According to its executives during an earnings call to discuss the railway’s third-quarter 2022 financial results, Canadian Pacific is eager to secure new business and expand existing opportunities as it prepares for a potential merger with Kansas City Southern in 2023.
CP (NYSE: CP) and KCS shareholders approved the $31 billion merger in December 2021, and the Surface Transportation Board is now reviewing the deal. The board held hearings on the proposed merger in late September and early October. STB is expected to decide in the first quarter of 2023, according to CP.
According to CP and KCS, the merger would result in a single rail system known as Canadian Pacific Kansas City, or CPKC, with a network extending from Canada into the United States and Mexico.
According to CP President and CEO Keith Creel, CP and KCS formed an integration management office to map out what needs to be done operationally between the two companies in the run-up to the merger and in the days and weeks following it.
“We’re taking some exhaustive steps with an integration management office that we’ve established, and [there’s] a lot of preplanning,” Creel said late Wednesday. “We’ve mapped out approximately 165 change processes across each business discipline.” We have disciplined leaders who work full-time for us.”
According to Creel, the merger will be a “horizontal integration” because the networks of the two railways do not overlap. As a result, the operational disruptions experienced in previous Class I railroad mergers, such as the one between Union Pacific and Southern Pacific, will not be an issue. According to Creel, the merger will not require much traffic rerouting.
“Plans are being made,” he said. “It’s not going to be flawless. We are not perfect humans. The operating world is not perfect, but we are doing all our homework ahead of time and intend to exceed expectations. And as we continue to expand this railroad, you’ll start to see revenue and cost synergies.”
According to Creel, these collaborations will begin in the second quarter of 2023 and ramp up in the third and fourth quarters, with momentum continuing into 2024.
According to CP Chief Marketing Officer John Brooks, CP is working with KCS to develop a proof of concept for an interline service that will use Lazaro Cardenas, Mexico.
According to Brooks, the interline service is intended to be something other than Los Angeles-Long Beach or other gateways in California, but rather to provide options for shippers and diversify CPKC’s portfolio.
To meet the anticipated demand for grain, potash, and intermodal transportation in Q4, CP is closely monitoring resources and work crews. According to Creel, the railway has hired approximately 1,500 conductors this year. It has accelerated capital investment in its physical plant to be ready for opportunities in the fourth quarter and 2023.
Although grain volumes were down in the third quarter, they increased in the fourth quarter. According to Brooks, CP now expects the Canadian grain crop to be around 75 million tons, placing it among the top five harvests of all time.
“This comes at an excellent time, certainly following significant investment in the supply chain by Canadian Pacific and many of our grain partners,” Brooks said. “We will have a critical mass of our new high-capacity grain cars for the first time this year.”
Meanwhile, according to Brooks, OEMs seeking to meet pent-up demand and replenish inventories may support automotive volumes.
The Canadian Pacific Railway and Ford Motor Company have a long-term contract involving CP’s new automotive compound 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,” according to Brooks.
“While we are still monitoring the broader macro environment,” Brooks added, “my team is staying close to our customers and our operating team and will navigate any changes appropriately.” “We remain laser-focused on executing our playbook and creating our luck by delivering our one-of-a-kind self-help initiatives.”
Financial results for Q3 2022
CP’s net profit for the third quarter of 2022 was 891 million Canadian dollars ($657 million), or 96 cents per diluted share, up from CA$472 million, or 70 cents per diluted share, in Q3 2021.
Revenue increased by 19% to CA$2.31 billion, owing to increases in intermodal, automotive, and potash volumes. Freight revenue increased 19% yearly (y/y) to CA$2.26 billion.
“We’ve said all year that 2022 would be a tale of two halves, and that’s exactly what’s happening,” Creel said in a news release. “We expected strong demand in potash and intermodal in the third quarter, and CP was well-resourced to handle the volume increases we saw.” “I’m proud of the team’s performance this quarter and excited about the opportunities ahead of us.”
Operating expenses increased by nearly 18% to CA$1.38 billion as fuel prices rose. Operating income was CA$937 million, up 21% year on year.
