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.ca. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star then one on your telephone keypad. If you would like to withdraw your question, please press star then two. Now I would like to introduce Maeghan Albiston, AVP Investor Relations and Pensions, to begin the conference.
Thank you, Sylvie. Good morning, everyone. 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 two in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on Slide three. Today, we're joined by Keith Creel, our President and Chief Executive Officer, Nadeem Velani, EVP and Chief Financial Officer, and John Brooks, EVP and Chief Marketing Officer. The formal remarks today will be followed by Q&A. In the interest of time, we would appreciate if you could limit your questions to one. It's now my pleasure to introduce our President and CEO, Mr. Keith Creel.
All right. Thank you, Maeghan, welcome back. 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. 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 in lockstep with our business, which obviously creates a compelling value for our shareholders.
The results themselves, the collective efforts, third quarter revenues more than CAD 1.9 billion, an increase of 4% year-over-year, an operating ratio of 59.4, driving earnings growth to 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 ESG value proposition even more compelling for our customers, and the time's never been more important to the customers or to the environment. That's something we're certainly excited about. John's gonna speak to it. Another record quarter in domestic intermodal, building on four 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, and 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. With that said, let me say a couple 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.
Speaking to the path forward, as we're all aware, September 30th, 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 forth quarter. That's still a very real potential outcome. We're making some progress with COFECE, which is encouraging. Assuming that continues to proceed, well as it is now, we've got our comments back from the SEC on our F-4. We intend to have our shareholder meeting December 8th. 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 fourth quarter, and at a worst case, perhaps that rolls over to the first quarter. Again, we're focused on the fourth. From there, the STB will begin their review process of the merger, which we expect to take 10 - 12 months. Obviously, we make commitments as 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 zero overlap, zero shippers lose an option.
We're gonna create new competition, new service options for our shippers, which are all very positive, compelling facts that support this combination. The combination is gonna unlock capacity and create the first U.S.-Mexico-Canadian railroad at a time it's never been needed more. 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 of the industry are also experiencing. 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. With that said, I'm gonna turn it over to John to bring a bit of color on the markets.
Nadeem will elaborate a bit on the numbers, and then we'll step into some questions.
All right. Thank you, Keith, and good morning, everyone. 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. As Keith said, we remained focused on controlling what we can control. You know, 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. Frankly, overall demand fundamentals as I go down through the commodities in many of our markets still remain favorable. Now looking specifically at Q3, revenues were up 4% on 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 third quarter revenue performance, I'll speak to these results in a currency-adjusted basis. Grain volumes were down 27% on the quarter, while revenues were down 21%. The challenges in the Canadian grain crop have been well documented with the crop size expected to be around 50 million 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 foot high efficiency product. We had six 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's Colonsay 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. 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. To close on the bulk business, coal revenues were up 22%, while volumes were down 2% as the supply chain rebounded well in August and September following the fires. Moving on to the merchandise side of the business, the energy chemicals plastics portfolio saw revenues increase 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. DRUbit started shipping in Q3 and ramped up quickly to more than 15 trains per month. We are excited about the stable long-term viability of this business and the pipeline competitive nature of this new product.
Forest Products volumes were down 3%, and revenues were up 10%. We saw volumes decline sequentially as lumber prices fell off their record levels in Q2. 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 Glovis contract in September, and like all the other roads, continue to see the impacts 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-t o- 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%, while revenue was up 16%, another Q3 record. We have now had four 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 1st, we opened our Pacific Transload Express, our new Vancouver transload facility in partnership with Maersk. Direct 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 Saint John domestic intermodal versus Q2 2021. On the international front, we performed extremely well in the quarter as we onboarded COSCO OOCL 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.
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 on bringing these two networks together has been overwhelming, and the list of opportunities continue to grow. With that, I'll pass it over to Nadeem.
Great. Thanks, John. 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 e-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 CAD 98 million in costs related to the KCS transaction. CAD 15 million from purchased services and other, CAD 83 million 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 CAD 6 million versus last year. The primary driver of the increase was additional training and headcount, along with higher accruals on long-term incentives. Fuel expense increased CAD 65 million or 49%, primarily as a result of higher fuel prices, partially offset by a 2% improvement in fuel efficiency. Equipment rents was down CAD 6 million or 16% as a result of lower price paid for pooled equipment despite higher IMS volumes. Depreciation expense was CAD 203 million, an increase of 6% as a result of a higher asset base.
Purchased services was CAD 288 million, adjusted for acquisition costs, an increase of CAD 19 million or 7%. The main driver of the increase was increased casualty costs in the quarter and incremental spend from the British Columbia wildfires. Moving below the line, as expected, other components of net periodic benefit recovery was up CAD 9 million, reflecting lower discount rates. Income tax expense decreased CAD 20 million 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 CAD 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 CAD 1.2 billion in free cash generated.
We continue to invest in the railroad and are on track to meet our CAD 1.55 billion guided CapEx spend for the year. 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 2.4x 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+ credit rating and will reduce leverage back to our targeted range over approximately 24 months. While Q3 had 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.
With that, I'll turn things back over to Keith.
Okay. Thanks, Nadeem and John. I guess to summarize, overall, certainly not a shortage of challenges, but no excuses. This team's 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 where demand is there to actually grow in their marketplace and realize a better outcome and prepare for this transformational transaction that's gonna unlock untold compelling long-term value for our customers, for our employees, and for our shareholders. With that said, let's open it up to questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star then two. As previously highlighted, please limit your questions to one. There will be a brief pause while we compile the Q&A roster. Your first question will be from Tom Wadewitz at UBS. Please go ahead.
Yeah, good morning. Keith, I wanted to ask 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 spent some time on, or does that come later? Would you say that there, you know, is there anything of interest in those discussions, you know, in terms of, you know, going well or resistance, both from the conversations with other railroads and with shippers?
All right. Great, great question, Tom. I can tell you this, obviously, you know, we're not a team that waits for things to come to us. We go to the issues, 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, you know, become re-engaged with KCS, they're progressing well. Obviously, they have concerns, given our facts are completely unlike anything they've experienced in the past, our track record to actually integrate and run the railway well, very well for us. We're gonna address, we're gonna be reasonable. We're having reasonable discussions, I expect those to come to a good place.
Same thing with, you know, 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. Those are very progressive, encouraging discussions. 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. These facts are so compelling that, you know, it's unlike anything they've experienced in the past, where those same concerns just simply do not exist. The facts matter. We're gonna speak to the facts.
We'll stay humble, we'll stay reasonable, again, we'll get to a good place. We're gonna create something that's gonna be great for this industry, great for the customers, great for competition. In the end, the U.S. rail industry overall will benefit from this, not be threatened by this.
Thank you.
Okay, great. Thank you.
Thanks, Tom.
Next question will be from Walter Spracklin at RBC Capital. Please go ahead.
Everyone. I know, you know, looking at the volume changes, you've had some pretty significant moves on particular Canadian grain, Canadian grain being, you know, roughly 15%-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, do you— I guess this is 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?
Yeah, 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. 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. 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 exciting.
Walter, as Keith said, we do see a path in 2022 to positive volumes despite the grain headwinds. 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, it's gonna open up new markets and new opportunities for our U.S. grain franchise. Frankly, that may provide more of an offset to some of the challenges in Canada than we fully realize at this point. You know, 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.
You know, we've got Inter Pipeline starting up next year. We've got this COSCO OOCL business that frankly is about 20%, I think, stronger volume than we anticipated, that we'll get a full year on. The Maersk 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, you know, opportunity in the crush, Canadian grain crush business as more and more of those oils wanna move into the renewable fuels. You know, the Saint John CMQ opportunity, you know, 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. DRU's ramping up.
You know, I can go down the list, despite the challenges and the Canadian grain headwinds, just about all the other commodity areas, I see a fair amount of upside and opportunity.
Those are great, exciting opportunities. Looking forward for the updates. Thanks everyone.
Thank you, Walter.
Next question will be from Fadi Chamoun at BMO. Please go ahead. Fadi, please unmute your line.
Yes, good morning. Apologies, I was muted. I wanted to ask on the pricing side, you know, can you help us understand a little bit the pure price momentum that you've experienced maybe in the last couple of quarters and the opportunity to touch, you know, the business maybe in 2022 from a pricing perspective?
You know, Fadi, you know, really the team I guess number one, pricing is always an initiative at CP. Our team is disciplined. We sell to the value of our service, and that's how we price. We've long talked about, you know, the pricing environment in good times being that 4% plus, in maybe more challenging times, you know, slightly inflation plus, on the lower end. You know, we're seeing pricing has accelerated through the year. You know, 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, you know, I don't know about you, but I don't see a lot changing, at least right now in terms of the 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. 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. You know, I was wondering, Keith, if you could talk a little bit about, you know, 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 a teacher 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 you know, 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 mind?
Yeah. You know, 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. You know, the issue with the teacher strike, obviously there's some politics there that we can't control. Ultimately, you know, that port that's here, Lázaro Cárdenas, once they get that resolved, and I believe they will, that is a very compelling opportunity with reliable service to displace cargo that has challenges getting into the interiors of the U.S. coming on a U.S. West Coast port. Certainly, you know, maybe not now, but that's a future opportunity for us that we certainly intend to convert.
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 six months ago with all the pain and suffering that offshoring has caused, North American customers, it's even more compelling today. The discussions that we're having, you know, I, I'll tell you, I had one last week in Toronto with a, with a major Canadian retailer.
The art of the possible, you know, 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 on the West Coast. There's 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, it's, it's an undeniable, compelling discussion. Those issues that they're dealing with at 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.
We're just as bullish, if not more than we were when we stepped into this, and we're gonna take those lemons that the world and the life and the market's 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. Nadeem, I wanted to ask you about the sort of transition here from an accounting standpoint. You know, what should we be thinking about 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? 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?
I'll take your second question first. Yeah, we're working through the PPA process and a lot of work being done internally right now. 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 depreciation. 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.
Again, when we, when we consolidate them, there's probably an equity pickup below the line for initially, and then a year from now, they'll be fully consolidated once we get full approval. 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, David.
Next question will be from Ken Hoexter at Bank of America. Please go ahead.
Good morning. Congrats on going through the process. Nadeem, you know, maybe some thoughts on your margin outlook. You know, you were very early to say confidence in sub-60% 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 KCS, you're just kind of looking at your thoughts on the network. Thanks, guys.
Sure. We'll, you know, we're still confident we're gonna have margin improvements this year. I think it gives you a good sense of what's left in Q4. You know, and keep in mind, of course, that we're all the rails, we're all facing the impact of higher fuel prices. You know, certainly, it's not as big a margin improvement as we had anticipated at the beginning of the year given some of that the noise around fuel surcharge. I think it's pretty strong performance to still get margin improvements. As far as 2022, you know, as John mentioned, Keith mentioned, we see the path towards positive RTMs.
Assuming 2022 looks similar to this year in terms of the macro, so fuel and FX, et cetera, I think we still have a good line of sight for increased improvement in the operating ratio. 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? You know, is it another 100 basis points just given the pricing? Is there a natural flow-through or?
You'll have to wait three months for that answer there, Ken.
Thanks, Nadeem.
All right.
Your next question will be from Brandon Oglenski at Barclays. Please go ahead.
Hey, good morning, everyone, and thanks for taking my question. John, you know, 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?
Brandon, maybe a couple thoughts on that is, and I'm just kinda going back to Keith's lemon to lemonade. You know, a year ago, we were a one-port port railroad, essentially Vancouver. You know, we've added, through the CMQ, East Coast, Atlantic Coast access. You know, with the acquisition, we add the Gulf in the U.S. and then two, you know, ports on each coast of Mexico. I think given what we are seeing, diversity and having that port diversity will matter. I can tell you those discussions with our customers are robust on that front. 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, I was talking to my international team this morning early, we've got three extra loaders coming in on Q4. That's the team working with our shippers to find ways to get them to move out of the congestion in the L.A. Long Beach area and utilize the capacity we have at Canadian ports. I can tell you we've got two or three opportunities with smaller chartered vessels, which we would look to also bring into either our East or West Coast ports, 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, it's gonna be hard, at least it's hard to quickly decouple, for these steamship lines, you know, what they're facing. We're optimistic that this will drive longer term change. With the ability of our new network to touch all these ports, we think presents a tremendous opportunity for the future.
Thanks, John.
Yep.
Sylvie, do you wanna progress to 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 three-year period. 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?
I'll touch to the revenue synergy piece. As Keith said, there, you know. Justin, I think your line is
Please stand by.
Sylvie?
Please stand by. It appears that Chris has disconnected. One moment while we try to reconnect.
We're okay without Chris. Let's get back to our callers.
Certainly, sir. Please continue.
Okay, Justin, sorry about that. Look, we've done a lot of work and we're actively meeting with customers 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 becoming more front-end loaded. There's a lot of opportunity there. You know, as we work with customers to try to line up their timing for these opportunities, you know, at the end of the day, it'll probably spread pretty equally through the three years as you think about that top line CAD 1 billion in revenue.
We'll, you know, 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.
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, you know, 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 a true PSR railway. We would expect that their cost will continue to improve, their service will continue to improve, which increases capacity at the same time.
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 are going to take advantage of that. Obviously, through our planning for our operating plan, which is part of the merger application, we have uncovered several opportunities to be able to do that. We will do that now. We have already started to implement some of those things, and it serves us and puts us in a good place. As we integrate the two companies, once we get STB approval, the capital spending, obviously we have a plan over a three-year period that will be in lockstep with the business. It is very prescriptive.
It's, it's planned for. There's nothing that's surprising in it at all. What it will allow in a very short period is a CP-like and a CPKC pro forma environment, operating experience, with similar margins, similar train lengths, you know, once we get to the end of that three-year period in a lot of capacity to grow with our customers in a very reliable, compelling value proposition. We're excited about it. We're not resting on our laurels. We're actively engaged in that process and will continue to be as we go through the STB review process and then pro forma as we execute and convert and exceed those synergies.
Next question will be from Konark Gupta at Scotiabank. Please go ahead.
Thank you, operator. Good morning, everyone. John, just wanted to kind of dig into your comment, you had about, you know, how you are kind of easing supply chain congestion at, let's say, Vancouver and how, you know, the Saint John's and CMQ, they have increased the business. Like, can you speak to, you know, are you seeing, you know, any discussions or having any discussions or seeing any interest from shippers or steamship lines in incremental sort of west to east or west to south shift in shipping lanes, due to supply chain constraints, perhaps or maybe other opportunities?
Yeah. Konark, we are. You know, I think initially many of the steamship lines were apprehensive to make or attempt to make massive changes in terms of their flows, hoping that this would be, you know, fairly short term in nature. Now that this has continued on, and I think most expect will bleed into 2022, I would say those discussions are accelerating.
You know, as I've said, we've worked with the steamship lines to maybe reconfigure some of these boats in terms of how they load, or to, you know, in some cases where typically a vessel would come into Vancouver and then drop down to Seattle-Tacoma, and then maybe head back overseas. You know, look, what are the opportunities to maybe eliminate that Seattle-Tacoma stop, you know, 'cause it might take 20 - 30 days out of the cycle of that vessel and make a quicker turn. We're looking at all those options, and as I said, we're starting to see some, I would say, better momentum in terms of those opportunities.
We're gonna 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, you know, 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 and a half, do you think you're gonna be able to keep on the railroad?
You know, Jason, here's the interesting thing about the domestic intermodal front. I think we believe that the opportunity to convert this traffic, you know, maybe not 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.
I can tell you, since we've implemented our demand management program, that we, you know, we spoke extensively about back at our Investor Day, it's allowed our customers to really help manage their supply chains and when they, and frankly, get the opportunity to potentially pay a cheaper rate or a premium rate, depending on how they wanna to flow their traffic into their distribution centers. That's allowed us to really smooth out our train lengths. I think it's also created a product that makes this business we've converted sticky long term.
You think it's more of a supply chain shift from your customers?
Yeah. Yeah. 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 two, three years, and I think we're experiencing and enjoying sort of the fruits of our labor. Again, I do believe it stays sticky to CP, and we continue to enjoy that freight.
Yeah, let me 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. You know, they've enjoyed, because of our service, it's part of their formula. You know, it's a partnership, that's the way we've approached this. You can say the words, "Help your customer grow, so you can grow with them," when you're a key enabler in their meaningful growth and they're taking market share from their competitors, you become part of that recipe that gets baked in. 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.
Especially, this is unique to our network in Canada, given the long lengths of haul, given the way the distribution centers are set up, in 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. 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. 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.
No, 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. Keith, maybe any conversations you've had with the STB regarding the expedited timeline for the merger? Can you just remind us, while you own KCS in 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?
Yeah. Let me start with the second question first. What you can do when you're in trust is run the companies independently. KCS has to run KCS. CP will 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, you know, 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, you know, do I want a seat at the table? You can have those kind of discussions as far as planning. 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 and/or 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. We're being very cognizant of that. On to the point about discussions with the STB on timing, we've not had any updates. You know, we filed within our application, we filed what we would like, what we'd request as far as a 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. At this point today, we have asked but they have not replied. We expect to hear something hopefully soon after we file that merger application.
Okay. Just so I understand, if a customer's not using interline service today, they can start using it still obviously has to be interline, but they can start using interline service next year?
Absolutely. Yeah, 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 as they see best fit for their railway, and CP will do the same thing.
Okay. Thank you, Keith.
Thank you, Scott.
Your next question is from Brian Ossenbeck at JP Morgan. Please go ahead, Brian.
Good morning. Thanks for taking the question. John, I wanna come back to you on the coal market, maybe some of the things that could offset the Canadian grain for next year. This year's been really strong for coal despite some of the supply chain challenges and the market share shift. 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 gonna see some mines come back to life? Is there volume upside as you look into the fourth quarter into 2022? Again, to possibly offset some of those Canadian grain challenges, going back to that list you were running down earlier. Thank you.
You know, we've, you know, beyond Teck, which had, as I said, rebounded quickly coming out of the fires, they're going to turn in, you know, a pretty strong growth year-over-year. I think over 26 million metric tons. As you described, the met pricing environment continues to be strong, and I think Teck has, as we work closely with them on plans for 2022, we expect a fair amount of growth opportunity right there. You know, we initially had modeled, you know, more of the business running to Neptune. We see opportunity with, you know, Westshore to play a role in this as you look at 2022. You know, 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. You know, we don't have any imminent mines that are opening up, maybe dissimilar to our competitor. I know they talked about that as an opportunity to offset next year. You know, I see more as it being this organic growth with Teck in the U.S. side. You know, we have worked on a number of other facilities that could be the Riversdale Mine, and a few others that could be longer term opportunities. Those discussions are ongoing and we'll have to see how those play out. You know, 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.
You know, frankly, if you just give you an example, as I look at Q3, if you just were to normalize grain and potash, you know, our RT Ms were up over 7%. That's a lot of those other business units where we've created these opportunities with our customers. As I 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 grain headwind?
All right, great. Thanks, John.
Right.
Your next question will be from Steve Hansen at Raymond James. Please go ahead.
Yeah. Good morning, guys. Thanks for the time. John, I'm just gonna dovetail on your last comment there on the potash front. You know, we're currently pushing decade ahead pricing here. I think we've got a seven handle now in the Western Hemisphere, even CAD 800 in Brazil. Yet to be 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. You know, can you just perhaps give us a little bit of color on how you see the potash environment shaping up next year for you guys, and whether any of those impediments that have been holding us back will allow volumes to flow more aggressively?
I think, Steve, this is a good news story. I was actually meeting with the Canpotex team here just in the last few days and talking about their projections. I'm not gonna speak for them, but they have a pretty strong growth trajectory. You know, part of the challenges we saw were frankly their upgrades to Neptune. You know, now the ability to essentially land 3 trains into Portland's gonna make a big difference for Canpotex. You know, 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, you know, very positive.
K+S, I can tell you, similarly has strong growth projections. You know, not only in terms of their ability to up their export capabilities but also their domestic opportunities. I do see potash, Steve, as a good growth story for us in 2022 and also into 2023 and beyond.
Appreciate the color. Thanks.
Thank you.
Next question is from Benoit Poirier at Desjardins Capital Markets. Please go ahead.
Yeah. 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?
Yeah, exactly. The excess acres you have across your network, whether there's an opportunity to accelerate this to leverage this, the 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, is as we look at the development of a new international product that includes in the future with the KCS, the Gulf and, you know, two ports in Mexico, as we see the introduction of a domestic product that runs north-south through the U.S., as we see, you know, the newfound sort of opportunity to extend haul with the automakers, I think all those bode well in terms of our land capacity, not only to create solutions, you know, new automotive compounds, but also it gives us the landing spot. 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 attack this volume, but we have the landing spot at our inland terminals due to this land capacity to improve our footprint. You know, Benoit, it's, I think it's a differentiator as you think about our story the last few years and our story looking forward.
Yeah. I think the other Hey, 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, you know, 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 land assets as well that are contiguous to their property. 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 gonna 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 gonna get through this fourth quarter. We'll close the year strong. We're gonna have margin improvement. We're gonna have some RTM growth, and we're gonna set ourselves up well for 2022 to replicate the same, and at the same time prepared to hit the ground running as we integrate these two railroads, with a successful review of the STB when we come out as a pro forma 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 allows for these two companies as we go forward into the future in a unique way unique to this industry, that uniquely supports North American commerce and the U.S. rail network and competition. 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.