CALGARY,
AB, June 28, 2023 /PRNewswire/ - As part of
its 2023 Investor Day, Canadian Pacific Kansas City (TSX: CP)
(NYSE: CP) (CPKC) today issued new multi-year guidance and unveiled
the next chapter in its long-term growth strategy as the only
single-line railroad that connects a continent.
Strategy to execute on the advantages of the new combined
network
At Investor Day, hosted at Union Station in Kansas City, members of CPKC's
industry-leading senior executive team will share how CPKC is
primed to execute on the advantages of the new combined North
American network to drive multi-year, long-term profitable growth,
bring increased environmental benefits and deliver superior service
and financial results.
"This historic combination will transform the industry and has
CPKC well-positioned to drive growth for the next half decade and
beyond," said Keith Creel, CPKC
President and Chief Executive Officer. "Our unrivaled single-line
service connecting Canada,
the United States and Mexico provides CPKC a unique advantage
allowing us to deliver a differentiated growth profile. Together we
expect to unlock more value for customers, employees, and
shareholders while benefitting the environment."
Financial targets over the period of 2024-2028:
- Revenue compound annual growth rate (CAGR) of high-single
digits
- Core adjusted diluted earnings per share (EPS) 1
CAGR of double-digits
- Continued margin improvement through cost control and operating
leverage
- Capital expenditures of approximately $2.6 billion to $2.8
billion per year
- Free cash1 conversion of Core adjusted
income1 of approximately 90%
- Return to double-digit Adjusted Return on Invested Capital
(Adj. ROIC)1
"Our success will continue to be driven by our deep bench of
industry-leading railroaders, a disciplined approach to capital
investment, and a focus on safety and sustainable growth, all
further empowered by this new network," said Creel. "We remain
committed to the foundations of precision scheduled railroading
across all aspects of CPKC with the rigor the operating model
demands for long-term success."
Key assumptions for 2024-2028 targets
- Exchange rate of 1.35
CAD/USD
- On-Highway Diesel price of $4.15
USD/US gallon
- Other components of net periodic benefit recovery of
$330 million to $370 million
- Annualized adjusted effective tax rate of approximately
25.5%1, excluding discrete items such as any effects of
changes in tax rates
CPKC issues 2023 guidance
As part of its Investor Day, CPKC also issued 2023 guidance.
CPKC expects core adjusted diluted EPS1 to grow
mid-single digits versus 2022 core adjusted diluted EPS1
of $3.77. CPKC's reported diluted EPS
was also $3.77 in 2022.
Webcast
CPKC will webcast presentations from today's Investor Day
session starting with opening remarks at 7:45 a.m. CDT. We encourage you to access the
webcast and presentation material at www.cpkcinvestorday.com.
Presentation material will be available on the website prior to the
event.
1 These measures
have no standardized meanings prescribed by accounting principles
generally accepted in the United States of America ("GAAP") and,
therefore, may not be comparable to similar measures presented by
other companies. For information regarding non-GAAP measures, see
Non-GAAP Measures below.
|
Forward looking information
This news release contains certain forward-looking information
and forward-looking statements (collectively, "forward-looking
information") within the meaning of applicable securities laws in
both the U.S. and Canada.
Forward-looking information includes, but is not limited to,
statements concerning expectations, beliefs, plans, goals,
objectives, assumptions and statements about possible future
events, conditions, and results of operations or performance.
Forward-looking information may contain statements with words or
headings such as "financial expectations", "key assumptions",
"anticipate", "believe", "expect", "plan", "will", "outlook",
"guidance", "should" or similar words suggesting future outcomes.
This news release contains forward-looking information relating,
but not limited, to statements concerning financial targets for
2024-2028 and financial guidance for 2023, the success of our
business, the realization of anticipated benefits and synergies of
the CP-KCS combination, and the opportunities arising therefrom,
our operations, priorities and plans, business prospects and demand
for our services and growth opportunities.
The forward-looking information that may be in this news release
is based on current expectations, estimates, projections and
assumptions, having regard to CPKC's experience and its perception
of historical trends, and includes, but is not limited to,
expectations, estimates, projections and assumptions relating to:
changes in business strategies, North American and global economic
growth and conditions; commodity demand growth; sustainable
industrial and agricultural production; commodity prices and
interest rates; performance of our assets and equipment;
sufficiency of our budgeted capital expenditures in carrying out
our business plan; geopolitical conditions, applicable laws,
regulations and government policies; the availability and cost of
labour, services and infrastructure; the satisfaction by third
parties of their obligations to CPKC; and carbon markets, evolving
sustainability strategies, and scientific or technological
developments. Although CPKC believes the expectations, estimates,
projections and assumptions reflected in the forward-looking
information presented herein are reasonable as of the date hereof,
there can be no assurance that they will prove to be correct.
Current conditions, economic and otherwise, render assumptions,
although reasonable when made, subject to greater uncertainty.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from those
expressed or implied by forward-looking information. By its nature,
CPKC's forward-looking information involves inherent risks and
uncertainties that could cause actual results to differ materially
from the forward looking information, including, but not limited
to, the following factors: changes in business strategies and
strategic opportunities; general Canadian, U.S., Mexican and global
social, economic, political, credit and business conditions; risks
associated with agricultural production such as weather conditions
and insect populations; the availability and price of energy
commodities; the effects of competition and pricing pressures,
including competition from other rail carriers, trucking companies
and maritime shippers in Canada,
the U.S. and Mexico; North
American and global economic growth and conditions; industry
capacity; shifts in market demand; changes in commodity prices and
commodity demand; uncertainty surrounding timing and volumes of
commodities being shipped via CPKC; inflation; geopolitical
instability; changes in laws, regulations and government policies,
including regulation of rates; changes in taxes and tax rates;
potential increases in maintenance and operating costs; changes in
fuel prices; disruption in fuel supplies; uncertainties of
investigations, proceedings or other types of claims and
litigation; compliance with environmental regulations; labour
disputes; changes in labour costs and labour difficulties; risks
and liabilities arising from derailments; transportation of
dangerous goods; timing of completion of capital and maintenance
projects; sufficiency of budgeted capital expenditures in carrying
out business plans; services and infrastructure; the satisfaction
by third parties of their obligations; currency and interest rate
fluctuations; exchange rates; effects of changes in market
conditions and discount rates on the financial position of pension
plans and investments; trade restrictions or other changes to
international trade arrangements; the effects of current and future
multinational trade agreements on the level of trade among
Canada, the U.S. and Mexico; climate change and the market and
regulatory responses to climate change; anticipated in-service
dates; success of hedging activities; operational performance and
reliability; customer, regulatory and other stakeholder approvals
and support; regulatory and legislative decisions and actions; the
adverse impact of any termination or revocation by the Mexican
government of Kansas City Southern de México, S.A. de C.V.'s
Concession; public opinion; various events that could disrupt
operations, including severe weather, such as droughts, floods,
avalanches and earthquakes, and cybersecurity attacks, as well as
security threats and governmental response to them, and
technological changes; acts of terrorism, war or other acts of
violence or crime or risk of such activities; insurance coverage
limitations; material adverse changes in economic and industry
conditions, including the availability of short and long-term
financing; the pandemic created by the outbreak of COVID-19 and its
variants and resulting effects on economic conditions, the demand
environment for logistics requirements and energy prices,
restrictions imposed by public health authorities or governments,
fiscal and monetary policy responses by governments and financial
institutions, and disruptions to global supply chains; the
realization of anticipated benefits and synergies of the CP-KCS
transaction and the timing thereof; the satisfaction of the
conditions imposed by the U.S. Surface Transportation Board in its
March 15, 2023 final decision; the
success of integration plans for KCS; other disruptions arising
from the CP-KCS integration; estimated future dividends; financial
strength and flexibility; debt and equity market conditions,
including the ability to access capital markets on favourable terms
or at all; cost of debt and equity capital; improvement in data
collection and measuring systems; industry-driven changes to
methodologies; and the ability of the management of CPKC to execute
key priorities, including those in connection with the CP-KCS
transaction. The foregoing list of factors is not exhaustive. These
and other factors are detailed from time to time in reports filed
by CPKC with securities regulators in Canada and the
United States. Reference should be made to "Item 1A - Risk
Factors" and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking
Statements" in CPKC's annual and interim reports on Form 10-K and
10-Q.
Any forward-looking information contained in this news release
is made as of the date hereof. Except as required by law, CPKC
undertakes no obligation to update publicly or otherwise revise any
forward-looking information, or the foregoing assumptions and risks
affecting such forward-looking information, whether as a result of
new information, future events or otherwise.
About CPKC
With its global headquarters in Calgary, Alta., Canada, CPKC is the first and only single-line
transnational railway linking Canada, the United
States and México, with unrivaled access to major ports from
Vancouver to Atlantic Canada to the Gulf of México to
Lázaro Cárdenas, México. Stretching approximately 20,000 route
miles and employing 20,000 railroaders, CPKC provides North
American customers unparalleled rail service and network reach to
key markets across the continent. CPKC is growing with its
customers, offering a suite of freight transportation services,
logistics solutions and supply chain expertise. Visit cpkcr.com to
learn more about the rail advantages of CPKC. CP-IR
Note 1: Non-GAAP Measures
The Company references certain measures in this press release
that have no standardized meanings prescribed by accounting
principles generally accepted in the
United States of America ("GAAP") and, therefore, may not be
comparable to similar measures presented by other companies. These
measures are: Core adjusted diluted EPS, Free cash conversion, Core
adjusted income, Adjusted ROIC, and Adjusted effective tax
rate. Management believes that these Non-GAAP measures
provide a basis for evaluating underlying earnings and liquidity
trends in the Company's business that can be compared with the
results of operations in prior periods. In addition, these Non-GAAP
measures facilitate a multi-period assessment of long-term
profitability, allowing management and other external users of the
Company's consolidated financial information to compare
profitability on a long-term basis, including assessing future
profitability.
The Company uses core adjusted earnings results to evaluate the
Company's operating performance and for planning and forecasting
future business operations and future profitability. Management
believes Core adjusted income and Core adjusted diluted earnings
per share provide meaningful supplemental information regarding
operating results because they exclude certain significant items
that are not considered indicative of future financial trends
either by nature or amount or provide improved comparability to
past performance. Core Adjusted inome and Core diluted EPS also
isolate for the impact of KCS purchase accounting to provide
financial statement users with additional transparency. KCS
purchase accounting represents the amortization of basis
differences, being the difference in value between the
consideration paid to acquire KCS and the underlying carrying value
of the net assets of KCS immediately prior to its acquisition by
the Company, net of tax, as recognized within Equity earnings of
Kansas City Southern in the Company's Consolidated Statements of
Income. All assets subject to KCS purchase accounting contribute to
income generation and will continue to amortize over their
estimated useful lives. As a result, these items are excluded for
management assessment of operational performance, allocation of
resources and preparation of annual budgets. The significant items
may include, but are not limited to, restructuring and asset
impairment charges, individually significant gains and losses from
sales of assets, acquisition-related costs, the merger termination
payment received, KCS's gain on unwinding of interest rate hedges
(net of CPKC's associated purchase accounting basis differences and
tax), as recognized within Equity earnings of Kansas City Southern
in the Company's Consolidated Statements of Income, the foreign
exchange ("FX") impact of translating the Company's debt and lease
liabilities (including borrowings under the credit facility),
discrete tax items, changes in the outside basis tax difference
between the carrying amount of CPKC's equity investment in KCS and
its tax basis of this investment, changes in income tax rates,
changes to an uncertain tax item, and certain items outside the
control of management. Acquisition-related costs include legal,
consulting, financing fees, integration planning costs consisting
of third-party services and system migration, fair value gain or
loss on FX forward contracts and interest rate hedges, FX gain on
U.S. dollar-denominated cash on hand from the issuances of
long-term debt to fund the KCS acquisition, debt exchange
transaction costs, and transaction and integration costs incurred
by KCS, net of tax, which were recognized within Equity earnings of
Kansas City Southern in the Company's Consolidated Statements of
Income. These items may not be non-recurring. However, excluding
these significant items from GAAP results allows for a consistent
understanding of the Company's consolidated financial performance
when performing a multi-period assessment including assessing the
likelihood of future results. Accordingly, Core adjusted income and
Core diluted EPS may provide insight to investors and other
external users of the Company's consolidated financial
information.
Significant items that impacted reported earnings for the year
ended December 31, 2022 include:
- in the fourth quarter, a gain of $212
million due to KCS's gain on unwinding of interest rate
hedges (net of CP's associated purchase accounting basis
differences and tax) recognized in Equity earnings of KCS that
favourably impacted Diluted EPS by 23
cents;
- in the fourth quarter, a deferred tax recovery of $24 million as a result of a reversal of an
uncertain tax item related to a prior period that favourably
impacted Diluted EPS by 3 cents;
- in the third quarter, a deferred tax recovery of $12 million due to a decrease in the Iowa state tax rate that favourably impacted
Diluted EPS by 1 cent;
- during the course of the year, a net deferred tax recovery of
$19 million on changes in the outside
basis difference of the equity investment in KCS that favourably
impacted Diluted EPS by 2 cents;
and
- during the course of the year, acquisition-related costs of
$123 million in connection with the
KCS acquisition ($108 million after
current tax recovery of $15 million),
including costs of $74 million
recognized in Purchased services and other, and $49 million recognized in Equity earnings of KCS,
that unfavourably impacted Diluted EPS by 12
cents.
Reconciliation of Historical GAAP Performance Measures to
Non-GAAP Performance Measures
The following tables reconcile the most directly comparable
measures presented in accordance with GAAP to the following
Non-GAAP measures for the year ended December 31, 2022:
Adjusted income is calculated as Net income reported on a GAAP
basis adjusted for significant items. Core adjusted income is
calculated as Adjusted income less KCS purchase accounting.
|
For the year
ended
|
(in millions of
Canadian dollars)
|
December 31,
2022
|
Net income as
reported
|
$
3,517
|
Less significant items
(pre-tax):
|
|
KCS net gain on unwind
of interest rate hedges
|
212
|
Acquisition-related
costs
|
(123)
|
Add:
|
|
Tax effect of
adjustments(1)
|
(15)
|
Deferred tax recovery
on the outside basis difference of the investment in KCS
|
(19)
|
Income tax rate
changes
|
(12)
|
Reversal of provision
for uncertain tax item
|
(24)
|
Adjusted
income
|
$
3,358
|
Less: KCS purchase
accounting
|
(163)
|
Core adjusted
income
|
$
3,521
|
(1)
|
The tax effect of
adjustments was calculated as the pre-tax effect of the adjustments
multiplied by the applicable tax rate for the above items of 16.97%
for the year ended December 31, 2022. The applicable tax rates
reflect the taxable jurisdictions and nature, being on account of
capital or income, of the significant items.
|
Adjusted diluted earnings per share is calculated using Adjusted
income, as defined above, divided by the weighted-average diluted
number of Common Shares outstanding during the period as determined
in accordance with GAAP. Core adjusted diluted earnings per share
is calculated as Adjusted diluted earnings per share less KCS
purchase accounting.
|
For the year
ended
|
|
December 31,
2022
|
Diluted earnings per
share as reported
|
$
3.77
|
Less significant items
(pre-tax):
|
|
KCS net gain on unwind
of interest rate hedges
|
0.23
|
Acquisition-related
costs
|
(0.14)
|
Add:
|
|
Tax effect of
adjustments(1)
|
(0.02)
|
Deferred tax recovery
on the outside basis difference of the investment in KCS
|
(0.02)
|
Income tax rate
changes
|
(0.01)
|
Reversal of provision
for uncertain tax item
|
(0.03)
|
Adjusted diluted
earnings per share
|
$
3.60
|
Less: KCS purchase
accounting
|
(0.17)
|
Core adjusted
diluted earnings per share
|
$
3.77
|
(1)
|
The tax effect of
adjustments was calculated as the pre-tax effect of the adjustments
multiplied by the applicable tax rate for the above items of 16.97%
for the year ended December 31, 2022. The applicable tax rates
reflect the taxable jurisdictions and nature, being on account of
capital or income, of the significant items.
|
Forward-Looking Non-GAAP Measures
Although CPKC has provided forward-looking non-GAAP measures
(Core adjusted diluted EPS, Free cash conversion of Core adjusted
income, Adjusted ROIC, and adjusted effective tax rate), management
is unable to reconcile, without unreasonable efforts, the
forward-looking Core adjusted diluted EPS, Free cash conversion of
Core adjusted income, Adjusted ROIC, and adjusted effective tax
rate, to the most comparable GAAP measure, due to unknown variables
and uncertainty related to future results. These unknown variables
may include unpredictable transactions of significant value. In
recent years, the Company has recognized acquisition-related costs,
the merger termination payment received, KCS's gain on unwinding of
interest rate hedges (net of CP's associated purchase accounting
basis differences and tax), the FX impact of translating the
Company's debt and lease liabilities (including borrowings under
the credit facility), discrete tax items, changes in the outside
basis tax difference between the carrying amount of the Company's
equity investment in KCS and its tax basis of the investment,
changes in income tax rates, and changes to an uncertain tax item.
Acquisition-related costs include legal, consulting, financing
fees, integration planning costs consisting of third-party services
and system migration, fair value gain or loss on FX forward
contracts and interest rate hedges, FX gain on U.S.
dollar-denominated cash on hand from the issuances of long-term
debt to fund the KCS acquisition, and transaction and integration
costs incurred by KCS which were recognized within Equity earnings
of Kansas City Southern in the Company's Consolidated Statements of
Income. KCS has also recognized significant transaction costs and
FX gains and losses. These or other similar, large unforeseen
transactions affect diluted EPS but may be excluded from CPKC's
core adjusted diluted EPS. Additionally, the Canadian-to-U.S.
dollar and Mexican peso-to-U.S. dollar exchange rates are
unpredictable and can have a significant impact on CPKC's reported
results but may be excluded from CPKC's core adjusted diluted
EPS.
For additional information regarding non-GAAP measures, see the
CPKC 2022 annual report on Form 10-K.
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