Canadian Pacific Kansas City Limited

afternoon my name is my name is marjorie and i'll be your conference operator today at this time i would like to welcome everyone to cpkc's third quarter 2024 conference call the slides accompanying today's call are available at investor.cpkcr.com all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you'd like to ask a question simply press star then the number one on your telephone keypad If you'd like to withdraw your question, press the pound key. I would now like to introduce Ashley Thorne, AVP, Investor Relations, to begin the conference call.

Thank you, Marjorie. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide two in the press release, and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. Please note, in addition to our regular quarterly financials, there's supplemental Q3-confined revenue and operating performance data available at investor.cpkcr.com. With me here today is Keith Creel, our President and Chief Executive Officer, Nadine Balani, 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 it if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Thank you, and good afternoon. Thanks for being with us today to discuss and review our third quarter 24 results. I'm pleased to share the results of our 20,000 strong CPKC family, I can tell you the body of work and what was a very challenging operational quarter with the significant derailment that Mark and the team faced in early July and the strike in August, both of which they did an exceptional job doing it. They bounced back and the network responded well as a result, following up and getting back in sync. In spite of the challenges, I'm proud to say we remain on track to deliver four-year guidance, double-digit earnings growth, including volume growth, which is better than what we had projected earlier in the year. So specific to the results of the quarter, the CPTC family delivered revenues of $3.5 billion, which is up 6%, strong volume growth, an increase of over 4%, an operating ratio of 62.9, earnings per share of $0.99, which is an increase of 8%. Most importantly, from a safety perspective, continuing improvement, the train accidents decreased by 17%, personal injuries decreased by On the operating front, continued strong performance across the network, which Mark will provide a bit of color to, but I'd like to specifically recognize the operating team specific to those challenges with the strike. They did an exceptional job in preparing for and bouncing back from the audits that we experienced as a result of the strike. Commercially, John and his team, as well, continued to generate industry best, sustainable, profitable growth. We're delivering unique products to the market with a strong service offering to our customers that's reflected in the results that we're going to share with you today. The NBNR, that's another exciting development over the quarter. I'm pleased that we received approval last week from the SDB for our new direct connection with the CSX in Mexico, Texas, and the U.S. Southeast over the NBNR corridor. I'd like to specifically, again, thank the SDB for their thorough review and approval of this competitive transaction. The new interchange that we're establishing with the CSX is going to provide a new competitive rail service to rapidly grow markets. It's going to bring new solutions to our customers and take trucks off the road. It's another example, again, of this unique growth story that the CPKHC franchise is delivering. On the hydrogen locomotive front, another milestone reached in the quarter. When it comes to our hydrogen locomotive program in early September, I'm very pleased to say that our first high horsepower hydrogen locomotive, along with the fuel tender, joined the contest of three diesel locomotives in pulling a fully loaded bulk train in our Western Canada corridor. Certainly an impressive achievement. It's a demonstration again of this company's commitment to leadership and sustainability. But let me say in closing, I'm proud of the results the team's produced. We're off to a strong start in the fourth quarter. We're in a great position for a strong finish to 24 and an even more exciting transition into 2025 and momentum. With that, I'm going to hand it over to Mark to provide some comments on the operating performance. John, I'll provide color on the markets, and then Dean will wrap up, elaborating on the numbers.

Thank you, Keith, and good afternoon. Looking at the quarter, I'm extremely excited. Railroaders for the continued hard work, very safe and reliable service. In the third quarter, we continue to drive strong year-over-year operating improvements. I looked at the average terminal dwell decline 8%, average train speed increased by 6%, locomotive productivity improved by 8%, and just to round off the fuel efficiency improvement by 2%. A lot of these are results demonstrating an efficient, fluid, resilient network that is delivering strong service to our customers. These results are particularly impressive given the challenges we faced in the quarter. I'm proud of the resiliency this network and team has displayed. As Keith mentioned, we navigated through a four-day work stop across our Canadian operations, and thanks to the hard work and preparation of the team, I'm pleased to say that we have a quick, efficient transition back to normal operations. I'll be frank, it was probably one of the best that I've seen in my career as we started this network back up. And you can contribute this to the operating team working closely with the customers, the rail partners, to minimize the interchanges and disruptions that we see as an operating team. But the work stop is behind us. We're well positioned to deliver it. to continue delivering the growth that we are committed to and strong service that our customers expect. Thank you to all the railroaders who contributed to this outcome. Looking at safety for the quarter, if I look at FRA train accident frequency at 1.27, that is 8% improvement year-over-year. And to look at the personal injuries, we were at 0.85, which is 17% year-over-year improvement. I'm pleased with these results and the safety of the journey. will always strive for further improvement. We also continue to execute on a number of initiatives that are improving efficiency and operating performance. The engineering team, in coordination with the operations, is improving efficiency, significantly reducing slow orders across the network, and also train delays. Part of the leveraged data from the investment in autonomous geometry testing curves to help us accurately plan preventive maintenance and capital investments. Looking forward, there are additional benefits to run out of these investments as we deploy these cars across our network, and specifically into Mexico as well. And as we continue to make interoperability upgrades to the CP, or excuse me, the legacy KCS fleet, so we can lead trains in Canada, by end of year, we'll have about 175 upgraded locomotives to be fully interchangeable across the North American network. Looking at capital, We're executing through our plan to support safe and sustainable growth through the investment of the network. In the first three quarters, we have been serving 60 sightings as part of the $275 million merger commitment, capital commitment. Two sightings will be targeted by the end of the year, along with a capital project centered around the Kansas City area that will come online this year as well. Capacity in Kansas City will further help us align and streamline the connection between the two networks, two legacy networks, improving the service through this key corridor. We've also in service new sidings in Mexico, along with crossovers and track rail alignment in our Escobedo yard, improving our capacity and fluidity in a key and growing segment of our network. Additionally, sidings and other investments in Mexico capacity are on the way, scheduled to go into service in Q4. These projects are targeted to improve the efficiency of our local and guard operations so we can run mainline trains while we serve customers, clearing the mainline and increasing the throughput. Finally, I'm pleased to announce we're still on time with the Laredo Bridge second span. We'll be open by the end of the year. Before I turn it over to John, I'd like to share my enthusiasm for the first phase of our high horsepower hydrogen locomotive test completed in Q4. This is a tremendous accomplishment. It's the result of a lot of hard work and dedication to the commitment to deliver our sustainable objectives. In summary, we're operating safely, efficiently. The network is in excellent shape. Our investments are creating capacity. We have a strong momentum heading into the fourth quarter. With that, John. All right. Thank you, Mark, and good afternoon, everyone. I'm extremely pleased with the top-line performance the team delivered despite the work stoppage in the quarter. We are creating and delivering on the unique opportunities, the strong service product we have, and we're pricing to the value of the capacity of our service. Now, looking at our results, this quarter we delivered freight revenue growth of 6% on a 4% increase in RTMs. This performance was despite the four-day work stoppage that Keith and Mark spoke to, and this was a 3% headwind to RTMs in the quarter. Our cents per RTM was up 2%, with strong pricing partially offset by mix. Now, taking a closer look at our third quarter revenue performance, I'll speak to the FX adjusted results, starting with bulk. Grain revenues were up 10% on 7% RTM growth. U.S. grain volumes grew 11% over the prior year. our franchise is benefiting from strong production in our growing regions and increasing shipments to Mexico as we connect new markets and create new opportunities for our grain customers. Canadian grain volumes grew 3% with increased wheat to Mexico and the ramp-up of harvests across the Canadian prairies. Now looking forward, we expect Canadian grain production in line with our five-year average And our comps in Q4 and early 2025 are favorable as farmers held onto their crop a year ago. Now that favorable volume setup coupled with regulated grain pricing of approximately 6.5% has us well positioned in Canadian grain. So looking ahead for grain as a whole, we are working closely with our customers across all three countries and expect to deliver strong grain results in the q4 and well into 2025. in potash revenues are up seven percent on a twenty percent volume growth we moved higher volumes of potash with camp attack to the portland terminal as demand remained solid and we left the shiploader outage in the ilwu strike last year Since our worst stoppage this quarter, the potash supply chain has normalized, and demand for export potash service is at an all-time high. Coal revenue was up 8% on a 2% decline in volume. Lower natural gas prices weakened demand for U.S. coal, and the strike impacted our Canadian coal shipments to Vancouver and Thunder Bay. Now, as we move into Q4, we've seen both of these supply chains stabilize, resulting in increased coal volumes on our network. Moving over to merchandise, energy, chemicals, and plastics revenue grew 10% on 6% volume growth. Volume growth in the quarter was across multiple commodities, driven by our self-help initiatives, synergy wins, and more market share gains. Now, looking at Q4, with the ongoing ramp-up of these business wins and growing demand for LPGs, we are set up for a solid year-end for ETP. For the products, revenues, and volumes were both down 1%. This is an area that continues to be impacted by a soft macro environment, and we are experiencing pressure on our Facebook business. We're able to partially offset these impacts with our unique synergy growth and our extended length of haul. We're focused on what we can control in this area and the unique opportunities that this franchise unlocks. and confident that we are going to be in a position and strength as the construction and paper markets rebound in the future. Metals, minerals, and consumer products revenue was down 3% and 8% volume decline. Now, much like the forest products area, the softer macro is impacting our base business in this area, along with lower volumes of frac fans and from a steel facility in Mexico as it slowly ramps back up following a labor disruption. Moving to the automotive area, this business segment produced another record quarter with revenue of 27% on a 37% volume growth. This franchise continues to benefit from our closed-loop service solution that we introduced shortly after control of the KCS and is developing longer haul volumes across our network. Our new Dallas auto compound, along with other investments in auto racks and expanding our Chicago compound, have helped us to deliver an entirely new supply chain model for the OEMs. giving them new competition, service, and capacity certainty like they've never had before. Looking forward, we expect our auto business to continue to drive differentiated growth as we benefit from these gains and the opportunity to compete for new business in the years ahead. On the intermodal side, revenue was down 5% on a 2% volume growth, Starting with domestic intermodal, volumes were down 70%, impacted by lower short-haul business in Mexico that was demarketed late last year, and the work stoppage as customers temporarily shifted some of their business to trucks. This decline was partially offset by growth on our MMX 180-181 cross-border service, which continues to perform extremely well in an otherwise very challenging domestic market. Now, looking forward, we have a strong pipeline of opportunities in this area, including wholesale, retail shipments, and also our temp-controlled service offerings. I would like to also take this opportunity to share my enthusiasm for the FTB's approval of our MNBR transaction. This is just one example of the several unique opportunities that we are developing, which will continue to offer new optionality in a routing efficiency for many of our customers. On the international intermodal front, volumes were up 12%, primarily due to onboarding our new contract with O&E that started up in June and lapping the impact of our port strike a year ago. In this space, we are excited as ever about our opportunity to grow our international cross-border service out of Lazaro. More to come as we move into 2025. So we are expanding the scope of our test shipments with a number of key customers who are interested in creating diversity and adding more resiliency into their supply chains. So to close, volumes came in better than expected, excluding the impact of our work stoppage. And I'm very pleased we are in a position to improve our RTM output to mid single digits for the year. And while the macro certainly remains challenging in a few areas, we continue to have line of sight to unique growth opportunities from synergies, self-help, and strong pricing. are all looked and supported by the reliable and resilient service that Mark spoke to and that our operating team across three countries continues to deliver. And I'm very excited of what we've accomplished so far this year and will continue to accomplish in the years ahead. With that, I'll pass it over to Nathan. Great. Thanks, John, and good afternoon.

This quarter was marked by strong core performance and the continued execution of our unique strategy that is delivering disciplined growth.

I'd also like to thank our best-in-class team of railroaders whose continued focus on and execution helped deliver these results despite challenges in the quarter. Now, looking at our results on slide 12, CPC's reported operating ratio was 66.1%, and the core adjusted combined operating ratio came in at 62.9%. Diluted earnings per share was $0.90, and core adjusted combined diluted earnings per share was $0.99, up 8% from prior year. Taking a closer look at our expenses on slide 13, I will speak to the year-over-year variances on an FX-adjusted basis. Comp and benefits expense was $644 million, or $640 million on an adjusted basis. The year-over-year increase in comp and benefits was driven by higher stock-based compensation, along with inflation and volume-driven increases from higher GTMs. This increase was partially offset by efficiency gains from reduced overtime, improved train weight, improved crew utilization, and other productivity gains as we continued to optimize the combined network. Looking to Q4, we continue to expect average headcount to be roughly flat on a year-over-year basis, driving further labor productivity gains as we grow volumes, particularly at bulk. Fuel expenses squandered $19 million, down 2% year-over-year. The decline was driven by lower fuel prices and a 2% improvement in fuel efficiency from running longer and heavier trains, which resulted in $8 million in P&L savings for the quarter. Savings were partially offset by volume-driven increases from higher GTMs. Material expense was $99 million or $98 million on an adjusted basis. The year-over-year increase was driven by higher locomotive maintenance from increased fleet utilization, along with higher GTMs and inflation. We also in-sourced the locomotive maintenance contract in the quarter, which resulted in incremental material expense, but a favorable offset within purchase services and other net savings in the quarter. Women rents were $89 million, down 4% year-over-year. The decline was driven by higher receipts from increased participation in the fleet pool, reduced car hire payments, along with efficiency gains from improved cycle times and increased network velocity, partially offset by inflation. Depreciation and amortization expenses up 4% year-over-year, resulting from a higher asset base. Purchase services and other expenses, $623 million, or $599 million on an adjusted basis. The line was impacted by lapping insurance proceeds received in Q3 2023, as well as higher in-quarter casualty costs and inflation. These increases were partially offset by reduced intermodal services expense, efficiency savings, and insourcing synergies and savings on insurance renewals. I'm pleased to see continued efficiency and synergy gains We expect these gains, along with the impact of lower inflation, to be sustainable and continue improving our cost structure going forward. As we move below the line on slide 14, other components of net periodic benefit recovery was $89 million in Q3, reflecting a lower discount rate compared to 2023. Net interest expense was $192 million or $188 million, excluding the impact of purchase accounting. The decline was driven by reduced debt balance. Income tax expense was $262 million or $295 million on a core adjusted combined basis. We now expect the CPKP core adjusted effective tax rate to be approximately 24.75% for the year. Turning to slide 15, we are generating strong cash flow with cash provided by operating activities of $1.272 billion in Q3. Capital investments in safety and growth remain our priority. In this quarter, we reinvested $748 million in line with our continued expectation to invest approximately $2.75 billion in 2024. As Mark discussed, we continue to make strategic investments in capacity across our network, positioning us to continue efficiently absorbing the growth that this merger has enabled. We generated $523 million in adjusted combined free cash flow and continue to repay debt. Our leverage ratio is 3.1 times, and we still expect to reach our target leverage of 2.5 times in early 2025, at which point we will evaluate shareholder returns of our board. In review of the quarter, the team continues to deliver industry-leading volume growth, along with continued discipline on price and cost control. The net impact of the work stoppage was 100 basis point headwinds to the quarter, primarily driven by loss in revenue from temporary diversions and supply chain delays. That event, along with higher casualties and stock-based problems, combined for a 300 basis point, or 11 cent, year-over-year headwinds to Q3 operating ratio and EPS, respectively. If all of these impacts were isolated in order, we believe that we are well positioned for sequential and year-over-year OR improvement in Q4. Our strong core performance puts us well on track to deliver double-digit core adjusted combined earnings growth in 2024 and mid-single-digit volume growth, which is an improvement from our Q at the beginning of the year and industry-leading. This all adds up to strong positive momentum as we head into 2025, feel good about the opportunities that we have ahead of us. With that, let me turn things back over to Keith.

Okay, thanks, Aideen. John Mark, Operator, let's open it up for questions.

Thank you. And if you'd like to ask a question, simply press star, then the number one on your telephone keypads. If you'd like to withdraw your question, press star, then two. As previously highlighted, please limit yourself to one question. Your first question comes from Chris Weatherby from Wells Fargo. Please go ahead.

Yeah, hey, thanks. Good afternoon. Maybe if I could start like kind of higher level key. I was kind of curious if I could get your take on what we've seen coming out of Mexican legislation potentially about some rail reform down there. I want to get a sense of how you guys are thinking about that. Is it something we should be concerned about from a risk perspective?

Yeah, great point, Chris. I think the best way to kind of summarize the way I feel about it is encouraged. You know, we – had some progress, had some face-to-face meetings, and clearly understood the mandate from the previous government. I would say that at this point, everything that's happened with the new president has only reinforced that. And in fact, expanded upon that, I was very encouraged To hear a couple weeks ago, I guess it was on a Sunday at Pietro, which is where the aspirational pastor train would be destined to for Mexico City along our right-of-way, the president announced that not only have they committed in their platform, but the vision is protect freight, create a dedicated corridor for two passenger tracks in the adjacent right-of-way. So I think it uniquely complements the other thing I'm being encouraged by. It's her commitment to the environment and her comments relative to the need to get trucks off the road to create additional highway capacity, be friendly to the environment, and bring additional business to the railway. So we are part of the solution, and as long as you're part of the solution, I think with a very sovereign country that's focused on growth and being part of a strong three-continent commerce system, I think you're in a good spot. So, again, encouraged.

Okay. That's helpful. in the short term about some improvement both sequentially and year-over-year in the operating ratio in the fourth quarter. I don't know if maybe you could put a little bit of a finer point on some of the opportunity here, because obviously RTMs seem like they're ramping back up. There's great opportunities in the fourth quarter that could be probably accreted from an OR perspective. Any other incremental thoughts that we should be thinking about for the fourth quarter specifically?

Yeah, so we had that labor disruption that had a 100 basis point headwind to the OR in Q3. Obviously, we had a very unfortunate drought in Port Alak, North Dakota that was about a $60 million expense hit. And so those are two unique items. Stock-based comp was a big headwind in Q3. So when I look at... kind of those one-time items not occurring again in the fourth quarter. And I look at the opportunity for operating leverage. You know, grain has started off quite strong. We've got a robust crop ahead of us. We've got a strong bulk outlook as a whole. So you factor all of that together and the ability to move at a low incremental cost, I mean, Chris, I believe that we have the opportunity sequentially to have a 500 basis point improvement in the OR. So stay tuned.

Appreciate the time. Thank you.

Thank you. And your next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.

Thanks very much, operator. Good afternoon. So I'd like to talk a bit about your volume growth here. I mean, you increased your projection here on expectations for this year. Just curious, you know, this is on a backdrop of still a weak macro environment, so presumably you're getting a lot of, kind of esoteric volumes here. Can you talk a little bit about those? And in particular, is it causing you to somewhat rethink your 28 targets of $1.5 billion revenue synergy on the upside or even your $5 billion kind of revenue pipeline? As you've seen a little bit more opportunities and what's developing on this new network, are you seeing upward revisions to that kind of outlook?

Well, maybe I'll start, Walter. Thanks for the question. You know, focusing on the near term, as the team has already spoke about, our bulk franchise is very encouraging. Not only do we have a strong Canadian grain crop that I think is sort of well-known and moving well, but we also have a really strong crop not only in our Upper Plains, North Dakota, Minnesota region, but also down in the Missouri, the legacy KCS regions. So really, I want to say the perfect storm as it relates to grain and opportunities to move a lot of freight in that space at low incremental margins. Now, if you look beyond that in the bulk, we've got, as I said, record potash demand. You know, coming from campus X on the export front, but also given some of the struggles Mosaic and others had in Q3 on the domestic front, we have a really strong domestic pull right now also. So I feel really good about that. the fertilizer and potash space. And frankly, we have some catch-up to do with Elk Valley and our coal opportunities, not only in Canada, but also a fair amount of maybe stronger demand on some of our legacy coal franchise in the U.S. So the bolts are set up well. You know, we've seen enough kick in our domestic intermodal business across Canada, and we continue to perform well. in our new MMX service. I think the last I looked, if you kind of neutralize for some of the headwinds on the business, that left their network. You know, we're up 27%, I believe, on the year in wealth on that train. So good outlook there. You know, international and intermodal, you know, frankly, since COVID, it's been tough to really tell how those international intermodal volumes will move up and down. But the lineup right now to close out the year, with our customers continues to look strong. And, in fact, we're seeing some really good growth out of Port of St. John with our services out there. So I feel pretty decent about the intermodal area. You know, as I said, we're going to continue to battle in some of those merchandise and forest products areas for the foreseeable future. But I think what makes us unique, and maybe part of your question is, There's so many extended length of haul and new business development opportunities in the ECP space to leverage this franchise and, frankly, in the merchandise and forest product space also that we've been able to, I would say, maybe outpace the industry a little bit in those areas. And what gives me comfort is we start to see any sort of rebound in in some of those macro areas that I think it's going to be, you know, quite a tailwind. So all that to say, I feel comfortable with, you know, we fit, you know, roughly around 4% RTMs. year-to-date right now. I see the demand out there to improve on that as we move through the final couple months of the year, work hard with our customers in the supply chains to make that happen. And frankly, you know, I certainly believe, Walter, that the future is bright as I look into the future and what 2025 and beyond looks like. But I think I leave it at that in terms of what our outlook is in those out years. Great call. I appreciate it, John. Yeah.

I think your next question comes from John Chappell from Evercore ISI. Please go ahead.

Thank you. John, I'm going to stick with you. From any way we measure yield, whether it's revenue per RTM or revenue per carload, the numbers look pretty strong. Just generally on core pricing momentum, but also I just wanted to highlight auto and intermodal from a revenue per RTM perspective. A little bit of pressure there. Was that a length of haul issue? Was that a new service kind of you know, mark to market or were there any kind of more extreme competitive pressures in those segments that maybe had them lag the core portfolio?

Yeah, thanks, John. You nailed it. I'll give you the stats. Our automotive length of haul on the quarter was up 17% and our intermodal length of haul about 20%. So that is exactly what you saw in those numbers. You know, as a whole, I would say I'm confident that this team is hitting it out of park in terms of pricing for the value of the service and the capacity that this network has. I'm super pleased with our here-to-date performance. Just to be candid, we're actively running north of 5% in a lot of those discussions and outcomes with those contracts. What makes me feel good about that is, you know, as we do that, that gives us a nice tailwind as you think about 2025 and what our same store looks like. Now, there's no doubt there's certain areas where we're feeling more pressures and certainly the intermodal space with all the trucking capacity and the cheaper saw rates for trucks. That has been a little more challenging. But luckily, we start to see a little bit of tightening as we move into 2025 in that space. And honestly, there may be a little bit of catch-up opportunity. I guess maybe the last point, John, and I think this is important just to point out, if you look ahead into Q4, I do know we are looking at a pretty significant fuel headwind as it relates to that sense for RFM, but that's maybe just something to keep an eye on.

Helpful. Thank you, Dan.

Thank you. Your next question comes from Fadi Shamoon from BMO Capital Markets. Please go ahead.

Yeah, good evening. Thanks. Kind of staying on the commercial side a little bit. So, The Gemini Alliance had been announced some schedules. They start up the service in February. And we've noticed kind of they're highlighting three ports that you serve being part of their loops. And I was wondering if you have any insight into what this might mean or translate into your network or your share in that kind of, you know, life as we go into 2025. and uh kind of follow up on some of the discussion earlier like if you if you're not kind of prepared at this point to talk about volume growth guidance for 2025 can you give us an idea what you feel this synergy pipeline will look like as we progress into 2025 i think you said in the prior call 800 million exit run rate for 24 what does this look like 12 months from now if you can provide any kind of insight into that thanks

Okay. So there's a few pieces to unpack there, Patty. I'll start off with Gemini. You know, certainly we have had a longstanding and really, I would say, strategic at the highest levels relationship with Half Egg Lloyd, a tremendous amount of respect between our companies. to grow, to expand our partnerships where we can to be very strategic. So certainly we feel very good about their prominence as part of that alliance. As you know, also, we've expanded our relationship over the years, most recently with Maersk in the development of our transload facility in in Vancouver where we utilize our land assets and partner with them to build that facility. Also, we've steadily grown our trust and our relationship with their ICI business, not only into Canada and down into the US. Naturally, I think we feel really excited about the Gemini opportunity. Frankly, their precision model that they want to deploy and how they deploy their ships and their assets and their port terminals really matches up philosophically with how Mark and Keith drive our rail operations. on a daily basis and I think that could yield a really positive strategic relationship. Now look, it's in the early days and we're working through what that's going to look like but I just take for instance Lazaro and specifically to the synergies you were asking about. You know, that's an area where it hasn't grown, and that opportunity for cross-border out of Lazaro maybe hasn't grown as much as we initially thought or as fast as we initially thought. But with APM Terminals and making the investments they're making and I think the commitment Jim and I have to grow that business, Along with the investments that Hutchinson's making, we see a tremendous opportunity to begin to see that volume grow through that Lazaro terminal. I will mention to you, Lazaro is still the fastest growing North American port that's out there. I think year-to-date, 32% of the last I saw, volumes are up. I can tell you our rail volumes are up 27%. Now, again, the majority of that is servicing domestic Mexico. But, again, we are seeing a fair number of, I would say, singles and doubles as we expand that service. Maybe the last piece on Gemini, and I think this is worth mentioning, is, you know, with the investments that DP World has made, at Port of St. John, it's really beginning to unlock that next step function of capacity at that terminal from the 300,000 tu a year potential to 800,000 tu a year with the development and addition of cranes at that port. So again, I think just another example of how we potentially believe you know, the partnership and expanded service calling into that port to generate growth in 2025. You know, specific to the synergies in the exit run rate, I continue to feel really good. Obviously, you only got a couple months to go with our exit run rate of $800 million to close out this year. I'm probably not allowed to give you any guidance beyond that into 2025. Other than I feel no reason why if we keep doing the things we do, we execute on business development opportunities, MNDR, the Lazaro and the Gemini, you'll begin to see our miracles. project in Kansas City and other locations unfold. We continue to gain momentum with our MMX service north-south. I see no reason why we can't see that synergy number continue at the pace of growth that you've seen through the first, I guess, two years of our control.

That's great. Thanks. Thank you. And your next question comes from Scott Group with Wolf Research. Please go ahead.

Hey, thanks, afternoon, guys. So I don't know if this is for Nadeem or Keith. As I think back to the analyst day last year, you talked about a sort of multi-year, high single-digit revenue, I guess probably mid to upper teens, earnings growth. And I think you told us 24 might be less than that, right, because you don't have the buyback yet. It sounds like the buyback is going to start next year. So I don't know, again, Nadeem, Keith, any puts and takes we should be thinking about for next year that you know about at this point that make, you know, that algorithm more or less likely to play out?

Yeah, Scott, I mean, obviously we'll give our formal guidance in January for results, but I think you captured it well. You know, nothing's changing as far as our multi-year outlook. you know, we're holding the line in terms of what we guided to last June, which was, as you said, high single-digit revenue growth, double-digit EPS growth, capex in that around 2.6 to 2.8 range. And as you said, you know, we're not getting a benefit to the buyback now, but we should start seeing that benefit next year once we reinstitute a buyback program. So, you know, as I look at where We're exiting 2024. We know we've got a strong crop ahead of us. We know some of our key wins and synergy opportunities are going to give us a very idiosyncratic opportunity to grow and be an industry leader in growth. again next year I would fully expect. So you can assume that what we guide it to is we'll start hitting our stride in 2025. And so I have no reason why we shouldn't be able to hit what you just mentioned in terms of our 2025 numbers.

Helpful. Thank you, guys.

And your next question comes from Tom Wiedewitz with UBS.

Good afternoon. I wanted to see, John, if you could give some thoughts on where you might be more optimistic in 2025, just in terms of which markets do you think can really continue to go strong and be drivers of growth? And then also, I guess, Mark made some comments at the beginning about some capacity investments. that uh you know potentially enable you to uh i i don't know if that uh creates more growth opportunity uh as as you add some capacity but just just some thoughts about you know where should we be most optimistic in uh 25 in terms of specific markets thank you yeah sure thank you tom so you know i think 2025 could shape up um at least in my mind

a little bit how we're closing out this year in terms of, you know, I don't know what we're going to get out of the organic Facebook if we're going to see it turn around and rebound and some tailwind there. I'm certainly hoping for it, but we're not counting on it. This kind of is in a rinse and repeat in terms of self-help initiatives and over-deliver the synergies. And it's really that lift that I just spoke to that excites me. I do believe, you know, there's opportunity for good growth in international intermodal, you know, not only with Gemini, as I spoke to quite a bit with other players, and now with our diversity across, you know, Vancouver, St. John, and down in Lazaro, I think gives us a strong growth platform. Ramp up of MMX, you know, still get marked on me quite a bit that we're not running long enough trains. on that service. And so I have a definite opportunity to continue to price into and fill up that north-south service. Now, the good news is I see a strong pipeline of opportunity on driving and on auto parts, on a whole variety of different items. And we haven't even really scratched the surface on our refrigerated product. I'll remind you that that facility that AmeriCold's building will be up and running here, let's call it June, July of 25. But I can also tell you we've been very candid about this is about creating an ecosystem. It's about creating a differentiated product in the marketplace. that really can go after truck volumes that are moving today. So I see the opportunity as we move into 2025 to expand the number of terminals we have co-located in this area by two or three or four more facilities, which again gives us that ecosystem that excites me. You know, and maybe one of the last areas, and we don't talk about it a lot, is our carload business, Tom. You know, it's an area of kind of the world of singles and doubles, but again, also really a creative business to our portfolio. And the team there has done a great job, if I think about how we expand our presence in the markets in Texas, particularly Dallas, how we continue to expand our fuel terminals in the Toronto and Eastern Canadian markets. And then also, you know, the ongoing demand that we're seeing, really, if you think about that Gulf region to grow our aggregates, business down in there and creating transloads and solutions to service those markets. So, you know, those are a few of the key ones. And I really didn't even mention autos, Tom, if you think about that area, because we still have a lot of contracts out there that are rolling over that we think we've got a really good service product to offer those OEMs.

Great. That's very helpful.

From the capital side, what I would say, as John brings this business home, obviously we still need to work on getting some of these locals off the main line where we can't pass trains. We talked earlier, that's what we're focused on, to make sure yard separations, local separations, we can continue to run an operation parallel with the road services. The biggest thing we'll hit at the end of this year is really double the capacity of Laredo Bridge. KCS made that investment. We finished it. We'll bring it across the finish line here soon, and that will create a lot of capacity to get across the bridge, 181, 180, amongst other grains and other products that could come across as well. Another piece is religious Kansas City, just as we treated it as two railroads. Years ago, as we look at it today, it's one network. We don't want to drive everything into Kansas City. We want to create that path where we can bypass Kansas City for dwell purposes, for speed, for car miles, for car days. So working through those capacity changes as well so John can continue to grow the business, but we can serve the customer as they expect us to serve them.

Great. Thank you.

Thank you. And your next question comes from Ken Hoekstra with Bank of America. Please go ahead.

Hey, great. Good afternoon. Nadim, that was a great rundown before on the kind of potential for 500 basis points sequential or improvement. You talked about the 100 basis point impact. Can you clarify? You just went so quick, the 300 basis point impact. You just went there. I just want to make sure I understand the difference. And then my question for John is thoughts on potential for additional tariffs. If we get an administrative change here, your thoughts on imports to Mexico, Canada, maybe cross-border. How should we be thinking about this as we prep over the next few weeks?

Yes, Ken, the year-over-year impact stock-based call was part of the 300 basis point. And then we had a $50 million increase year-over-year on imports. on derailment costs. $60 million came from one in particular in Board Black. So that combined with 100 basis points from the impact of the work stoppage is the full 300 basis points.

Thanks.

Yeah, Ken, look, it's a little bit of a wait and see, obviously, on how that's going to play out. Again, I'm really encouraged, you know, based on the comments Keith made earlier around, you know, kind of the administration of Mexico staying the line or maybe even double down a little bit here most recently around the desire to grow and to support, you know, commerce in Mexico to support North America. you know, I'm kind of resting a little bit on the fact that, you know, whatever administration comes into play, I think commerce for North America is important. And ultimately, I think, whether you look back at the current administration or maybe the one previous to that, that is what won the day. You know, USCMCA was obviously created during the first Trump administration, and ultimately turned into, I think, a good piece of policy for the three countries. So we'll navigate it. Obviously, we're staying close with our customers on this file. We're going to be active, no doubt, with whatever government is in place in the U.S. and also in Mexico. Mexico and Canada, and we'll navigate whatever those tariffs may or may not look like as we move into the future.

Great. Thanks, John. Thanks, Peter.

Your next question comes from Brian Osenbeck with J.P. Morgan. Please go ahead.

Yeah, thanks. Appreciate you taking the question. So maybe just a couple quick follow-ups for John there. Would you say you've already felt some of the impact of this uncertainty with constitutional reform, the passenger rail, just the broader tariff question in the elections and the transition of both administrations in the U.S. and Mexico? I mean, foreign direct investment has been pretty soft for a little while. So do you think you've already felt and seen some of this and the potential for it to improve when there's some uncertainty in terms of what the rules of the game are? And then just maybe more specific, it looks like there's been some trouble south of the border with your competitor handling some of the grain shipping over there. So you talked about a strong grain harvest in the second bridge of the Rado. Do you think that's an opportunity for you guys to pick up some additional share given those circumstances? Thanks.

It's hard to tell in terms of any sort of impact. We were talking about it actually prior to the call a little bit. There's so much activity that's been announced. in Mexico to support the auto industry, plastics, appliances, white goods, that we continue to work through with those customers down there that present huge opportunities for our cross-border shipments. It really gets tough for me to see, you know, is the remark slowed down or not. You know, I think my answer is no, I really haven't seen any impact at this point. And actually, just most recently, I can tell you, we were down in front of some folks that just didn't announced some recent production down in Mexico, and there was no apprehensiveness from them whatsoever in terms of moving forward with their investments, and that was foreign investment coming into Mexico. So we're going to have to just see how that plays out. I think the fundamentals just continue to support a North American economy, continue to make sense. you mentioned about the grain challenges and that. Yeah, I think we've certainly seen some opportunities migrate to our network. But I'll also tell you, and you've heard this from us a long time, we're not going to oversubscribe, we're not going to oversell. We're going to be very disciplined on what those opportunities look like. And that doesn't mean I We're not willing to work with our other Class 1 partners because we certainly are and we do. But I also want to make sure that if we're going to take on some new business down in those lanes, that marketing team can execute it because, as we've said a number of times, building that trust with the customer is paramount. And once you burn them, it becomes a lot harder sell to get it back on your railroad. And I guess last you said the second bridge, you're darn right I believe it's an age sales tool. It is something that myself and my team and our team down in Mexico are making sure our customers understand that additional capacity that we're going to gain that not only will continue to promote, I think, world-class fluidity through Laredo, but also give us the capacity to grow and grow with certainty with those opportunities that I'm talking about. So, yes, that presents a significant opportunity for my team in the future.

Very helpful. Thank you, John. Yep.

Thank you. Our next question comes from Steve Hansen with Raymond James. Please go ahead.

Oh, yeah, thanks for your time, guys. John, I want to follow up on your last comments on grain. I think you've spoken pretty positively to the north-south grain movement here for the past two or three quarters now. It's obviously somewhat crop-dependent, but how would you characterize your progress so far in grain in establishing that new north-south corridor or north-south lane? You've been trying to work on relative to maybe your initial expectations. Thanks.

Yeah, I'd say we're ahead of pace a little bit on that front. If you just think about our makeup of synergies and grain that's coming off of the legacy CP network, you know, terminating on the legacy KCS network, we're, I would say, ahead of pace. But nowhere where I want to be on that front, Steve. I truly believe we're just scratching the surface of in terms of creating optionality for those grain companies to sell into different markets like they've never had in the past. My CEO would always tell me, I would always complain that I didn't have enough grain markets for my shippers and we don't have that excuse now. We've got a really good service product to go into the south and into Mexico. So I'm super excited what 2025 can bring in that space in terms of not only grain out of Canada, down into Mexico, but across all of our upper plains terminals.

And I think, Steve, I would add to the can't underestimate the power and the value to the customer of a reliable fluid gateway. Now, that gateway, the single-line gateway, only grows stronger with more capacity. The alternative, the competitive alternative, is a very congested gateway that's much more complex because you've got three railroads involved as opposed to one, just by nature. The complexity adds additional risk to the supply chain. So in these times, the competitive alternative is challenged as it has been challenged. It even makes the value proposition for our route even more compelling.

Makes sense. Appreciate the call.

I think your next question comes from Robbie Shanker from Morgan Stanley.

Thanks, everyone. So just to follow up, our surveys have shown a shift by customers towards the FMX service in recent months. Is that just maturation of the offering since you launched it, or has something changed recently with your commercial and go-to-market strategy there?

Ravi, I think you called it right. It is a maturation. going through the sales cycle and process. It's going through – I'll give you an example. We have one customer that we literally tested one box a day for 45 straight days, and they every day measured our performance on a per-box basis to see if we could deliver what we said we were going to do. And I'll tell you the good news is we did exactly what we said we were going to do, and they rewarded us with a significant piece of business. that's actually starting up as you speak. So I do believe it's an absolute progression. I'll tell you, doing it in the face of the sort of trucking challenge and the The headwinds of all the capacity in that corridor that's out there now has been a little bit of a surprise and more of a challenge than I anticipated. I'm pleased with the work our sellers have done. Schneider, our partner in that corridor, has really worked hard and performed quite well. And when you begin to now be able to expand your sales offering with a product such as Emergent Speedway, either to the NS or the CSX now, with this transaction, just kind of continues to open up the portfolio of options we can offer shippers. So I continue to be optimistic that you'll see more of a step function of growth in that train pair.

Very good. Thank you.

Your next question comes from Ari Rosal with Citigroup. Please go ahead.

Ari?

Ari, your line is open.

I lost it.

We'll go next to Benoit Poiret from Desjardins Capital Markets.

Yes, thank you very much and good evening, everyone. Obviously, labor issues have been very topical this year. When we look at the volume in Mexico, we've seen a great cross-border activity level. So I was wondering whether there was any pull forward in demand with respect to the U.S. election. And also, John, you've been able to quantify that labor issues impacted RTM by about 3%. uh during q3 that that got lost so was just wondering about whether you see opportunity uh to to recover and maybe uh uh the latest discussion with shippers retailer about the opportunity to to get back this volume uh on the network all right so can you just a couple comments there

I do believe we saw a fair amount of pull forward, but maybe not on that north-south product, but ahead of our labor stoppage and just ahead of that in July and August. Now, I think it's normalized, and as I said, actually we've seen now as we move into October on that domestic and model front, I think a little bit of an uplift in our volumes, our transload volumes, and we're optimistic, at least the customer feedback seems to be that we're going to see that continue to close out the year. You know, the 3% RTMs, you know, related to the strike. I think the good news is the bulk of that business was our bulk business. You know, it was potash, coal, grain, opportunities like that that simply will roll forward. And it's part of the reason why when I say, you know, we've got record demand for coal in Q4, we've got record demand for potash in Q4, Part of it is that roll forward, so it's not lost. Now, certainly we lost some domestic intermodal in that, but I think that's kind of washed itself out of the system already. And as I said, we've actually seen a little bit of pickup in that volume. So that was the impact over those days. I don't have any concerns. There's plenty of freight out there for us to close the year strong.

That's a great caller, John. Thank you.

Thank you. And we have run out of time, so I will now turn the call back over to Mr. Keith Krill.

Thank you. I appreciate the time this afternoon sitting with us and discussing our results. I hope you would definitely agree what you've heard. In spite of the macro, we continue to be a very unique value-creating story at CPKC, outpacing the industry's growth, most importantly, bringing it to the bottom line safely and efficiently. We've created a premium network of parallels in our industry with new growth opportunities, and this team has and will continue to convert it, creating unique value for our shareholders. Stay tuned for our fourth quarter results. Thank you.

Thank you, and that concludes today's conference. We appreciate your participation, and please have a wonderful day.