Cognizant of that. On to the point about discussions with the STB on timing, we've not had any updates. We filed within our application.
We filed what we would like, what we've request as far as the timeline. They have not commented yet. It could be and we expect that once we file that merger Application at the end of this month, perhaps we'll get comments back on the timing at that point. But at this point, today, We have asked, but they have not replied, and we expect to hear something hopefully soon after we file that merger application.
Just so I understand, so if a customer is not using interline service today, they can start using it Obviously, it has to be Interline, but they can start using Interline service next year.
Absolutely. There's nothing that stops the customer From giving us more business. It's just we can't act as if we're one company obviously. KCS has to negotiate Their piece of the business is they see best fit for their railway and see people do the same thing. Okay.
Thank you, Keith.
Thank you, Scott.
Your next question is from Brian Ossenbeck at JPMorgan. Please go ahead, Brian.
Hey, good morning. Thanks for taking the question. John, I want to come back to you on the coal market, maybe some of the things that could offset the Canadian grain For next year. So this year has been really strong for coal despite some of the supply chain challenges and the market share shift. So maybe you can talk about What's driving that?
Just given where prices are and expected to be here for the foreseeable future, do you think you're going to see some mines come back to life as their volume upside as you look into the Q4 into 2022 and again to possibly offset some of those Canadian grain challenges Going back to that list you were running down earlier. Thank you.
Yes. So we've Beyond Tech, which is, as I said, rebounded quickly coming out of the fires. They're going to turn A pretty strong growth year over year, I think over 26,000,000 metric tons. As you described, the met Pricing environment continues to be strong and I think Teck has and as we work closely with them On plans for 2022, we expect a fair amount of growth opportunity right there. We initially had modeled more of the business running to Neptune.
We see opportunity With Westshore to play a role in this as you look at 2022. In addition to that, We've seen a good bump in our U. S. Coal volumes. Now whether or not that's sustainable, We'll see.
We don't have any imminent minds that are opening up, maybe Similar to our competitor, I know they talked about that as an opportunity to offset next year. I see more as It being this organic growth with tech in the U. S. Side. We have worked on a number of other facilities that could be the Riversdale mine In a few others that could be longer term opportunities.
Those discussions are ongoing and we'll have to see how those play out. To The biggest thing that gives me comfort, as I look at 2022, again, is all the self help things that we've described As really presenting that opportunity to offset. Frankly, if you just give you an example, as I look at Q3, If you just were to normalize grain and potash, our TMs were up over 7%. And that's a lot of those other business units where we've created these opportunities with our customers. And again, as I work with my team, that is our focus running into 2022.
How do we take all these other opportunities that are in the pipeline, get them delivered and get them ramped up as fast as possible to offset that green headwind.
Okay, great. Thanks, John.
Right.
Your next question will be from Steve Hansen at Raymond James. Please go ahead.
Yes. Good morning, guys. Thanks for the time. John, I'm just going to dovetail on your last comment there on the potash front. We're currently pushing decade ahead pricing Here, I think we've got a 7 handle now in the Western Hemisphere, even 800 in Brazil.
Yet to bring your prepared marks, There's been a number of issues both on the production front and on the terminal side that have held back volumes this year. So can you just perhaps give us a little bit of color on how you see the
Yes. I think Steve, this is a good news story. I was actually meeting with the Camptex team here just in the last few days and in talking about their projections and I'm not going to speak for them, but they have a pretty Strong growth trajectory. Part of the challenges we saw were frankly their upgrades to Neptune. Now the ability to essentially land 3 trains in the Portland is going to make a big difference for Canpotex.
To Whether it's Canpotex and their growth expectations, I think world fundamentals Around grain and feed and fuel and the need for those nutrients all remain very positive. K Plus S, I can tell you, Similarly has strong growth projections, not only in terms of their ability to up Their export capabilities, but also their domestic opportunities. So I do see potash, Steve as a good growth story for us in 2022 and also into 2023 beyond.
Next question is from Bernard Poirier at Desjardins Capital Markets. Please go ahead.
Yes. Good morning, everyone. Could you talk about the opportunities to either leverage or accelerate the excess land deployment In light of the overall supply chain issues.
Our land opportunities, Benoit, is that?
Yes, exactly. The excess acres you have across your network, whether there's an opportunity to accelerate this To leverage this deployment in light of the overall supply chain issues we see these days.
Well, I think there definitely is. I think Keith spoke to it earlier. As we look at the development of a new international No product that includes in the future with the KCS, the Gulf and 2 ports in Mexico. As we see the introduction The domestic product that runs north south through the U. S.
As we see, the new found sort of opportunity to extend hall with the automakers. I think all those bode well in terms of our land capacity, Not only to create solutions, new automotive compounds, but also it gives us the landing spot. And that's something that I think is different than a lot of the other carriers in the industry. We not only have the over the road capacity to To attack this volume, but we have the landing spot at our inland terminals due to this land capacity to improve our footprint. So Benoit, I think it's a differentiator as you think about our story the last few years and our story looking for.
I think the other very Benoit, the other very exciting point that can't be lost with the credibility we've created with our ability to actually execute this land strategy, matching it up to create additional value combination and capacity for our customers. The success we've had, scale that up when you go to the KCS, when we combine these two railroads, they have very strategic assets as well that are contiguous to their property. And don't expect that we're not thinking and planning to take what we've done at CP at a much larger scale as part of that combined supply chain integration success story that's going to be created with CPKC.
That's great color. Thanks for the time.
Thank you, Benoit.
Thank you. We are now out of time. I will turn the call back over to Mr. Keith Creel. Please go ahead, sir.
All right. Well, thank you again for your time this morning. I can tell you this team, we remain focused. We're going to get to this Q4. We'll close The year is strong.
We're going to have margin improvement. We're going to have some RTM growth and we're going to set ourselves up well for 2022 to replicate Same and at the same time prepared to hit the ground running as we integrate these 2 railroads with a successful review The STB when we come out as a pro form a company. This team remains humble, hungry, disciplined and driven, Focused on creating compelling long term value in a way that was never possible without what this combination allow us for these 2 companies as we go forward into the future in a unique way, unique to this industry that uniquely supports North American Commerce in the U. S. Rail Network and Competition.
So with that said, we look forward to speaking to everyone in future events and reporting our results next quarter. Take care.
Thank you, sir. Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines.