Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Canadian Pacific Kansas City Ltd (CP, Financial) reported strong revenue growth of 8% in Q2 2024, reaching $3.8 billion.
- The company achieved a significant improvement in its operating ratio, which decreased by 280 basis points to 61.8%.
- Earnings per share (EPS) increased by 27%, reaching $1.05.
- Operational metrics showed positive trends, including a 9% decline in average terminal dwell and a 6% improvement in average train speed.
- The company reported a 38% improvement in personal injuries, highlighting a strong focus on safety.
Negative Points
- The freight environment remains challenging, with ongoing macroeconomic headwinds affecting certain segments.
- There is potential for a labor strike, which could disrupt operations and impact financial performance.
- The company faced a significant casualty cost in July, estimated at $45 million to $50 million, which will impact Q3 results.
- Stock-based compensation costs are expected to increase in Q3, adding to financial pressures.
- Certain segments, such as forest products and metals, minerals, and consumer products, experienced volume declines due to a soft macro environment and specific disruptions.
Q & A Highlights
Q: Can you provide an update on the synergy side, particularly the revenue synergy progress and expectations for the back half of the year?
A: John Brooks, EVP and Chief Marketing Officer, highlighted that the synergy progress has been strong, with an exit rate of around $350 million at the end of 2023. He expects this to potentially double, reaching closer to $800 million by the end of 2024. This growth is spread evenly across intermodal, bulk, and ECP merchandise businesses.
Q: Can you elaborate on the capacity and potential of the new Dallas auto compound?
A: John Brooks explained that the Dallas auto compound has a capacity of 160,000 to 180,000 gins annually, with three OEMs already signed on. The facility is currently at about 75% capacity, with potential for expansion. Keith Creel, CEO, added that this opportunity was not included in the initial Investor Day guidance and represents additional growth potential.
Q: What is the current status of the labor situation and its potential impact on operations?
A: Keith Creel mentioned that negotiations with the TCRC are ongoing, but the parties are far apart. He anticipates a probable work stoppage, which could occur by the end of the month if the CRIB releases the parties. The company is preparing for this scenario and has asked for time to allow customers to plan responsibly.
Q: How do you manage capacity and avoid congestion issues, especially in the Western corridor?
A: Keith Creel emphasized the importance of not oversubscribing the network and maintaining a disciplined approach to capacity management. He highlighted the need for the right number of locomotives, cars, and crews to ensure smooth operations and avoid congestion.
Q: What are your thoughts on the potential for strong margin expansion in 2025, given the available capacity on some services?
A: Keith Creel and Nadeem Velani, CFO, both expressed confidence in the company's capacity to support high single-digit revenue growth. They highlighted the ongoing capital investments and the ability to bring on new business at a low incremental cost, setting up for strong margin expansion in 2025.
Q: Can you provide an update on the grain crop outlook and its potential impact on volumes?
A: John Brooks mentioned that the grain crop is shaping up to be strong, with projections around 73 million metric tons, potentially reaching 75-78 million metric tons. The company is well-positioned to handle this volume, particularly in the Western corridor.
Q: How are you managing the impact of the peso volatility on your business in Mexico?
A: John Brooks stated that the company has not felt a significant impact from peso volatility. The strength of intra-Mexico demand and the confidence in cross-border opportunities have been positive factors. The company continues to work with customers to manage any potential impacts.
Q: What are the implications of the FMC halting the Gemini alliance for your growth plans?
A: John Brooks explained that the company is strategically aligning with partners like Hapag and Maersk to optimize the international business. The halting of the Gemini alliance presents opportunities for growth, particularly in the Port of St. John and Lázaro.
Q: How do you see the potential benefits of cargo diversion due to the ILA port workers' contract expiration in the US?
A: John Brooks indicated that ongoing dialogue with steamship lines and BCOs presents opportunities for cargo diversion to Lázaro and the Port of St. John. The company is preparing to capitalize on these opportunities if the East Coast labor situation leads to disruptions.
Q: Can you provide more details on the casualty costs and stock-based compensation impacts for Q3?
A: Nadeem Velani mentioned that a significant casualty incident in July resulted in costs of around $45-50 million. Additionally, there will be a step-up in stock-based compensation costs in Q3. These factors are expected to impact the operating ratio for the quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
