Canadian Pacific Railway Limited (CP) Q4 2022 Earnings Call Transcript
Canadian Pacific Railway Limited (NYSE:CP) Q4 2022 Earnings Conference Call January 31, 2023 4:30 PM ET
Company Participants
Maeghan Albiston – Investor Relations
Keith Creel – President and Chief Executive Officer
John Brooks – Chief Marketing Officer
Nadeem Velani – Chief Financial Officer
Conference Call Participants
Jon Chappell – Evercore ISI
Tom Wadewitz – UBS
Chris Wetherbee – Citigroup
Walter Spracklin – RBC Capital Markets
Ken Hoexter – Bank of America
Scott Group – Wolfe Research
Jason Seidl – Cowen
Brandon Oglenski – Barclays
Konark Gupta – Scotiabank
Steve Hansen – Raymond James
Brian Ossenbeck – JPMorgan
Ariel Rosa – Credit Suisse
Amit Mehrotra – Deutsche Bank
Justin Long – Stephens
Operator
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.
Maeghan Albiston
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.
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 commend Chris and Maeghan and Ian for the great work they did when we were going in your absence. They certainly made you proud.
Now moving on to the results. In the fourth quarter, we produced revenues of $2.5 billion and operating ratio of 59.1% and core EPS of $1.14. For the year, total revenues were up 10%. We delivered an operating ratio of 61.4%, core EPS of $3.77, which was flat versus last year. But we knew from the beginning ‘22 would be a year of two halves, and particularly, we had high expectations for the fourth quarter, which we are ready and resource to meet. Unfortunately, there are some factors that impeded our fourth quarter to some degree.
But with that said, I am very pleased with how we began the year, strong revenue and operating performance in January which carries – carry great momentum into the first quarter of this year and as we play out in 2023. We are in a great place from a network and resource perspective in spite of a historically tight labor market in ‘22. It was a record year of hiring at CP. We added more than 1,600 conductors over the course of last year and we made some significant progress with our labor agreements with the recent tentative collective agreements, both with the Unifor as well as the BLET. Both of those agreements are out for ratification.
Specific to the BLET and this has to do with the consolidated territories, which are obviously contingent upon the STB approving our merger application. This agreement with the BLET which have the locomotive engineers and the earlier agreement that we signed with Smart, the conductors for the KCS in Kansas and Missouri, they are both progressively hourly agreements, which will improve our operational flexibility as well as predictability in our employees’ quality of life.
Again, it’s an agreement that gives us flexibility in turn enables our employees to realize higher pay, scheduled jobs and a better quality of life compared to a traditional labor agreement is in U.S. rail space. Parts of these agreements, of course, remain subject to the STB’s approval of the merger, but we certainly see additional opportunities down the road pending and assuming depending upon an approval to create a framework for the benefit of all employees when you combine CPKC and that work – and also obviously, the reliability benefits in service that this agreement will prove for a combined CPKC.
Let’s say a couple of words about the transaction. On the CPKC front, both of our teams, both CP and KCS are hard at work preparing to seamlessly integrate these two iconic companies. I can tell you there has been a ton of tremendous work that’s been accomplished by teams at both railways to ensure the smooth transition. I am extremely pleased last week also to note the release of the final environmental impact statement. Certainly, that’s no small feat and a huge quantum of work by the STB to get that done in the meticulous thoughtful way that they handled not only just the environmental impact statement, but has been handling this entire file. So I commend the team for the work they did. Throughout the process, as I’ve said, the STB isn’t very thorough. They have been meticulous and we continue to eagerly anticipate their decision on our merger applications, which we expect this quarter.
On the environmental front, couple of words. CP continues also to make strong progress in this space, specifically on sustainability. I am pleased to see that the company’s efforts continue to be recognized for the first time in our history, CP was named to the Dow Jones Sustainability World Index, which is a tremendous achievement for the entire CP family that we can be proud of. We were also named to the Dow Jones Sustainability North American Index for the third consecutive year and finally named to the CDP A list, which is an absolute reflection of our commitment to comprehensive comment disclosure at Canadian Pacific.
We continue to demonstrate our leadership and commitment to a more sustainable future, also through our hydrogen locomotive project, which is unique in the industry. In late October, that project hit a significant milestone when the locomotive performed its second mainline test and first revenue move and are seen to experience the second hydrogen locomotive, which is the GP38, 4-axle DC locomotive over the next month, which will be making its debut so to speak as we get it out rolling and operating, so we can work the bugs out of it.
So let me close by saying ‘23, we are poised and ready to roll. It’s going to be a very special year for two-storey companies. We can’t wait to get to work abiding these two great companies and creating value for our customers, our employees in the North American economy. We are focused on executing the plan and I am very pleased with the start that we have had to this year to what I expect will be a historic year.
So with that said, I am going to hand it over to John to make some color on the markets and then Nadeem will wrap up elaborating on the numbers and then we’ll open it up to Q&A.
John Brooks
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 for potash remains strong and unchanged. I expect to see similar growth in 2023 as we saw last year in potash. And to close out the bulk business, coal volumes were down 25% on the quarter and declined 18% on the year. An outage at Teck’s Elkview mine in September impacted volumes through much of the fourth quarter and lasted longer than we anticipated. We lost over 100 trains in the fourth quarter due to these challenges.
Looking ahead in coal, given the disruptions we faced in 2022, combined with a solid macro demand environment, we have a good setup from a compare standpoint as we move into 2023. So when I look at our bulk franchise, which makes up 40% of our book, it is an extremely well-positioned in 2023, whether it’s through strong demand fundamentals, favorable compares or both, we have a setup to deliver double-digit growth in this less macro sensitive portion of our book of business.
Moving on to merchandise, the energy, chemicals, plastics portfolio saw volumes grow 4%. We saw increased volumes in our DRUbit during the quarter as well as plastics from our new IPL petrochemical facility single-served by CP in the Alberta, Heartland. Despite macro uncertainty, I expect ECP volumes to remain resilient as we start off 2023. Forest products were down 4%, while revenues were up 17%. Despite the Q4 decline in volume, this caps a record year for CP and forest products. While housing starts are expected to decline in 2023, CP’s demand is softer compared to our record 2022. Our lumber, panel and pulp volumes have stabilized and we are working with our customers to optimize new market opportunities. Automotive revenues were up 27%, while volumes were up 11% on the quarter. On our Q3 call, I talked about over 7,000 vehicles sitting at CP origins waiting for final components.
I am pleased to see that we are seeing definite improvement in parts supply and more vehicles are moving towards shippable status. We have also began moving to new Ford business that started up January 1 and I am pleased with the startup of our new auto compounds at both Edmonton and Bensenville. Looking ahead, demand for finished vehicles remains fairly strong and we are working with our customers to replenish inventories at dealerships across our network. Those fundamentals, combined with the new business we brought on, have positioned our auto business well for 2023.
Now finally, on the intermodal side of the business, quarterly volumes were up 17%, where revenues were up 29%. Despite demand coming off record levels that we have seen in the past few years, our unique market wins have differentiated us in international intermodal, with volumes up more than 3% in the quarter. With favorable compares with the first half of 2023, driven by new business that started out the back half of 2022 and the continued port expansion at the Port of St. John, we are well positioned to continue to outpace the industry in this space. Port of St. John continue to see tremendous growth, eclipsing 150,000 TEUs in 2022, more than a 70% increase year-over-year.
Our partners at DP World are in the midst of deploying super new post-Panamax cranes, and this, coupled with the new birth and track at the port, will result in a doubling of the capacity by April 1. The Port of St. John remains on plan to grow its total capacity to 800,000 TEUs in 2024. On the domestic side although demand with our core retail customers, have come down from their recent highs, our temperature-controlled products continue to be strong. CP is a leader in the temp controlled space across Canada and we look forward to paving the way into new markets across North America, with CPKC should the SDP approve our merger.
We are continuously working hard with a variety of customers on test moves on an interline basis, which are going very well. We recently completed a southbound test shipment from the U.S. Midwest markets, Laredo, carrying temp controlled products in about 3 days, which is competitive with a single-driver truck. Further, we have also been testing the northbound lane focused on those service sensitive products to markets across the upper Midwest, U.S. and into Canada. These markets are 100% served by trucks today and present a tremendous conversion opportunity for the combined CPKC to provide truck competitive single-line service pending the STB merger of our – approval of our merger.
So, let me close by saying, as I look out at 2023, with the broader macro environment certainly remaining uncertain, CP’s strong bulk franchise, our self-help business wins and anticipated opportunities as part of CPKC have us in an advantageous position. My team is focused on staying close to our customers and selling the value of our service.
So with that, I will finish up and pass it over to Nadeem.
Nadeem Velani
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 intermodal and automotive. Depreciation expense was in $219 million, an increase of $9 million as a result of a higher asset base. Purchased services came in at $310 million, an increase of $54 million or 21% when adjusted for acquisition costs. The main driver of the increase was higher pickup in delivery costs and other third-party services.
Moving below the line. The equity pickup from KCS in the fourth quarter was $287 million when adjusted for KCS’ acquisition-related costs, purchase accounting and a gain KCS had from an interest rate hedge unwind. Other components of net periodic benefit recovery increased $6 million, reflecting higher discount rates compared to 2021. Net interest expense was up $32 million versus last year as a result of a higher debt balance related to the KCS acquisition in Q4 2021. Income tax expense decreased $49 million, excluding KCS related items and the reversal of a previous provision for an uncertain tax item, the effective tax rate was approximately 17.5% on the quarter. Looking ahead, I expect the CP stand-alone tax rate in 2023 to be approximately 24%. Rounding out the income statement, core adjusted EPS was $1.14 in the quarter. On the year, core EPS was $3.77, flat versus 2021.
We continue to generate strong cash flow with cash provided by operating activities of $4.1 billion in 2022. We continue to reinvest in the railroad and finished the year with a capital spend of just under $1.6 billion. I anticipate a similar level of investment for CP stand-alone in 2023. In the fourth quarter, we received dividends from TCS totaling $415 million, which were utilized to pay down short-term debt. Over the course of 2022, we received a total of $880 million or approximately CAD1 billion in dividends from cash flow in excess of the capital KCS has invested in their railroad. Inclusive of the dividends, we generated CAD2.7 billion in free cash flow. Over the course of 2022, we repaid more than $1.6 billion in debt. Pro forma leverage ended the year at 3.8x, and we remain committed to returning to our target leverage. Looking at the year ahead, despite uncertainties with the macro environment, inflation and interest rates, I couldn’t be more excited. We have a transformational merger with Kansas City Southern and a strong pipeline of opportunities for the team to deliver.
With that, let me turn it back to Keith wrap things up.
Keith Creel
Okay. Thank you for your comments to color both John and Nadeem. So operator, let me open up the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Jon Chappell from Evercore ISI.
Jon Chappell
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?
John Brooks
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.
Jon Chappell
Understood. Thank you, John.
Operator
And our next question comes from Tom Wadewitz from UBS.
Tom Wadewitz
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?
Keith Creel
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.
Tom Wadewitz
Okay, great. Thank you.
Operator
Our next question comes from Chris Wetherbee from Citigroup.
Chris Wetherbee
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.
Keith Creel
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.
Chris Wetherbee
Great, thanks.
Operator
The next question comes from Walter Spracklin, RBC Capital Markets.
Walter Spracklin
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?
John Brooks
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.
Walter Spracklin
That’s great story. Appreciate the time. Thank you.
Keith Creel
Thank you, Walter.
Operator
The next question comes from Ken Hoexter from Bank of America.
Ken Hoexter
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
John Brooks
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.
Ken Hoexter
It sounded something I guess we will hear about in the future. Thanks a lot for your time.
John Brooks
For sure.
Operator
Our next question comes from Scott Group from Wolfe Research.
Scott Group
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.
Nadeem Velani
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.
Scott Group
All good. So I will leave it there. Thank you, guys.
Nadeem Velani
Thanks, Scott.
Operator
Our next question comes from Jason Seidl from Cowen.
Jason Seidl
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?
Keith Creel
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.
Jason Seidl
Appreciate the color understood and look forward to the next big announcement.
Keith Creel
As do we. Thanks Jason.
Operator
Your next question comes from Brandon Oglenski from Barclays. Thank you.
Brandon Oglenski
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?
Keith Creel
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.
Brandon Oglenski
Thanks Keith.
Operator
Your next question comes from Konark Gupta from Scotiabank.
Konark Gupta
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?
Nadeem Velani
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.
Konark Gupta
That helps. Appreciate it. Thank you.
Operator
Your next question comes from Steve Hansen from Raymond James.
Steve Hansen
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?
Keith Creel
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.
Steve Hansen
Appreciate the color.
Keith Creel
Thanks Steve.
Operator
Your next call comes from Brian Ossenbeck from JPMorgan.
Brian Ossenbeck
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.
Keith Creel
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.
John Brooks
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.
Brian Ossenbeck
Okay. Thank you.
Operator
And our next call comes from Ariel Rosa from Credit Suisse.
Ariel Rosa
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.
Nadeem Velani
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.
Ariel Rosa
Got it. Fair enough. Thanks everyone.
Nadeem Velani
Thanks Ariel.
Operator
And our next question comes from Amit Mehrotra from Deutsche Bank.
Amit Mehrotra
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?
Nadeem Velani
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.
Amit Mehrotra
Yes. I thought I would try anyways. Thank you very much. Appreciate it.
Nadeem Velani
Thank you.
Operator
And our next question comes from Justin Long from Stephens.
Justin Long
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?
John Brooks
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.
Justin Long
Understood. Thanks.
Operator
That reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.
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.
Operator
This does conclude today’s conference call. You may now disconnect.