Canadian Pacific Kansas City Limited (CP) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Bo, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's Third Quarter 2026 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. [Operator Instructions] I would now like to introduce Mr. Chris de Bruyn, Vice President, Capital Markets, Tax and Treasurer. Please go ahead, sir.

Thank you, Bo. Good afternoon, everyone, and thank you for joining us today. Before we begin, I remind you this presentation contains forward-looking information. Actual results may differ. 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 outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer. Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Thanks, Chris, and good afternoon, ladies and gentlemen. Thank you for joining us on the call today. First and foremost, I want to extend. I felt thank you to our 20,000 strong family of railroaders across the 3 countries that produce the results our team [indiscernible] we're discussing today. We're extremely proud of what this team has delivered during this quarter, handling strong growth. bringing the railroad extremely well and continuing to create opportunities across this very unique network. Looking at the quarter on the results side, we delivered third quarter revenues of $4.2 billion, volume growth of 6% and an operating ratio of 61.9% that generated 16% adjusted EPS growth. Against a pretty dynamic backdrop. I'm pleased with what the team has delivered. We handled 6% more volume while continuing to improve the performance of the railroad. And more importantly, there is so much more opportunity in front of us. On the car velocity, train velocity, fuel efficiency terminal fluid all showed strong improvement year-over-year in operations. And this credit belongs to Mark, the senior team and the roads across our network executing our plan every day. Nick Walker, Greg Squires, Jason Ross, Brad Robertson Braden Ted, Tom Ragone continue to provide strong leadership, and I'll tell you we're fortunate to have a deep experience and talented bench of operating leaders across this network. We've invested ahead of growth. We've got the people, the locomotives and the infrastructure aligned with our demand. We're prepared to grow, and we're becoming better rail orders each and every day. Operational excellence is a journey, it's not a destination. There's more opportunity to be mined and rest assured, I'm confident this team will continue to find it. On the commercial side, John and his team continued to convert the reach and the opportunities this network creates in new markets, new products and profitable sustainable growth during the quarter. We established all-time volume records in domestic intermodal, international intermodal and U.S. grains. These outcomes reflect strong service discipline in the market and the unique options this network creates for our customers. We also announced a meaningful expansion of our relationship with Elk Valley resources to move their product from the mines that we serve in Southeastern British Columbia to Vancouver for global export. This expanded agreement reduces complexity, strengthens Indian supply chain and position CPKC and EBR to grow together for years to come. Our Canada, Mexico Landbridge is another powerful proof point, which continues to generate value in the face of uncertainty. When we brought these 2 railroads together just over 3 years ago, this traffic was about $100 million in annual revenue. We expect to exit this year north of $600 million. And this is not growth we inherited. It's growth that we created, taken a challenge and turning that challenge into an opportunity, creating new markets enabled by this unique North American network. And importantly, we delivered 6% volume growth despite headwinds across certain markets during the quarter. That tells you something about the quality and the diversity of our growth opportunities as we remain well on track for another year of mid-single-digit volume growth. It also speaks to the alignment between our operating and commercial teams. The operating team delivers the service. The commercial team takes the service to the marketplace and creates opportunities. They've been doing it consistently since we brought these 2 networks together over 3.5 years ago. So the bottom line, when you combine industry-leading operations, the unique network built for growth and a hungry disciplined commercial team, you create a very compelling outcome. So let me leave you with this. The larger message has not changed. We have a railroad that's running extremely well, a differentiated network, a deep pipeline of growth opportunities that are in front of us. I'm proud of what the team has delivered in this quarter, but rest assured, we are not satisfied. We know there's more work to do and more importantly, opportunity to capture. The team will remain focused on execution taking care of our customers, converting these opportunities into profitable sustainable growth. And with that, I'll turn it over to Mark to walk through the operation, John to give you some color on the markets, and they deem will close it up before our questions elaborating on those numbers. So over to you, Mark.

Yes. So thank you, Keith, and good afternoon. I want to begin by thanking our railroaders for another strong quarter of execution. Our network is running very well in delivering reliable service for our customers while supporting continued growth across the business. We saw strong improvement across several of our operating metrics, train speed improved 8%, dwell improved 7%, car miles per car day increased 10%, locomotive productivity up 4% and fuel efficiency improved 3%. These results demonstrate the strength of our PSR operating model. Review of the safety results. Our personal injury frequency was 1.12, which is 20% higher than last year. Our train accident improved 60% to 0.46. Where we are pleased with the train accident result, the increase of the person enters does not meet our standard. Safety is a never-ending journey. We will learn from every incident, reduce the fundamentals -- reinforce the fundamentals, stay focused on what matters most. Every railroad are going home safe at each and every ship. Turning to labor. In the U.S., we reached agreements that bring employees from several separate agreements under our Mid-South agreement to simplifies how we operate provides greater flexibility helps us run a more consistent, reliable service for our customers. I'm also pleased to announce that we have 2 new collective agreements with BLET Smart have been ratified on the DMA and [indiscernible] properties. In Canada, CPKC and the IBEW agreed to binding arbitration, ending the strike involving approximately 300 signal and communication employees. Turning to capital. We continue to make disciplined investments in safety, growth and efficiency. We have received 170 of the Tier 4 locomotives from Wabtec. We're starting -- beginning to receive 35 more from Progress Rail. In total, we expect to bring on 300 new locomotives through 2028. We're already seeing benefits in these investments. The newer locomotives have contributed to more than 35% reduction in our service interruptions on our 100 Series trains in Canada, a 10% reduction in interruptions in our Western Canadian fleet, while improving fuel efficiency on both services. We are strengthening the tools of our service design team using the plan and uses the plan and operate the railroad. We recently moved into the new planning platform that gives the team near real-time visibility in the traffic and network conditions, along with the greater control of the data and the models used to build the operating plan. This in-house tool replaces a legacy third-party application. Visibility allows us to evaluate operating scenarios faster, responding to changing traffic patterns sooner refine the plan as conditions change. This is what disciplined PSR execution looks like, better information, quicker decisions and even more tighter alignment between the operating plan, our resources and customer demand. In closing, Brotheway, the railroad is continuing to execute across the network. This railroad is running well. We're beginning -- we're building on that strong foundation with disciplined investments in our people, capacity, equipment and technology. Together with our PSR model, these investments are improving reliability, creating capacity, positioning us to safely handle Johns and then his team's growth. We're never satisfied when we keep controlling what we can control, keep our foot on the gas and continue making this railroad better every day. With that, I'll turn it to John.

All right. Thank you, Mark, and good afternoon. The CPKC team in this unique network produced another record quarter driven by strong operating and commercial execution. We delivered record Q3 freight revenues and RTMs, up 15% and 6%, respectively. Cents per RTM increased 9%, reflecting sustained pricing strength and higher fuel surcharge revenue. Our capacity and reliable service support new business initiatives and share gains, while disciplined pricing remains a core focus. Moving on to the next slide, I want to highlight the consistency of our industry-leading growth. We have delivered consistent RTM growth across our 3 nation network with year-to-date Q3 volumes ex coal, up 17% since the merger. That performance, despite a tough macro backdrop is driven by disciplined commercial execution, self-help initiatives and strategic share gains and our strong service product, network validity and available capacity provide the foundation for this growth. Now taking a closer look at our third quarter revenue performance. I'll speak to the FX adjusted results. Starting with bulk. Q3 was another record quarter for Green with record revenue, RTMs and carloads. Revenue increased 27% on 23% volume growth. Canadian grain volumes increased 35%, driven by a high carryout of stocks following the record harvest, growth into our Mexico market and strong Vancouver exports. U.S. grain volumes increased 13%, driven by strong corn demand in the Mexico and exports through P&W. Now looking ahead, we expect continued grain volume growth through the end of the year and into early 2027, supported by healthy supply and demand fundamentals, combined with our diverse market reach. We are also very encouraged by new crush production coming online in both Canada and the U.S., including our new contract with LDC at Yorkton. Potash revenues were up 8%, on a 7% decline in volume with performance reflecting the impact of Canpotex's Portland terminal maintenance during the quarter. Now looking ahead, export demand fundamentals remain healthy and Portland's maintenance is now completed. We expect a return to solid growth for the remainder of the year. To round out bulk, coal revenue declined 1% and 11% reduction in volume. The decrease continued to reflect production-related challenges at the mines. However, as expected, this volume headwind is continuing to moderate. And more importantly, as Keith mentioned, I'm very excited about our new 5-year contract with EVR. This agreement establishes a strategic long-term partnership for CPKC and EVR, resetting to what good service looks like for our Canadian coal franchise. Now moving on to merchandise. Energy, Chemicals and Plastics revenue increased 9% on flat RTMs. Higher energy prices have shifted some of our commodity flows into shorter-haul domestic and export market, creating a headwind versus our expectations on the quarter. As energy prices moderate over time, we expect those trade flows to normalize. At the same time, I can tell you this team remains laser-focused on controlling what we can control and that's winning new business and pursuing self-help opportunities that only set us up well as we go to 2027. Forest Products revenue increased 9% on a 2% volume growth. We delivered solid and resilient growth in this space, despite softness in housing and cross-border tariffs. Our focus on industrial development opportunity supports growth against the softer macro backdrop. The Metals, Minerals and Consumer Products area revenue increased 13% on 8% volume growth. We continue to deliver growth and record quarterly volumes in steel, aluminum and metal, supported by good demand from industrial production and construction activity. Moving to the automotive area. Revenue increased 5% on a 5% volume decline. While the quarter was significantly impacted by plant retooling and production holds, we remain confident in the long-term growth outlook for our automotive franchise. We have line of sight to return volume growth for the fourth quarter and into 2027, supported by share opportunities and the conversion of short sea traffic to rail. Now closing with Intermodal, revenue increased 21% on a 10% volume growth and all-time record performance. Domestic intermodal volumes increased 7% in the quarter. Growth was supported by strong performance across our Canadian domestic lanes, along with continued strength in our U.S. lanes and Mexico cross-border service. Our SMX product with CSX continues to build momentum with volumes up 30% sequentially. Our service reliability on both our MMX and SMX intermodal products position us well to continue to build trust with our customers and capitalize on favorable truck-to-rail conversion opportunities. In International Intermodal, volumes increased 11%, driven by continued strength in shipments from the Port of Vancouver for Gemini and also CMA. Our capacity at both the port and the inland terminals support reliable service and sustainable profitable growth. We are particularly excited about the recent federal funding announcement for the Port of St. John, including significant investments in the port, water access, warehousing and rail efficiency. This nearly $500 million investment will unlock capacity to handle up to 1 million TEUs capacity and support growth for this premier gateway for years to come. So to close, the growth we are delivering is differentiated and sustainable. It is supported by strong service, disciplined pricing and an expanding pipeline of self-help opportunities that are unlocked by this unique network. We are well positioned for a strong finish to the year, and I remain confident in our ability to carry this momentum into 2027 and beyond. So with that, I'll pass it over to Nadeem.

Okay. Great. Thanks, John, and good afternoon. I'm pleased with the solid results the team delivered this quarter. Strong volume growth, disciplined pricing and continued productivity gains drove 16% growth in core adjusted diluted EPS, despite the margin pressure from higher fuel prices. Now turning to our third quarter on Slide 15. CPKC's reported operating ratio was 64.8%. Our core adjusted OR was 61.9%, up 120 basis points from last year. Diluted earnings per share was $1.04, and core adjusted diluted EPS was $1.28, up 16% versus last year. Taking a closer look at our expenses on Slide 16, I will speak to the year-over-year variances on an FX-adjusted basis. For adjusted comp and benefits expense was $708 million. The year-over-year increase was driven by higher stock-based and incentive compensation, wage inflation and volume-related expense. These increases were partially offset by strong productivity gains, including lower overtime and workforce efficiencies. Looking ahead, we now expect full year head count to be down slightly. This, combined with mid-single-digit volume growth continues to drive strong labor productivity and operating leverage. Fuel expense was up 56% year-over-year, driven by a 53% increase in average fuel price as well as higher volumes. The change in fuel price was 90 basis point headwind to core adjusted OR in the quarter, while providing a modest benefit to earnings. Our continued focus on fuel efficiency supported by our locomotive investments drove a 3% improvement in the quarter and generated $21 million in savings. Materials expense was up 12% year-over-year, driven primarily by higher fuel prices on our non-locomotive fleet. Lower locomotive material costs partially offset the increase. Equipment rents were 9% lower versus prior year as improved networking performance and cycle times more than offset the impact of increased volumes. Depreciation and amortization expense was up 4%, driven by a larger asset base. Core adjusted PS&O expense was $568 million. The year-over-year increase reflected inflation, volume growth and other operating costs, partially offset by lower casualty costs and productivity gains, including lower crew and terminal costs. Overall, I'm pleased with the operating leverage we delivered in the quarter. Volume growth, disciplined pricing and continued productivity improvements drove double-digit earnings growth despite higher fuel prices, creating pressure on the operating ratio. Moving below the line on Slide 17. Net interest expense was $239 million or $235 million excluding purchase accounting. The increase was driven primarily by interest on new debt, partially offset by debt repayment. Income tax expense was $448 million or $369 million adjusted for purchase accounting and significant items. We continue to expect the full year core adjusted effective tax rate of approximately 24.75%. Now turning to Slide 18 and cash flow. Our earnings growth continues to translate into strong cash generation. Year-to-date, net cash provided by operating activities is up 12%, while adjusted free cash flow increased 59% to $2.4 billion. Year-to-date capital expenditures were $2 billion, down 12% from last year, and we remain on track to deliver full year CapEx of approximately $2.65 billion, a 15% reduction versus last year. Our targeted investments over the last several years in network capacity and locomotives are delivering tangible benefits as demonstrated by our operating productivity and fuel efficiency performance. Through the first 3 quarters of the year, our disciplined approach to capital management delivered over $4 billion of shareholder returns through share repurchases and dividends, reflecting a balance and opportunistic allocation of capital. Stepping back, I'm pleased with the overall performance in this quarter. We delivered strong earnings growth and cash generation while continuing to improve productivity across the business. As we move into the fourth quarter, we remain focused on execution, and we are very well positioned to deliver on our full year guidance. With that, let me turn it back over to Keith.

Okay. Thank you, gentlemen. Operator, if you can, let's open it up for questions.

[Operator Instructions] We'll go first this afternoon to Steve Hansen with Raymond James.

Keith, I'm hoping you can provide a little more color on this New Elk Valley agreement, your additional or higher share of the haulage. And just what kind of growth you might contemplate through the new term? It does sound like service and the root simplicity played a role here. Curious if the investment announcement in the Neptun also play a role recently.

Yes, thanks, Steve, thank you for the question. Just in context, if you go back to the last contract, I guess, with our competitor, Canadian National. Historically, before that contract, CP originates 100% of this coal and terminated 100% of the coal kind of from the mine to the Tidewater. Now to step or to the North Shore, CNX is our agent as they do for potash that they do for grain. Well, this last contract and back then, I guess, it would have been tech coal, introduced an interchange at Kamloops, which you have 100% of the traffic we originate that some interchange to CN at Canadian National to go to those same locations at Topwater in Vancouver. And I think we all understand every time you introduce a handoff and/or interchange you create complexity and an opportunity for introducing supply chain cost indoor, compromising reliability. And I would suggest, over the period of that contract, that has happened in small or large part to a point that in our negotiations, that became a topical point. So what's happening now is about half of the traffic that today and our changes to our competitor at Kamloops to go to the North Shore of Vancouver will be reclaimed back to CP origin to destination and the interchange can lots would be eliminated for that traffic. So about 1.5 trains will flip back to CPs route cradle to Gray.

We'll go next now to you, Brian Ossenbeck with JPMorgan.

Maybe just a big picture question for John. Just how you're thinking about the pricing opportunity going forward and balancing that with volume growth and of course, network resources. I would assume there's some inflation you're expecting to cover, but in terms of just the broader truckload market and all the support that we would see from the market itself. Should we expect something a little bit better than usual when we think about just kind of the run rate, maybe the mid-single digits? And of course, probably an impact from the Canadian green being lagged with the fuel surcharge. So I would appreciate some comments on that.

Yes. So Brian, you know what, I'm bullish on the pricing outlook. We've got it's been a pretty good run. And I think you've seen our commercial team be extremely disciplined in the marketplace. That's not going to change. I'd just be candid. Renewals continue to be that 3% to 4% or even more in some cases. So I don't see that changing. We're going to stay aggressive on that front. Obviously, fuel surcharge where it's at in the marketplace. Canada has introduced another dynamic that we're keeping an eye on and making sure that we're competing in the markets like we need to be. But I continue to have a pretty favorable outlook to close out this year. Most of our book is already pretty much renewed. But I got a favorable outlook as we look into the beginning of 2027.

We'll go next now to Fadi Chamoun with BMO Capital Markets.

Yes. You talked about the deep pipeline and growth going forward. I was hoping you can elaborate on kind of what verticals, what do you see share with us some thoughts on where these opportunities are as you go kind of over the next 12, 24 months? And any kind of high-level idea on how to think about RTM growth in 2027 given kind of the pipeline and now you have a bit of a visibility into the grain and the cold story, I guess, for mid to next year from an LTM growth next year?

I don't think they're going to let me quite guide to '27 yet, but I will give you some color. Certainly, we've had a really good bulk year this year. So those compares are going to be tougher as you look at 2027. But I'll tell you, I'm still pretty bullish that we have not run out all the opportunity specific to this green franchise, we continue to uncover more and more opportunities into the southern part of our network and growth in New Mexico and driving efficiency there. So despite what I do see is tougher comps in that space, I'm convinced we have some upside in there. This crush market and the development of that business, not only in Canada, but also in the U.S. has been pretty good. It really diversifies our grain business. And those crushers got to crush 365 days a year. They're a production facility. So that's really good business. And I think that's an area that you should look to as some upside. Keith mentioned the land bridge earlier. There's -- I spent here in the last few weeks in Mexico meeting with customers and that that area only continues to build momentum. And that's just -- that's both carload type business and steel products and pay products, but it's intermodal opportunities in that, too. So I expect to build on that land bridge. I would suggest to you that we're also in the early innings of this domestic intermodal story. I remain bullish on our team's ability to convert truck opportunities. I've talked about, we've got a hunter group in Mexico that is keenly focused on uncovering those opportunities and converting new customers. And we're working closely with CSX on our SMX product that only provides further upside. And we posted really good international numbers this year on some wins. But between the opportunity and the investment that's going to go in at St. John, there's a lot of upside there. And we continue to see -- albeit singles and doubles, we continue to see growth at Lazaro. And who knows, as you see the canal has had some challenges here on water levels, you could have a potential West Coast U.S. strike with the long shoreman in 2027. We continue to be pretty bullish on Lazaro also in terms of growth. So that's a few nuggets that are out there, let alone some of the other things that we have come down the pipeline.

Yes, John, if I could add that point about the strike in the West Coast. I think we all understand the complexity of how that might develop. And that's true now that wasn't true the last time is we have [indiscernible] Lazaro into the Houston markets and into the Midwest that shippers did not have a chance or an opportunity to diversify their risk relative to that strike. And I would suggest that will be part of the playbook. And once you get some of that traffic on your railroad, the experience, the service, the experience reliability. It may not all stick, but from a diversification play, we realized our experience to [indiscernible]. And I think that bodes well to our growth aspiration.

And one comment I'd make is just also just staying in front of John on capacity. I know we are lockstep with different things that he's doing businesses bringing on this railroad, and we certainly got locomotives in place resources in place for crews and certainly better agreements that I spoke about that we can move people around and around the southern part of the U.S. Shreveport area, for sure.

We'll go next now to Jonathan Chappell with Evercore ISI.

John, I know they won't let you talk about the '27 RTMs. But maybe as it relates to the fourth quarter, you're running at about 5.5%. You spoke about a lot of favorable things in your favor right now from auto to potash, et cetera. And then you also should still have some carry out, I would think, from the grain side. So how do you think about momentum for the rest of the quarter, given some of those things that seem to be shifting potentially from headwinds to tailwinds?

Yes. Jonathan, it's gap on. We're going to push it as hard as we can. And I think the -- look, the markets are not perfect. There's ups and downs. We've got some headaches that are out there, but we're going to push it hard. And to your point, as I think about the bulk area today to close out the year, I think it looks pretty good. Domestic Intermodal, our international business, I think, looks pretty good. We've had a little bit of a rough go in the automotive sector here. But we also had the chip issues in that in November, December last year, those compares will turn for us in those months. And I'm super proud of my merchandise team. That's an area that has just been strapped with tariffs and issues and ups and downs. And we -- you've seen in the numbers, we've continued to battle in forest products and in the merchandise sector, to post some pretty good numbers there. So I'm not going to give you a number, but I'm optimistic that we can close pretty strong.

We're going to go now to Ken Hoexter with Bank of America.

Great. Maybe I know you've talked a lot about maybe capturing some of the good grain crop or, I guess, continuing it, but I don't think we got your expectation for next year in terms of -- do you expect it to be down 5%, 10% and given the crop or do you make that up? And then maybe just your thoughts on capacity. You talked about buying locomotives and getting them on board. Where do you feel like you are in terms of this mid to upper single digit RTM growth in terms of your ability to sustain that? Or should we expect a rise in CapEx in the '27?

Ken, I'll let John address the commercial question. When it comes to capacity, I'll just remind everyone, we made a commitment with our transaction to build out this network to handle high single-digit RTM growth. We haven't experienced that yet, but we've invested the capital, the infrastructure is there. We've got the locomotives. We've got the cars. We've got the terminal and the track capacity. We've got a new bridge. We're built forward for growth. There will be no issues without adjusting our capital envelope.

Yes, Ken. I mean we're going to finish the year, as I mentioned, $2.65 billion this year. You might get a modest increase off of that given where the Canadian dollar is, but good side of that, we've guided long term $2.6 billion to $2.8 billion range of CapEx. So you should expect that range.