Hi, everyone. Good morning, and thanks for joining us on day one of our two-day conference. I'm Konark Gupta, Transportation and Aerospace Sector Analyst at Scotiabank. As Jeff was saying, we have some of the most respected leaders in the transportation and industrial sector today. I'm really excited to start off this year's conference with CP Rail, and pleased to have EVP and CMO, John Brooks, and EVP and COO, Mark Redd. John, Mark, welcome, and over to you for any opening remarks before we get into Q&A.
All right, so maybe I'll kick things off. Appreciate, Konark, the warm welcoming. Glad to be here in Toronto this morning, representing all the employees of CPKC across our networks, certainly across Canada, down through the United States, and now, you know, into Mexico and all the way to Lázaro Cárdenas. To say it's been a exciting 2023 would be an understatement. Chris was saying we're almost, for today, 7 months into the integration of the KCS network. Certainly it's not been without its challenges, but I sit here today telling you we are quite pleased with how the integration of these two companies has transpired.
You know, as I look to the current, it's certainly been a challenging, I would say, 2023 from a macro, certainly geopolitical, and then everything on top of it. But I, you know, I sit here quite pleased on our focus relative to where we sit, certainly relative to our industry peers, but also with the opportunity in front of this company for many, many years to come. You know, I think we closed out October, about flattish or slightly up on RTMs. That was sort of an inflection point. You know, as I sit here, month to date in November, our RTMs are just under 4% up. So I'm pleased with the progression. We've seen nice sequential improvement, you know, really starting months ago overall on our top line.
That's not to say there's not a lot of heavy lifting to do yet, Konark, to finish things out, but I'll tell you, we're focused on, certainly Mark will talk to it, the service and cost control, you know, the pricing environment. I continue to be pleased with the team's efforts in that area. And of course, what I think we do best is self-help, creating markets and initiatives and supply chain solutions that was spoken to just a few minutes ago, that are gonna be unique and needed as you look to the future. So that's our focus, and maybe as I said, I'm really pleased on how the operating environment and the service that we're offering to our customers has really improved over the last 30-60 days.
Maybe I'll turn it to Mark to make a couple comments. Thanks.
Yeah. So thanks, John. And, you know, really just pleased to be here, representing our employees of CPKC across three nations. First event for me, so, you know, appreciate the invite, Konark. You know, for us, we've been focused on just the integration of the two companies. We wanna make sure that we don't get, certainly our service and, in front of John to make sure we get capital in place to take care of our trains, train movement across the, the network, make sure our yards operate efficiently. From a business side, I mean, we've been focused on dwell. We've been focused on car miles per car day, how we do that, just mainly through whiteboarding.
We pulled out our old whiteboards from the past and making sure that we have our time studies in our yards, focusing in that area. Again, we don't want to oversell. We make sure we put capital in place before we bring on, you know, marginal amount of business, but certainly working close with John, creating tension with each other to make sure we don't do that, but also just make sure we complement each other to execute what we do, do what we say, and make sure we do what's right for this organization.
Konark?
Yeah, no, that's great. Thanks for that remark. So maybe we can, you know, start off with the big picture question from a macro standpoint. Like, 2023 had been sort of a volatile year for the industry, especially the summer. Things are getting better a little bit, sequentially, at least. Heading into 2024, if you can talk to us about, you know, what do you see in the economy? You know, you have a big network now, Canada, U.S., Mexico. Any thoughts on, like, how are you approaching the macroeconomic outlook for 2024?
Yeah, sure. Well, look, I, I'd love to say that relative to the, maybe interest rates, some of the macro pressures we're facing, that, you know, we're gonna flip the calendar and things are gonna change. The reality is, geopolitically, we've got quite a situation going on across the globe. The reality is we've got a couple very full political elections in 2024 that'll be, that'll be somewhat, I'm sure, interesting TV. That being said, you know, look, we, I, I do believe we've seen an inflection point, on our volumes. Now, is it a hockey stick? By no means. It's, it's a slugfest out there.
But it really boils down to leveraging our network to try to create these solutions, ultimately, Konark, that maybe don't generate the hockey stick day one, but as this then returns, and I guess it's anybody's guess, it's probably more second half of 2024 than it is first half of 2024. But as this thing turns, we've got the solutions in place for our customers, and maybe you do see that hockey stick. You know, maybe just a couple other comments specific to the lines of business. I'd think about it like this. You know, generally, our intermodal business is challenged. We've seen a little bit of an uptick. I kind of see that run rate as you see it today, particularly the international intermodal, kind of staying as is, for the foreseeable future.
You know, our bulk business, which was sort of a long bellwether, you know, franchise for our CP network, continues to perform strong. I will tell you, albeit the broader drought situation in Canada has been a little more impactful than we had planned and anticipated. That's pressuring some of the near-term volumes, and we'll see how next year plays out. The good news is, with the KCS network, our U.S. franchise has somewhat, not insulated us, but it's helped diversify that grain book. So we're in a little better position from that standpoint. You know, the auto business, I expect to continue to run strong right into 2024, Konark, and our general merchandise business has actually been pretty decent as you think about, that's the energy, chemicals, plastics, steel-type business.
A lot of good synergy opportunities that we've been able to uncover in that area that I think give us tailwinds as you think about 2024.
Okay, that's great. And Mark, you know, if you look at the operating environments in Canada and the U.S., we have seen a lot of kind of, you know, labor changes across the industry, a lot of disruptions, some strikes here and there. How are the operating environments right now for you guys in Canada and the U.S., maybe?
So, you know, I would start with the U.S. I knew from day one when we took CPKC over, or Kansas City over, that we understood I needed to get in front of the union leadership. We spent a lot of time, you know, prior to the takeover, just due to the fact of having integrating contracts within Kansas City itself, the property area. We've spent some time with, you know, sleeves rolled up with the general chairman. We built that relationship, we continued that relationship. Within the first two weeks, I had all local chairman, general chairman in Kansas City, really just for a, you know, just to shake hands, understand the business, understand who I am, understand my team and what we're all about.
Part of that, I think, has really helped us just throughout this summer, throughout this, this fall so far, just to create that, that conversation of what we can do, how do we control costs, to what we do when we control costs, and what that looks like. So it's not a surprise when we come in and take out a few jobs here and there. It's all about that conversation, how do we get there, and why we do what we do? Part of that is building upon hourly agreements. Hourly agreements is something unique to this company, and maybe one other, but the fact is hourly agreements kind of take the handcuffs off of operating people, where it can do with, when you arrive in the yards, terminals, or depart, you've got more flexibility within that schedule.
That's one thing we've been able to do with Kansas City Southern, in and around Kansas City itself, but we'll push that through the rest of the property. Throughout, I would say, you know, 6, 6 months to a year, we'll have that completed across the KCS. But again, I think it starts with that, just building that relationship with the unions. I think it starts with just doing what you say. If they have issues, you dive into issues immediately. If they have some discipline stuff going on, you dive into discipline, understand what happened, what do we do, and how do we create that environment where we can work together.
I think you see it in Canada, you see it on the U.S. property for Soo Line, you see it with Kansas City Southern as well.
Okay, I think just along those lines, you and, I think you're looking at the U.S., Canada operations mostly, right? And John or-
Yes.
Is focusing on Mexico. Can you talk to us about, you know, how are you managing the entire network, and then, like, how are you splitting the responsibilities to kind of, you know, focus on different aspects of the network?
Yeah, great question. Really, from Beaumont South, John is gonna take the lead with running the operation, and the reason for that is there's so much integration and so much customer build outs and things in that area where John is gonna be more experienced in that space, and that's what we want him to do, is focus in that area.
To where I've got some history with Kansas City Southern, Shreveport, a lot of different areas, and we can bring that company together quicker, create synergies for ourselves quicker, efficiencies, and just, I'm gonna be frank, I mean, we've been able to take out about 30% cost in Shreveport alone, just based upon job alignment, whiteboarding, and things like that, where John is seeing just the complements on the Mexico side as well, where he's created that environment with the unions and creating some space and agreements to be able to help flexibilities and release some handcuffs in a couple of different areas, to where we can spot trains on arrival and/or bring power to trains, and the last piece is really just longer trains.
Konark, I'd tell you, I, you know, directly to the question of John and Mark, in that I, I'm on phone with one of the two, or if not both of them, about every day, talking about what's going on in the network, you know, where we can improve, where we're getting customer feedback. Super pleased with the progress that John has made down in Mexico. Our GTMs in a given day, we're setting records down there, all-time KCS records or KCSM records down on that property. And the amount of opportunity and volume that is available down there, with the consistency of an operation like that, just no different than what Mark and his team have done in Canada over the years. You just see the revenue and the opportunities generate themselves.
So super pleased with that, and, and Mark's being modest. We've, we've had a really good run, here most recently, in terms of our on-time performance and dwell and car velocity, really across the whole network, that, you got enough other battles to fight relative to the, all the things we face. To be able to lean on commercially a strong, stable service, is kind of core to who we, who we are at CPKC.
We certainly did see that in your weekly network performance metrics.
Yeah.
They are moving in the very, very right direction, so that's great. I think things are coming up, obviously. Talking about, you know, Mexico and, you know, KCS, you know, any updates for the revenue and cost synergies, how much you have achieved so far or realized so far?
Specific to Mexico or in broader?
Just across KCS, yeah.
You know what? I think about it like this. You know, I think it was Keith said, I don't know, it was about a month ago or maybe a little longer than that, that we saw a, you know, a comfortable run rate in that $350 million, I think, ballpark. I can tell you we're better than that. The number is north of that, and I feel very comfortable with saying that. You know, maybe more exciting as you think about as we move into 2024, you know, our unique story is regardless of the macro, and don't get me wrong, the macro puts overall pressure on the big pie.
But regardless of that, it doesn't change the fact that we have a unique network that spans three countries, single line haul, and customers are attracted to that. Regardless of what our competitors do, regardless of ultimately the macro, if you believe supply chains, you know, need resiliency, that to some degree, nearshoring or whatever term you wanna put on it, is an ongoing momentum in North America, we're set up to provide that service. So, you know, as much as I'm excited about the fast start out of the gate, I really get excited what the next 2, 4, 8 years look like, Konark, as I think about the multiyear plan.
As these facilities develop and some of the products that we're introducing, like our reefer supply chain, or our automotive closed loop system, or our Mexico Midwest Express train, you know, they're just in their infancy right now, and if they're generating, you know, low hundreds today, that only gains momentum as we move forward and more customers begin to test it. Certainly, the macro gives us a lift as we come out of this sort of economic environment we're in today.
Okay.
I would, you know, I would just add on some of the, the synergies and efficiencies is we, we have a little higher headcount, but the question gets to be, okay, what are you doing with the headcount? I mean, I've got, I mean, this is, this isn't a tomorrow story. This is, this is many years in the future. Think about the efficiencies of guaranteed pay for people sitting at home, not doing anything. I'm gonna turn the tables and say, "Okay, well, let's train them to be engineers, because I'm gonna need engineers in the future, and it takes me 6-7 months to generate an engineer. So let's do it now.
Let's make the investment now to where John gets more and more business, synergy business, we can run it across, you know, across quickly, not just waiting for engineers at that point, so just sitting back and paying fatigue. We talked about locomotives before, and it's about controlling costs, okay? If I'm gonna control costs because this is a growth story, it's about pulling locomotives. It's about pulling assets. We've been able to pull about 6,000 cars that you see in the week-to-week numbers, but we've also still, from day one, I've talked about these locomotives. We still have pulled and maintained about 130 or so locomotives pulled out of the network and continue to do that.
So as we head into fall peak, and we head into fourth quarter, we'll certainly have the locomotives on hand to do what we need to do, or tie them up, whichever.
Okay, that's great. You touched on, John, you touched on competition a little bit. Obviously, right out the gates, we saw some response, right? You know, from EMP, changes to Falcon, Quantum recently, J.B. Hunt announced some changes as well. No surprises, I'm sure. Some interlines. How are your customers reacting to that competitive response, and how are you blocking and tackling?
Yeah. Well, I guess let me first say they're all proving our thesis from day one. We told the STB. We told, well, a lot of you, we told our customers that we're gonna be a disruptor. We're gonna create more competition. The better products we put in place, our competition is gonna have to react, and I think that's exactly what we've seen. Look, at the end of the day, I'll put a markup against any of them. It all boils down to how you operate, and the capacity you have and that long-term discipline.
I would tell you, we feel good how we've let that story play out across our legacy CP and across Canada in the past, and it's the same playbook, Konark, as I look going forward. So I think customers have reacted positively. They got more options in the more marketplace, to play us off against each other. But if, at the end of the day, a single line haul, one-stop shop, fastest service in the industry matters, it usually wins. And at the end of the day, I think, regardless what product specific, you were talking about largely intermodal products, I feel really good about our chances, to execute with our partners.
And look, you know, there's, I think, been a reason KCSM historically was maybe a little bit more of the dominant provider in Mexico. It's because the routes are good, the capacity is strong, and the service product in the marketplace traditionally outperformed, and we expect the same going forward.
And with respect to intermodal, and these competitive products are mostly centered on that, obviously, right?
Yeah.
Can you talk to us about the truck-to-rail conversion opportunity in the U.S. Midwest and North-South Corridor market? And what percentage are you trying to capture on that?
Well, I maybe that's the other side of the story you just asked about. The good news is, we introduced additional competitive products in the marketplace, and I don't believe at all that it's a zero-sum game relative to, it's just a share shift between key competitors. Now, I'm not saying there won't be some of that going on, of course, there will. But the truck market available to everybody out there is massive, and I think we've long, you know, been criticized. Maybe the rails historically have just been too focused on stealing from each other versus really stealing from the true competitor, and that's truck, you know, trucks.
You know, I think we identified, I spoke about it at Investor Day, about $1.8 million annual addressable market, as we just simply look at that central Mexico up into the Midwest area. All you gotta do is take a field trip to Laredo and look at the congestion going across, you know, through the border there. There's a tremendous opportunity, and again, not all that is just conducive to intermodal and our product, but when we're able to run 3.5, 3.9 days between Chicago and SLP, that is truck-like service, and that will convert over the road.
And we've had some early success, and if you believe, you know, more and more companies are environmentally conscious around reducing their greenhouse gas emissions, and we provide a product that can do that to the clip of 60%-70% in that quarter, I think that all becomes meaningful. You know, there's a lot of muscle memory in a buyer picking up the phone and calling a truck to show up to go to Chicago. But once you begin to chip away with that, and they can experience the discipline and consistency of the product, they get the benefits of, you know, some of the greenhouse gas emission savings, and we can do it at a competitive price, I think you see more and more of that conversion opportunity.
And frankly, Konark, that, you know, my thinking is traditionally been more, in that North-South corridor. The volume of trucks and opportunity that are moving between the Southeast U.S. and that Mexico market, too, kind of around that horn, which we have not the best route, again, in the industry, that presents itself a whole another layer of truck conversion opportunity, and we're super excited. You know, we've got an existing partnership and great route with the NS. We're developing a new route with the CSX that just opens up a whole another world of customers that maybe have never had. So we're super excited to work with both those partners to attack, and I mean, attack, that truck market in that lane.
Okay. If we extend that access to the ports, Lázaro has seen some success, obviously, initially. I think you recently talked about-
Yeah
- some new opportunities that have come up there. What's happening in that market right now? Where do you see that going? Is there any traction you're seeing with a lot of shippers? Is that really an alternative to some of the ports on the West Coast?
Yeah. You know, macro-wise, developing international business at a time today couldn't be any harder. So we've set ourselves up to develop Lázaro, arguably, in some of the challenging international import/export conditions we've faced in some time. That being said, I'll tell you, the reception around a long-term alternative to L.A. Long Beach, to the challenges at Vancouver and Prince Rupert, to the challenges that shippers are facing through the Panama Canal, is getting traction. Is it as fast as I want? No. I think, again, part of that is driven around we've just got such a soft import/export overall environment. That being said, you look at volume through ports in North America, there's really one port that is actually 34%.
So much of that business of being in the past, trucked out of that port, we've actually grown our share out of that port, in addition to the growth that it's seen. So we're pleased. I would say this one, we're early innings, but I'm very optimistic that we're gonna see some significant calls in 2024 that will not only begin to further build that domestic Mexico demand, import and export, but also begin to build that demand in and out of the Texas market and up in the United States.
Yeah. I want to shift the gears a little bit to Mark. On the operations side, the regulatory environment has been a little bit topical lately. So recently, STB came out with reciprocal switching rules, which is kind of a reboot of 2016, I guess. Any thoughts there? What does it mean for you guys? We read some of the comments that you guys provided in response to that. I know it's still gonna work its way through over the next, you know, several months, but any thoughts on how does it impact your operations in the U.S.?
I'm sorry, we said interswitching.
Reciprocal switching.
Okay.
Yeah.
Okay, I missed that. I apologize. You know, it's an environment we've been in today. I mean, in Canada, you have that environment, so it's not, it's nothing new to us, so we know how to navigate through the environment. Really, it's simple: provide the service, Mark, and that's what I've got to do as a team, is to make sure that we provide the service for John, to where customers don't want to go to someone else. So obviously, we work in that space with customers. We've done a lot of, a lot with, you know, different entities in that space, but at the end of the day, we just got to provide service and you don't have an issue that way. Even with STB, too, they have ways that, you— they can create some friction with the railroads.
But, you know, we haven't really dealt with that through the STB. I have an issue or John has an issue, he comes to me, and we work through, work through a service plan, a service plan environment, or if it's just an execution environment, I'll work with the execution side. But again, something we live through today with Canada, you know, we don't—we'll just, we'll take it as drive to understand, you know, what the expectations are once they land. But at the end of the day, you know, we're, we're experienced in that space.
Okay. And then, just back to Mexico only, I would think, is there any specific low-hanging fruit you would like to call out where you can execute on in the next couple of years or so to improve the operations? Obviously, like it's more for John or like, you know, from Canada, any fruits you can talk about.
Yeah. So the first thing is labor agreements, working through labor agreements, as I talked about earlier. How do you get toward a daily rate? Like a daily rate, how do we get bigger train size, as we've worked on? Using a second job, two-spot cuts. There's just many nuances that we would do in that space. Like, you know, a couple, you know, data points of how we collectively put something together to develop a better service plan. That's one thing I would say. The other piece is talk about Mexico, but I'm going to look at it as a network. In KCS, that grain trains that flow through Canada, they flow through U.S., they go through Mexico. Wherever this operation is like intermodal facility.
Grain trains through this yard that come out of Mexico, so it's Mexico, complement, but they come out of Mexico, going to Kansas City, and we re-wheel cars that may be out of order or work on cars and train and never stop the train, never pull the crew off. So we actually pull in this facility, we do all of this mechanical type work, and then we're still able to take it to the next destination for the, for the final spot, being if it's on the gateway towards St. Louis, being if it's on the, Council Bluffs area, we have that ability to do that. That's just part of the, low-hanging fruit, I would say, as a, as a team, collectively, as three, right?
You can, you can have that kind of mind thought, think that type of work, where we've done this work at today, where we've done this work at Calgary and other locations. KCS has not done so much of that, to where we can bring something to the table. As far as for them, they have plenty of ideas that we used as far as train handling and how we operate trains in Mexico through the mountains, that we've been able to trade off and really just have a whiteboard session and understanding how we can do and how we can be better in that space. Because we both have mountains.
Konark, I'd add just real quickly, you know, we've just in the early innings of doing some very, really focusing on the industry first in Mexico, the opportunity is staggering. But more about still watching their facility, figuring out what that industry did in the early days of that transformation. We're going to go customer by customer, industry by industry, the steel guys, the grain guys in Mexico, as you think through 2020. That you get out of that in terms of not only volume, velocity, and cost savings, just builds upon itself as you think about Mexico in the future.
Great. I think that sets for a great future, I believe. So thanks for the time, gents, and a ll the best for the next year.
All right, thank you.
Thank you.
Yep.