Canadian Pacific Kansas City - Q2 2024
July 30, 2024
Transcript
John Brooks (EVP and CMO)
Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's second quarter 2024 earnings conference call. The slides accompanying today's call are available at investor.cpkc.com. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press Star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press Star 2. I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference. Chris, please go ahead.
Chris de Bruyn (VP, Capital Markets)
Thank you, Beau. 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 two in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. Please note, in addition to our regular quarterly financials, there are supplemental Q2 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, our President and Chief Executive Officer, Nadeem Velani, our Executive Vice President and Chief Financial Officer, and John Brooks, our Executive Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A.
In the interest of time, we'd appreciate it if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.
Keith Creel (President and CEO)
Thanks, Chris, and good afternoon. Listen, before we get into the results, on behalf of our CPKC family, I want to extend our heartfelt prayers and condolences to Pat Ottensmeyer and our family and friends. Our family mourns his tragic passing. We extend our deepest condolences to his fiancée, Deanna Ottensmeyer, his entire family, as well as the many friends and former colleagues. Pat's vision and leadership played a monumental role in the great history of Kansas City Southern, and he helped reshape the railway industry. We've lost a truly remarkable leader and a cherished friend. All of you knew him as a professional and a railroader, and had nothing but respect and admiration for the material impact he made across so many aspects of our industry.
If you had the honor to have enjoyed a friendship with Pat, as I did, words will never capture what a class gentleman and human being he was. Pat's legacy lives on, and it can be seen in the work we'll do every day at CPKC. I'm also pleased to be hosting this call in Kansas City, at our brand-new state-of-the-art US operations headquarters at Knoche Yard. This facility is just one small example that would have never been possible without Pat's vision and strength as a leader. His contributions as a railroader, as a person, will never be forgotten. In moving on to the quarter, I'd like to first start by thanking the 20,000 strong CPKC family for their efforts in the second quarter.
As a leader, it's always my honor to represent the results we're going to cover on behalf of this team, which I'm extremely proud of. In the second quarter, the family delivered revenues of $3.8 billion, which is up 8%, strong volume growth, an increase of 6%, operating ratio of 61.8, which is a 280 basis point improvement versus last year, and EPS of $1.05, a 27% increase. Certainly, extremely pleased with these results. I can tell you these numbers that I just walked through do not happen by accident, but through execution. So on the operating front, I applaud Mark and his operating team for their continued strong operating performance across this network. They delivered significant improvement across a number of our key operating metrics.
Unfortunately, Mark had an unexpected eye procedure he had done yesterday, so he's not with us today, so I'm going to cover his results and his body of work. Average terminals well declined 9% in the quarter, average train speed improved 6%, locomotive productivity up 10%, and fuel efficiency improved 2%. All of these results reflect a network that's fluid, that's running well, and delivering strong service to our customers as we carry that momentum into the second half. And from a safety perspective, train exits were down 4%, and personal injuries, an astounding 38% improvement. I'm extremely proud of the team's continued focus on safety each and every quarter.
Commercially, John and his team continue to bring on business that's going to fit our network well, working in close collaboration with our operating and service design teams, and the team continues to price the value of the service that this new network uniquely offers. The team's executing on the vision we had when we first proposed putting these networks together, and it's leading us to a differentiated outcome. While it's been well publicized, the freight environment continues to be challenging. We're not making excuses. We're leaning into the challenge. We're creating our own opportunities that are uniquely enabled by this new network. So in closing, let me say I'm extremely pleased with the first half of the year, even more excited about what the second half holds. We're in a position of strength. We're carrying momentum into the second half that we're going to build on.
As I said in January, we're positioned to deliver an exciting year of value creation, and that is exactly what this team is delivering. We're uniquely positioned to deliver strong value in 2024, and more importantly, for years to come. So with that said, John, I'm going to hand it over to you to provide some color on the markets, and then Nate and the team will elaborate on the numbers.
John Brooks (EVP and CMO)
All right. Thank you, Keith, and good afternoon, everyone. I'm extremely pleased with the strong top-line growth the team delivered this quarter. This franchise is creating the unique opportunities we've talked about since day one. Our operations are strong, and we're pricing to the value of the differentiated service we are providing our customers. Now, looking at our results, on a combined basis, we delivered freight revenue growth of 8% on a 6% increase in RTMs. Cents per RTM was up 2%, with strong pricing and a slight tailwind from FX, partially offset by mix. Now, taking a closer look at our second quarter revenue performance, I'll speak to an FX-adjusted result on a CPKC combined basis. Starting with bulk, grain revenues were up 17% on 15% RTM growth.... US grain volumes grew 17% over prior year.
Our franchise is benefiting from strong shipments of corn to the PNW, Mexico, and Alberta, along with increased shipments of soybeans and wheat to Mexico, which remains a strong area of synergy growth for CPKC. Canadian grain volumes were up 13% on the quarter, as we saw a stronger than expected spring and summer sales program emerge, as farmers reduced their on-farm inventory in preparation of the upcoming harvest. Now, looking forward, early indications are that this harvest will be more in line with our five-year average, or if not, stronger. That, coupled with our regulated grain pricing of approximately 6.5%, has us well-positioned in Canadian grain. Now, moving on to potash, revenues are up 24% on 11% volume growth.
We moved higher volumes of potash with Canpotex to their Portland terminal as we lapped the impact of their ship loader outage back in April of 2023. Now, looking forward, potash supply chain is performing very well, and export demand is sold out for the second half of the year. We are on pace to set a record all-time tonnage with Canpotex this year. Coal revenue was down 3% on a 2% decline in volume. Lower natural gas prices weakened demand for our U.S. coal franchise, and that weakness was partially offset by more export Canadian coal to Vancouver and Thunder Bay. On the merchandise side, energy, chemicals, and plastics revenue grew 10% on a 14% volume growth.
The volume growth in the quarter was driven by higher crude as we lapped the impact of some outages last year, and growth from synergies across just about all of the ECP portfolio, including LPGs, plastics, renewable diesel, and refined fuels. We are excited about the wins we've captured in this space as we are connecting markets from Alberta to the Gulf Coast and into Mexico with our single line haul service. Now, looking forward, the ongoing ramp-up of these synergies, we are set up for a solid second half of 2024 in ECP. In the forest products area, we were down 1% revenues on a 1% decline in volumes. Forest products volumes continue to be challenged by a soft macro environment, impacting both our paper and lumber products.
However, we are largely offsetting this headwind with synergy growth and extended line haul, shipping more lumber from Canadian producers down to our franchise in Texas and the Gulf markets. Metals, minerals, and consumer products revenue was down 3% on a 9% volume decline. Volumes in this quarter were impacted by weakness in frac sand, driven by the lower natural gas prices, but also a labor disruption we had at ArcelorMittal steel facility in Mexico. Now, looking forward, although we expect the weakness in frac to continue, the labor disruption has ended, and we expect Arcelor to ramp up production in the back half of the year. In automotive, we produced another record quarter, with revenues up 28% on 21% volume growth, an exceptional performance by the team.
Our auto franchise is benefiting from higher, longer haul volumes out of Mexico as our closed loop model service solution only continues to ramp up. I'm also pleased to share that our new Dallas auto compound, located at our Wylie, Texas intermodal terminal, opened in late June. This compound is part of our playbook that unlocks an entirely new supply chain model for the OEMs, giving them new competition, service, and capacity certainty like they've never had before. Our auto business continues to deliver differentiated growth, and we expect a strong performance as we move through the second half of the year. Now, on the intermodal side, revenue was down 7% on a 3% volume decline. Starting with domestic intermodal, volumes were up 3% despite a soft base demand environment.
Our MMX, or 180, 181 cross-border service continues to perform extremely well in what I would consider a very challenging domestic market. Volumes on this service are up 50% since our exit rates at the end of 2023, and we have a strong pipeline of opportunities stacked up for the back half of the year. This includes new inter wholesale opportunities, new retail opportunities, temp control service offerings, and new joint line routes into both the Southeast US and the Ohio Valley markets. Now, moving on to the international side, volumes were down 9%, primarily related to timing of the impact of lingering strike uncertainty and the timing of some share shifts in business. With new business ramping up and a solid outlook for demand, we are well-positioned across all our ports for the second half of the year.
To close, the volumes in the first half came in slightly better than we expected and are off to a strong start in Q3. While the macro remains challenging in some areas, overall demand has stabilized, and more importantly, we continue to have line of sight, strong, differentiated growth from synergies, self-help initiatives, and disciplined pricing. The operations team is delivering reliable, resilient service to our customers, and my team is laser focused on selling into that service in taking advantage of our expansive new network. I'm excited about what we've accomplished so far this year, and even more for the opportunities we have ahead of us. So with that, I'll stop and pass it over to Nadeem.
Nadeem Velani (EVP and CFO)
Well, thanks, John. That's a great report. So let me start by sharing my enthusiasm for the strong performance for the quarter. Our success is driven by the hard work and dedication of CPKC's railroaders, and I'm proud of what the team is accomplishing. Looking at the quarter, CPKC's reported operating ratio was 64.8%, and the core adjusted combined operating ratio came in at 61.8%. Earnings per share was $0.97, and core adjusted combined earnings per share was $1.05, up 27%. Similar to what we shared in previous quarters, our combined operating expenses in 2023 illustrate the effects of the acquisition for the second quarter, as if the acquisition closed on January 1, 2022. I will speak to FX adjusted combined operating results in these prepared remarks.
Now, taking a closer look at our income statement, reported operating expense is provided on slide 11, and combined operating expenses on slide 12, where I'll focus my comments. Excluding adjustments, comp and benefits expense was $610 million. The year-over-year decline in comp and benefits was driven by reduced stock-based compensations, as well as efficiency gains from reduced overtime, improved fluidity, and engineering productivity gains. This was partially offset by inflation, volume-driven increases from higher GTMs, and higher current service costs from our DB pension plan, due to a lower discount rate at year-end 2023. Looking to the rest of 2024, we continue to expect average headcount to be roughly flat on a year-over-year basis, driving further labor productivity gains as we grow volumes. Fuel expense was $466 million, up 9%.
The increase was primarily driven by a $24 million, or 4% increase in fuel price, along with volume-driven increases from higher GTMs. Increases from price and volume were partially offset by a 2% improvement in fuel efficiency, which resulted in a $9 million savings, another area where we are seeing network efficiency gains translate directly into margin improvement. Excluding adjustments, materials expense was $95 million. The decline in the quarter was driven primarily by timing of locomotive and freight car maintenance, as activity schedules across the network are aligned. Equipment rents were $82 million, down 5% year-over-year. The decline was driven by reduced car hire payments and receipts, along with efficiency gains from improved cycle times and increased network velocity. Depreciation expense was up 6%, resulting from a higher asset base. Excluding adjustments, purchased services and other expense was $581 million.
Cost of inflation and terminal service costs were partially offset by a year-over-year decline in casualty expense. So overall, top-line growth in the quarter, coupled with strong cost control and execution, resulted in a 17% increase in core adjusted combined operating income, and a 280 basis point improvement in our core adjusted combined operating ratio to 61.8%. Moving below the line on slide 13, other income was $40 million, driven by higher equity income, along with a gain on some debt repurchases in the quarter. Other components of net periodic benefit recovery was $88 million in Q2. This reflects the lower discount rate compared to 2023, and partially offsetting the headwind to comp and benefits from current service costs. Net interest expense was $200 million, or $195 million, excluding the impact of purchase accounting.
The decline was driven by a reduced debt balance. Income tax expense was $292 million, or $328 million on a core adjusted combined basis. We still expect that CPKC core adjusted expected tax rate to be approximately 25% for the year. Turning to slide 14, we are generating strong cash flow and cash provided by operating activities of $1.278 billion in Q2. Capital investments in safety and growth remain our priority. In this quarter, we reinvested $808 million, in line with our expectation to invest approximately $2.75 billion in 2024. We continue to make strategic investments in capacity across our network, positioning us to continue efficiently absorbing the growth that the merger has enabled.
On the quarter, we generated $526 million in adjusted combined free cash flow and continue to repay debt. Our leverage ratio is 3.2x, and we still expect to reach target leverage in early 2025, at which point we will evaluate shareholder returns with our board. In review of the quarter, the team delivered another strong volume growth ahead of expectations, along with continued discipline on price and cost control. Synergies are continuing to ramp, and the network is performing well. We continue to gain momentum on our expense synergies, improvements in velocity, as well as locomotive and car productivity are generating operating savings. We're also gaining procurement savings through consolidating agreements across the company, as well as savings in G&A through combining processes and functions. We're well on track to deliver double-digit core adjusted combined earnings growth.
Growth is driven entirely from the business and without any help from shareholder returns. This network is delivering strong and profitable growth, and I'm excited for the opportunities we have ahead. With that, let me turn it back to you, over to you, Keith.
Keith Creel (President and CEO)
That's great, guys. Let's open it up for questions.
Operator (participant)
Thank you, Mr. Creel. Ladies and gentlemen, if you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, again, press star two. As previously highlighted, please limit yourself to one question. We go first this afternoon to Chris Wetherbee, with Wells Fargo.
Chris Wetherbee (Senior Analyst)
Hey, thanks. Good afternoon, guys, and condolences to the CPKC family and, and certainly to Pat and his family as well. He'll be missed. You know, if I could maybe start a little bit on the synergy side, the revenue synergy side, maybe if we could get a sense of how that's kind of progressing, and as we think about the back half of the year, could we see an acceleration in sort of activity? I just, you know, get a sense of kind of what we're thinking about in terms of revenue synergy progress and maybe what we think the exit rate could look like as we get through the end of 2024.
John Brooks (EVP and CMO)
Yeah, Chris, so it's John here. Super pleased with progress. We came out of the gates, you know, really strong last year and a number of announcements piled up a pretty good exit rate in that 350 range, which we've talked about at the end of 2023. I mean, maybe just to get to the point, I fully expect, you know, we said we'd double that, but I fully expect that we're on a run rate that could get us closer to that $800 million type number as we exit 2024. If you think about that, it's really spread pretty evenly across our book.
Just to give you a sense, about half of that, I would lump in the area of intermodal, so international, domestic, automotive. And then the other half, maybe split pretty evenly between our bulk franchise, as we've really seen here this summer, our grain shipments down into Mexico accelerate, and then the other half of that being our ECP merchandise business. So I'm quite pleased with where we sit so far here, and I expect, again, a pretty good ramp up as we move through the second half of 2024.
Chris Wetherbee (Senior Analyst)
Great. Thanks very much. Appreciate it.
John Brooks (EVP and CMO)
Yep. Thanks, Chris.
Operator (participant)
Thank you. We go next now to Walter Spracklin at RBC Capital Markets.
Walter Spracklin (Equity Research Analyst)
Yeah, thanks very much. Good afternoon, everyone. John, in speaking with you, you spent a bit of your time out there on your prepared remarks, talking on the Dallas Auto Compound opening and some of the opportunity there. Can you talk a little bit about the capacity there? How much you could ramp it, how quickly it could come on, and if you could frame it quantitatively, even better, but just curious to hear what the upside there is on that particular line.
John Brooks (EVP and CMO)
Yeah, Walter, so I'm really excited about this one. You know, this is an opportunity, you know, similar to the playbook in Canada, where we identified the land available down in Wylie and aggressively got after that opportunity. You know, the, in terms of capacity, we're looking at a facility that'll do, let's say, 160,000-180,000 VINs annually. You know, we utilized about 35 acres or so there. You know, right, right now, we've got three OEMs that are, that are signed on and actively shipping into the, into the facility. You know, my, my sense is those three, probably at full run rate, Walter, get us to, mm, 75% capacity, roughly in, in that neighborhood.
Then we've got two or three fish on the line that I'm pretty excited about that I could see coming on maybe even towards the end of this year, but certainly into 2025. You know, as you look to the future, the great thing about that location is it's expandable. We can add some capacity there, and it's really gonna provide a pretty unique solution, I also think, as you see the production grow in the eastern U.S., with connections to the NS and CSX, that becomes a pretty big opportunity for the future.
Keith Creel (President and CEO)
Yeah, I would just add to that, that entire opportunity, as well as we execute, is well beyond our Investor Day guidance. It wasn't in the base plan. You've got 430 acres left, Walter, to expand into, so we have the capacity, we have the land. I think we're gonna have the business opportunities. We've got great partners with CSX and with NS to reach all their markets and feed traffic into that Dallas market and then down to Mexico. So I think it complements uniquely this network that we're optimizing.
John Brooks (EVP and CMO)
If anyone's gonna be in Dallas in September, we're gonna be doing a tour there, so...
Keith Creel (President and CEO)
Yeah, we're happy to show that facility off in September.
Walter Spracklin (Equity Research Analyst)
All right. Thank you very much. Appreciate the time.
John Brooks (EVP and CMO)
Thanks, Walter.
Operator (participant)
Thank you. We go next now to Fadi Chamoun at BMO Capital Markets.
Fadi Chamoun (Research Analyst)
Yeah, good... for taking my question. Keith, maybe can you give us an update? Recent, and I wanted to ask you, John, like, you know, typically your second half does end up being a little bit stronger than the first half from a volume perspective, like, just typical seasonality, I guess. But how do you see some of the diversion issues that we have experienced in the second quarter and you're experiencing now with stabilizing? Do you think that there's potential for more kind of headwind on that front as we look into the third and fourth quarter?
John Brooks (EVP and CMO)
... Hey, hey, Fadi, you cut out on the question to Keith. Can you just repeat, please?
Keith Creel (President and CEO)
Yeah, the first part?
Fadi Chamoun (Research Analyst)
Oh, the first part is just about an update on the labor situation, if you can just give us your latest thoughts on that.
Keith Creel (President and CEO)
Okay, well, as we all know, we've been trying our dead level best to make sure we keep our customers updated and all key stakeholders. The CIRB took hold of a question that the Minister of Labor challenged, relative to potential threat to Canadian safety. We're waiting for a ruling on that question. They've committed to have that ruling come out by August the ninth. What we've asked for in return is essentially a little bit of time for our customers to plan, so they can responsibly wind down their operation and not just have mass chaos. Because you can imagine the impact, obviously, of both railroads in the nation being shut down. That said, you know, the parties, although we stay at the table, we're far apart. I'm just being transparent and honest.
It's gonna be a challenge. You know, we've offered to enter into binding arbitration, given we understand the potential damage to the Canadian economy. We understand the damage and the pain and suffering on our employees, even those that might be out on strike, as well as those that aren't out on strike. So it's not a good outcome for anyone. But that said, at this point, I'll remain cautiously optimistic. It's most probable that we'll have a work stoppage, both railroads. My guess is, best guess, they release the parties by the ninth. That would put a work stoppage probably sometime the end of the month, is what I would be guessing at and planning for.
But again, we won't know until that ruling comes out from the CIRB, at or no later than August 9, based on their commitment.
John Brooks (EVP and CMO)
Yeah, and Fadi, you know, a few things here I, I would say. You know, certainly, I feel better about where I thought I was going to be at this, this point of the year, and, and I, I do have quite a bit of optimism around the run rate, if you think about the, the back half of the year. Now, now, that being said, I'll tell you, we, we still got to, as Keith just spoke to, we got to get through what is likely going to be a strike that brings a certain level of uncertainty. Of course, we've got an election year. We've got, you know, a macro environment that, that, you know, is still, not great in, in some areas.
So, you know, that being said, you know, maybe the counterbalance to that is, as I said, I think we're shaping up for a pretty good grain season. And we are really well-positioned in the Western Corridor, in terms of our capacity in being able to provide the service, our grain shippers need in that region. In addition, I'm super excited about what we've been able to do in the U.S. and bringing Mexico into our portfolio of destinations. So I definitely see the bulks accelerating, I think, in a pretty sizable way as we move through the back half of the year. You know, we're going to keep plugging along on the domestic intermodal front.
I'm pleased with the growth, but it's a tough market out there. There's no doubt about it. So we'll see how that unfolds. I'm excited about some things we have ramping up in that business unit. And frankly, some of those merchandise areas, you know, kind of present a little bit of a mixed headwind and some of those opportunities, as you know, that carload area is pretty strong sense for RTM, but that's an area where in the forest product and steel and some of those areas where we're definitely not counting on a rebound the back half of the year. So hopefully that's a little bit more color.
Keith Creel (President and CEO)
Yeah, I think, Fadi, there's one more thing I think it's important that everyone takes away. Our guidance is assuming the work stoppage, so unless it's one of long duration, when I say long, more than two weeks, we're anticipating that. We're planning for that, and it's not going to impact our guidance. Once we get beyond that, I think we'll be in a very good position to have a better, a better, more responsible line of sight at the end of the year. We'll see how the labor situation plays out. We'll have a good picture of grain, I think, by then, and then we'll look at it if we need to change in our outlook.
Fadi Chamoun (Research Analyst)
Thank you. I appreciate that.
Operator (participant)
Thank you. We go next now to Steve Hansen with Raymond James.
Steve Hansen (Managing Director and Equity Analyst)
Yeah, good afternoon, guys. Thanks for the time. Look, if I'm listening to your recap this evening, it's almost like you weren't operating in the Western Corridor. One of your peers talked about a lot of congestion problems in the West, and it raises a lot of questions about, you know, ultimate capacity out west here and how that's serviceable into the key corridors or key port terminals out here. I mean, how do you feel that you were able to escape the congestion issues that the others faced? And, you know, do you feel like the capacity into the key jurisdiction here is still sufficient for you? Any comments around that would be super helpful.
Keith Creel (President and CEO)
Yeah, Steve, let me focus our comments on CPKC. And, you know, I've said this all along, you can't oversubscribe your network. You've got to understand your capacity, you've got to understand your limitations, and you sell to the strength of your franchise. You don't oversell it, you don't oversubscribe it. You got to have the right number of locomotives, right number of cars, right number of crews. You got to understand where the business is coming on. And, and at our railroad, we focus intently, in a very disciplined fashion, on making sure that we right-size our assets and we sell to that capacity. That's a discipline. You know, if, if you let your aspirations get ahead of your capacities, then ultimately, I know that we would get in trouble. And as an operating CEO, I'm intently focused on that routinely.
It's a discipline that's woven into our DNA, and as long as I have anything to do with this railroad, and or anyone that I train and work with, has anything to do with this railroad, that's the way CPKC will be run in Canada, U.S., and Mexico. It's the recipe for truly running a true precision-scheduled railroad that provides great service, controls costs, allows earned margins, and allows it to be sustainable for your customer. Because they're making their decisions based on our ability to keep our word and do what we say we're going to do. The last thing I want to do is destroy that credibility, because they have very short memories.
Steve Hansen (Managing Director and Equity Analyst)
Very helpful, thank you.
Operator (participant)
Thank you. We go next now to Tom Wadewitz, with UBS.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah, good afternoon. Keith, I wanted to ask you how you think about, or, or John, how you think about capacity of some of the services you have, and also maybe how we think about the potential for 2025 to be a strong margin expansion year. I guess I think of, just one example, but the, you know, one eighty-one eighty-one, that you probably still have good amount of capacity, so you see some growth, it should be pretty strong incremental margins. You know, you've had some noise this year, kind of, I guess, anticipating the, the labor issue and so forth.
I just wonder if you have kind of a broad thought that, you know, potentially set up for a pretty strong margin expansion year next year, and, and how you think about available capacity on some of the services you have. Thank you.
Keith Creel (President and CEO)
You know, we're well positioned from a capacity standpoint, Tom, you know, it's a great question. 181 181 is a perfect example. You know, we're, we're eating some margin because we've got that service out there, but to John's point, it's up 50% here since the beginning of the year. That train's running at half train length, so we still have additional capacity to sell into, and the margins only improve once you get the base costs covered in that train start. So again, all across this network, all these lanes that we're selling, we said this to the STB, and I'll say it again and again and again, we're building this network out to match these synergies so that we can onboard this business, not deteriorate our service offering, not deteriorate our car cycle times, our locomotive productivity.
All those things that allow us to run a successful business, to be able to continue to pour record amounts of capital into this network, so that it can grow in a responsible way that rewards the shareholder, as well as provides the customer the reliable service they need. That's the recipe. It's not rocket science. The issue is having the discipline to execute it. And if you do that, you're going to continue to put yourself in a position of success that, quite frankly, is proven to be very unique in this industry.
Tom Wadewitz (Senior Equity Research Analyst)
Do you think the available capacities, it's fair to think it's broader than that particular service, that you would have it across, you know, kind of multiple areas in the network?
Keith Creel (President and CEO)
I would say we're not capacity constrained in any lane. That's probably the best way to say it. Think about the capital that we're spending. In line with our STB submission, we said we're going to spend about CAD 275 million. We're well on our way. We've got 7, 8 sidings in. We've got the bridge at Laredo that's about to be completed. I was just looking at the progress of it a couple of hours ago. It'll be done, it'll be online. We've got 6 or 7 capital projects we did not even plan, that we added into the capital envelope in Mexico based on the learnings of last year when we put that task force down there, that haven't came online yet. So they're at, what I would call, critical capacity points.
Once that capacity comes online, you're going to see locomotives move faster, you're going to see cars move faster, you're going to see costs come down, and guess what? You're going to create capacity for more growth. So again, this network is not capacity constrained. It's our job to make sure that we don't get in that position. As long as our customers work closely with us, they give us good forecasts. Now, I'm not going to say that we can go back to March of this year, and we had a 40% increase of business on the West Coast and Vancouver, and it oversubscribed that the port. It actually did. We took decisions, we took steps responsibly, responding to that in March to make sure we weren't oversubscribed.
We allow contracts clauses to be relaxed, so the traffic can be diverted, so that our customers could still continue to meet their customers' expectations. We also allowed contracts shifting to occur early in anticipation of the strike, because we knew, at that time, we thought the strike was going to happen in May, and it was our responsibility to make sure we protected our capacity so that we could deliver for our customers and bounce back from that strike in very good fashion. That's exactly the rhythm and the discipline that we've applied as we go forward. Whether the strike happens in August, September, October, God help us, it doesn't. We need to get this uncertainty over, but this railroad's going to deal with what we can deal with. Control what you can control, and you're going to have a very differentiated outcome if you do that.
Nadeem Velani (EVP and CFO)
Tom, let me just add, we laid out a year ago guidance for 2024 to 2028 of high single-digit revenue growth, and we're right on track for that in year one, and we have plenty of capacity to support that revenue growth, and we're going to bring it on at a low incremental cost.
Tom Wadewitz (Senior Equity Research Analyst)
Great. Thank you for the time.
Keith Creel (President and CEO)
Thank you, Tom.
Operator (participant)
We'll go next now to Scott Group with Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Afternoon, and I echo the condolences on Pat from earlier. Nadeem, at the beginning of the year, you talked about an inflation sort of catch up. Can you just give us an update on how that's playing out and same store price trends? And then maybe just, John, just some thoughts, like the RTM carload spread is just so wide right now. I think it was like 10 points in the second quarter, similar spread in the third quarter. Is this the right way to think about the business sort of going forward with the synergies, or is there something sort of unusual just given commodity dynamics? How should we think about this? What's the right spread, I guess, going forward?
Nadeem Velani (EVP and CFO)
It's Scott, you know, you're right on. I mean, we highlighted that there's gonna be an opportunity to have some pricing catch up, just the way the contracts, the nature of the contracts, and just the way that cost inflation has surged so much in the previous, call it 18 months, 22, 24 months. So we're starting to see, on the cost side, inflation moderate, you know, kind of in that mid-threes, 3.5% kind of level. We're seeing the strength of our service being rewarded in the marketplace, and we're seeing kind of the same sort of pricing in that north of 5%. So that spread of pricing versus inflation is widening. And I don't see that changing.
In fact, I see that accelerating to an extent, more so because I see inflation moderating further. I mean, we've seen that across the board of whether that's on the material side. You know, labor has been a bit higher, but again, that's gonna moderate over the next year. And so I think we're gonna see the benefits of strong pricing and lower inflation. I think that's gonna be helpful to our margin story.
Keith Creel (President and CEO)
And Scott, on the RTM and carloads question, I mean, RTMs to us, what we get paid for, they're the most important metric, even more so with this new expanded length-of-haul network. So what you're seeing in the spreads today is accentuated or exaggerated because we haven't yet allowed that loss of the short-haul, low, low-profit business that left us, I guess, it was fourth quarter of last year. Order of magnitude, that's 170,000 carloads. So if you get caught up in the carloads, you're gonna miss the power of what's really occurring. Every carload that we have with converting length of haul, whether it's 30% longer, 40%, 50%, your miles aren't gonna catch it. So again, RTM should be the Holy Grail when it comes to this railroad, not carloads.
Scott Group (Managing Director and Senior Analyst)
Makes sense. And just so I understand your point, Nadeem, even with the new labor deal coming, you still feel good about ex-labor inflation, overall inflation slowing?
Nadeem Velani (EVP and CFO)
I do. I do. I think we've, you know, we've been accruing at what we anticipate, a fair ruling and a fair kind of win-win situation between us and labor, and so I'm not, I'm not concerned about that. I mean, on near term, you know, we're gonna have a bit of a headwind. We had a significant casualty cost that we faced in July that we're gonna feel in the third quarter. That being said, you know, there's still two months left in the quarter, and we gotta keep them on the rail, and we can help mitigate some of those costs. And I think we've seen some additional stock-based comp costs that we're gonna feel in Q3 year-over-year.
Outside of that, the way the network's running, and the operating leverage that I see in front of us, I think it more than offsets some of those costs, and I think we're gonna have a very strong back half of the year. So, you know, perhaps not sequential improvements in the OR in Q3 because of some of those headwinds I just mentioned, but I think in Q4, we're set up to have a record operating ratio for CPKC, and I think it's gonna be a very strong finish to the year, and it's gonna set us up for a 2025 that I think could be a very powerful earnings model.
Keith Creel (President and CEO)
Scott, just maybe just want to comment on the carloads and RTMs. Like, just to give you an example, like right now, in Q2, our average length of haul is up about 6%, but if you look at our domestic intermodal, it was up over double digits on average length of haul. And again, that's just indicative of what exactly Keith described on that shift in business. And frankly, as I look out to the second half of the year, as I see some strength in, I think our international franchise, there's a you know, a really good chance we can play catch-up, and kind of you'll start to see that deviation come closer together as we move through Q4.
Scott Group (Managing Director and Senior Analyst)
Very helpful, guys. Thank you.
Keith Creel (President and CEO)
Yeah.
Nadeem Velani (EVP and CFO)
Thanks, Scott.
Operator (participant)
We'll go next now to Brandon Oglenski at Barclays.
Brandon Oglenski (Senior Equity Analyst)
Thanks for taking the question, and again, condolences to Pat and family and friends. Keith, or maybe John, I guess, you know, when you speak about the Laredo Bridge expansion, maybe we're overemphasizing how much capacity that adds to the system. But how do you approach that, you know, with a balanced, you know, outlook for growth with customers, but also balancing the need to keep consistent service? And where do you think we're gonna see the results from that expansion, most immediately in 2025?
Keith Creel (President and CEO)
You're gonna see... The results to me would be about train speed and train velocity. You know, it's gonna be singles and doubles. There's not gonna be any big home runs. If you think about it today, you're running 4-hour windows, so it's suboptimal when it comes to trains. You've got a number of trains are gonna be in queue, could be in queue for 1 hour, could be in queue for 4 hours before it gets to change. All that goes away. The queue disappears. We get to make meets on the bridge, and we'll work well with UP. UP's gonna work well with us. It's gonna be a smooth transition. We're working out the details now for UP to have a crossover coming off that second bridge. So again, we're both co-located on the bridge. We both will do better.
The velocity is gonna improve, and our assets are gonna turn faster. So again, it'll be baked into the metrics. There won't be any home runs, but it makes a meaningful difference.
John Brooks (EVP and CMO)
... in today's operation, and most especially in tomorrow's growth. And Brandon, it's a differentiator in the marketplace. It is what my team is using to sell to the customers expanding down in Mexico and really feeding that cross-border service. It's about security, it's about service, it's about capacity. And the second bridge, honestly just adds to that capability that differentiates us against other routes in and out of Mexico. And that's a strong selling point to our customers.
Brandon Oglenski (Senior Equity Analyst)
Thank you both.
Operator (participant)
We'll go next now to John Chappell at Evercore ISI.
John Chappell (Senior Managing Director)
Thank you. Kind of staying with that theme, John, we're getting a lot of, I think, concern or maybe even excitement, depending on who you are, on potential tariffs and what that means, especially into Mexico. What are your customers telling you about potentially front-end loading or being more proactive as it relates to imports, either the West Coast to Canada or to Mexico? And then also, where does the service stand right now? I know there were some maybe hiccups at the big initial stages of the integration. I know Mark and his team made a lot of headway, a whole lot of progress there. Where is the service at on Mexico if there is a surge in the coming months?
John Brooks (EVP and CMO)
Service, service has never been better. Over to you, John. Yeah, honestly, John, we just ran a number of test loads, imports through Lázaro up into the Houston market, and I think they're on our rails for three and a half days. You know, that excludes time at the port, and really good customer experience. I would say it's been a to your point, it's been a slog. It's been educating around, you know, what import-export freight can look like through Mexico. So it's been a pretty big learning curve with the customers, but we're starting to produce some results. I'll just give you an example, and you've probably seen some of this, but we've actually had five new service calls recently announced at Lázaro.
A couple of new Maersk services, ONE, MSC, CMA. And I think what we're seeing is we're building confidence. The service level is, as Keith said, strong, and we're demonstrating that. And frankly, there's good demand intra-Mexico. But that intra-Mexico demand brings with it the opportunity for space on those boats to then flourish and provide capacity for cross-border. And you're right, you know, we certainly have some pending labor issues that could take place on the East Coast. And combined with these new services that we think it sets us up well for, you know, continuing to grow that Lázaro opportunity the back half of this year and into 2025.
John Chappell (Senior Managing Director)
Thanks, John.
Operator (participant)
We'll go next now to Ken Hoexter at Bank of America.
Ken Hoexter (Managing Director)
Hey, great. Good afternoon, and again, my condolences to the CPKC and Pat's family. I've known Pat for over 20 years, and always brought definitely smiles to the room. Just to clarify, Nadeem, on your OR improvement, or I guess you're not looking for OR improvement in the third quarter, and I think you said significant improvement. Is that like maybe 300+ basis points to get to sub 60 in the fourth quarter to get to your double-digit earnings? Does that sound right? And then is there clarification on the level of stock-based comp return that comes back? And then lastly, just a quick one for John. It looks like the grain crop... I think you've got an average crop built in. It looks like we've got a decent one shaping up.
Any thoughts on the size scale of the market at this point?
John Brooks (EVP and CMO)
Yes, so Ken, just sequentially, I don't see necessarily improvements in the OR, just given, like I said, some derailment costs in July and some additional stock-based comp in this quarter relative to a year ago and higher versus Q2. As far as Q4, you know, we had a very strong Q4 operating ratio in 2023, and I'd see year-over-year improvements in the OR, Q4 2024 versus 2023, which puts you at a very good operating ratio. Yeah, Ken, you know, being a grain guy, it's never made until it's in the bin. But we are pretty optimistic in Canada.
I think what we're particularly optimistic about is, if you think about last year's crop, and even going back to the 2021, 2022 drought crop, you know, our growing territory felt more of the effects of that. And as we sit here today, we certainly see significant improvement in the CPKC growing territory in the southern part of the provinces. You know, in terms of projections, you know, we've kind of settled in at, in our mind, in our modeling, at about 73 million metric ton or so. But, you know, customers are talking about possibly 75-78 million metric ton type crop. So we'll see. We got a little bit of time left to go.
Certainly optimistic that it could be a strong grain fall.
Ken Hoexter (Managing Director)
Great. Thanks for the thoughts and time. Appreciate it.
John Brooks (EVP and CMO)
Yep. Thanks, Ken.
Operator (participant)
We'll go next now to Brian Ossenbeck at JP Morgan.
Brian Ossenbeck (Managing Director)
Hey, afternoon. Thanks for taking the question. Maybe, Nadeem, just to follow up on the OR commentary. I mean, that seems pretty reasonable that it would deteriorate if you're expecting a labor disruption, you know, here in the quarter. So just wanted to clarify that, or if maybe the derailment is a bit bigger than we thought. And then just for John, if you can give us some context around the end markets that are potentially affected by the peso. You know, we've seen a pretty big swing post-elections, probably going to stay a little bit more volatile in the coming quarter. So does it have an impact on those calls at Lázaro, be able to offset that with other maybe cost improvements or maybe price it on a dollar basis?
Like, how do you work through that volatility, and what are the customers looking for?
John Brooks (EVP and CMO)
Well, Brian, you know, honestly, I don't know if we've felt a whole lot of effect at this point, or at least I can differentiate what would be, you know, just sort of broader macro softness in some of the areas in and out of Mexico, that cargo business, particularly like some of our steel business down in that area. You know, I honestly, because we don't have a what I would consider regular cross-border import-export business at this point in Lázaro, I haven't really felt much on that. Frankly, I would say just the opposite to customers, the steamship lines we're working with, because of the strength within Mexico that we're seeing right now, have actually been pretty excited about what the cross-border opportunity could present.
You know, I don't know if that's just forward-thinking, Brian, in terms of, you know, expectations on the peso to moderate some or not. But nothing I can really call out to you right now that has materially impacted our cross-border flows.
Nadeem Velani (EVP and CFO)
And Brian, just to reiterate on the OR, yeah, we had, you know, near-term additional costs associated with some casualty. There's going to be a step-up in costs in the quarter. And then, yeah, I mean, reasonably, we think we're going to have a labor disruption, and that's going to have an impact on the OR. So I think from our perspective, I think it's responsible to highlight the fact that there's going to be costs associated with what we think is going to occur near term. Keith mentioned that's maybe end of August, that that's a likely event, and so factoring that into what we think is going to be our margins in Q3 is responsible. You're going to get me in trouble with Tony Hatch for talking about the OR so much.
Brian Ossenbeck (Managing Director)
All right, guys. Thanks very much.
John Brooks (EVP and CMO)
Thank you.
Operator (participant)
We'll go next now to Kevin Chiang at CIBC.
Kevin Chiang (Director of Institutional Equity Research)
Hey, yeah. Thanks for taking my question. Good afternoon, everyone. I'm just wondering, with the FMC halting this Gemini Alliance, does that have any near or medium-term implications in terms of some of the growth you envisioned, either later this year or into 2025?
John Brooks (EVP and CMO)
Yeah, you know, it's a really good question, Kevin. You know, the... since frankly, since COVID, the international business unit is the volatility in some of those freights and port flows, as Keith spoke to earlier, that we experienced in March, April, has presented more challenges. And I can tell you, we are strategically, as much as we say, very much into picking our partners and how we align, rethinking in a lot of areas, how we think about that international space. You know, certainly, Hapag-Lloyd is one of our largest customers and most trusted partners. We also have a significant business with Maersk. So I would tell you, generally speaking, I'm excited about it.
I think it presents opportunities for us, coast to coast, both Vancouver and in Port of Saint John. And certainly then with APM Terminals operating down at Lázaro Cárdenas, and frankly, Maersk announcing two new services, or actually a new service and revised service, where they're calling on Lázaro Cárdenas ahead of Manzanillo, it I think presents a really good opportunity for us. Now, we'll see. It's not all done yet. I know they're working through a lot to get that completed, but if in fact that does what we think it could, it could present a certain really a good opportunity in the international space in 2025.
Kevin Chiang (Director of Institutional Equity Research)
That, that's great. Thank you for taking my question.
John Brooks (EVP and CMO)
Mm-hmm.
Operator (participant)
We'll go next now to Stephanie Moore with Jefferies.
Stephanie Moore (SVP of Equity Research)
Hi, guys, and thanks for the question. I apologize if this was asked earlier, but it's just kind of looking at the most recent weekly kind of RTM data. It does look like you're standing apart from maybe some of your peers as of late. So just curious if you're seeing anything kind of specific, maybe having to do with some near-term dynamics, fire, strikes, the like, just kind of curious because it does seem to stand out a little bit, or it just has to do with maybe a big jump in Mexico, but maybe if anything, you can speak to just some of the early early 3Q performance on the RTM front. Thank you.
Nadeem Velani (EVP and CFO)
Yeah, I mean, we are lapping the port strike from a year ago. That's been beneficial, but certainly, I mean, we're seeing strength across the board. What have been some macro challenges, if you think about Mexican modal, for example, that's turned into a positive. We're starting to see confidence in the new grain crop, so grain is strong year-over-year. So I think across the board.
John Brooks (EVP and CMO)
... you know, I think we're up almost 14%, our TMs, quarter-to-date. Now, that's gonna slow a little bit as we lap this strike benefit year-over-year or strike comp. But I think we're still set up for a very strong Q3 and back half of the year. So I agree with you. We are kind of setting ourselves apart from some of our peers. If you think about this transaction and what it provided, we kind of did things a little bit backwards. We saw the benefits of synergies on the front end in an environment where the macro was weak. Now we're gonna continue to see the synergies ramp up. John talked about the exit rate closer to $800 million on the top line.
But now we're also starting to see the base business that was weak in the, you know, last year and a half, start to rebound. So, you know, Canadian grain is a big part of our franchise. We're starting to see that recover. On the intermodal side, we're starting to see the benefits of, of our domestic franchise and some of our, our market share wins, and we're starting to see the macro improve. So that's gonna start being a tailwind. So some of the base business, and I can go on with coal and potash, is starting to recover. And so as that base comes on with synergies, we're seeing kind of that double effect of, of outsized growth that we talked about at our Investor Day last year.
I think that is gonna create a lot of operating leverage and allow us to get that growth to the bottom line. That's why we're so excited about, you know, 2025 and beyond.
Stephanie Moore (SVP of Equity Research)
Got it. So you wouldn't necessarily call out any kind of short-term dynamics that you're seeing in the last couple of weeks because of some kind of outside event, so to speak? This is kind of... You're running the playbook as you outlined.
John Brooks (EVP and CMO)
Yeah. A little bit of the comps year over year, easy comps from the strike that occurred a year ago at the West Coast ports in Canada. That's the benefit. But outside of that, no.
Stephanie Moore (SVP of Equity Research)
Okay. Really appreciate the time. Thanks, guys.
John Brooks (EVP and CMO)
Thanks, Stephanie.
Operator (participant)
We'll next now to Cherilyn Radbourne of TD Cowen.
Cherilyn Radbourne (Managing Director and Equity Analyst)
Thanks very much. Good afternoon, and thanks for squeezing me in. John, was just hoping that we could dig in a little bit more on the exit run rate on the revenue synergies, which sound like it could be up to $100 million higher than originally expected. Could you talk about where you're seeing that outperformance from an end market perspective, and whether that is evenly balanced, as synergies overall?
John Brooks (EVP and CMO)
Yeah, Cherilyn. So a couple things. You know, when we originally built this 2-3 years ago, like, the world has changed and evolved now as we sit here today. And I've talked a lot about that, you know, autos was an area initially we thought would be a longer-term story, but actually is with our Wylie Compound and some of the opportunities out of Mexico, has actually pulled ahead to be an early story. If you think about the intermodal business, and I'm going to say largely domestic intermodal and autos, that's making up roughly, I'm going to say, about half, slightly below half of the synergies. And then the other half is split between our bulk and our merchandise ECP franchises.
Now, you know, an area I'll call out, that we didn't expect to be quite as strong at this point, with some of our grain into Mexico. But I'll give you an example. This month, in July here, we've run, I think, 15 trains between corn, wheat, seed, soybeans, off of our traditional legacy CP franchise, whether it be southern Canada, North Dakota, Minnesota, down into Mexico. I think the prior month was nine, the prior month to that was six, if my memory calls. So we're seeing a nice ramp-up in that bulk franchise, that maybe is coming on a little stronger than I initially had anticipated. I hope that helps.
Cherilyn Radbourne (Managing Director and Equity Analyst)
That's perfect. Thank you.
Operator (participant)
Thank you. We go next now to Konark Gupta at Scotia Capital.
Konark Gupta (Director of Equity Research)
Thanks, Andy. Good afternoon. Thanks for squeezing me in. John, I think you alluded to earlier on the call about some international intermodal shifts. There was some market share shift as well as some new wins. Can you please elaborate? And then, Nadeem, I think you mentioned about some cost impact in Q3. Any early sense on the magnitude of those two items, casualty and strong base farm? Thanks.
John Brooks (EVP and CMO)
Yeah. Kunal, just on the share piece, just call it like it is. We shifted Costco partially out of our franchise at Vancouver, and we've brought on, you know, a corresponding piece of O&E business. And again, this goes back to what I was talking around, really right-sizing our partners at the Port of Vancouver, and also with an eye to what these partners can do with us across our entire franchise, so Saint John, Lázaro. And as we kind of rework this book, you know, there might be more to come, in how we do that. But rest assured, we're high-grading the overall franchise value of the book.
... with those shifts and doing it with an eye towards using our entire network, now that we have the leverage of, of CPKC. And Conor, just on the stock base comp, I mean, as you know, we, we mark the market each month, so that's that amount is still to be determined. We'll see what, what occurs on, you know, September thirtieth when the, when the quarter ends. And on the casualty side, you know, we had one incident alone that was, in, in July, earlier this month, that was, in the neighborhood of $45-$50 million, worth of, worth of cost. So that's why I highlight just how, how, this is gonna be a headwind. And, and so, you know, like I said, there's an opportunity to maybe avoid costs in, in the remaining part of the quarter.
That's our goal and intent to keep them on the rails. But just given this cost occurred, I wanted to make sure I highlighted it.
Konark Gupta (Director of Equity Research)
Thank you.
John Brooks (EVP and CMO)
You're welcome.
Operator (participant)
We'll go next now to Ravi Shanker at Morgan Stanley.
Ravi Shanker (Equity Research Analyst)
Thanks. Good afternoon, everyone, and our thoughts are also with the CPKC company as well. Just kind of on that point, Nadeem, thank you for clarifying the size of those two items. If I can ask you as well, you said there are some strike-related cost items in the guidances or in the OR walk as well. Is that purely kind of a cost thing, or are you also trying to quantify any diversion of volumes away that you're seeing right now and to come? And also, on that diversion, is that something that snaps back, you know, right after you have a resolution, or does that take longer, like it was last year with the port strikes, or how do you see that playing out?
Nadeem Velani (EVP and CFO)
No, so I-- we've already faced some revenue headwinds in May before the labor disruption was delayed, if you will. You know, I'm not factoring necessarily into our-- into the commentary about an OR sequential headwind related to that. So anything tied to revenues, I think, you know, it's gonna be a delayed revenue, if anything. So I think it's a cost element. I think we're gonna start, you know, we will see the network be brought to a halt, and then to ramp back up, it takes some cost. It takes time. You know, you have these inefficiencies over a period of whatever, you know, the 72-hour notice, and then whatever period that the company is out.
So that's how I'd, how I would highlight the cost headwind associated with the strike.
John Brooks (EVP and CMO)
Well, and that, you can put a number to it, and to maybe Dean's point, you know, domestic intermodal, right, can be tracked, and certainly we'll face some of that. But the rest is kind of, as he said, delayed and, you know, it'll push volume certainly into Q4 and likely into Q1 of next year, if depending on how long the stoppage would be.
Nadeem Velani (EVP and CFO)
The uniqueness of this time is that you've got both railroads, right? That creates a very different scenario than we've faced over the last 20 years. So it puts a different pressure on the supply chain, and it has a different dynamic as far as the recovery for the supply chain as for Canada as a whole, post-labor disruption.
Ravi Shanker (Equity Research Analyst)
Understood. Thank you.
Nadeem Velani (EVP and CFO)
Thanks, Ravi.
Operator (participant)
We'll go next, now to Ben Nolan with Stifel.
Ben Nolan (SVP of Investor Relations)
Oh, thanks. I appreciate you guys getting me in. I wanted to go back a little bit to the pricing. I know that it had, and you alluded to this a little bit ago, but there was still some legacy contracts pre-merger that were set to be repriced, and I think you're doing some of that in the third quarter. Curious if all of that has been worked through, if there might be a little bit more juice to squeeze on some of those contracts.
Nadeem Velani (EVP and CFO)
You know what? We are getting into the late innings of the base book. There's probably one big one out there that remains, but for the most part, we have worked through. Just timing-wise, they didn't have a lot of multiyear contracts. Most of them were annual. We've been at this now going on close to a year and a half or whatever, since April of 2023. So we've rolled a lot of that over now, is the direct answer.
Ben Nolan (SVP of Investor Relations)
All right. Thank you.
Nadeem Velani (EVP and CFO)
Yep. Thanks, Ben.
Operator (participant)
We'll go next now to Benoit Poirier of Desjardins Capital Markets.
Benoit Poirier (VP and Industrial Products Analyst)
Yeah, thanks very much. Good afternoon, everyone. Could we maybe cut back on the overall labor issues and whether you believe it puts Canada's reputation at risk? And do you feel that there's a lot of business on the sideline that could cut back in light of labor resolution? And also, if we look in the U.S., there's the port workers, the contract with the ILA port workers, that is set to expire in September 2024, and I was just curious to see whether you see any potential benefits in light of a positive cargo diversion. Thank you.
Nadeem Velani (EVP and CFO)
And then, well, I'll take the reputational damage. That's undeniably present. You know, you think about what Canada's going through, the port strike last year, how long that lasted, and how much pain and suffering that caused for customers, how much credibility impact. Some of that traffic's not came back to the West Coast. So undeniably, fast-forward to this, you have both railroads shut down. At some point, customers, as much as they need our products in Canada, they're gonna get labor unrest fatigue.
Keith Creel (President and CEO)
... So we gotta get beyond this. You know, I don't have a magic bullet for this. I don't know what the secret answer is. All we can do is continue to be at the table. We have figured out how to negotiate successfully with every other collective agreement we have in Canada. This is the only group, TCRC, that we just can't get there. So we're gonna not give up, remain cautiously optimistic, but we're not gonna do a bad deal either. I'm not going to punish this company or let this company suffer because we don't have the discipline to say no and do what's in the best long-term interest for all employees, that's fair across all employees, including the TCRC.
John Brooks (EVP and CMO)
Well, I'd say the answer is yes to your question there regarding the East Coast. You know, potential strike. There's ongoing dialogue with the steamship lines on alternatives, and frankly, directly with BCOs that are looking for... I'd say we're kind of early innings, but some of these tests that I talked about over Lázaro were specifically designed with the intent of traffic that is going through the canal and using the East Coast today. That, you know, could this be an opportunity to do something a little more permanently at Lázaro? And I also do believe it presents a potential opportunity up at the Port of Saint John. So we'll have to see how that plays out.
Benoit Poirier (VP and Industrial Products Analyst)
Thank you very much for your time.
Operator (participant)
Thank you, and ladies and gentlemen, we have reached our allotted time for Q&A. I would now like to turn the conference back to Mr. Keith Creel.
Keith Creel (President and CEO)
Hey, listen, let me close by thanking you for your time. I hope the comments provided some color on this unique network and this unique value creation that we're unlocking. You know, I think back, especially now in light of Pat's passing, I think about what we committed to and what we agreed to do. Pat and I combined these networks to enable growth and to create competition and unlock unique value for all stakeholders across the entire supply chain. That means good-paying jobs for our employees. That means great service for our customers. That means rail network capacity for our nation to grow, for all three nations to enjoy prosperity and to increase trade together, and we're doing exactly that. So we look forward to sharing another chapter in that growth story when we report our Q3 results, and until then, stay safe.
Operator (participant)
Thank you, Mr. Creel. Ladies and gentlemen, that does conclude today's CPKC second quarter earnings call. Again, thanks so much for joining us, everyone, and we wish you all a great evening. Goodbye.