Canadian Pacific is eager to secure new business and expand existing opportunities as it gears up for a potential merger with Kansas City Southern in 2023, according to its executives during an earnings call to discuss the railway’s third-quarter 2022 financial results.
Shareholders of CP (NYSE: CP) and KCS approved the $31 billion merger in December 2021, and the deal now sits before the Surface Transportation Board for review. The board conducted hearings on the proposed merger in late September and early October. CP expects a decision from STB sometime in the first quarter of 2023.
CP and KCS maintain the merger would create a single rail system known as Canadian Pacific Kansas City, or CPKC, with a network that would extend from Canada into the U.S. and Mexico.
CP and KCS put together an integration management office that is mapping out what needs to be done operationally between both companies leading up to the merger and in the days and weeks following it, according to CP President and CEO Keith Creel.
“We’re taking some exhaustive steps with an integration management office that we’ve created and [there has been] a lot of preplanning,” Creel said late Wednesday. “We’ve got about 165 processes of change that we’ve got mapped out across each discipline of the business. We’ve got disciplined leaders that are full-time assets.”
The merger will be a “horizontal integration” because the two railways’ networks don’t overlap, according to Creel. As a result, the operational disruptions that have occurred in past mergers of Class I railroads, such as the one between Union Pacific and Southern Pacific, won’t be an issue. The merger won’t entail a lot of rerouting of traffic, Creel said.
“There are plans being laid,” he said. “It’s not going to be perfect. We’re not perfect human beings. The operating world is not perfect, but we certainly are doing all of our homework upfront and plan to exceed expectations. And you’ll start to see synergies both on revenue as well as on the cost side as we grow this railroad going forward.”
Those collaborations will start in the second quarter and then ramp up in the third and fourth quarters of 2023 with momentum continuing in 2024, Creel said.
CP is working with KCS to develop a proof of concept for an interline service that will utilize Lazaro Cardenas, Mexico, according to CP Chief Marketing Officer John Brooks.
The interline service isn’t meant to replace Los Angeles-Long Beach in California or other gateways but rather to provide options for shippers and diversify CPKC’s portfolio, Brooks said.
To keep up with anticipated demand in Q4 to move grain, potash and intermodal, CP is monitoring resources and work crews. The railway has hired about 1,500 conductors this year to date and accelerated capital to invest in its physical plant so that it can be ready for opportunities in the fourth quarter and 2023, according to Creel.
Although grain volumes were down in Q3, they have increased moving into Q4. CP now expects the Canadian grain crop size to be around 75 million metric tons, which would put it among the top five harvests all-time, Brooks said.
“This comes at a great time, certainly following a lot of investment into the supply chain by not only Canadian Pacific but many of our grain partners,” Brooks said. “This will be the first year we have a critical mass of our new high-capacity grain cars.”
Meanwhile, automotive volumes may find support from OEMs seeking to meet pent-up demand and replenish inventories, according to Brooks.
CP and Ford Motor Company have a long-term contract involving CP’s new automotive compound located in Bensenville, Illinois, and the railway is reopening its Edmonton auto compound “to provide more service options to Ford as our anchor tenant for shipments of trucks and SUVs into this northern Alberta market,” Brooks said.
“While we are all still watching the broader macro environment, my team is staying close to the customers and our operating team and will navigate any changes appropriately,” Brooks added. “We remain laser-focused on executing our playbook and making our own luck through delivering our unique self-help initiatives.”
Q3 2022 financial results
CP’s net profit for the third quarter of 2022 totaled 891 million Canadian dollars ($657 million), or 96 cents per diluted share, compared with net income of CA$472 million, or 70 cents per diluted share, for Q3 2021.
Revenue rose by 19% to CA$2.31 billion amid gains for intermodal, automotive and potash volumes. Freight revenue was also 19% higher year over year (y/y) at CA$2.26 billion.
“Throughout the year, we have said 2022 would be a tale of two halves, and that is exactly how it is unfolding,” Creel said in a news release. “The third quarter saw strong demand in potash and intermodal that we anticipated, and CP was well resourced to handle the volume increases we have seen. I’m proud of the results the team delivered this quarter and excited about the opportunities in front of us.”
Operating expenses increased nearly 18% to CA$1.38 billion amid higher fuel costs. Operating income was CA$937 million, 21% higher y/y.
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