Good afternoon. My name is Gretchen and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific Fourth Quarter 2022 Conference Call. The slides accompanying today’s call are available at investor.cpr.ca. [Operator Instructions] I would now like to introduce Maeghan Albiston, Vice President, Capital Markets to begin the conference.

Thank you, Gretchen. Good afternoon, everyone and thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and 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 U.S. regulators. This presentation also contains non-GAAP measures which are outlined on Slide 3. With me here today is Keith Creel, President and CEO; John Brooks, Chief Marketing Officer; and we are welcoming back Nadeem Velani, our Chief Financial Officer and CP’s newest Conductor. The formal remarks will be followed by Q&A. [Operator Instructions] It’s now my pleasure to introduce President and CEO, Mr. Keith Creel.

Thanks, Maeghan. Let me start by thanking our 12,000 strong CP family. Their efforts have allowed us to produce these results in the fourth quarter and certainly over the course of 2022 and I can tell you what I am most proud of, which is I know is only enabled by their individual and collective efforts is the safety performance that the team produced in 2022, producing our lowest ever FRA accident frequency ratio in the company’s history and our 17th consecutive year of being best-in-class, best in the industry as it’s related to reportable train derailments in the industry, something to be extremely proud of. And then to Maeghan’s point, our bench is only getting better. I am thinking of that, that we have got our CFO, Mr. Nadeem Velani, who adds another background into his title, Chief Financial Conductor Officer, CFC, CFO, whatever you want to call it. He has had a very rich experience. He is – obviously his business acumen from his time in Harvard has increased, but most importantly, his railroad acumen and ability to apply his business talent has increased with the railroad now as he has obtained the last 5 years, it seems like probably 5 years in this 25 below. The last 5 months specifically out on the railroad boots on the ground in the ballast, spending time not only getting connector qualified, but also riding trains, time in the mechanical department, time with the track department, time in the locomotive department, all the functions that truly make this company run day in and day out by degree professional railroaders, we have the men and women makes CP what it is. So with that said, again, welcome back, Nadeem glad to get you back in the seat. And I also want to…

Alright. Thank you, Keith, and good afternoon, everyone. So as Keith mentioned, the fourth quarter wasn’t without its challenges as certainly customer supply chains and the winter weather we faced impacted our volumes. We ultimately fell a little short of our RTM growth we expected to deliver for the year. However, I am pleased, as Keith said, to the start to 2023 and believe we are uniquely set up for the year. I will take a look at our fourth quarter results now. Total revenues were up 21% on the quarter. Volumes are up 8% on the quarter, while FX and fuel combined to be a 15% tailwind. The pricing environment continues to be strong. Now taking a closer look at the fourth quarter and the 2022 revenue performance, I will speak to the results on a currency-adjusted basis. Grain volumes were up 27% on the quarter, while revenues were up 42%. Working in concert with our grain supply chain partners, CP set new all-time monthly tonnage record for shipping grain and grain products in October and we delivered our second largest quarter ever for grain volumes. Our newest 8,500-foot high-efficient elevator, a Richardson greenfield facility in Saskatchewan, started receiving in December. And in 2023, we expect to be over 50 Origin elevators that will be 8,500 foot capable, enabling us to continue to move records amount of grain more efficiently. On the U.S. front, we saw strong demand in Q4 for both our export and domestic markets. I fully expect our grain franchise to continue to be an area of strength as we move through 2023. On the potash front, volumes were down 2% on the quarter, but we ended up 9% on the year. While we saw volumes for export potash impacted by weather challenges, the long-term outlook…

Thanks, John and good afternoon. It’s great to be back and speaking to the results of CP team period this quarter. Some of you are aware of being out of the office in the field in the last 5 months it’s been a very energizing time on the railroad. And I am thrilled to see the passion and pride from our people firsthand. I had a chance to spend a few months in our world class training center, getting conductor qualified along with a strong pipeline of new railroaders that will enable us to deliver on our growth agenda safely and efficiently. Let me take a moment just to thank four specific trainers that helped me, Jeff McClean, Nate Blunt, Mark Mariam and Joe [indiscernible] who shared their collective 140 years of rail experience with me, and I’m very grateful. I too also want to thank Maeghan Albiston and Ian Gray for their support and backfilling for me and doing a wonderful job. So thank you to two of you. Now looking at the quarter, the adjusted operating ratio came in at 59.1%. Taking a closer look at a few items on the expense side, I’ll speak to the variances on FX-adjusted basis as usual. Comp and benefits expense was up $1 million versus last year. Increased volume and wage inflation were largely offset by lower accruals for incentive and share-based compensation. Fuel expense increased $153 million or 52%, primarily as a result of higher fuel prices, which were up 43% on the quarter versus last year and roughly flat sequentially. Materials expense was up 33% or $17 million as a result of cost inflation, largely in non-locomotive fuel. Equipment rents were up 43% or $13 million as a result of higher car hire payments resulting from stronger volumes in…

Okay. Thank you for your comments to color both John and Nadeem. So operator, let me open up the line for questions.

Thank you. [Operator Instructions] Your first question comes from Jon Chappell from Evercore ISI.

Thank you. Good afternoon. John, I know that you guys clearly didn’t put out any guidance targets for all the obvious reasons. But when you hear you walk through all the different segments, bulk being 40%, double-digit volume growth, the tailwinds on auto, etcetera, etcetera. When you look to ‘23 on a CP stand-alone basis, understanding the macro headwinds, does it seem to you that you can have volume growth that’s not just at or better than GDP, but substantially better, almost like a multiple of that, just given all your idiosyncratic tailwinds that you have on your own network?

Well, Jon, look, I definitely see a path to growth. You know what? We’re unique in that 40% of our book is our bulk franchise, and I’m leaning heavy on that. As you said, certainly the macro environment is uncertain, and we’re not going to get too far over our SKIs and trying to predict what that’s going to look like. But the Canadian grain franchise is set up well. Canpotex gets through their contract negotiations with China and India, we believe there is a path to a double-digit growth opportunity there. And as I said, we had a tough year between the weather and some of the mine challenges they had. There is, I think, a significant upside in a good market demand environment in the metallurgical coal area. So if you sort of build that out, Jon, and you can make your own predictions on sort of where those more industrial and consumer markets to go, it definitely leads to a path to some growth.

Understood. Thank you, John.

And our next question comes from Tom Wadewitz from UBS.

Thanks. Good afternoon. Wanted to see – I think you’ve given us quite a bit of color over time about the opportunities for growth when you get the approval on with KCS. Is anything changing? Or is there anything that’s kind of new and developing as we wait for that STB decision? Or is it pretty stable and it’s kind of the same pipeline same opportunities that you’ve been talking about?

Tom, I’ll just say this in short. Number one, I can’t get ahead of the STB. The STB is the authority here and all explain we need there, the stamp of approval. Now I do think that our facts are very strong and it’s a very compelling value creation for all stakeholders and enables growth and all the things that we have said all along remain to be true, but ultimately, they have to decide and when they do. Nothing has at all needed our optimism for the opportunities and all the discussions we’ve had continued upon that approval, we have an opportunity, that we’re going to be able to execute that we’re looking forward to get to work on.

Okay, great. Thank you.

Our next question comes from Chris Wetherbee from Citigroup.

Thanks. Good afternoon, guys. I think as well out into 2023 and thinking about sort of the combination of this business, I would guess maybe curious your thoughts on the ability to improve the OR from what was obviously a bit of a transition year or 2 halves, as you mentioned, Keith, in 2022. So I don’t know, team, if you be willing to sort of think about on a CP-specific basis above the line, your thoughts around either EBIT growth or improvement from where we finished 2022.

Let me size it up like this, Chris. Let me start by saying the 61.4% is not a CP standard. So that is an absolute fact or at least we look forward, there is a lot of parts. Obviously, we don’t know what the economy is going to do, but we do know our story is unique. And we know we’re going to control what we can control, and I do see a path to our improvement. So let me leave it that.

Great, thanks.

The next question comes from Walter Spracklin, RBC Capital Markets.

Yes. Thanks very much. Good afternoon, everyone. Nadeem, great to have you back. My question, I guess, is on St. John. And you mentioned going to 150 this year, obviously up from a less than 90 run rate and now you’re pretty much running at a 300 run rate, so probably double that again in ‘23. You’re pointing to 824. Just curious, when you get to that level, how long do you think it will be that you could fill that 800 capacity in ‘24? And is L.A. Long Beach in the shorter queues and the less congestion over the West Coast. Does that hurt your ability to get up to $800,000 on a quick basis in ‘24 or beyond?

Well, Walter, you know what, I don’t think so. And the thesis all along, if we think back to when we bought the number one, it was – there was only one competitor in that marketplace. We identified a route that with our investment, with our partnership with and the NBSR, we’re able to create a service package that ultimately, long-term, we believe, is what is the enabler of the growth. We can get to Toronto, Montreal, Chicago on a 200 mile plus faster route. That’s not undeniable. And I think that’s given us opportunities to talk to these steamship lens, maybe a little differently than we have in the past. And I think the other point is I think about timeline in ‘24, ‘25 and beyond is a CP network that reaches Gulf Coast across Canada. And with the STB, hopefully approving our transaction, being able to link in the Gulf and also potentially Lazaro down in Mexico, gives us a really nice menu to be able to work with our customers on. And as part of that, enabling customers to not only look at the West Coast, but grow that East Coast port of with us, but then also potentially further diversify themselves by potentially going down and utilizing the ton of capacity that we’re going to have available coming in through Mexico.

That’s great story. Appreciate the time. Thank you.

Thank you, Walter.

The next question comes from Ken Hoexter from Bank of America.

Hi. Great. Nadeem, welcome back and good luck on the rest of this process as you go through here. It’s an exciting time to follow it. Can you talk about the test runs? I think you talked some of the lanes you’re testing with KCS on a commercial basis. Is there anything you can kind of talk about in the interim, you mentioned selling was 100% served by trucks. Maybe can you quantify that specific opportunity or the potential

Well, Ken, I’ll say this at this point. As I said, these are interline test moves that we’ve put together to, I guess, somewhat replicate or begin to sort of proof of concept with these customers. As I said, there is a moving 100% truck today. So part of the sale is helping the customer understand what that process and what that opportunity could look like. Obviously, in the future, if we’re blessed with single-line service between Toronto and Chicago and Laredo and ultimately down to Mexico, we wanted to begin to prove that we can compete head-to-head with trucks and ultimately provide that the liability that those customers are going to require. I can tell you that the second part of the story that’s kind of met around some of these opportunities is in these couple of examples I spoke to, we’ve done some work with the customers to identify the greenhouse gas emission savings at about 60% to 75% clip versus their current mode on those specific moves. And it’s really become a unique and exciting sales tool that maybe far more than ever in the past, some of these customers have so to say that. That’s beyond the price and the savings and the reliability and the service, this is an important story for our companies. So I hope that helps, Ken.

It sounded something I guess we will hear about in the future. Thanks a lot for your time.

For sure.

Our next question comes from Scott Group from Wolfe Research.

Hi, guys. So I understand 61 sort of not the CP standard. So do you think maybe is this a year where we can get back to that 57, 58 OR we had in ‘21. And then just in terms of like the consolidated results, and I know we can’t give specific guidance yet. But last year, you gave us directional commentary, low single-digit kind of earnings growth. Anything you could say it was double-digit earnings, the Street’s got high teens earnings growth? Any sort of directional color you can share? Thank you.

Scott, I appreciate the question. I’d just say if we want to give guidance, we wouldn’t have given it. It’s difficult in this environment. We’re awaiting a decision from the STB. So out of respect for that, I think we should hold off on guidance for a consolidated entity. And in terms of the OR, I think Keith said it perfectly. I mean 61 is not something that we write about. There is opportunities, as John highlighted this year in terms of – on the volume side, but there is also uncertain on the macro front. So we think that – we think and we expect to see improvements. But to give you a quantum, I don’t think it’s appropriate right now, Scott. We will update you as the year unfolds. And as we progress on our potential transaction and you can expect an Investor Day from us later this year, and I think there will be time – plenty of time to give you a more formal kind of guidance when the time is appropriate.

All good. So I will leave it there. Thank you, guys.

Thanks, Scott.

Our next question comes from Jason Seidl from Cowen.

Nadeem, welcome back. I wanted to touch on pricing a bit. I think you guys noted it continued to be strong. I was wondering if you could sort of compare it to where we were at in 3Q? And then does it need to actually get better from here given cost pressures?

Jason, I would say we sustained and maybe even improved a little as we move through Q4. I would go as far as saying that high-single digit type pricing on renewals, certainly inflation plus. And just looking out so far, Q1, Q2 expectations in 2023, I would say pretty well lined up in that similar space. So, I remain optimistic on our pricing. And as we have always done in the past, certainly, we are very conscious of this inflationary environment, but a big part of our philosophy is pricing to the value of our service and capacity and whatever the inflation were – inflation environment is going to be, you can assure that we will continue to – the sales team will continue to price that way in the marketplace.

Appreciate the color understood and look forward to the next big announcement.

As do we. Thanks Jason.

Your next question comes from Brandon Oglenski from Barclays. Thank you.

As you talked about new progressive hourly agreements with the SMARTs and the BRAC unions, how important is that towards working – towards a quick integration and what advantages do these hourly contracts have versus maybe some of your competitors?

Well, it’s critically important. It’s a success enabler. I can tell you that – I don’t know if we have a lot enough time to go through this on this call. But I think of one collective agreement, think of a conductor, think of an engineer, think of no complexities from yard rules and road rules, where we have two classes of employees. So, you have one class of conductors and engineers, they make more money, they have scheduled time off. And as a result of that, we have more predictability. And when you offer a better quality of life, especially in today’s world, you pay more money and you let people know when they have to come to work. In the rail industry, that’s a very unique and compelling value proposition. So, to be able to expand that, we benefited from that on the new properties at CP, we have had a unique outcome even through last year and the year before. So, that’s been part of our recipe for success and to be able to leverage that and give something to our employees will be proud of, their families will be proud of. And I think it’s part of the being not only to succeed in realizing revenue synergies and the growth that we committed to as well as operational synergies. Most importantly I think it’s necessary to be the employer of choice. Employees in the rail industry had to work it’s not an easy job. They have a choice of where to work, all the railroads are hiring, CPKC, pending, of course, the STB’s approval of our transaction. I believe has the potential, again, for the employee to create a unique experience in this industry, and that’s what I am most excited about.

Thanks Keith.

Your next question comes from Konark Gupta from Scotiabank.

Good evening everyone. Welcome back Nadeem. Just wanted to ask on one of the comments you made on the largest hiring and CapEx programs you undertook in preparation of the opportunities ahead. How much harder in CapEx are we expecting to unleash months of transaction STB approved?

Well. From a – I will tell you from a CP standalone, our CapEx is $1.6 billion. So, let me comment on Kansas City Southern’s CapEx, but they have had a number of initiatives, call it, whether it’s from a bridge point of view or from other land acquisition and so forth, they are hitting record CapEx levels as well. From a hiring point of view, we hired starting in the spring of 2022. We have had a strong pipeline in anticipation of the grain crop coming back. So, we saw our employee counts, I think get up to almost 13,000 people at the end of the year. And so we hired, I think close to 2,500 new people were hired and trained. So, that was certainly a significant expense in 2022 and it will be a significant expense this year as we prepare for growth. So, those RTMs that we expect to come along the GTMs, assuming a positive response from the STB, the synergies that one day will realize, will take some people. So, we are hiring a few thousand at a time, and we are spending CapEx at record levels on our property and KCS on their properties. So, just a bit of color, hopefully, that helps Konark.

That helps. Appreciate it. Thank you.

Your next question comes from Steve Hansen from Raymond James.

Good afternoon. I appreciate the time. You noted that KCS estimates on or headwinds in the past couple of quarters here, units differ then. At the CP core just you can comment at this juncture, just curious how addressable you think those headwinds are and how quickly they can be range in upon a successful STB decision?

Yes. It’s hard to put a number that, Steve. The thing I think about, obviously, I can’t stick my hands of their business. John and Pat and the team are very competent and capable and talented railroaders, and they are managing those situations now. Pending STB approval and we have an ability to get our hands into it. Then obviously, when you put the combined network together as we tend to go as a team, we create and you take out handling, you do a lot of those things that whatever challenges they are dealing with is going to get better from a fluid an operational standpoint. And the other thing is as we win this business that we are talking about and we create these new markets, you take out some of the complexity of cars being handled back and forth with a single-line move versus an interchange move. That’s true for CP-KCS, that’s true for a move perhaps giving ECB, NCN all of the above. Single line is part of the value of this for the customer. It’s part of the efficiency. As far as the asset turn, you control the move cradle to value there, you charge a fair price for it, you create capacity. And as a result, you have a more efficient railway, which produces a lower operating ratio. It’s just the way you effectively run the business. So, I can’t put a number on it. I can tell you that you should expect improvement naturally because of all those reasons. And I can tell you this is going to be a team committed to driving that improvement.

Appreciate the color.

Thanks Steve.

Your next call comes from Brian Ossenbeck from JPMorgan.

There is a change in basic time in Canada towards the end of last year, let’s call it $300 million headwind as it appear, just wanted to see how you are thinking about that at your home network year and the next year. And then maybe for John, if you can comment on just the price mix and I guess there was a 200 basis point headwind this quarter. Putting it together, it looks like you might be facing similar trends in the first half of next year just based on the comps and the wins that are coming on the network. But I wanted to see if you give some high-level color in terms of how to think about mix and how that impacts you next year? Thank you.

I will say a few short words about these new orders [ph] in the sick days. I am not thinking in tens of millions of dollars, I am not thinking in hundreds. I am thinking about the practical application of this. Number one, those sick days have to be earned through ‘22 or ‘23. So, really, they don’t come into play until ‘24 full year effect. Number two, our manpower models, and I don’t care if it’s a mechanical group, the running trades group, locomotive group, the lines are very great. We model because employees obviously get sick days already in our manpower models. So, to suggest it’s going to go from zero to whatever to 10, a multiple of 10 would be to me are responsible on my part. Our employees, if I look at running trades, for instance, we have got average sick days in a year, I think the rough number is four or five. So, that’s already kind of baked into the manpower model. Now, if I have got to payment for those four days or five days, there is some impact. But at the end of the day, it’s not going to be material. I don’t know exactly what it will be, but we won’t have full effect in ‘23. I know that for a fact and when we do, I don’t think it’s going to be material.

Brian, you know what, you are right. I kind of see similar trends evolving as we move in the first half of 2023. Typically, our bulk franchise just by nature, a little lower on an average cents per RTM basis relative to the rest of our book, that will kind of maintain or keep some of the pressures relative to the mix that you described.

Okay. Thank you.

And our next call comes from Ariel Rosa from Credit Suisse.

Hey. Good afternoon. Thanks for taking the question. I just wanted to see if Nadeem or Keith, maybe you could talk about the expectations for the progression of the debt pay-down, kind of how are you seeing that play out over the course of 2023 and maybe into 2024? And what kind of impact might that have on your interest expense? Thanks.

So, yes, we are generating a significant amount of free cash as well as dividend payments from Kansas City Southern. So, we are kind of on pace to continue to de-lever, get back to our 2.5x target leverage. So, we have gone from kind of a little bit above 4, 4.1, 4.2 down to 3.7, 3.8 levels as we speak. I would expect that to get in the high-2s by the end of the year. And so over the course of ‘24, we should be back in target leverage, keep it at that level. And as far as the interest payment, I just follow that – follow-up with Maeghan and Chris post call back in the office three days so far. So, you caught me on that one, and so it’s better to connect with them on the interest.

Got it. Fair enough. Thanks everyone.

Thanks Ariel.

And our next question comes from Amit Mehrotra from Deutsche Bank.

Thanks operator. Hi everyone. I joined the call a little bit later, so apologies if these questions have been asked. But one, I was wondering if you could talk about non-fuel costs. Obviously, there is inflation, I assume you have some visibility, if you could help us kind of think about the OpEx this year. I guess, follow-up separately, with Kansas City, there used to be a time where they provided US OR and Mexico OR. And I assume that based on where they are today, it may be safe to assume that they are kind of in the 70s now in terms of the U.S. business. I don’t know if you want to comment or talk about that, but just trying to understand gap in terms of where they are in the U.S. business and where CP is?

Sure. Yes, thanks for those questions. You cut out a little bit, so forgive me if I didn’t get – I don’t get the full question and respond to you correctly. But I think you mentioned about inflation ex-fuel. We were running close to high-6%, almost 7% in Q4, so significant inflation that we haven’t seen in some time or certainly haven’t seen in my career. The good news is John has been – as he updated on the call, we have been pricing above inflation, and we fully expect that. In this uncertain macro environment, we will see what happens with inflation. Certainly, we have seen it kind of slowdown in some areas, some of the latest economic indicators have seen hopefully peak inflation, and we will see that come down through 2023. But irrespective, we are protected from an operating income point of view. In terms of OR, KCS versus KCSM, yes, not appropriate for me to comment, and I couldn’t even tell you the answer, if I wanted to. So, if I knew it. So, more to come on that and not something that I am going to answer on this call.

Yes. I thought I would try anyways. Thank you very much. Appreciate it.

Thank you.

And our next question comes from Justin Long from Stephens.

Thanks and good afternoon. I guess to follow-up on some of the questions about pricing. Can you talk about what percentage of your business is getting re-priced this year? And as you have started to pursue some of the new business opportunities as a result of the KCS merger, are you seeing any of the other rails respond to that with more competitive pricing? And if not, how are you thinking about that risk as you integrate the deal?

So, Justin, we should see roughly 40% of our book rollover in 2023, and that’s pretty typical for us. And the competitive response, I fully expect that they are going to do it. They need to do in areas where we are going to go head to head, again, assuming the STB approves our transaction. That being said, I would also say that a lot of the examples I have provided today, and I have spoken to in the past, are really non-rail moves today. It’s about focusing on these opportunities, I think uniquely can be solved by CP-KCS and are really competing against truck. And as I think about even traffic that we are looking at potentially out of Mexico, up in some markets that’s moving short or other alternatives that aren’t head-to-head versus rail. So, look, we are going to compete where we compete, and I fully expect the U.S. rail competitors to do what they need to do on that front, and we will do the same. And again, we will try to focus on those growth opportunities that are more maybe non-competitive with those in moving via truck or other modes.

Understood. Thanks.

That reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.

Okay. Thank you, operator and thank you for joining us again this afternoon. As you can sense, these are unique opportunities, its unique time in this company’s history. Obviously, continue to find the STB approving our merger application, we are poised and ready for a historic year for a combined entity CPKC, historic for our customers, for our employees, for the communities we serve, for the North American economy in a very unique way. So, with that said, we look forward to waiting on that decision and pending that decision as positive as we hope that it will be, and we believe the support. We will be scheduling election note, a date to in the future sometime in June, late June, we will be in a position to be able to come together and share all these facts and answer a whole lot more questions and provide some color as to what the true opportunity lays ahead of us for 2023 and beyond. So, thank you for that, stay safe, and we look forward to talking again on our next call.

This does conclude today’s conference call. You may now disconnect.