Canadian Pacific Kansas City Limited (NYSE:CP) Q3 2023 Results Earnings Conference Call October 26, 2023 4:30 PM ET

Company Participants

Chris de Bruyn - Vice President, Capital Markets and Treasurer

Keith Creel - President and Chief Executive Officer

Mark Redd - Executive Vice-President and Chief Operating Officer

John Brooks - Executive Vice President and Chief Marketing Officer

Nadeem Velani - Executive Vice President and Chief Financial Officer

Conference Call Participants

Chris Wetherbee - Citi Investment Research

Scott Group - Wolfe Research

Brandon Oglenski - Barclays Capital

Fadi Chamoun - BMO Capital Markets

Steve Hansen - Raymond James

Tom Wadewitz - UBS

Jonathan Chappell - Evercore ISI

Cherilyn Radbourne - TD Securities

Konark Gupta - Scotia Capital

Walter Spracklin - RBC Capital Markets

Ken Hoexter - Bank of America Merrill Lynch

Brian Ossenbeck - J.P. Morgan

Ben Nolan - Stifel

Justin Long - Stephens Inc

Benoit Poirier - Desjardins Securities

David Vernon - Bernstein

Operator

Good afternoon. My name is Travis and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's Third Quarter 2023 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference. Please go ahead, sir.

Chris de Bruyn

Thank you, Travis. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide 2 in the press release and in the MD&A filed with Canadian and US regulators. This presentation also contain non-GAAP measures outlined on slide 3. Please note, in addition to our regulated quarterly financials, there are supplemental Q3 combined revenue and operating performance data available at investor.cpkcr.com which some of today's discussion will focus on.

With me here today is Keith Creel, President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer.

The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to one.

It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Keith Creel

Thanks, Chris. Let me start by thanking the CPKC family of 20,000 railroaders across our three great nations. We've been hard at work providing service for our customers. The effort and the passion they've demonstrated each day as we integrate and execute is truly commendable. So let's take a look at the results of the quarter.

The second quarter produced revenues of CAD 3.3 billion on volumes that were down 3% versus last year with an operating ratio of 61.7, core EPS of CAD 0.92. So no doubt a challenging quarter as we dealt with a softer demand environment and supply chain impacts from the strike at the Port of Vancouver. I'm going to let John talk more about that in a few minutes.

As you're seeing in the press release, given the more challenging environment, further stress by the labor strike, we're adjusting our 2023 guidance accordingly. Certainly not the outcome we had planned, but it's the prudent thing to do at this point.

That said, it's not the challenges that define us, but rather how we respond. And I'm very proud of how this team, our collective CPKC families are responding to the challenges.

I'll say a few things about the Mexico Task Force. That's an excellent case in point to how we respond in the task force. You recall back in our second quarter call, we talked about an enhanced focus on operations in Mexico. Shortly after that, we deployed a task force to Mexico that was led by John Orr. John who many of you are familiar with, has a lot of experience in Mexico from his previous role as EVP, Ops of KCS and KCSM. And I can tell you, this effort was monumental. It brought together railroaders from every part of the organization, nearly 100 employees across information services, network services, marketing, engineering, mechanical, and many others came together to support John on the task force objectives. And we're seeing the results from that effort.

You've seen noticeable progress across all the operating metrics, train speed improvements, terminal dwell reduction, car miles per car day improving, locomotive productivity improving and, ultimately, the most important part, the service experience for the customer. And this transformation is ongoing, and the investment in people, process infrastructure, and technology in our Mexican operations, as well as our US and Canadian operations is a continual journey.

On the safety front, we've continued to rise to the challenge from a safety perspective. Mark will speak to some of this in more detail in a moment. But I can tell, on a combined basis, we've seen year-to-date improvement in FRA personal injuries of 12%, FRA train accident frequency of 37%, which is a tremendous result that I want to commend the entire team on as we continue to lead the industry in the space. Safety's a never ending journey. And it continues, and will always be our number one priority.

Few comments on the integration. On the integration front, integrating these two companies, obviously, is a challenge in and of itself, particularly so in today's world with an industry with a history of merger related service challenges.

We certainly not been perfect. There are opportunities to improve that, that we're reminding everyday 24/7. But the teams from the legacy CP and legacy KCS have embraced the challenge, they've united, working together to produce a unique outcome that will benefit our customers, our communities, and each other.

A couple points on the M&BR. While we continue to make progress integrating these two railroads, we also continue to progress the M&BR transaction that we announced in June. Pleased to announce that we filed our application for the deal with the STB on October 6.

So in closing, we're a little over six months into this combination into our forever story. There's no doubt there's a few near term challenges from a softer demand environment. Regardless, the differentiated growth opportunities we've laid out and guided to remain unchanged. We're successfully integrating this network. We've maintained our commitments to our customers, to the regulators and we're seeing momentum in our operating performance.

So with that said, I'm going to hand it over to Mark to speak to the operations before John brings some colors on the markets and Nadeem elaborates on the numbers.

Mark Redd

Certainly. Thank you, Keith. And good afternoon. I'd like to start by thanking the CPKC operating professionals for their tireless work and dedication to safety and operational excellence.

The first six months of the merger has been both exciting and challenging. This team is up to the task and they're delivering on their mandate to integrate the CP and the KCS network seamlessly, while maintaining safety as CP's top priority.

So if we're looking at safety for the quarter, I'm pleased to report that we continue to build on industry leading record. Our Q3 FRA reportable injuries improved by 35% to a 0.97. Our train accident as reported improving 9% to 1.3.

As I've discussed on last quarter, stakeholder engagement is a core pillar of our safety performance. We regularly engage our employees, our union leadership, our regulators to collaborate safety best efforts, ensuring alignment.

Since day one, we have failed two safety walkabouts where CPKC leadership and partners directly engage with the field employees across the property. Our safety walkabouts are key to a strong consistent safety culture.

Now, turning to the operating performance, I will speak on the metrics from a comparison to CPKC if the combination occurred in 2022. Locomotive productivity improved 4% versus Q3 last year. Our average train speed and length declined 2% and 1% respectively. And the average train weight was down 2%.

As we focus and remain on our aligning operating practices across our network, we feel very good about the progress that we have made in the first six months. We're optimizing our train concepts, improve locomotive productivity and fuel efficiency. To that, fuel efficiency approved sequentially Q2 and Q3, and I expect that to continue in the area for opportunity as we look forward.

So, if we're looking at where we sit today, network wide dwell has improved 13% since the beginning of the third quarter. We have further to go, but the metrics across the board, locomotive productivity, car miles per car day and dwell are all moving in the right direction. We feel confident that these gains are sustainable.

If we look at our capital projects for the year, our construction of the second span of the Laredo bridge is 35% complete. We remain on target, operationally should be in by the end of 2024.

If we look at our 275 [ph] on our merger capital commitment we've made, we have put in service two of the five sidings. We look for the next three sidings to be within – service within three months.

In closing, when we look at the early stages of the journey as a combined company, I'm very confident in the actions and in the – taking the development, the network and alignment operations, this story will continue to have continuous improvement and my team will be laser focused on delivering strong results.

With that, I'll turn it over to John.

John Brooks

All right. Thank you, Mark. And good afternoon, everyone. So as Keith said, we're just over a half a year in as CPKC and I want to say that I'm excited as ever about the unique opportunities that this franchise has to offer our customers.

While it's certainly been a more challenging quarter than I expected, nothing that we've seen diminishes any of the exciting growth opportunities that we've guided to over the long term.

My team has been hard at work at creating new markets, capturing new business and I'm extremely proud of what we've accomplished to date despite this challenging economic backdrop. CPKC's unique footprint and our self-help initiatives are differentiators in this marketplace, and were extremely well positioned as the volume environment rebounds.

Now as I look to the third quarter results, on a reported basis versus CP standalone in 2022, total revenues were up 44% while volumes were up 31%. On a combined basis, total revenue was down 4% while volumes declined 3% versus pro forma CPKC a year ago. FX was a 3% tailwind while fuel was a 6% headwind on the quarter. The pricing environment remains strong with inflation plus renewables across our book of business.

Now taking a closer look at our third quarter revenue performance, I'll speak to the FX adjusted results on a comparison versus CPKC had the combination occurred in 2022.

Starting with bulk. Grain revenues are up 7% on 9% RTM growth. Canadian grain volumes were up 13% year-over-year driven by the improved harvest, lapping the drought affected prior year.

US grain volumes were up 6% as this year's harvest has been solid in our service territory, and we are benefiting from our expanded destination market reach. We continue to see new and unique grain flows emerge on the CPKC system. Customers are taking advantage of the opportunity to connect grain origination and destination in ways never available to them in the past.

Now looking forward, projections for the current Canadian grain crop harvest has come down since our Q2 call. Our customers are now estimating the crop size to be in the 60 million to 65 million metric ton range.

Currently, in Canada, we are seeing customer demand to start this crop year at levels below our resource planning, giving us available capacity to offset some of this headwind with shipments of US grain.

As a reminder, the CPKC combination has further diversified our grain franchise, and the US grain markets now make up more than half of our grain revenues.

On the potash front, revenues were down 22% on a 28% volume decline. Our potash volumes were impacted in the quarter by the strike at the Port of Vancouver and continued outage of Canpotex Portland terminal. To say this has been a challenging supply chain year for our export potash volumes with Canpotex is a true understatement.

Now looking ahead, although we do not expect the Portland terminal to come back online before the end of the year, we do have a strong demand outlook for Q4, and we're working hard to maximize our volumes through all available terminals to build some momentum with Canpotex as we close out the year.

And to finish out on our bulk business, coal revenue was flat on 7% volume growth. With favorable compares in Q4 following last year's outage of Teck's Elkview mine and higher met coal prices as we sit here today, I see a very strong growth in coal as we finish out the rest of this year.

Now moving on to merchandise. The energy, chemicals, plastics portfolio saw a 3% decline in revenue on a 5% decline in volumes. Lower volumes were driven by a decrease in crude business as a result of a facility maintenance and less demand in LPG. However, this was partially offset by growth in our refined fuels, including new business with Shell that began in August and continues to ramp up. And plastics growth out of Canada into the US and all the way down into Mexico.

Now as we move into the fourth quarter, I expect positive RTM growth in energy, chemicals, plastics, driven by continued strength in refined fuels as Shell continues to ramp up and we onboard new share wins.

Forest products revenues declined 6% on a 4% decline in volumes. While we are seeing the impact of a softer economy and slower housing markets, we are very encouraged about the quick development of long haul forest product shipments from Canada down to our southern markets. The combination of our seamless route to market and the development of our transload network will position us well to capture synergies in this market as it rebounds.

The metals, minerals and consumers products portfolio was up 2% on a 1% decline in volumes. Performance in this space was mixed as consumer products and frac sand were down as metals continued to have a strong performance. We are particularly encouraged by continued growth from the Mexico field space. Production is ramping up to support strong demand for the auto industry and for infrastructure construction projects and CPKC's footprint in Mexico is uniquely positioned to service this growing market.

Automotive revenues continued to be strong, up 21% on 11% volume growth, a record quarter. Demand for finished vehicles remain strong as the auto industry continues to be challenged with high finished vehicle ground counts exceeding available supply chain capacity to move these vehicles to market. We are working with many of the OEMs to create unique solutions to improve rail efficiencies that will increase capacity and help clear this inventory.

I'll note that, as of now, we do not expect the auto strike to materially impact our business as we are focused on servicing the strong demand from our production facilities in Canada and in Mexico.

And finally, on the intermodal side, revenue was down 19% on a 10% volume decline. Domestic intermodal volumes continue to be pressured by soft market demand, higher inventories and competitive over-the-road rates. However, we remain extremely encouraged by the uptake of our new 180/181 cross border service. The opportunity in the cross border intermodal space is significant, our services consistent and truck-like and we're in the earliest stages of developing this premium rail market.

Moving over to the international intermodal area, volumes were challenged in the quarter by the Vancouver port strike and softer demand. Although we are excited as ever about this space and we look to continue to expand our services out of the port of St John and to grow Lázaro Cárdenas, we expect near term headwinds as ocean carriers continue to blank failings and rightsize their capacity in reaction to the softer demand.

In closing, so certainly while we are not as immune to the headwinds impacting the economy and certainly the entire rail and transportation sectors, we remain uniquely positioned to deliver long term differentiated growth. This powerful combined franchise is creating new opportunities for our customers to grow. And our synergy gains and the opportunities ahead of us continue to exceed our expectations.

So with that, I'll now pass it over to Nadeem.

Nadeem Velani

Thanks, John. And good afternoon. I would like to first thank the entire CPKC team for its hard work, focus and resilience. This team of railroaders is making history and I'm very pleased with their perseverance and dedication in the face of a more challenging operating and macroenvironment.

Well, looking at the quarter, CPKC's reported operating ratio was 64.9%. And the core adjusted combined operating ratio came in at 61.7%. Earnings per share was CAD 0.84 and core adjusted combined earnings per share was CAD 0.92.

Results this quarter were impacted by the change in fuel price on both revenue and operating expenses. The impact of fuel price was a CAD 95 million headwind to combined operating income. This includes the CAD 72 million unfavorable lag effect on combined fuel revenue. The CAD 95 million impact to combined operating income translated to a 70 basis point and CAD 0.08 headwind to core adjusted combined operating ratio and EPS respectively. Based on where fuel prices sit today, we expect the fuel price headwind from Q3 to be a slight tailwind in Q4.

Now taking a closer look at our income statement, reported operating expenses provided on slide 14 and combined operating expense on slide 15. Similar to what we shared last quarter, our combined operating expense illustrates the estimated effects of the acquisition for the third quarter as if the acquisition closed on January 1, 2022.

Reported comp and benefits expense was CAD 598 million, down 4% on an FX adjusted basis when compared to combined comp and benefits expense a year ago. Driving the FX adjusted decline was lower current service costs and the DB pension plan resulting from higher discount rates and lower stock-based compensation. That decline was partially offset by wage inflation.

Headcount was down slightly sequentially in Q3. We expect headcount to be down sequentially again in 4Q, which will continue to give us improved operating leverage as volumes accelerate into the end of the year.

Fuel expense was down CAD 86 million or 21% on an FX adjusted basis when compared to combined fuel in Q3 2022. The decline was primarily driven by a CAD 93 million or 16% decline in combined fuel price along with lower GTMs versus prior year. As I mentioned a moment ago, that reduction in fuel expense due to price is more than offset by CAD 188 million headwind from a decline in combined fuel surcharge revenue.

Combined materials expense was down 4% on an FX adjusted basis. The decline was largely driven by reduced locomotive maintenance materials spend. Equipment rents were up CAD 24 million on a combined basis or 34% on an FX adjusted basis. The equipment rents increased due to higher car, higher payments resulting from automotive volume growth, lower use of CPKC intermodal equipment by other roads and increased use of pooled equipment.

Combined depreciation expense was up CAD 32 million or an FX adjusted 6%, resulting from a higher asset base. Combined purchase services and other was CAD 506 million or roughly flat year-over-year on an FX adjusted basis.

Our business interruption insurance recovery in the quarter related to 2021 flooding and wildfires in British Columbia offset increased casualty expense and cost inflation. Looking to 4Q, I still expect PS&O to come in around CAD 530 million to close the year.

Moving below the line, other components of net periodic benefit recovery decreased CAD 17 million, reflecting higher discount rates compared to 2022 and other expense was up CAD 6 million in the third quarter on a reported basis.

Net interest expense was CAD 207 million or CAD 202 million on an adjusted basis. The decline was driven by a reduced debt balance. On a combined basis, income tax expense was CAD 258 million.

We now expect the CPKC core adjusted combined effective tax rate to be approximately 25% for the year, a reduction of 50 basis points from the outlook provided in Q2.

Turning the slide 17. We're generating strong cash flow with cash provided by operating activities of CAD 1,027 million in Q3. Our first call on capital remains the business and growth, and in the quarter we reinvested over CAD 700 million, in line with our expectation to invest approximately CAD 2.7 billion in combined capital in 2023. We generated CAD 454 million in adjusted combined free cash flow on the quarter in just under CAD 1.4 billion year-to-date.

Our combined leverage is 3.6 times on our path back to our target leverage of 2.5 times. In review of the quarter, despite challenges, John's teams continue to bring on synergies and our operations are gaining momentum, especially in Mexico. We remain well positioned to deliver on our long term guidance, and I'm extremely confident of this team's ability to execute.

I'm excited about what this franchise can deliver. And I look forward to sharing our success with you going forward.

With that, Keith, let me turn things over to you.

Keith Creel

Okay. Thank you, gentlemen. Let's go and open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Chris Wetherbee, Citi.

Chris Wetherbee

I guess you just mentioned that you've been able to capture some of the synergies from the deal. So maybe, if you can help us sort of understand what you think from a synergy perspective you'll be able to realize here in 2023. And then, I guess what it'll take to maybe reaccelerate earnings growth back towards some of the longer term targets that you have? Is it simply just getting into a better macroenvironment? Or are there some incremental cost actions or others that you can take sort of early in 2024 to kind of reaccelerate the earnings growth profile?

John Brooks

Well, maybe I'll start, Chris, on the synergy piece. This is John. So, as I said, I'm really pleased. Despite the challenges we're facing certainly in the macro and all the geopolitical things going on that we're all facing, the team has been laser focused on the synergies and certainly delivering on a lot of things we laid out at Investor day. I think we said at Investor Day, we saw an immediate run rate of CAD 240 million sort of annualized. I can tell you, I know we pushed that to CAD 350 million that we talked about at some conferences, and I'm comfortable in telling you that we're beyond that now. I'm not going to pick quite a number for you at this time. But I'm quite comfortable, we're going to end up north of a number like that. So I'm quite pleased. And I'll tell you, there's a number of contracts and opportunities that are ready to go, but we'll start up in 2024, but that'll continue to add to that story.

Mark Redd

Chris, I'll just add a little color on the cost side. We're ahead of our target on the cost side as well. If we talk about accelerating, what I expect to see in 2024, is we debottleneck and continue to improve upon even numbers that Mexico is experiencing back to November of last year. That momentum will continue. We've got the investments that we made this year in the physical infrastructure that's tied to the merger application. I think we've got five siding that are here online now, two more come on within about a month. And then we've got one more to close the year out. So we'll get the benefit of that in 2024. So what I expect is the railroad to continue to incrementally improve from a fluidity standpoint, the locomotive productivity standpoint, and ultimately, you put those two together, you're going to turn your assets faster, will have better car productivity, car miles per car day, and you'll see operating expense tied to the synergies including these two networks accelerate a bit from the run rate that we've been after the last six months.

And again, I'll finish where I started. We're exceeding our expectations. Now there's some puts and takes to that, but as far as where we thought we would be or where we should be, to realize the synergies that we committed to you on the cost side, we're in a good spot, getting better every day.

Nadeem Velani

Chris, I'll just add, running a fluid network which we're seeing clearly today is going to help us on the operating the cost side ex synergies. We had talked about finishing the year with a lower labor headcount number, and that's certainly going to be the case. I think we'll have incrementally sequentially about 1,000 person reduction in headcount. And that's just attributed to timing of some of the works projects and also just your normal seasonality. So you're going to see us see the benefits of operating leverage. We do expect to see growth in this quarter from a volume standpoint. So, that operating leverage is going to naturally provide us some – the ability to take our costs down, improve our margins, and I fully expect – I'm sure we're going to get this question, so might as well hit it now. I fully expect this sub 60 OR in this quarter.

Operator

Our next question comes from Scott Group, Wolfe Research.

Scott Group

Nadeem, you got me on the OR question already, so I won't ask it again. How are you thinking about RTM growth in the quarter? And then I know it's early, but when I think back to the analyst day, you talked about high-single digit revenue growth, mid-teens kind of earnings growth. Do you have visibility to getting to those kinds of growth rates in 2024 or is it just too early to tell at this point?

John Brooks

Now, let me take the RTM piece. So we're slightly positive now for the quarter, Scott. We continue to expect to ramp up in November, December, and I fully expect the quarter, probably mid-single, 4% to 5% RTM growth versus last year.

Nadeem Velani

Scott, when we gave our guidance, I guess three or four months ago now, we talked about the five year plan. Nothing's changed on that front when you look at it from a long term perspective. We didn't expect it to just be without some level of cycle in during that timeframe. And so, we're seeing that macro challenge now. I think we'll see a bit of a softer grain crop in Canada next year. We've diversified our franchise, as John has pointed out. We're not as reliant on Canadian grain, but it's going to affect us probably in Q2 of 2024.

That being said, I fully expect when we give guidance in January, consistent with what we've described in June, that we're going to have double digit EPS growth in our sights. We always said that, over that four or five year period guidance, we're going to ramp up the synergies. And in the outer years, we're going to be at the stronger levels, not only because of the ramp up and synergies, but also the benefit of some – the ability to buy back shares and lower the share count and what that provides from EPS accretion. So from our perspective, as we stand here today, I certainly expect double digit EPS growth.

Operator

Our next question comes from Brandon Oglenski, Barclays.

Brandon Oglenski

John, I think on the last earnings call here, we were talking about incremental business wins that have you guys pretty relatively bullish on the volume outlook in your network for the fourth quarter. Is that still coming through the way you thought back then? And can you talk to some of those specific opportunities that we should be looking for coming down the line in the near term?

John Brooks

Certainly, we talked about the win in the ECP area, which we've definitely seen that volume ramp up. And that, frankly, has caused the ECP area to inflect positive. I'll tell you that that's an area where I continue to see ramp up. There's two or three recent contract renewals in that area that I feel really good about the share growth that CPKC and the team has delivered in that area. So I think you'll continue to see upside in that space.

I had said, we're just getting started on that 180 and 181 train pair north/south. There's a number of pieces of business that you should expect to see start up on that train pair – Chicago, Kansas City down to and into Mexico and out Laredo. We're projecting yearly, I'm going to say, 10% growth in our reefer business this year, in a year where much of intermodal is down. That's been an area of growth and it's going to be an area of growth you're going to see to continue to come on to that north/south train pair.

And then maybe last, I'll leave you with this, as you look across all the North American ports, I'm quite pleased with where Lázaro Cárdenas sits today.

We're seeing import export growth of about 26% at that terminal. And as you think about LA Long Beach, minus 20; Rupert, minus 30; East Coast ports, minus certainly double digits, Lázaro has seen growth. And I'm not suggesting – we've got a long ways to go and a lot of work to do in a challenged international area. But we are making some headway. We're doing a lot of ease of business thing. We're working with [indiscernible]. I don't know if you saw, but them recently announced a new port of call into Lázaro that's going to start up November 9, so not only domestic Mexico, but for also shipments into the US.

So, that's another area that I just think you're going to see us continue to position ourselves well. And when things rebound, we're going to be in a really good spot there.

Operator

Our next question comes from Fadi Chamoun, BMO.

Fadi Chamoun

John, I'm not sure if you're willing to take a stab at – like this CAD 350 million, what would that number you hope to have looked like kind of years from now, given the pipeline of all these opportunities that you seem to have your eyes on it?

And just to follow up on some of the cost commentary, Nadeem, you had a 10% decline in your ex fuel yield cost kind of Q3 versus Q2 on slight volume, which is impressive, obviously. But were there any unique items in there? Or you're calling headcount going down again, going into Q4, like is this a new level that we get to improve from? Or are there some unique items maybe in the third quarter that we should take into account?

John Brooks

No, this is a new base now. We're going to expect some volume growth in Q4. So you're going to have some volume ramp up. We did have an insurance recovery in purchased services. Now we also had higher casualties. So the net of two was a small benefit in purchase services and other. And that's why I mentioned that we'll ramp that up a little bit from 506 closer to 530. But certainly, we expect labor costs come down as the headcount comes down, and we don't backfill – attrition does its job on that front.

Nadeem Velani

Fadi, I'll just say that I continue to see us exceeding in our revenue synergy area, and I would say, you know what – and our Investor Day, we guided to sort of what our multi-year plan expectations would be annually. We're right on pace for that or even again some upside as I look to that.

Operator

Our next question comes from Steve Hansen, Raymond James.

Steve Hansen

John, question for you. Perhaps the disruptions and constraints facing potash have been significant thus far, as you've described. You've now got some constraints in the eastern direction, with the seaway as well. Do you want to maybe just give us a sense for how the potash volume look looks through the next quarter or two as we sort of get through some of these constraints?

John Brooks

Canpotex has a pretty good sales book on for Q4. It's just their ability to execute without the Portland terminal, which is a significant workhorse for them and a good route for us. It's been horribly challenging. So I'm optimistic that we're going to sequentially improve. The numbers are so low, we better sequentially improve as we move through Q4 in potash. And we'll get that terminal back up at the end of the year. And as I said, I'm hoping we gain some momentum in November and December and really hit the ground running as you look to 2024. I know Canpotex has ambitious plans to sort of gain back the market share that they've lost over 2023, into 2024 as a result of a number of these challenges they've faced.

Operator

Our next question comes from Tom Wadewitz, UBS.

Tom Wadewitz

I know you've had a couple of questions on 2024. I want to kind of circle back to that a little bit. I think the broader theme for transports has been somewhat weaker freight markets, lowering of expectations for 2024, just to reflect that kind of lower momentum. I think you have a lot of puts and takes, right? Like, clearly the conversation on potash, you would think that's easy comps in 2024, but I know you've got Canadian grain down a little bit. So maybe just at a high level as you go into 2024, do you view that as kind of a low base or easy comps, so you can have kind of stronger growth than normal? And that maybe gets you up towards where the Street is with 20% earnings growth? Or do you think that it's like, hey, let's be a little careful because there is enough weakness that's kind of macro weakness in the markets that we ought to be a little bit careful on expectations?

Keith Creel

Tom, I'll make a couple of comments and then if, Nadeem, you want to make a comment or two. But, look, I got bit in 2023. I thought I was – had easy comps for potash coming into 2023. And, well, frankly, the numbers are – I saw 10% growth in potash and we're at a 10% decline in potash. So, it's fool me once, but we're going to be a little more cautious on that front. Again, in that area, I expect to be set up well. You know what, we're going to move a lot of Canadian grain, US grain over the next couple of quarters here and we'll watch what materializes, Tom, as we move into Q2 and beyond with this crop. That's certainly more challenged in the southern part of Canada.

And maybe my last comment is, overall, I feel hopefully good about the synergies and that ramp up as we look to next year. I do believe this pricing environment continues to be favorable as I look to next year. It's all about the macro in the base and how the intermodal business and some of these very heavy consumer driven areas rebound or not. And we're just going to be very prudent about how we how we look at those volumes into 2024.

Nadeem Velani

Not to get into too much detail, it is still October here, about 2024. But I think just fundamentally, you should think about it in the usual way of how we've been successful in the past, which is some volume growth, pricing, we've been hurt by inflation. That's been, call it, a significant impact, I think, in transportation in general in 2023. But I think the ability to price above inflation comes back in 2024, which will be positive and accretive. I think currency could be supportive as well. And so, you factor that into and you can get to that kind of mid to high single digit revenue number.

And I think the more important thing is the operating leverage. As this network starts humming as we start to continue to invest in the capacity sidings that Keith mentioned and Mark mentioned, you get the benefits of running a better network as a whole. You get the benefits of some of the synergies both on the top line and on the operating costs. I think it formulates a pretty decent EPS growth number. So, I'm not backing off. We're not backing off what we think we can achieve.

Sure, there's going to be some challenges on the macro side that we're fully aware of, and we'll get into that in January and have a better view of that. But as we stand here now, I don't think we're changing this kind of the earnings model of how we've been successful in the past both at CP and at KCS.

Operator

Our next question comes from Jon Chappell, Evercore ISI.

Jonathan Chappell

John, about six months in, where do you think you stand on the unique pricing true up opportunities that you had across the entire portfolio? Is that something that's easier to do once you've integrated for a full year when you have more of a demand tail on your back? Or was that something where you can enact pretty quickly and we should start to see the benefit of that as soon as the fourth quarter?

John Brooks

I would say, John, we've attacked that pretty aggressively. I feel good. In terms of where we're are, we're still discovering things and I don't know maybe we're in the mid innings of that story as a whole. I can tell you I think you'll start to see some of those benefits as you come – probably Q1 of next year, but we still have a number of areas of opportunity that we're going to work over the next – certainly this quarter and into Q1.

And I do believe that that's given us – that does give us a little bit of tailwind as you think about some of our pricing in terms of RTM as you look to 2024.

Operator

Our next question comes from Cherilyn Radbourne, TD Cowen.

Cherilyn Radbourne

Everyone is aware of the industry is facing a softer freight demand environment. So, I'd be curious whether there are any capital projects that you would contemplate accelerating to take advantage of lowering network activity levels and better condition the company for synergy capture once we get into an eventual recovery scenario.

John Brooks

I would say that, from a sourcing standpoint, maybe materials, we'll look at that. But as far as actually executing capital projects uniquely in this industry, we've got a pretty full plate across our network, in line with the commitments we made to the STB, the Laredo bridge, the expansion in Bensenville, the sidings. So for us to have too much of an aggressive appetite, I don't think would be the right thing to do because we certainly don't want to size up and start laying a bunch of people off. I don't think that's a cycle we want to get into. So we'll be opportunistic on material purchase perhaps, on steel perhaps, maybe looking at locomotives, we are looking at our locomotive fleet and developing overall long term strategy relative to our demands, our unique industry demands for the business growth as well as some of our ESG objectives and commitments. So those two together may give us some chances. But the leverage – but, again, I think there'll be opportunistic and not anything large scale.

Nadeem Velani

It's helping some of our – to your point, the overall capital efficiency on what we can get done in terms of the fundamentals of changing tires and putting valves and getting access to the network. So that's where we're seeing the benefit overall, Cherilyn.

Operator

Our next question comes from Konark Gupta, Scotia Capital.

Konark Gupta

Just on Q4, John, I wanted to figure out mid-single digit RTM growth. Currently, you're down about maybe flat to down in the first three weeks of October. Core potash are doing fine. They're easy comps. But I think intermodal and grain are still a bit soft here. Do you expect some sort of rebound in grain intermodal as you head into November, December and any new contracts you can point to which might start there this month?

John Brooks

As I sit here today, actually, we're slightly positive from an RTM perspective, Konark, in October. I do expect acceleration as we move into November and December. I think the grain outlook, not only Canadian grain, but also our US grain franchise, looks positive. As I said, frankly, the potash area couldn't have been more troubling and I'm optimistic we're going to gain some rhythm to close out the year with potash. And, again, we're just really ramping. Met coal prices are high. Tech has really strong demand. We're lapping that out. And so, we've got pretty strong growth in not only our met coal, but also some of our thermal coal in the US. And I do believe, as I said, you'll continue to see add strategically volume to our 180/181. We'll continue to ramp up some more ECP synergy wins and share wins. That all help sort of carry the day to get us to that low mid-single digits for our fourth quarter.

Keith Creel

I'd say the last bit of color I would add to that is don't underestimate the power of revenue and RTM generation with the pent up demand that we have in Mexico. That's obviously been subdued because of the lack of capacity and the operational challenges as we continue to free that railroad up. In fact, I think right now we're at an all-time high GTM, RTM level in the Mexico franchise with no shortage of demand. So the automotive market, the metals market, those are two key economic drivers and demand drivers that the more capacity we free up, the more that we get to move.

Operator

Our next question comes from Walter Spracklin, RBC.

Walter Spracklin

So I wanted to actually come back to John on the West Coast port volumes and the strike that you had alluded to there. And the strike occurred in July and you cleared out your backlog pretty quickly. But the volume declines that continued quite substantially here until August and now September. And I'm just wondering if you're concerned at all that, given some of this is discretionary into Vancouver, and certainly we saw [indiscernible] up in Prince Rupert, very strongly. This discretionary aspect of these volumes going to Chicago, have they found another route? Are you concerned that that's going to be a while to come back? Do you have any view on how long it comes back? And is Mexico enough of an offset? When you're looking at those port volumes, they're off the charts for Mexico, which is great, into September? And is that enough to offset? If there is some more, let's call it, structural impact from this strike that happens in Vancouver? Can you entirely offset that by Mexico? Or is it just not big enough to offset that kind of decline, if it were to continue?

John Brooks

Maybe to answer that question, first of all, I think that's a fair call out. No, we expect growth at Lázaro. And I said I'm excited about the future of what we can do at that port, but it's [Technical Difficulty] to ramp that up. So that is not a one for one by any means.

I do believe, structurally, there's been somewhat of a change on the West Coast ports. By far, and you just look at our train lanes and where our import volume is going, it's all domestic Canada. And we've got very little volume going into the US.

I think it'll be a function of two things. One is how quickly this market actually does rebound. I just had my team visiting all the steamship carriers over in Asia and also in Europe. And they didn't paint a very bright picture. Certainly, it's going to be through 2024 as we see that ramp up. And then, we'll have to watch. Certainly, there's a reason why Vancouver and Prince Rupert, and that had success. We have port fluidity, we have some economic advantages. As things tighten back up and as the volume improves in LA Long Beach, that is really what will be the tell on if you see that freight moves back up there. But in the meantime, I can tell you we're focused on the business that we're handling within domestic Canada. And we are laser focused on how we grow this and leverage that port with a ton of capacity down at Lázaro. And again, it won't be a one for one offset. But I'm confident we will grow domestically into Mexico and also into that Texas market.

Keith Creel

I think a very encouraging comment about the port of Lázaro, we just had a trade mission, actually the governor of Michoacán came up in that with John and myself and the team two weeks ago in Kansas City. So that's a local government, the state governor that is motivated for economic growth. He understands the potential that Lázaro has. And I can tell you this, historically, KCS had challenges. I think, structurally, perhaps, they didn't go deep into the US and have an opportunity to provide competitive interline line rates to West Coast alternative. That's not the case. Now we do.

And I think the other challenge was the reliability of the gateway. There was a lot of issues with the teacher strikes, with blockades. I can tell you that governor was proud to tell us the day het met with us two weeks ago, that was day 702. He is committed to keeping that track open. He is committed to growth over that port. And not just that port, there are many other products, once you create the ecosystem, and the transportation, the reliable trains back and forth to take products that are growing in that state that are consumed in the Midwest and consumed in parts of Canada that this new reefer ecosystem we're creating can benefit from and serve. So more to come on that.

Again, does it ever replace all of it? No, but it's certainly a unique growth opportunity for us coming from Mexico both on the domestic moves, as well as leveraging the international opportunity.

From Mexico, both of them domestic news, as well as leveraging the international opportunity.

Operator

Our next question comes from Ken Hoexter, Bank of America.

Ken Hoexter

Nadeem, just a quick numbers question and a long term question. Just the CAD 51 million, is there a reason why you didn't take that out [indiscernible] here and there and CAD 22 million numbers, just want to understand why that was left in if there was a historical thing.

And then long term, it's kind of a tale of two cities here. On the, I guess, prepared remarks, it was a bit more sanguine about the economy. And it was maybe even more negative than what we heard from your Canadian peer or the eastern rail that we just heard from. But now you're talking about kind of mid-single digits and it just seems like a much more upbeat, I don't know, Q&A. It's just a very different position. I just want to understand the message that you're trying to send here in terms of the outlook because, Nadeem, talking about sub 60 or into the upper 50s on the OR. Just maybe delve into the thoughts there.

Nadeem Velani

We answered them like we see them, Ken. You've known us for a long time. And that's the visibility we have on near term and what we expect for 2024. So, that's our honest and transparent answers of what we think we can deliver, and what we hold each other accountable for. So I'll leave it at that.

There is cause for concern with the macroenvironment. We're not of the view that it's a robust economy by any stretch. But we think that what we can control, we're focused on controlling and we'll deliver. And the visibility that we have on the top line, as John mentioned, in the near term over the RTM of, call it, 3% to 5%, so I think is genuine.

Why we didn't strip out the insurance, we had, I think, CAD 40 million increase in casualty made up of a bunch of one-time items through the year. $20 million jury settlements and such. Same reason, I guess we didn't strip out when we had about CAD 150 million impact from the flooding and costs associated in 2021. So we're just being consistent with how we approach that would be how we thought about that insurance recovery.

Ken Hoexter

And if I could just squeeze in a follow-up, again, you were just talking about Mexico, you sent a team of 50 or 200 down there. I guess, Keith, is there any update on that? Have you changed any operations around?

Keith Creel

Yeah, of course. Of course, we have. We've tweaked and adjusted. But, yeah, we initially started, Ken, with 50, 52 officers that were down there around the clock. It was a group of every discipline within the company from engineering to operating to IT to customer service to kind of descramble the egg for the lack of a better term. We were locked up, we were congested. So we debottlenecked, we've now shifted from a response phase to an enhance and build phase. We made structural changes from a leadership standpoint. John Orr, who led the team, is now focused day to day. He's responsible for all of the Mexican operations and actually left to Beaumont, which is the crew change point with the TexMex to take the train south through Houston. That's a natural break. And then, of course, Mark has everything north of there. So, structurally, we've got a very focused team. He's continuing to develop talent. We've got the place running smoothly again. We're making progress with labor, which is very encouraging. It's not the kind of progress that creates monumental quantum change, like we've experienced in other parts of our network in our history.

But I'll tell you this, to make the change that we're talking about relative to what's been changed in the past is a testament to the understanding and commitment of the union leadership. I met personally with the president of the union and explained our journey, explained our opportunity and how we could uniquely partner with our employees, his members, and I can tell you, he and our members are excited and energized by it. So there's structural change, there's progress that's ongoing, and what I would say is expected to continue.

Operator

Our next question comes from Brian Ossenbeck, J.P. Morgan.

Brian Ossenbeck

So just wanted to ask, maybe John, about the closed loop automotive potential. It looks like you've been making some significant progress more recently. I don't think we had an update on this call. But just if you can go back to that. Are you close to ordering the cars? What's been the guarantee car supply? What's been the uptake and the interest level

from some of the OEMs? Obviously, some noise with UAW right now. But is that something we could see perhaps coming forward in 2024?

John Brooks

Brian, it's been strong. Maybe as far as an update, we've got construction underway in the Dallas market for auto compound there. We expect to see that up and active and, frankly, sold out by mid next year. So quite excited about that. So the closed loop, we've got – currently receiving new buy levels right now. I think we'll receive upwards of 1,200 or so over the coming months to really be targeted at that closed loop model. So, we've got some good early wins there. And I expect you to see that being fully deployed as we move into the start of 2024.

Operator

Our next question comes from Ben Nolan, Stifel.

Ben Nolan

John, I remember as it relates to potash or remember a couple years ago or last year, maybe you mentioned that there might be some opportunities, new potash to the Gulf Coast. Just given everything that's gone on in Portland, is that something that's materializing? Or is there an opportunity to maybe do that?

John Brooks

Ben, I think, right now, given everything that's gone on, there's a little bit of pause in terms of that. I don't think anything's changed in terms of what we believe the opportunity to create sort of what I would consider a true third outlet for export potash out of Canada. Whether it's K+S, Canpotex, future BHP, I think we continue to see that as a long term opportunity.

In terms of timing on that, it's probably pushed out a little bit further than when we were thinking about it about a year ago when I spoke about it.

Operator

Our next question comes from Justin Long. Stephens.

Justin Long

I was wondering if you could provide an update around your expectations for the level of inflation that you're seeing in the business this year, and how that compares to your early expectation for inflation as we move into 2024. And when you think about that kind of price versus cost gap, how you see that trending in the quarters ahead?

Nadeem Velani

We've seen all in inflation closer to that 7% level. And as you know, it's been pretty apparent. A lot of that has been on the labor side, so the biggest cost buckets. We have seen also, up north, the impact of some of the work rest rule changes that have also impacted comp and benefits. So overall, inflation has been a challenge. It's been a headwind much higher than we anticipated at the beginning of the year. And it's partly the reason I think that margins have been where they are.

I would say that we expect, in 2024, that to moderate. I think as some of the rate hikes and some of the action by the Fed and Bank of Canada kind of moderate, I think we should start seeing that settle. Maybe we should start seeing even some of the recent inflation numbers have moderated. So, I think we'll be closer to call it a 4% level rather than that 7% level. And I think that's what gives me confidence in our ability to price above inflation. We're still getting strong pricing. John and his team have done an excellent job. It's just it's been a high bar this year in particular just because of the, call it, one time nature of some of the labor increases.

Operator

Our next question comes from Benoit Poirier, Desjardins Capital Markets.

Benoit Poirier

Keith, you provided great color about the opportunities and John about the obviously Mexico, but also great rationale around Vancouver, what's happening. Could you maybe provide more color about the eastern part of your network? If we look at the Port of Montreal, there's a upcoming labor agreement with the dock worker. So, I'm just wondering if you are having any discussion with shippers about some potential cargo diversion and whether the Port of St. John could get some volume uptick. And with respect to [indiscernible] expansion, we've seen some announcements lately. I know it's a very long term opportunity, which is having some challenges. But how do you see the potential opportunities for CPKC longer term?

Keith Creel

Benoit, I would say yes. Again, I had the team just recently – overseas meeting with all the various ocean lines and certainly Montreal. And I don't know, it seems like the annual troubles there with the labor, certainly, was a big topic. Unlike years past, we really didn't have an option. But now we've got a readymade option with a lot of capacity and new equipment and an eager partner in BP World to get after it. So I do believe those backstops in terms of if freight does need to move out of Port of Montreal, St. John presents us now a great opportunity to move that freight.

In terms of [indiscernible], as of right now, it's not a facility or port that we will be looking to serve. Now, who knows, those discussions and the maneuvering of access to the port is ongoing. But frankly, our efforts are focused on continuing to service Port of Montreal and grow St. John. It's absolutely growing.

Operator

Our final question comes from David Vernon, Bernstein.

David Vernon

I wanted to dig in a little bit to the headcount commentary. Sequentially, it looked like we had headcount growth. And, Nadeem, I think you mentioned we're going to be coming down on headcount. Can you help us understand kind of what we should be expecting in sort of Q4 for cost per employee and where the heads are shifting and what's driving sort of the shift? Is this in the transportation function? Is this overhead functions? Is it just moving jobs up and down the bigger network here? I'm just trying to get a sense for what's happening with the choppiness in the headcount?

Nadeem Velani

Fair question. So, we had anticipated this for some time. I kind of pointed to Q4 as an opportunity to see that inflection. We've been ahead of the curve in terms of hiring and training, just given the challenges I think the economy has seen in terms of getting qualified employees and servicing customer. That doesn't change. But as you see attrition work through our industry and work through our system and as volumes don't materialize the same way that you can expect grain, for example, we know that it's going to be a less robust next year than this year. You can make the call in terms of what you do from a hiring and training. And so, there's some seasonality as well, as I mentioned earlier, in terms of headcount.

And then when you think about the opportunity as far as synergies, we were going to have some natural opportunities as far as headcount on the synergy side. And then, as you get operating leverage, so as you turn to being able to run longer trains, more density, and so forth, you need less employees per GTM, and so the volumes are moving. So it's a combination of all those factors that's going to drive a bit of a reduction in headcount sequentially.

And as far as comp per employee, somewhat dependent on stock based comp. Now, that's been a bit of a tailwind near term, who knows where that's going to end of the year, but kind of mid-single digits is probably a fair estimate as we stand here today.

Operator

We have reached the allotted time for Q&A. Yes, sir. I'd like to turn the call back over you.

Keith Creel

Okay, thank you, operator. Well, listen, thanks for everyone taking the time to spend with us this afternoon. I can say, in closing, that we're six months into our forever story. And I'm extremely proud of the progress that we're making, both integrating and executing. We're realists, we're not immune to the macro challenges that we're all facing with this economy. But I can tell you, we're focused on controlling what we can't control. And that's to operate safely always, efficiently, and continue to sell to what is a very unique three nation network that we've created that's allowing us to grow in uniquely at a macro level, be it share shift, be it customer solutions with new markets, be it take trucks off the road in spite of the macroenvironment. And when the macro comes back and turns favorable, now it gets exciting. So we look forward to sharing our fourth quarter results next time we talk in January.

John Brooks

Thank you.

Operator

This concludes today's conference call. You may now disconnect.