Good afternoon. My name is Gretchen, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific Q4 2022 Conference Call. The slides accompanying today's call are available at investor.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to introduce Megan Albiston, Vice President, Capital Markets, to begin the conference.
Thank you, Gretchen. Good afternoon, everyone. Thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and 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. With me here today is Keith Creel, President and CEO, John Brooks, Chief Marketing Officer. We're welcoming back Nadeem Velani, our Chief Financial Officer and CP's newest conductor. The formal remarks will be followed by Q&A. In the interest of time, we'd appreciate if you could limit your questions to one. It's now my pleasure to introduce President and CEO, Mr. Keith Creel.
Thanks, Megan. Let me start by thanking our 12,000 strong CP family for their efforts that have allowed us to produce these results in the Q4 and certainly over the course of 2022. I can tell you what I'm most proud of, which is I know is only enabled by their individual and collective efforts, is the safety performance that the team produced in 2022, producing our lowest ever FRA accident frequency ratio in the company's history and our 17th consecutive year of being best in class, best in industry as it's related to reportable train derailments in the industry. Something to be extremely proud of. Then to Megan's point, you know, our bench is only getting better. I'm tickled to death that we've got our CFO, Mr.
Nadeem Velani, who adds another acronym to his title, Chief Financial Conductor Officer, CFC, CFO, whatever you wanna call it. He's had a very rich experience. He's obviously, his business acumen from his time in Harvard has increased, but most importantly, his railroad acumen and ability to apply his business talents has increased with the railroad knowledge that he's obtained the last five years. Five years, it seems like probably five years, and it's 25 below.
The last five months, specifically out on the railroad, boots on the ground and the ballast, spending time not only getting conductor qualified, but also riding trains, time in the mechanical department, time with the track department, time in the locomotive department, all the functions that truly make this company run day in and day out by the great professional railroaders we have, the men and women that make CP what it is. So with that said, again, welcome back, Nadeem. Glad to get you back in the seat. I also want to commend Chris and Megan and Ian for the great work they did when you were gone in your absence. They certainly made you proud. Moving on to the results.
In the Q4 , we produced revenues of CAD 2.5 billion, an operating ratio of 59.1 and core EPS of CAD 1.14. For the year, the total revenues were up 10%. We delivered an operating ratio of 61.4, core EPS of CAD 3.77, which was flat versus last year. We knew from the beginning, 2022 would be a year of two halves, and particularly we had high expectations for the Q4 , which we were ready and resourced to meet. Unfortunately, there were some factors that impeded our Q4 to some degree. With that said, I'm very pleased with how we began the year. Strong revenue and operating performance in January, which is gonna carry great momentum into the Q1 of this year and as we play out in 2023.
We're in a great place from a network and resource perspective in spite of a historically tight labor market in 2022. It was a record year of hiring at CP. We added more than 1,600 conductors over the course of last year, and we made some significant progress with our labor agreements with the recent tentative collective agreements, both with the Unifor as well as the BLET. Both of those agreements are out for ratification. Specific to the BLET, and this has to do with the consolidated territories, which are obviously contingent upon the STB approving our merger application. This agreement with the BLET, which are the locomotive engineers, and the earlier agreement that we signed with SMART, the conductors for the KCS in Kansas and Missouri.
They're both progressively hourly agreements, which will improve our operational flexibility as well as predictability in our employees' quality of life. Again, it's an agreement that gives us flexibility and in turn, enables our employees to realize higher pay, scheduled jobs, and a better quality of life compared to what a traditional labor agreement is in the U.S. rail space. Parts of these agreements, of course, remain subject to the STB's approval of the merger, but we certainly see additional opportunities down the road pending and assuming, depending upon an approval to create a framework for the benefit of all employees in a combined CPKC network and also, obviously, the reliability benefits in service that this agreement will provide for a combined CPKC. I wanna say a couple words about the transaction on the CPKC front.
Both of our teams, both CP and KCS, are hard at work preparing to seamlessly integrate these two iconic companies. I can tell you there's been a ton of tremendous work that's been accomplished by teams at both railways to ensure the smooth transition. I'm extremely pleased last week also to note the release of the final environmental impact statement. Certainly, that's no small feat, and a huge quantum of work by the STB to get that done in the meticulous, thoughtful way that they handled, not only just the environmental impact statement, but in handling this entire file. I commend the team for the work they did throughout the process. As I've said, the STB has been very thorough. They've been meticulous, and we continue to eagerly anticipate their decision on our merger applications, which we expect this quarter.
On the environmental front, couple of words. CP continues also to make strong progress in this space, specifically on sustainability. I'm pleased to see that the company's efforts continue to be recognized. For the first time in our history, CP was named to the Dow Jones Sustainability World Index, which is a tremendous achievement for the entire CP family that we can be proud of. We were also named to the Dow Jones Sustainability North American Index for the third consecutive year, and finally named to the CDP A List, which is an absolute reflection of our commitment to comprehensive climate disclosure at Canadian Pacific. We continue to demonstrate our leadership and commitment to a more sustainable future also through our hydrogen locomotive project, which is unique in the industry.
In late October, that project hit a significant milestone when the locomotive performed its second mainline test and first revenue move, and we're soon to experience the second hydrogen locomotive, which is a GP38, a four-axle DC locomotive over the next month, which will be making its debut, so to speak, as we get it out rolling and operating so we can work the bugs out of it. Let me close by saying, 2023, we're poised and ready to roll. It's gonna be a very special year for two story companies. We can't wait to get to work combining these two great companies and creating value for our customers, our employees in the North American economy. We're focused on executing the plan. I'm very pleased with the start that we've had to this year and to what I expect will be a historic year.
With that said, I'm gonna hand it over to John to bring some color on the markets, and then Nadeem will wrap up elaborating on the numbers, and then we'll open it up to Q&A.
All right. Thank you, Keith, good afternoon, everyone. As Keith mentioned, the Q4 wasn't without its challenges, certainly customer supply chains and the winter weather we faced impacted our volumes. We ultimately fell a little short of our RTM growth we expected to deliver for the year. However, I'm pleased, as Keith said, to the start to 2023, believe we are uniquely set up for the year. I'll take a look at our Q4 results now. Total revenues were up 21% on the quarter. Volumes are up 8% on the quarter, while FX and fuel combined to be a 15% tailwind. The pricing environment continues to be strong. Taking a closer look at the Q4 and the 2022 revenue performance, I'll speak to the results on a currency adjusted basis.
Grain volumes were up 27% on the quarter, while revenues were up 42%. Working in concert with our grain supply chain partners, CP set new all-time monthly tonnage record for shipping grain and grain products in October. We delivered our second-largest quarter ever for grain volumes. Our newest 8,500 foot high efficiency elevator at Richardson Greenfield facility in Saskatchewan started receiving grain in December. In 2023, we expect to be over 50 origin elevators that will be 8,500 foot capable, enabling us to continue to move records amount of grain more efficiently. On the U.S. front, we saw strong demand in Q4 for both our export and domestic markets. I fully expect our grain franchise to continue to be an area of strength as we move through 2023.
On the potash front, volumes were down 2% on the quarter, but we ended up 9% on the year. While we saw volumes for export potash impacted by weather challenges, the long term outlook for potash remains strong and unchanged. I expect to see similar growth in 2023 as we saw last year in potash. To close out the bulk business, coal volumes were down 25% on the quarter and declined 18% on the year. An outage at Teck Elkview Mine in September impacted volumes through much of the Q4 and lasted longer than we anticipated. We lost over 100 trains in the fourth Q4 due to these challenges.
Looking ahead in coal, given the disruptions we faced in 2022, combined with a solid macro demand environment, we have a good setup from a compare standpoint as we move into 2023. When I look at our bulk franchise, which makes up 40% of our book, it is extremely well positioned in 2023. Whether it's through strong demand fundamentals, favorable compares or both, we have a setup to deliver double-digit growth in this less macro sensitive portion of our book of business. Moving on to merchandise. The energy chemicals plastics portfolio saw volumes grow 4%. We saw increased volumes in our DRUbit during the quarter, as well as plastics from our new IPL petrochemical facility, single served by CP in the Alberta Heartland. Despite macro uncertainty, I expect ECP volumes to remain resilient as we start off 2023.
Forest Products were down 4%, while revenues were up 17%. Despite the Q4 decline in volume, this caps a record year for CP and Forest Products. While housing starts are expected to decline in 2023, and CP's demand is softer compared to our record 2022, our lumber, panel, and pulp volumes have stabilized, and we are working with our customers to maximize new market opportunities. Automotive revenues were up 27%, while volumes were up 11% on the quarter. On our Q3 call, I talked about over 7,000 vehicles sitting at CP origins waiting for final components. I'm pleased to see that we are seeing definite improvement in parts supply and more vehicles are moving towards shippable status.
We have also began moving the new Ford business that started up January first. I'm pleased with the startup of our new auto compounds at both Edmonton and Bensenville. Looking ahead, demand for finished vehicles remains fairly strong. We are working with our customers to replenish inventories at dealerships across our network. Those fundamentals, combined with the new business we brought on, have positioned our auto business well for 2023. Finally, on the intermodal side of the business, quarterly volumes were up 17% while revenues were up 29%. Despite demand coming off record levels that we've seen the past two years, our unique market wins have differentiated us in international intermodal with volumes up more than 40% on the quarter.
With favorable compares through the first half of 2023, driven by new business that started out the back half of 2022 and the continued port expansion at the Port of Saint John, we are well positioned to continue to outpace the industry in this space. Port of Saint John continues to see tremendous growth, eclipsing 150,000 TEUs in 2022, more than a 70% increase year-over-year. Our partners at DP World are in the midst of deploying super new post-Panamax cranes, and this, coupled with the new berth and track at the port, will result in a doubling of the capacity by April 1st. The Port of Saint John remains on plan to grow its total capacity to 800,000 TEUs in 2024.
On the domestic side, although demand with our core retail customers have come down from their recent highs, our temperature-controlled products continue to be strong. CP is a leader in the temp-controlled space across Canada, and we look forward to paving the way into new markets across North America with CPKC should the STB approve our merger. We are continuously working hard with a variety of customers on test moves on an interline basis, which are going very well. We recently completed a southbound test shipment from the U.S. Midwest market to Laredo, carrying temp-controlled products in about three days, which is competitive with a single driver truck. Further, we've also been testing the northbound lane, focused on those service sensitive products to markets across the upper Midwest, U.S., and into Canada.
These markets are 100% served by trucks today and present a tremendous conversion opportunity for the combined CPKC to provide truck competitive single line service pending the STB approval of our merger. Let me close by saying, as I look out at 2023, with the broader macro environment certainly remaining uncertain, CP strong bulk franchise, our self-help business wins, and anticipated opportunities as part of CPKC have us in an advantageous position. My team is focused on staying close to our customers and selling the value of our service. With that, I'll finish up and pass it over to Nadeem.
Thanks, John, and good afternoon. It's great to be back and speaking to the results the CP team produced this quarter. Some of you are aware I've been out of the office a lot in the field the last five months. It's been a very energizing time on the railroad, and I'm thrilled to see the passion and pride from our people firsthand. I had the chance to spend a few months in our world-class training center getting conductor qualified, along with a strong pipeline of new railroaders that will enable us to deliver on our growth agenda safely and efficiently.
Let me take a moment just to thank four specific trainers that helped me, Jeff McLean, Nate Blunt, Mark Merriam, and Joe Wenzik, who shared their collective 140 years of rail experience with me, and I'm very grateful. I too also want to thank Megan Albiston and Ian Gray for their supports and backfilling for me and doing a wonderful job. Thank you to the two of you. Now looking at the quarter, the adjusted operating ratio came in at 59.1%. Taking a closer look at a few items on the expense side, I'll speak to the variances on FX-adjusted basis as usual. Comp and benefits expense was up CAD 1 million versus last year.
Increased volume and wage inflation were largely offset by lower accruals for incentive and share-based compensation. Fuel expense increased CAD 153 million or 62%, primarily as a result of higher fuel prices, which were up 43% on the quarter versus last year and roughly flat sequentially. Materials expense was up 33% or CAD 17 million as a result of cost inflation, largely in non-locomotive fuel. Equipment rents were up 43% or CAD 13 million as a result of higher car hire payments resulting from stronger volumes in intermodal and automotive. Depreciation expense was CAD 219 million, an increase of CAD 9 million as a result of a higher asset base. Purchased services came in at CAD 310 million, an increase of CAD 54 million or 21% when adjusted for acquisition costs.
The main driver of the increase was higher pickup and delivery costs and other third-party services. Moving below the line, the equity pickup from KCS in the Q4 was $287 million when adjusted for KCS's acquisition-related costs, purchase accounting and a gain KCS had from an interest rate hedge unwind. Other components of net periodic benefit recovery increased $6 million, reflecting higher discount rates compared to 2021. Net interest expense was up $32 million versus last year as a result of a higher debt balance related to the KCS acquisition in Q4 2021. Income tax expense decreased $49 million excluding KCS related items and the reversal of a previous provision for an uncertain tax item. The effective tax rate was approximately 17.5% on the quarter.
Looking ahead, I expect the CP standalone tax rate in 2023 to be approximately 24%. Rounding out the income statement, core adjusted EPS was $1.14 in the quarter. On the year, core EPS was $3.77, flat versus 2021. We continue to generate strong cash flow with cash provided by operating activities of $4.1 billion in 2022. We continued to reinvest in the railroad and finished the year with a capital spend of just under $1.6 billion. I anticipate a similar level of investment for CP standalone in 2023. In the fourth Q4, we received dividends from KCS totaling $415 million US, which were utilized to pay down short-term debt.
Over the course of 2022, we received a total of $880 million, or approximately CAD 1.2 billion in dividends from cash flow in excess of the capital KCS has invested in their railroad. Inclusive of the dividends, we generated CAD 2.7 billion in free cash flow. Over the course of 2022, we repaid more than CAD 1.6 billion in debt. Pro forma leverage ended the year at 3.8x , we remain committed to returning to our target leverage. Looking at the year ahead, despite uncertainties with the macro environment, inflation and interest rates, I couldn't be more excited. We have a transformational merger with Kansas City Southern and a strong pipeline of opportunities for the team to deliver.
With that, let me turn it back to you, Keith, for wrap things up.
Okay, thank you for comments, the color both John and Nadeem. operator, let me open up the line, for questions.
Thank you. If you'd like to ask a question, simply press star then one on your telephone keypad. If you would like to withdraw your question, press the pound key. As previously highlighted, please limit yourself to one question. Your first question comes from Jon Chappell from Evercore ISI.
Thank you. Good afternoon. John, I know that you guys clearly didn't put out any guidance targets for all the obvious reasons, but when you hear you walk through all the different segments, you know, bulk being 40%, double digit volume growth, tailwinds on auto, et cetera, et cetera. When you look to 2023 on a CP standalone basis, understanding the macro headwinds, does it seem to you that you can have volume growth that's, you know, not just at or better than GDP, but substantially better, you know, almost like a multiple of that, just given all your idiosyncratic tailwinds that you have on your own network?
John, look, I definitely see a path to growth. You know what? We're unique in that 40% of our book is our bulk franchise, and I'm leaning heavy on that. As you said, certainly the macro environment is uncertain and we're not gonna get too far over our skis in trying to predict what that's gonna look like. The Canadian grain franchise is set up well. You know, Canpotex gets through their contract negotiations with China and India. We believe there's a path to a double-digit growth opportunity there. As I said, you know, Teck, we had a tough year between the weather and some of the mine challenges they had. There's a, I think, a significant upside and a good mark-market demand environment in the metallurgical coal area.
If you sort of build that out, Jon Chappell, and then you can make your own predictions on sort of where those more industrial and consumer markets go, it definitely leads to a path to some growth.
Understood. Thank you, John.
Yep.
Our next question comes from Tom Wadewitz from UBS.
Thanks. Good afternoon. wanted to see, I think you've given us quite a bit of color over time about the opportunities for growth when you get the approval on with KCS. Is anything changing or is there, you know, anything that's kind of new and developing as we, you know, wait for that STB decision? Or is it pretty stable and it's kind of the same, you know, pipeline, same opportunities that you've been talking about?
Tom, I'll just say this, in short. You know, number one, I can't get ahead of the STB. The STB is the authority here, and ultimately we need their
Their stamp of approval. Now I do think that our facts are very strong and it's very compelling value creation for all stakeholders and enables growth and all the things that we have said all along remain to be true. Ultimately they have to decide. When they do, nothing has at all muted our optimism for the opportunities. In all the discussions we've had contingent upon that approval, we have an opportunity-rich list that we're gonna be able to execute, that we're looking forward to get to work on.
Okay, great. Thank you.
Our next question comes from.
Thanks, Ben.
Our next question comes from Chris Wetherbee from Citigroup.
Yeah. Thanks. Good afternoon, guys. you know, I think as we're looking out into 2023 and thinking about sort of the combination of this business, I would, I guess, maybe curious your thoughts on the ability to improve the OR from, you know, what was obviously a bit of a transition year or a tale of two halves, as you mentioned, Keith, in 2022. I don't know, Nadeem, if you'd be willing to sort of sink it down on a CP-specific basis above the line, your thoughts around either EBIT growth or OR improvement from where we finished 2022?
Let me size it up like this, Chris. Let me start by saying, you know, the 61.4 is not a CP standard. That is an absolute fact of the belief. We look forward. There's a lot of moving parts. Obviously, we don't know what the economy is gonna do, but we do know our story's unique, and we know we're gonna control what we can't control, and I do see a path to OR improvement. Let me leave it at that.
Yeah. Thanks.
Your next question comes from Walter Spracklin, RBC Capital Markets.
Yeah. Thanks very much. Good afternoon, everyone, and Nadeem, great to have you back. My question, I guess, is on St. John, and you mentioned going to 150 this year, you know, obviously up from a less than 90 run rate, and now you're pretty much running at a 300 run rate, so probably double that again in 2023. You're pointing to 800 in 2024. Just curious, you know, when you get to that level, how long do you think it'll be that you could fill that 800 capacity in 2024?
Is L.A. Long Beach and the shorter queues and the less congestion over the West Coast, does that hurt your ability to get up to 800,000 on a quick basis in 2024 or beyond?
Well, Walter, you know what? I don't think so. The thesis all along, if we think back to when we bought the CMQ, number one, there was only one competitor in that marketplace. We identified a route that, you know, with our investment, with our partnership with Irving and the NBSR, we're able to create a service package that ultimately long term, we believe is what is the enabler of the growth. We can get to Toronto, Montreal, Chicago, on a 200 plus mile faster route. That's not undeniable. I think that's given us opportunities to talk to these steamship lines maybe a little differently than we have in the past.
I think the other point as I think about your timeline in 2024, 2025 and beyond is, you know, a CP network that reaches coast to coast across Canada, and, you know, with the STB hopefully approving our transaction, being able to link in the Gulf and also, you know, potentially Lázaro down in Mexico gives us a really nice menu to be able to work with our customers on. As part of that, I see that enabling, you know, customers to not only look at the West Coast, but grow that East Coast port of call with us, but then also, you know, potentially further diversify themselves by potentially going down and utilizing the ton of capacity that we're gonna have available coming in through Mexico.
That's a great story. Appreciate the time.
Thank you.
Thank you, Walter.
Our next question comes from Ken Hoexter from Bank of America.
Hey, great. Nadeem, welcome back, and good luck on the rest of this process as you go through here. It's an exciting time to follow it. Can you talk about the test runs? I think you talked about some of the lanes you're testing with KCS on a commercial basis. Is there anything you can kind of talk about in the interim? You mentioned the lane that's a 100% served by trucks. Maybe can you quantify that specific opportunity or the potential there?
Ken, I'll say this at this point. As I said, these are interline test moves that we've put together to, I guess, somewhat replicate or begin to sort of proof of concept with these customers. As I said, they're moving 100% truck today. Part of the sale is helping the customer understand what that process and what that opportunity could look like.
You know, obviously in the future, if we're blessed with single line service, you know, between Toronto and Chicago and Laredo and ultimately down into Mexico, we've wanted to begin to prove that we can compete head to head with trucks and ultimately provide that reliability that those customers are gonna require. I can tell you that the second part of the story that's kind of neat around some of these opportunities is in these couple examples I spoke to, we've done some work with the customers to identify the greenhouse gas emission savings at about a 60%-75% clip versus their current mode on those specific moves.
It's really become a unique and exciting sales tool that, you know, maybe far more than ever in the past, some of these customers have stood up to say that, you know, that's beyond the price and the savings and the reliability and the service, this is an important story for our companies. I hope that helps, Ken.
It has, John. It's just something I guess we'll hear about more in the future. Thanks a lot for the time.
For sure.
The next question comes from Scott Group from Wolfe Research.
Hey, guys. I understand 61's sort of not the CP standard, do you think maybe is this a year where we can get back to that 57, 58 OR we had in 2021? Just in terms of like the consolidated results, and I know we can't give specific guidance yet, but last year you gave us directional commentary, low single-digit kind of earnings growth. Anything you could say? You know, is double-digit earnings, the street's got high-teens earnings growth. Any sort of directional color you can share? Thank you.
Hey, Scott. Appreciate the question. you know, I'd just say if we wanted to give guidance, we would've given it. It's difficult in this environment. We're awaiting, you know, a decision from the STB, so out of respect for that, I think we should hold off on guidance for a consolidated entity. In terms of the OR, I think Keith said it perfectly. I mean, you know, 61.4 is not something that we write home about. you know, there's opportunities, as John highlighted, this year in terms of on the volume side, but there's also uncertainty on the macro front. you know, we think that we think and we expect to see improvements.
To give you a quantum, I don't think it's appropriate right now, Scott. We'll update you as the year unfolds and, as we progress on our, on our potential transaction and, you know, you can expect an investor day from us later this year, and I think that's, that'll be plenty of time to give you a more formal kind of guidance of when the time is appropriate.
All good. Totally fair. Thank you, guys.
Thanks, Scott. All right.
Our next question comes from Jason Seidl from Cowen.
One, Nadeem, welcome back. I wanted to touch on pricing a bit. I think you guys noted it continued to be strong. I was wondering if you could sort of compare it to where we were at in 3Q, and then does it need to actually get better from here given cost pressures?
You know, Jason, I would say we sustained and maybe even improved a little as we moved through Q4. You know, I'd go as far as saying that high single-digit type pricing on renewals, certainly inflation plus. You know, just looking out so far, Q1, Q2 expectations in 2023, I'd say it pretty well lines up in that similar space. I remain optimistic on our pricing.
As we've always done in the past, certainly we're very conscious of this inflationary environment, but a big part of our philosophy is, you know, pricing to the value of our service and capacity and whatever the inflation environment is gonna be, you can assure that we'll continue to, you know, the sales team will continue to price that way, in the marketplace.
Appreciate the color. Understood, look forward to the next big announcement.
As do we. Thanks, Jason.
The next question comes from Brandon Oglenski from Barclays.
Barclays.
Barclays. Thank you.
Okay. You talked about new progressive hourly agreements with the SMART and the BLET unions. You know, how important is that towards working towards a quick integration, and what advantages do these hourly contracts have versus maybe some of your competitors?
Well, it's critically important. It's a success enabler. I can tell you that, I don't know if we have enough time to go through this on this call, but think of one collective agreement. Think of a conductor, think of an engineer. Think of no complexities from yard rules and road rules, where we have two classes of employees. You have one class of conductors and engineers, they make more money, they have scheduled time off. As a result of that, we have more predictability. When you offer a better quality of life, especially in today's world, you pay more money, and you let people know when they have to come to work. In the rail industry, that's a very unique and compelling value proposition.
To be able to expand that, we've benefited from that on the C&D and E properties at CP. We've had a unique outcome even through last year and the year before. That's been part of our recipe for success, and to be able to leverage that and give something to our employees they'll be proud of, their families will be proud of.
I think it's part of the recipe not only to succeed in realizing our revenue synergies and the growth that we've committed to, as well as operational synergies, but most importantly, I think it's necessary in today's world to be the employer of choice. Employees in the rail industry have to work their tails off. It's not an easy job. They have a choice of where to work. All the railroads are hiring. CPKC, pending, of course, the STB's approval of our transaction, I believe has the potential, again, for the employee to create a unique experience in this industry, and that's what I'm most excited about.
Thanks, Keith.
Our next question comes from Konark Gupta from Scotiabank.
Thanks, operator. good evening, everyone. welcome back, Nadeem. just wanted to ask on one of the comments you made on the largest hiring and CapEx programs you undertook in preparation of the opportunities ahead. How much hiring and CapEx are you expecting to unleash once the transaction is fully approved?
Well, I'll tell you from a CP standalone, our CapEx is $1.6 billion. You know, don't let me comment on Kansas City Southern's CapEx. They've had a number of initiatives, call it, you know, whether it's from a bridge point of view, or from, you know, other land acquisition and so forth. They're hitting record CapEx levels as well. From a hiring point of view, we hired starting in the spring of 2022. We've had a strong pipeline in anticipation of the grain crop coming back. We saw our employee counts, I think, get up to almost 13,000 people at the end of the year.
We hired, I think close to 2,500 new people were hired and trained. You know, that was certainly a significant expense in 2022, and it will be a significant expense this year as we prepare for growth. Those RTMs that we expect to come along, the GTMs, you know, assuming a positive response from the STB, the synergies that one day we'll realize will take some people. You know, we're hiring a few thousand at a time, and we're spending CapEx at record levels on our property, and KCS on their property. Just a bit of color. Hopefully, that helps, Konark.
No, that helps. I appreciate it. Thank you, Nadeem.
Thanks.
Our next question comes from Steve Hansen from Raymond James.
Oh, yes. Good afternoon. Good. I appreciate the time. Noted that KCS has faced some of its own or headwinds in the past couple of quarters here, even stiffer than the CP core. Just to the degree that you can comment at this juncture, just curious how addressable you think those headwinds are and how quickly they can be reined in upon a successful STB decision?
Yeah, it's hard to put a number on that, Steve. The things I think about, you know, obviously, I can't stick my hands into their business. You know, John and Pat and the team are very competent and capable and talented railroaders, and they're managing those situations now. Now, you know, pending STB approval and we have an ability to get our hands into it, obviously, when you put the combined network together, as we come together as a team, you create fluidity, you take out handling, you do a lot of those things that whatever challenges they're dealing with is gonna get better from a fluidity and operational standpoint.
The other thing is, as we win this business that we're talking about and we create these new markets, you take out some of the complexity of cars being handled back and forth with a single line move versus an interchange move. That's true for CPKC. That's true for an interline move, perhaps that might be going UP, BN, CN all of the above. You know, single line, that's part of the value of this for the customer. It's part of the efficiency. As far as the asset turn, you control the move cradle to grave. You charge a fair price for it. You create capacity. As a result, you have a more efficient railway, which produces a lower operating ratio. It's just the way you'd effectively run the business. So I can't put a number on it.
I can tell you that you should expect improvement naturally because of all those reasons. I can tell you this is gonna be a team committed to driving that improvement.
Appreciate the color.
Thanks, Steve.
Our next call comes from Brian Ossenbeck from JP Morgan.
You know, there's a change in the paid sick time in Canada starting the end of last year. It was called out to be a CAD 100 million headwind as your peer. Wanted to see how you're thinking about that at your own network here in the next year. Maybe for Jon Chappell, if you can comment on just the price mix, and I guess other was a 200 basis point headwind this quarter. Putting it together, it looks like you might be facing similar trends in the first half of next year just based on the comps and the winds that are coming on the network. I wanted to see if you could give some high-level color in terms of how to think about mix and how that impacts you next year. Thank you.
I'll say a few short words about these new regulations and the paid sick days. I'm not thinking in tens of millions of dollars. I'm not thinking in hundreds. I'm thinking about the practical application of this. Number one, those sick days have to be earned through 2022 or 2023. Really they don't come into play until 2024 full year effect. Number two, our manpower models, I don't care if it's mechanical group, the running trades group, locomotive group, the main away group, we model because employees obviously get sick days that are already in our manpower models. To suggest it's gonna go from 0 to whatever to 10, a multiple of 10 would be, to me, irresponsible on my part.
Our employees, if I look at running trades, for instance, we've got average sick days in a year is, I think, the rough number is four or five. That's already kind of baked into the manpower model. Now, if I've got to pay them for those four or five days, there's some impact, but at the end of the day, it's not gonna be material. I don't know exactly what it will be, but we won't have full effect in 2023. I know that for a fact. When we do, I don't think it's gonna be material.
Brian, you know what? You're right. I kind of see similar trends evolving as we move into the first half of 2023. You know, typically our bulk franchise, just by nature, a little lower on an average cents per RTM basis relative to the rest of our book. You know, that'll kind of maintain or keep some of the pressures relative to the mix as you described.
Okay. Thank you for your time.
Yep.
Our next caller comes from Ari Rosa from Credit Suisse.
Great. Good afternoon. Thanks for taking the question. I just wanted to see if Nadeem Velani or Keith Creel maybe could talk about the expectations for the progression of the debt pay down. Kind of how are you seeing that play out over the course of 2023 and maybe into 2024? What kind of impact might that have on your interest expense? Thanks.
Yeah, we're generating a significant amount of free cash, as well as the debt payments from Kansas City Southern. You know, we're kind of on pace to continue to delever, get back to our 2.5x target leverage. You know, we've gone from kind of little bit above 4.1x, 4.2x, down to 3.7x, 3.8x levels as we speak. You know, I would expect that to get in the high two's by the end of the year. Over the course of 2024, we should be back in target leverage, keep it at that level.
As far as interest payment, just follow up with Megan and Chris post-call. I'm back in the office three days so far, so you caught me on that one and so it's better to connect with them on the interest cost.
Got it. Fair enough. Thanks for the time.
Thanks. Thanks, Ari.
Our next question comes from Amit Mehrotra from Deutsche Bank.
Thanks, operator. Hi, everyone. I joined the call a little bit later, so apologies if these questions have been asked. One, Nadeem, I was wondering if you could talk about non-fuel costs. Obviously, there's inflation. I assume you have some visibility. If you could help us kind of think about the OpEx this year. Other, I guess, follow-up separately, with Kansas City's OR, you know, there used to be a time where they provided U.S. OR and Mexico OR, and I assume that, you know, based on where they are today, it may be safe to assume that they're kind of in the 70s% now in terms of the U.S. business.
I don't know if you want to comment or talk about that, but just trying to understand the gap in terms of where they are in the U.S. business and where CP is.
Sure. Yeah, thanks for those questions. You, you cut out a little bit, so forgive me if I don't get the full question and respond to you correctly. I think you mentioned about inflation ex fuel. You know, we were running close to high six, almost 7% in Q4. You know, significant inflation that we haven't seen in some time or certainly I haven't seen in my career. The good news is, you know, John has been, as he updated on the call, you know, we've been pricing above inflation, and we fully expect that. You know, in this uncertain macro environment, we'll see what happens with inflation. Certainly, we've seen it kind of slow down in some areas.
Some of the latest economic indicators have seen, you know, hopefully peak inflation, and we'll see that come down through 2023. Irrespective, we know we're protected from an operating income point of view. In terms of OR, you know, KCS versus KCSM, yeah, not appropriate for me to comment. I couldn't even tell you the answer if I wanted to, if I knew it. You know, more to come on that and not something that, you know, I'm gonna answer on this call.
Yeah. I thought I'd try anyways. Thank you very much. Appreciate it.
Yeah. A heck of a try, Amit. Thanks.
Our next question comes from Justin Long from Stephens.
Thanks, and good afternoon. I guess to follow up on some of the questions about pricing, can you talk about what % of your business is getting repriced this year? As you've started to pursue some of the new business opportunities as a result of the KCS merger, are you seeing any of the other rails respond to that with more competitive pricing? If not, how are you thinking about that risk as you integrate the deal?
Justin, we should see, roughly 40% of our book, roll over in 2023, and that's I would characterize that as pretty typical for us. You know, in the competitive response, the I fully expect that they're gonna do what they need to do in areas where we're gonna go head-to-head, again, assuming the STB approves our transaction. That being said, I'll also say this, you know, a lot of the examples I've provided today, and I've spoken to in the past are really non-rail moves today. It's about focusing on these opportunities that I think uniquely can be solved by CPKC, and are really competing against truck.
You know, as I think about even, you know, traffic that we're looking at potentially out of Mexico up into markets that's moving short sea or other alternatives that aren't head-to-head versus rail. Look, we're gonna compete where we compete, and I fully expect, you know, the U.S. rail competitors to do what they need to do on that front and we'll do the same. Again, we'll try to focus on those growth opportunities that are more maybe non-competitive with those than in moving via truck or other modes.
Understood. Thanks.
We have reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.
Okay, thank you, operator. Thank you for joining us again this afternoon. As you can sense, these are unique opportunities. It's a unique time in this company's history. Obviously, contingent upon the STB approving our merger application. We are poised and ready for a historic year for a combined entity, CPKC. Historic for our customers, for our employees, for the communities we serve, for the North American economy in a very unique way. With that said, we look forward to waiting on that decision, and pending that decision is positive as we hope that it will be, and we believe the facts support.
We will be scheduling and let you know a date to protect in the future, sometime in June, late June, where we'll be in a position to be able to come together and share all these facts and answer a whole lot more questions and provide some color as to what the true opportunity lays ahead of us for 2023 and beyond. Thank you for that. Stay safe and we look forward to talking again on our next call.
This does conclude today's conference call. You may now disconnect.