With congestion at the ports of Los Angeles and Long Beach poised to extend into 2022, Canadian Pacific is seeking opportunities among customers and even with the steamship lines to divert traffic to western Canada and Atlantic Canada ports, CP’s executives said during the railway’s third-quarter earnings call on Wednesday.
“Many of the steamship lines were apprehensive to make, or attempt to make, massive changes in terms of their flows, hoping that this [congestion] would be fairly short term in nature,” said CP Chief Marketing Officer John Brooks in a call with transportation analysts. “Now that this has continued on — I think most expect [this] will bleed into 2022 — I would say those discussions [to reconfigure flows] are accelerating.”
CP (NYSE: CP) has been working with the steamship lines to potentially reconfigure some of the boats in terms of where or how they load, Brooks said. For example, one situation CP has looked at is determining what would happen if a vessel eliminated a trip to Seattle-Tacoma after stopping at Vancouver in order to quicken the vessel’s turn back, he said.
“We’re looking at all those options. … We’re starting to see some … better momentum in terms of those opportunities. We’re going to see some of that in Q4. And I think that accelerates as you move into 2022 as these issues persist,” Brooks said.
While CP expects challenges in the international intermodal space to persist into 2022, CP says it continues to see strong demand for the product, according to Brooks. The merger with Kansas City Southern (NYSE: KSU) will allow for additional opportunities for customers seeking access to the Gulf Coast, while CP’s acquisition of the Central Maine & Quebec Railway provides CP with East Coast access via Atlantic Canada.
“The team [is] working with our shippers to find ways to get [shippers] to move out of the congestion in the LA/Long Beach area and utilize the capacity we have at Canadian ports,” Brooks said. “I can tell you we’ve got two or three opportunities with smaller chartered vessels, which we would look to also bring into either East or West Coast ports to try to not only alleviate the congestion, but drive some revenue in that capacity we have in those areas.”
He continued, “With the ability of our new network to touch all these ports, we think this presents a tremendous opportunity for the future.”
Meanwhile, a strategy that CP will continue to pursue to grow its domestic intermodal segment is to encourage existing customers to expand their use of rail. CP’s demand management program allows customers to pay a lower rate or premium rate depending on how they want to flow traffic into their distribution centers, Brooks said. That also allows CP to “smooth out our train lengths,” he said.
CP said it has seen four consecutive record quarters for domestic intermodal revenue. The railway opened the Pacific Transload Express in Vancouver on Sept. 1 in partnership with Maersk, and its Atlantic Canada service experienced a 39% increase sequentially in domestic intermodal volume through St. John in New Brunswick.
“It’s a partnership, and that’s the way we’ve approached this. … So as long as you provide that reliable service, that value proposition, customers don’t shy away from paying a fair rate increase. They don’t treat you like a commodity, they treat you like a partner because, again, you’re part of that formula,” said CP President and CEO Keith Creel.
CP still expects its merger with KCS to receive federal approval in the second half of 2022, and the railway will hold a shareholder meeting on the merger on Dec. 8.
Although teacher protests and changes in Mexico’s regulatory regime for refined fuels impacted KCS’ (NYSE: KSU) results for the third quarter, the merger is still attractive because it would enable potential customers to take advantage of nearshoring opportunities, according to Creel, who said he was speaking recently with a Canadian retailer about potential opportunities.
“To be able to take more control of their supply chains, to be able to source and not be exposed to some of these things we can’t control that are happening in on the West Coast — and there’s so many different issues and moving parts in that — to be able to stabilize your supply chain nearshore or near source the components that [would] allow you to compete in business and succeed in business — it’s an undeniably compelling discussion,” Creel said.
Third-quarter 2021 financial results
Net profit for CP in the third quarter slipped to CA$472 million (US$383 million), or 70 cents per diluted share, compared with $598 million, or 88 cents per diluted share, in the third quarter of 2020. One Canadian dollar equals 81 cents in U.S. currency.
“The third quarter presented challenges across the supply chain, but the CP team’s commitment to the foundations of precision scheduled railroading enabled us to respond quickly and effectively to changing environments,” Creel said in a release. “We are committed to controlling what we can control, as CP continues to focus on providing service excellence to our customers and driving value for our shareholders.”
Revenues rose by 4%, to $1.9 billion, while operating expenses grew nearly 8%, to $1.17 billion.
Operating ratio was 60.2% for the third quarter, compared with 58.2% last year. Adjusted OR, which excludes KCS acquisition-related costs, was 59.4%. Investors sometimes use OR to gauge the financial health of a company, with a lower OR implying improved health.
CP revised its volume growth outlook for 2021 and now sees “low-single-digit volume growth” compared with 2020 and as measured by revenue ton-miles. In April, CP’s outlook was “high-single-digit volume growth.”
CP “remains confident” that full-year diluted earnings per share will grow by double digits.
“Despite global supply chain issues and a challenging Canadian grain crop, we remain confident in our ability to deliver full-year double-digit adjusted diluted EPS growth,” Creel said. “The underlying demand environment remains strong, and our commitment to generate sustainable, profitable growth will not be distracted by elements outside our control.”