CPKC a ‘Powerful Combination’

Written by William C. Vantuono, Editor-in-Chief

“I am elated for our CP family,” an understandably energized Canadian Pacific President and CEO Keith Creel told Railway Age Editor-in-Chief William C. Vantuono the day after a joint call with analysts with his Kansas City Southern counterpart, Pat Ottensmeyer, following the announcement of their agreement to proceed with a merger. “This is a blessing,” he said. “This has been a journey with many twists and turns, and it led me to this place in life. Call it faith, destiny, because deep down, I have been confident that sticking to the truth, the facts, was the only chance we had to succeed. Facts matter, as well as understanding your own strengths and weaknesses. This, I feel, has been my purpose.”

During his 30-year career in railroad operations before becoming CP’s CEO, Creel was not directly involved with regulatory matters, but he knew that he needed to have a firm grasp of them if he was to successfully steer CP and KCS toward combing. “I did a lot of homework,” he said.

When, asked what he would say to his mentor, the late Hunter Harrison if he were around, Creel replied, “I’d say, ‘Thank you for teaching me the railroad business.’ I learned from Hunter—and there’s a lot of him in me—that railroading is basically about people, processes and operations, and that PSR, when executed the right way, is a recipe for success.”

Provided the Surface Transportation Board gives its stamp of approval, a special celebration is planned to mark the official start-up the Class I railroad that will be named Canadian Pacific Kansas City, or CPKC. Creel told Railway Age that a commemorative business train will be operated from Calgary to Mexico City on the CPKC main line to mark the occasion—powered by none other than 2816, the iconic Empress steam locomotive. “We of course do not want to get out in front of the STB, but if all goes as anticipated, 2816 will be on the head end, in full steam.”

No doubt, many will be trackside to see 2816 and her consist as it operates across the “USMCA Railroad.”

Framework and Timing

On Sept. 16, at KCS headquarters in Kansas City, Keith Creel and Pat Ottensmeyer, joined by CP’s John Brooks (Executive Vice President and Chief Marketing Officer), Nadeem Velani (EVP and Chief Financial Officer) and Chris de Bruyn (Managing Director, Investor Relations and Treasury), took question from analysts.

“It’s an honor to be here today in Kansas City with Pat and the team,” Creel said. “I think it’s only appropriate that we started the first day of our future together as the CPKC family. We flew down last night to join the team. We are excited about this powerful combination. On behalf of the Canadian Pacific and the Kansas City Southern Boards, we’re excited to combine to create the first U.S.-Mexico-Canada rail network. We continue to see challenges—it’s undeniable that the pandemic is right on our supply chain—so this combination makes even more sense today. It creates stability and opportunity for our customers in the North American transportation network.”

“Speaking from the Kansas City Southern side, we’re very excited about the merger between these two terrific, historic and iconic franchises,” said Ottensmeyer. “Kansas City Southern and Canadian Pacific have been the two fastest-growing railroads in the industry for the recent past. This combination is driven by growth, driven by opportunity for North America that this one-of-a-kind North American rail franchise is going to create. Not only will we participate in the growth that USMCA and other factors are creating for a resurgence of manufacturing in North America, we believe that this combination, the creation of this North American network, will help drive that growth and attract manufacturing and investment back to all three countries in North America. It creates truck-competitive options and single-line service options to leverage this network, and provides significant environmental advantages, reduced carbon emissions by converting truck traffic to the railroad. We will achieve diversification in our service offering for both companies vs. what we have today, and access new markets, new growth opportunities. This benefits our employees by enabling us to become part of a larger and growing truly North American continental enterprise. It’s particularly significant that Keith and his management team chose to come to Kansas City for the announcement and sessions that we’re having here today. It clearly validates and reinforces his commitment to Kansas City and the employees of Kansas City Southern.”

“We expect expense synergies of $180 million through a combination of improved fuel efficiency, lower G&A and  equipment rents as well as facilities, IT spend and licensing,” said Velani. “We’ve been overwhelmed by the positive response from customers, this proposal, that gave us the confidence to increase our revenue synergy estimates. When fully realized, after a three-year period, we expect annual $820 million of EBITDA growth through incremental revenues of just over $1 billion, which will be achieved through the combination. Combined with the $180 million of expense synergies, we expect to generate $1 billion in EBITDA over three years. Ultimately, you should expect that CPKC franchise to deliver what investors have come to expect from us, industry-leading margins, high single-digit CAGR of revenue growth and return on invested capital in excess of 16%.

“We have a high confidence in our ability to exceed the $1 billion in synergies,” said Brooks. “I can tell you we’ve pressure-tested these synergies. I have most of my career, but in particular, over the past year or so, the customer response has been overwhelmingly positive. CPKC truly unlocks new capacity for the industry and builds supply chain resiliency in a time we all know we need it more than ever. No customers will be left behind. We will provide new markets, new routes, new alternatives to reach consumers across North America. We see growth opportunities equally across all lines of businesses and customers big and small. I look at our agriculture book of business, and this becomes a real game-changer. This deal links our franchise to new export and domestic consumption markets we simply can’t get to today. On the intermodal front, this gives us access from Mexico through Texas and into the U.S. Midwest and Canada, and will create new competition and powerful opportunities for customers to take trucks off the road. On the automotive front, manufacturers in Mexico will gain single-line access in markets such as Minneapolis, Chicago, Detroit and of course, Canada. And I’m particularly excited about the ability to continue to extend our reach to our short line and regional partners as they will continue to be a critical part of our growth engine. And our combined transload network provides new options for non-rail-served customers to convert truck to rail. We are and will continue to be keenly focused on our CP and KCS customers through this journey.”

As for timing, the STB approved the CPKC voting trust in May of this year. “We were intentional to not change any pertinent facts in our renewed merger agreement, which we have submitted along with an amended notice of intent to the STB for their review,” Creel stressed. “We see a clear path to completion with the previous voting trust approved. The gating times will be the shareholder votes and approvals in Mexico. On the shareholder vote aspect, we expect votes in December of this year. On the Mexican approval process, we expect that to take two to four months. We expect to close and enter into trust in first-quarter 2022. It has been a journey, one worth traveling. We’re ready to get to work, close this in the trust, securing ultimate STB approval and integrating these two iconic companies into something neither could achieve alone. We’re excited, we’re energized, we’re ready for the future, ready to go to work for the shareholders, for the customers, for our employees, our CPKC family and for the communities we serve.”

Analyst Queries (edited for clarity)

Chris Wetherbee, Citigroup: “When you think about the revenue synergy opportunities, the cost synergy opportunities, and just sort of continued improvement on both of these networks over the course of a multi-year period post transaction closing, it looks like you could sort of be well on your way toward a 50-ish type of OR and potentially even better depending on what type of inputs you want to put in the model. In the context of what we’re seeing as cautionary commentary from the STB over the course of the past couple of weeks, do you see that as something that as a potential negative? Do you think you can live up to the full potential business and still balance the dynamics of service as well as some of the regulatory concerns?”

Creel: “It’s all about balance. I’ve said this before, and I’ll restate this today. We’re not [preoccupied] with operating ratio. Operating ratio in and of itself is actually an outcome. It’s the way we run the business. When you run the business the correct way, you run it controlling your costs, not slashing and burning, investing in your network so that you can become more efficient and safer, an provide more reliable truck-like service to your customers, who own most of those assets. There’s something in it for them other than just the service. There’s a cost benefit to that as well. We call that the total value of the transportation that we sell. That’s what we bring to the table. 

“So again, it’s a balance and it’s a full-circle model. It’s not about just cutting cost. It’s not about the operating ratio. It’s about driving earnings growth. The operating ratio was an outcome. The operating income, obviously, is an outcome. We’re not going to focus on operating ratio. We’re going to focus on the right investment so that we can unlock the right capacity so that we can compete for new business so that we can grow and add jobs, so that we can be more for our customers, so that they can win in marketplaces that perhaps they don’t serve today. And we can bring some supply chain stability to North America, connecting three countries, which allows and provides the backbone and the platform for all those companies that are sitting there today pulling their hair out because their supply chains are upside down, and because their cost and inflation is going up because they have put so much risk into supply chains that are offshore. So as they onshore, if you provide that backbone, we believe that provides the stability and faith and confidence for those companies to spend their capital dollars, investing on our railroad so that we can connect them to their end markets or connect their suppliers to their manufacturing facilities. It truly is a holistic approach. It’s not a singularly focused approach.

“When you do it that way, operating ratio is a positive outcome. It’s just a measure of how efficiently you run your business. It doesn’t mean it’s a license to run your business into the ground. It doesn’t mean it’s a license to abuse employees or to cut jobs just to satisfy Wall Street. If you run the business the right way, as a default, you’re going to satisfy Wall Street, while you make your customers and employees happy and while you serve the communities and ultimately serve the public interest, which is what the regulator is most concerned with. When you can do that in today’s world and take thousands of trucks off the road and have such a positive impact on ESG  objectives in the environment that we all depend upon during global warming, this combination uniquely allows all that to happen.

“I’m always going to respect the regulator. I’m not going to speak for the regulator. I know that they have plenary authority, and I know that they will use it if it’s necessary. My objective and intent in this company is that it’s never going to be made necessary for the regulator to step in. We’re going to complement what their mandate is, not conflict with it.”

Tom Wadewitz, UBS Investment Bank: “It seems pretty fair to say it’s a pro-competitive deal, and yet you would imagine other railroads and customers might ask for something through the approval process. What might be risks related to approval? What potentially could constrain you in the upside potential that John referred to with respect to gateways?”

Creel: “We realized that customers are going to have their asks and their concerns. We understand that our railroad partners and competitors are going to have their list of asks and concerns. But the risk comes in only if we don’t act in a responsible way and we’re not of our word. We’re going to keep interchanges open. Physically, commercially, we’re going to work closely with our interchange partners. We’re not going to price them out of lanes. We’re not going to behave in a predatory manner that creates that kind of risk. The facts: This is uniquely different than any other transaction. This is an end-to-end combination. There are no debits and credits. The truth matters. It’s hand in glove. We connect in Kansas City. We’re this morning at our yard that we’ve operated for more than 80 years together. What’s going to change is we’re going to operate it better together because we’re going to be one company. Some of the previous mergers, some of those concessions, have dealt with overlap, with competitive concerns. They dealt perhaps with predatory behaviors and/or service disruptions, all those kind of issues and noise that historically have not boded well.

“Understandably the customers, they’ve got some scars. We’re not going to minimize that. We’re going to be transparent. We’re going to work closely with them. But at the end of the day, this transaction for these two companies and our track records do not represent the same set of facts nor the risk that those previous transactions have entailed. We’re optimistic that when we sit down with our customers, we listen to their concerns, they’re going to understand that. And we’re going to take that same approach with our interchange customers. I’m not here to go to war with UP or BNSF or CN or CSX or NS. We’re going to compete fiercely where we compete, but we’re going to partner closely in our interline moves.”

John Brooks: “Frankly, the ability for us to work with our interchange partners to grow the pie, while at the same time, our existing and new customers to create infrastructure, to move more grain out of the Midwest into Mexico, to grow our overall share in growing that pie is the objective. As long as we listen to our customers, we allow them to help shape what our products look like. And with the service they require to enable this growth, I think we’re just going to be just fine.”

Creel: “At the end of the day, the STB, when it comes to having to impose concessions because agreements can’t be made, it will only be because it’s something that’s completely unreasonable and unrealistic. It’s not because this team is being unreasonable and unrealistic. The STB will see that, and we’re going to do our best to make sure they understand that. At the end of the day, I’ll stand by those facts, and we’ll accept the decisions that they may or may not make.”

Walter Spracklin, RBC Capital Markets: “The growth opportunity, that $820 million: When you look at your end markets, and if you do better than $820 million, what areas are you most excited about? What area do you see as having the most potential for exceeding the projections that you have built into the $820 million right now?”

Brooks: “I fully expect to exceed it. The great thing about what we’ve been able to do, I’d say, over the past year in my experience with Pat and his team over the years is what we’ve identified as tangible opportunities are concrete. We’ve got a list that’s been built that we’ll just be chomping at the bit to get after. A perfect example: If you think about our domestic intermodal product across Canada, until we instill the discipline, and not only in the operating side of the business, but the ability to go sell that product in the marketplace, then we start reaping the benefits of what that generates. Intermodal is an area in which we’ve continued to be conservative. This is as much about creating that product, creating that momentum and then overlaying and selling to the customers. Once the product is in place, overlaid with our best-in-class service  and damage prevention, there’s a tremendous amount of opportunity. In the ag space, we’ve got a lot of synergies in that area. Once we start to develop our 8,500-foot bulk product onto the KCS and lengthen those trains and accelerate those train cycles, I have no doubt there’s opportunity to grow share in that space.”

Pat Ottensmeyer: “We’ve seen pretty good growth in our cross-border intermodal. We know that market is huge. It is a very large truck market. The market and the customers will embrace the additional capacity, the addition of a truly single-line service from Central Mexico all the way up into the Great Lakes and into Canada. It’s just a matter of time to show and prove that we can deliver the consistent, reliable, resilient service that intermodal and premium automotive customers expect and demand. We know the market is there. I think it’s a matter of time before that revenue synergy number will be exceeded.”

Ivan Yi, Wolfe Research, LLC: “What are cost synergy opportunities? It looks like you’ve raised the revenue synergy guidance since the original deal, but left the cost synergies unchanged. Is there any potential upside here?”

Creel: “I’ve been doing this long enough to know you don’t know what you don’t know, and we’ve become better railroaders every day. We’re partnering with very operating-focused team at KCS, a tremendous amount of talent here. We obviously have quite a bit of experience at implementing the PSR operating model. When it comes to synergies, they’re  natural outcomes to a point, but we’re not focused on synergies. This is not a synergy-driven transaction. It’s a growth-driven transaction, so the synergies are modest. We’re not targeting any job cuts. We’re not targeting shutting down yards. We have none of those thoughts in our heads. What we see is an immediate opportunity in that space. There’s some G&A expense. Obviously, we’ve got duplicate IT groups. We’ve got a headquarters building here in Kansas City that we’re happy that KCS owns. Contrary to CP, we’re in downtown Minneapolis, where our operations center is located and John’s offices and our IT folks are. We lease that space. We were actually facing a decision in 2025, when the lease runs out, to build our own facility, on our own property in St. Paul. Now we don’t have to do that. So there’s going to be some shift, some pluses and minuses there. But at the end of the day, when you’re focused on growth and the revenue that’s going to come, the people that want to work are going to have an opportunity to work.

“Minneapolis-St. Paul is a major work location for the CP network. It’s the only hub we have in our system. It’s going to become more important to this combined network, not less important. We’re going to get more efficient with locomotives, with fuel. We’re going to have some G&A, but those are modest numbers. If we’re doing our jobs and becoming better every day, you can expect this team to exceed the synergies. But again, it’s not our focus. It should be a natural outcome, but it pales in comparison to the growth opportunity and the synergies from the revenue.”

Amit Mehrotra, Deutsche Bank: “The opportunities to develop the Mexican ports as a U.S. West Coast alternative: Lázaro Cárdenas is an attractive port, and there’s probably a greater potential there to invest and develop it. How are you thinking about that opportunity? And related to this $820 million of incremental revenue, what are the mixed characteristics of that revenue, either from a length-of-haul or balance of the network or revenue per unit?” 

Creel: “I see this in simple terms. It’s a three-pronged approach. You’ve got Vancouver in the West, St. John in the East, Lázaro in the Southernmost tip. We all understand the supply chain and capacity challenges that the U.S. Western ports have experienced. We believe that if we can provide an efficient, reliable alternative, that we can create the density with this three-coast network to attract additional business at Lázaro.” 

Ottensmeyer: “If you do a Google Earth look at all of the ports up and down the West Coast of North America, you will see that Lázaro looks very different. There’s just a tremendous amount of space. The port authority over the years has invested a significant amount of money in rail infrastructure to connect the two intermodal terminals, which today, I think, have in excess of two million TEUs and the capability to grow to probably double that. The rail miles between Lázaro and Houston are 300 miles shorter than L.A. to Houston. But of course, the big story is the congestion at the port in L.A. versus Lázaro. We believe that, long term, there’s going to be interest. And with a rail network that can connect three major ports in North America, East Coast and West Coast, we can offer our global ocean shipping customers some options for asset and vessel utilization that may not exist anywhere else. That’s going to be a pretty attractive and compelling value proposition for them. And as the situation on the West Coast just gets tighter and tighter, the capacity is going to be very valuable. Lázaro’s sweet spot as a stand-alone port, irrespective of the connection to the rest of North America, is really Texas, the Gulf Coast, the Southeast. Those are big markets. With the right approach, the right service levels, consistency and service, there’s just a tremendous amount of growth potential at Lázaro.”

Brooks: “If you think about the $1 billion in synergies, I break it down simply as one-third premium intermodal and automotive, one-third merchandise, single-carload manifest, and one-third bulk fertilizer and ag. Something that particularly excites me: The mix of the overall amount of traffic really diversifies the CP franchise. We’ve been heavy intermodal and bulk and not traditionally strong in merchandise traffic. It excites me because it’s old school—blocking and tackling and rolling up sleeves and working with single manifest customers to convert more to rail and turn their assets faster and create value in those ways through our daily service.”

Justin Long; Stephens Inc.: Is your intention to get Mexican regulatory approval prior to the shareholder vote? And as we think about the Mexican regulatory review process, what is your sense of the visibility around that two- to four-month timeline a successful outcome?” 

Ottensmeyer: “We’ve learned a lot in the past few months about the Mexican approval process just by the nature of the questions that they have asked. We are hopeful that the Mexican antitrust agency has gotten warmed up on how to look at a merger like this. I was in Mexico City the past two days, meeting with a number of our important contacts in the federal government. There’s a lot of excitement and positive feeling about this combination from the Mexican side of the equation. They see this as a real benefit for Mexican companies, Mexican manufacturers, with opportunity to attract new investment in Mexico because of the way this will connect to the rest of North America.

“But those are all other government officials, high-level cabinet level ministers in Mexico and not the COFECE (Comisión Federal de Competencia Económica, or Federal Economic Competition Commission). We’ve learned a lot about COFECE’s interests. There’s no question that there’s no direct competitive issues here. We’ve learned, by some of the questions that COFECE has asked, that they’re interested in the possibility that there is a web of ownership or other interests that could be harmful or detrimental to competition in Mexico. There are none here to be concerned about.

”The other factor that we will have to deal with is that, as a result of some of the austerity measures that President Andrés Manuel López Obrador has continued to pursue in the federal bureaucracy, the COFECE is understaffed. We expect that’s going to be a bit of a speed bump in terms of getting this through, but that certainly doesn’t foretell of any issues. We will be as actively engaged as we possibly can to move this process along quickly. Hhopefully, the work that COFECE has done in the past few months will be helpful and useful to just put them in the right frame of mind, to pick up with a new application and move it through as quickly as possible.”

Creel: “We’re in a very good place with the KCS team to complete the merger application, and intend to submit it mid- October. On the shareholder side, we have to make our SEC and proxy filings. We believe we’ll be able to have a shareholder vote early- to mid-December at the latest, assuming all those processes go as we expect them to. The vote will happen before the COFECE most likely gives approval. Finally, once COFECE comes through, we’ll close into trust. We’re asking for a 10-month timeline from the STB to review the merger application. Obviously, the STB can take the time they deem necessary. We know it’s going to be a robust review. We anticipate that. We’re going to work in support of that. But we believe that it can be concluded in that timeframe in a reasonable fashion and bring us to a pro forma company October or November of 2022. That’s what the best case looks like, and that’s what we’re going to work our tails off to be able to achieve.”

Brandon Oglenski, Barclays Bank PLC: “We’ve seen challenges with network integration across lots of transport modes, including rail if we go back in time. What have you learned from those past issues? And what mitigants do you have from a people or culture perspective, and then from a network and systems integration perspective as you look forward?”

Creel: “If you really get into the history of what’s happened and understand where things went wrong, it’s about those systems, it’s about not doing your homework and not being methodical and ensuring that all those back shop systems that all of our business is based on are functioning and communicating. That work, in all honesty and transparency, began back in March. James Clements, our Senior Vice President Strategic Planning and Technology Transformation, is working with his counterpart at KCS, Mike Schuler, Director of IT Strategy and Architecture. They already have a very robust plan. They got together in March, comparing all of our systems, identifying the disconnects, identifying the go-forward platform. We’re not going to flip the switch, for the lack of a better term, until we’re confident it’s going to work seamlessly for the business and for our customers. And we’ve got a bit of experience in this, too. Not on the same scale, but certainly the same methodical disciplined process. We integrated the Central Maine & Quebec in 2019-2020, and it was seamless.”

“On the culture side, the people side, we’re starting again from a place of strength. We’ve got two like-minded companies. Obviously, there’ll be nuances, I can tell you myself. Culture is the key, the foundation. We’re going to come at this from a sense of identifying best practices. We’re going to learn from them and vice versa. We’re going to get boots on the ground. We’re going to get out on the property, myself and Pat. During this time of STB review, we’re going to spend a lot of time doing integration planning. We’re going to spend a lot of time interacting with the employees. This represents significant change for the KCS employees. I recognize that with change comes stress, then anxiety. But this is a good story. We’re going to get out and tell it. We’ve got a very specific leadership model that we’ve implemented and integrated in CP that I’ve been very hands-on developing. To me, it’s what legacy is all about. It’s based on leadership and leaving it better. And we’re going to work with our partners on the KCS and deploy that during this interim period. We haven’t put the plan together, but Mark Redd, EVP Operations, is working on it. He’s going to work closely with his counterpart, John Orr, integrating and rolling out leadership development training, which is the foundation of how we run our business. It’s how we create constructive tension. It’s how we deliver a safe and consistent product and control costs and continually work to get better day in and day out. It’s a journey.

“It’s not a perfect railroad. CP is not. KCS is not. CPKC will not be perfect. But rest assured, we’re going to strive for perfection in our service and performance for the customers. And when you do that, and you’re committed to change and growth and learning from your mistakes and working in lockstep with your entire company, it’s not just about managers. It’s mostly about our employees, the men and the women that actually move the trains. They are the experts in how to get those trains over the railroad in a safe and efficient manner. You’d be amazed at what you can learn when you listen. And I know that Pat has stepped in and embraces that, as have John Orr and the team at KCS. I’ve done this a few times. To me, that is the path to success. We’ll get by and we’ll get commitment. Our employees collectively will be part of that culture change. That’s where ownership comes from, and that’s where change is actually woven into the DNA of who we are as railroaders, day in and day out. I look forward to that. I’m ready to start that immediately. And I know Pat feels the same way. We’re going to be humble. We’re going to work together to grow and drive change. Our objective is to be the best railroad in North America.”

Ottensmeyer: “Just by virtue of working so closely with Keith over the past few months, with a brief interruption, that he has a lot of respect for what we have done here at Kansas City Southern over the past few years. They clearly see this as a combination of two strong companies. The fact that Keith originally  came up with the name of the combined company and the significance of putting Kansas City and the name of the company, the significance of selecting Kansas City, if you just do a quick look at the math, your visual, your blind eye will lead you to Kansas City as really the heart, almost the geographic center of this network. I did not invite or suggest that Keith come to Kansas City. He chose to come here for this session, and we have other engagements with the employees and the leadership team to mark this historic announcement. That all is extremely powerful to send the message that is going to be very sensitive to the culture and going about this the right way so that when we have the opportunity to integrate it’s going to be a company that hopefully will hit full stride and get out of the gates very quickly in terms of execution and delivering the benefits of this combination.”

Steve Hansen, Raymond James Ltd.: “What ability do you have, Keith, to start introducing new service options or routes in advance of an approval that might start to get that process going? You’ve already described a bunch of integration planning that will take place. But from a revenue standpoint, can you start to introduce any new routes on your side independently that might be a precursor for some of those revenue synergies in the future?”

Creel: “We can introduce anything that we normally would introduce as an interline move. So obviously, as we learn each other’s networks, I’m sure there’s going to be some interline opportunities that perhaps we didn’t know about. But again, at the end of the day, Pat will have complete autonomy with his team to do what’s in the best interest of KCS when they’re in trust. I can’t dictate nor I ask or direct, and I will not. We’ll have discussions. We’ll see opportunities. And if Pat decides it’s in KCS’s best interests while in trust and if it’s a solution for the customer and an interline opportunity, we’re going to put it in place. It’s our responsibility to do that. But as far as exercising any kind of control, I cannot and I will not.”

Ottensmeyer: “We’ve had overwhelming customer support since day one. But over the past couple of days, I’ve customers already looking at expanding facilities or building new facilities that would ultimately support a single linehaul to move their products as part of this combined network. We fully intend to push those opportunities immediately. But as Keith described, it’s stand-alone, and we’ll have to work from an interline perspective. And we’ll be able to possibly begin moving freight interline as soon as those deals come together. And then if, in fact, they do, obviously, those routes or opportunities would reap the benefit as all customers would with single linehaul routes in the future.”

Creel: “This will be important to our customers and give them sort of a taste of what’s to come. I guarantee you that Mark Redd and John Orr will sit down and whiteboard operationally. What blocking, what operational changes can KCS do to take work out of CP’s network? And what can CP do perhaps in our hump in St. Paul to help KCS increase fluidity or reduce cycle times on customers’ fleets to create capacity more opportunities for revenue and to create consistency in service and velocity? So those are things as interline partners and as well as a pro forma company that make good business. So that does not have to wait.”

Amit Mehrotra, Deutsche Bank: “CP has been very successful in growing the business with good cost control, and that’s translated to the industry-best operating ratio. But as you   pursue the 8%, 9%, 10% per-year growth for the next three to five years and you are able to generate incremental margins that are in the 70%, 80% level that you have been doing for many years, the way the math works in the model is that you have a sub-50% OR by 2025. Do you think there’s a ceiling on OR improvement? Or do you think growth ultimately will be a function of where that goes, given how high the incremental margins can be in the business relative to where margins are today?” 

Creel: “Yes. If you control your costs and you layer on growth to the network, then obviously, margins should improve. That said, again, I’m not focused on the operating ratio. It’s an outcome. The only way I get focused and concerned about operating ratio is if it puts us at a competitive disadvantage; if it puts our cost basis to a point where we can’t compete in a lane for a customer and make a buck doing it and earn our cost of capital and reinvest in the network, so we can continue to provide good paying jobs and growth and all those things our customers and employees expect. I’ve lived that world. That’s why I came to CP. We were at a competitive disadvantage in a dramatic way at our primary competitor in Canada. We didn’t have the money, the cash flow to invest in the rail infrastructure. We took holidays on ballast. We pushed ties. We robbed Peter to pay Paul for a lack of a better term. That’s not a place for a business to sustain long-term.

“Rail is a capital-intensive business. It requires a lot of investment, continually, to run it safely and efficiently and to continue to create capacity for today’s traffic as well as tomorrow’s growth. And that’s what PSR allows us to do. It’s about, again, controlling costs, turning assets, strategic investments so that you can grow and still provide great jobs for your employees, high-paying jobs for your employees. Our employees work their tails off, but they enjoy a high standard of living. We want to continue to do that. And in fact, we want to do more of that. We run the business the right way. We grow, we bring business on to this network that we’re talking about and that, I believe, will exceed those expectations. Yes, we’re going to have margin improvement along the way. But again, it’s an outcome. I’m not going to be concerned with it. I’m concerned about growth. I’m concerned about earnings growth as well, job growth for our employees and allowing our customers to grow in their markets and win with our superior service. If you do that, the customers are going to be happy, the employees are going to be happy, and the regulator is going to be happy.”

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