Canadian Pacific Kansas City Q3 Earnings Call Highlights

Key Points

• Strong third-quarter results: Revenue reached CAD 4.2 billion on 6% volume growth, while core adjusted diluted EPS rose 16% year over year to CAD 1.28. Record intermodal and grain volumes helped drive freight revenue up 15%.
• Operational improvements offset by fuel costs: Train speed, dwell, locomotive productivity and fuel efficiency all improved, but fuel expense surged 56%, pushing the core adjusted operating ratio to 61.9%. Personal injury frequency increased 20%, despite a 60% improvement in train accident frequency.
• Positive outlook and cash generation: Adjusted free cash flow rose 59% to CAD 2.4 billion year to date, and management reaffirmed mid-single-digit full-year volume growth while targeting a sub-60 operating ratio in the fourth quarter.

Canadian Pacific Kansas City NYSE: CP reported third-quarter revenue of CAD 4.2 billion, supported by 6% volume growth, while core adjusted diluted earnings per share rose 16% from a year earlier to CAD 1.28.

The railroad’s core adjusted operating ratio was 61.9%, 120 basis points higher than the prior-year period, as higher fuel prices pressured margins. Reported operating ratio was 64.8%, while reported diluted EPS was CAD 1.04.

President and Chief Executive Officer Keith Creel said the company handled higher traffic while improving operating performance and remains positioned for further growth across its three-country network. “We handled 6% more volume while continuing to improve the performance of the railroad,” Creel said.

Operating Metrics Improve as Safety Results Remain Mixed

Chief Operating Officer Mark Redd said the railroad improved several operating measures during the quarter. Train speed increased 8% year over year, dwell improved 7%, car miles per car day rose 10%, locomotive productivity increased 4%, and fuel efficiency improved 3%.

CPKC’s train accident frequency improved 60% to 0.46, though personal injury frequency increased 20% from a year earlier to 1.12. Redd said the increase in personal injuries did not meet the company’s standard.

The company also reported progress in labor agreements. In the U.S., CPKC reached agreements that bring employees from several agreements under its Mid-South agreement and said new collective agreements with BLET and SMART had been ratified on the DM&E and Soo Line properties. In Canada, the company and IBEW agreed to binding arbitration, ending a strike involving about 300 signal and communications employees.

CPKC has received 170 Tier 4 locomotives from Wabtec and has begun receiving an additional 35 locomotives from Progress Rail. The company expects to bring on 300 new locomotives through 2028. Redd said the new equipment has contributed to a more than 35% reduction in service interruptions on its 100 Series trains in Canada and a 10% reduction in interruptions in its Western Canadian grain fleet.

Intermodal and Grain Set Records

Chief Marketing Officer John Brooks said CPKC posted record third-quarter freight revenue and record revenue ton-miles, or RTMs. Freight revenue and RTMs increased 15% and 6%, respectively, while revenue per RTM rose 9%, reflecting pricing strength and higher fuel surcharge revenue.

The company established quarterly volume records in domestic intermodal, international intermodal and U.S. grain. In bulk markets, grain revenue increased 27% on 23% volume growth. Canadian grain volumes rose 35%, aided by carryout stocks from a record harvest, Mexican demand and Vancouver exports. U.S. grain volume increased 13%, driven by corn demand in Mexico and Pacific Northwest exports.

Brooks said grain traffic is expected to continue growing through year-end and into early 2027, supported by supply-and-demand conditions and CPKC’s network reach. He also cited opportunities tied to new crushing capacity in Canada and the U.S., including a new contract with LDC at Yorkton.

Potash revenue rose 8% despite a 7% volume decline, which CPKC attributed to maintenance at Canpotex’s Portland terminal. The maintenance has been completed, and the company expects solid growth through the rest of the year. Coal revenue declined 1% on an 11% volume reduction due to production challenges at mines, though management said that headwind has been moderating.

CPKC announced a new five-year agreement with Elk Valley Resources. Creel said roughly half of the coal traffic that currently interchanges with Canadian National at Kamloops for transportation to Vancouver’s North Shore will return to CPKC’s route from origin to destination. He described the shift as about “a train and a half” returning to CPKC’s network.

Intermodal revenue increased 21% on 10% volume growth. Domestic intermodal volume grew 7%, while international intermodal volume rose 11%, supported by shipments from the Port of Vancouver. Brooks said the company’s SMX service with CSX saw volumes rise 30% sequentially.

Fuel Costs Pressure Margins, but Cash Flow Rises

Chief Financial Officer Nadeem Velani said higher fuel prices were a significant operating-ratio headwind. Fuel expense increased 56% from the prior year, reflecting a 53% increase in average fuel price as well as higher traffic volumes. The fuel-price increase alone represented a 190-basis-point headwind to the adjusted operating ratio.

Fuel-efficiency gains generated CAD 21 million of savings during the quarter, Velani said. Equipment rents declined 9% as improved network performance and cycle times more than offset the effects of higher volumes.

Year-to-date net cash provided by operating activities increased 12%, while adjusted free cash flow rose 59% to CAD 2.4 billion. Capital expenditures through the first three quarters totaled CAD 2 billion, down 12% from a year earlier. CPKC reaffirmed its expectation for approximately CAD 2.65 billion in full-year capital expenditures, a 15% decline from the prior year.

The company returned more than CAD 4 billion to shareholders through repurchases and dividends in the first nine months of the year. Velani said CPKC expects full-year headcount to be down slightly and continues to target a full-year core adjusted effective tax rate of about 24.75%.

Management Sees Strong Finish to the Year

Management reaffirmed its expectation for mid-single-digit volume growth for the full year. Velani said the company expects to deliver a sub-60 operating ratio in the fourth quarter, citing strong October volumes, network performance and what it expects to be a favorable weather environment in Canada.

Brooks said the commercial team expects pricing renewals generally in the 3% to 4% range or higher in some cases. He also said the company expects to outperform the industry’s RTM growth by one to two percentage points consistently, although CPKC did not provide formal 2027 volume guidance.

During the question-and-answer session, Creel reiterated CPKC’s opposition to a proposed Union Pacific-Norfolk Southern combination, arguing that it would create excessive market power and should be rejected by the Surface Transportation Board.

About Canadian Pacific Kansas City (NYSE:CP)

Canadian Pacific Kansas City Limited NYSE: CP is a North American transportation company that operates Canadian Pacific Kansas City (CPKC), a Class I freight railway. The company was created in 2023 through the combination of Canadian Pacific and Kansas City Southern, forming the first single-line railroad connecting Canada, the United States and Mexico.

CPKC transports a broad range of freight, including grain and fertilizers, coal, forest products, automotive goods, energy and chemicals, industrial and consumer products, and intermodal shipments.

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