Canadian Pacific Kansas City Limited

Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's first quarter 2025 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 would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. I would now like to introduce Mr. Chris DeBruin, Vice President, Capital Markets, to begin the conference call. Please go ahead, sir.

Thank you, Beau. 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 file with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. With me here today is Keith Creel, our President and Chief Executive Officer, Nadeem Vellani, 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.

Hey, thanks, Chris. It's certainly great to be here with everyone today. For a store of business, I'd be remiss not to pay tribute and express my appreciation to the 20,000-strong team of railroaders We have spread across three nations that I get privileged to serve with on a daily basis that actually produce these results. Results that certainly demonstrate industry best performance. First quarter, the team delivered revenue of 3.8 billion, which is up 8%. The revenue growth is driven by volume growth of 4%. An operating ratio of 62.5, which is 150 basis point improvement. An industry-best earnings growth at 14%, producing $1.06 of earnings. Finally, most importantly, a record performance from a safety perspective, driving tremendous improvement on both train accidents as well as personal injuries. We're undoubtedly off to a strong start in 2025, and we're experiencing a strong start to the second quarter. as well that being said there's certainly an undeniable macro environment uncertainty that exists trade policy uncertainty and currency uncertainty as such based on what we do know today we do feel it's prudent to and responsible to adjust our guidance at this time that said i firmly believe as a leader it's our responsibility to drive positive results with those things that we control We're not paid to make excuses. Crisis creates opportunities, and that's how we're approaching this uncertainty around tariffs and trade policies. Our base business remains strong. It's reflected in the results in the quarter and our volumes year-to-date, driven by strength in our grain portfolio, coal, potash, intermodal, including a record quarter on our Midwest Mexico Express, as well as a new partnership with Gemini. The uncertainty... that's created by these shifting trade policies on a positive side is also exhilarating opportunities that we always eventually felt would develop when we combined these two companies. This unparalleled three-nation network is uniquely built for times like this. We stepped into this trade storm that we're facing to become market makers. We're seeing opportunities with new trade flows between Canada and Mexico. We've got increased refined fuels, LPGs, plastics, grains that our customers in Canada are sending south as they look to diversify their end markets. Our network connects to those new end markets, a land bridge to Mexico uniquely. The ability to move more appliances coming north, furniture, food products, finished vehicles, and auto parts from Mexico to Canada as well. CPKC uniquely serves as a land bridge between Canada and Mexico. We're working closely with our customers in creating these industry-unique positive outcomes. But it's not just at the customer level that we're driving these results. Our teams are working closely with the government in Canada at the federal, provincial level, as well as the government in Mexico regarding policies that could further incentivize growing Canada to Mexico trade volumes. We're hearing from both governments a genuine desire to see the Canada-Mexico trade relationship mature and deepen, and we're playing a major role in supporting that agenda. Now, let's talk more on the U.S. front with the FRA, another very encouraging area of opportunity, positive developments and opportunities that we've been actively working on from a regulatory perspective. I'm extremely encouraged by the early discussions with Secretary Duffy. and the U.S. Department of Transportation team, especially those in place at the FRA on their willingness to implement process changes and utilization of technology to deliver safer and more reliable outcomes. It makes too much sense not to do these things. Mark will get into the details. They're fact-based, data-driven results and opportunities that the regulator wants. to embrace for best outcomes from a safety perspective as well as from a service perspective. This is all again refreshing change in my mind, common sense, best sense, value creating change. In line with other value creation opportunities that we realized in the quarter, the PCRC, the Panama Canal Railway, as you've seen early in the month after careful evaluation, we made the decision to divest our 50% stake in the railroad. The sale of this non-core asset to a key strategic partner, a major customer of the PCRC, allows us to focus on our core business and generates additional capital that we deploy to create value for our shareholders elsewhere. and our three-nation network. When shareholder returns, another area of strength last month, having delivered on our commitment to repay debt and reduce our leverage following the merger, we announced a new 4% share buyback program. And just yesterday, we announced a 20% increase in our quarterly dividend. I'm very pleased for this company to be in a position of strength again to begin returning cash to shareholders, particularly amidst a volatile market. So in closing, let me say this. There's short-term uncertainties, undoubtedly, from the macro to trade policies. That said, this network is performing extremely well, and volumes continue to be strong. We've continued the momentum we carried from 2024 to the first four months of 2025, just as we told you we would do. We have the opportunity, the network, and the team to drive a differentiated outcome, and that's exactly what we will do. So with that said, I'm going to turn it over to Mark to speak a bit to the operation. John provides some color on the markets, Nadim on the numbers, and then we'll open it up for questions. Over to you, Mark.

Thank you, Keith, and good afternoon. The operating team did deliver another strong performance for the quarter, demonstrating why they're the best in the business. Their focus on safely delivering our precision scheduled service model is delivering exceptional results, even during some of the challenging winter operating conditions throughout most of February. Dealing with three consecutive weeks of extreme cold is no easy feat, and I'm particularly proud of how quickly our network bounced back to produce a record march. We have carried this momentum also into second quarter. When I think about the results, we continue to drive strong year-over-year operating improvements, Our train weight and length improved 5% and 4%. Our locomotive productivity improved 3%. Fuel efficiency was flat despite the challenging winter. We delivered on strong demand, and in March we delivered the strongest daily GTMs in our combined company history. We met demand safely, efficiently, in part by leveraging our prior investments in locomotive interoperability, allowing us to send power from the southern portion of the network to the western portion of Canada, where we saw a significant surge in GTMs. A resilient network is well positioned to maintain this momentum, quickly adapt to changes in the operating environment as needed. If I look at safety, FRA personal injuries were 0.98, which is 14% better year-over-year improvement. Our FRA train accident had a record 0.38. That's 58% improvement year-over-year and noted a record performance as a combined company. And although we never stopped striving to do better, I'm extremely proud of the team for their commitment to our home-safe culture. If I look at the labor update, just turning to labor, I'm pleased on the progress we have made in this space. Recently, we announced four-year agreements ratified by both UNIFOR, MWED, and USW in Canada, representing our mechanical, engineering, and clerical forces. We're also working closely with the unions in the U.S. to expand our hourly agreements. These hourly agreements will support some of the redefined crew districts that we are in the process of implementing. As we evaluate traffic flows across this new network, combining crew districts in certain areas will allow us to run extended runs, further improve cycle times, and deliver more resilient service to our customers. As Keith noted and very proud, we are working closely with the FRA on a number of initiatives that will enhance safety and generate operational improvements, including removing redundant air tests at the U.S.-Mexican border, Also, securing the final waiver approval to optimize where we change battle order wheels on our network, driving yard efficiencies, and also reducing dwell at key locations like Kansas City and Laredo. Exploring our cold wheel technology that when implemented in Canada, or when we did implement in Canada, we've identified 30% more defects than the standard tests. and the ability to better utilize our broken rail detection in dark territories since we began this in 2021 we've detected 150 instances of broken rail preventing numerous numerous derailments i'm extremely encouraged by the f-ray on their willingness to explore the process and technology improvements which will lead to improved safety outcomes and enhanced service As I look at the balance of 2025, our capital plan is built to support safe, efficient, sustainable growth through pinpointed investments. We have capital investments coming online this year, including merger sightings and CPC that we spoke about, along with targeted investments in Mexico and Kansas City area to improve fluidity through those key corridors. We're also beginning to take on delivery of the new Tier 4 locomotives in the coming week, that will support our growth and improve reliability and fuel efficiency for our fleet. We will continue to make targeted safety investments across the network, including hotbox detectors and broken rail detectors, which are improving safety and generating material expense savings. So in closing, we have a lot of momentum operationally. This network is built to drive growth with the team to execute it. The operating team and commercial team are closely aligned and work with each other on our customers to adapt quickly to changes in demand and traffic flows. And with that, I'll pass it over to John.

All right. Thank you, Mark, and good afternoon, everyone. I'm extremely pleased with the record volumes and revenue, continued strong pricing, and unique value for our customers that we delivered this quarter. This performance is unique, particularly impressive if you think about the weather impact from February, along with the macro and tariff policy uncertainty. Q2 is off to a strong start, as Keith said, and our network is performing quite well. And although we continue to face this uncertainty, the team is laser-focused on what we can control, and I'm confident in our ability to deliver disciplined growth to this network. Now, looking at our Q1 results, this quarter we delivered freight revenue growth of 9% on a 4% increase in RTMs. Sense for RTM was up 5% with strong pricing and FX partially offset by fuel and mix. Now taking a closer look at our first quarter performance, I'll speak on an FX adjusted results. Starting with our bulk business, grain revenues were up 4% on 3% volume growth, a record Q1 performance. Canadian grain volumes were up 12% driven by increased grain to Vancouver and Mexico if export demand remains steady and we drive unique growth from our synergies. Now looking forward, our comps remain favorable through the first half of the year. The VRCPI was recently reported at 3.1% and our outlook for further synergies remains strong. Moving to U.S. grain, volumes were down 5% over prior year as we saw reduced volumes of U.S. grain exports. However, our U.S. grain franchise remains well-positioned with available grain stocks, and as we look ahead, we expect steady volumes across multiple outlets, including to the P&W, Canada, eastern U.S., and down to Mexico. We also had a record Q1 in potash, with revenues up 10% and 8% volume growth. With positive demand fundamentals and Campitex fully committed at strong levels for the first half of the year, we continue to expect another strong year of potash growth in 2025. And to finish out bulk, we closed the quarter with coal revenue up 21% on 10% volume growth. Strength was driven by higher Canadian met coal, as we moved more volume to Vancouver and Thunder Bay, driven by inventory drawdowns resulting from the prior labor strikes and weather impacts. Now moving to our merchandise business segment. Energy, chemicals, and plastics revenue grew 3% on flat volumes. Our base ECP franchise continues to deliver volume growth across multiple commodities from synergies, self-help, market share gains, and they were offset this quarter, though, by lower crude volumes. We had strong growth from refined fuel shipments and plastics from both the U.S. Gulf Coast and Canada into Mexico. We also posted an all-time record LPG performance in the quarter as our network is efficiently connecting Canadian production with destinations in the U.S. and Mexico. Looking ahead, we have a very positive outlook for this business segment with opportunities across multiple commodities, improving crude fundamentals, and new opportunities for trade directly between Mexico and Canada. Forest products revenues were up 2% on 4% volume growth. We continue to drive synergies and extended length of haul in this space, despite uncertain markets and a softer base demand. Volumes this quarter did benefit from higher wood pulp and paperboard, driven by synergies and a new contract that we secured last fall. Metals, minerals, and consumer products revenue was down 1% on flat volumes. A softer demand environment coupled with supply chain shifts impacted the volumes in the quarter. These declines were partially offset by higher volumes of frac sand and aggregates. Looking forward, we see lower cross-border steel demand resulting from the tariffs. However, we expect to see partial offsets from growth at two new aggregate transload terminals, along with the development of direct steel moves that our network can facilitate between Canada and Mexico. Moving on to the automotive area, revenues were up 18% on 24% volume growth. We posted another record quarter as this continues to be an area of unique growth for CPKC, driven by our advantage footprint serving production plants and auto compounds across North America, along with our closed-loop service solution. While evolving trade policy has resulted in choppy volumes, our long-term outlook remains strong, and we're staying close with our customers to drive growth in this business segment. On the intermodal side, revenue and volumes were up 4%. Starting with domestic intermodal, we delivered solid performance this quarter with volumes up 8%. We are seeing steady volumes with our Canadian retail customers and strong momentum on our MMX 180-181 service as customers continue to take advantage of the fastest, most efficient cross-border rail solution between the U.S., Mexico, and Canada. Our volumes on this service were up 42% in Q1, and March was our highest volume month on record. Now, looking ahead, we have good line of sight to domestic intermodal growth as our business with Schneider National continues to outperform, and AmeriCold's cold storage warehouse, co-located in Kansas City, starts ramping up mid-year. On the international intermodal front, the volumes were flat in the quarter. We saw higher volumes through the Port of St. John and Lazaro, primarily with Hapag-Lloyd as Gemini vessels started to ramp up in March. However, some of that growth was offset by lower volumes through Vancouver and Montreal. Looking forward, we continue to see a lot of opportunity in this space as the Gemini Alliance increasingly utilizes CPK C-SERV ports which you are now seeing in our volumes ordered today. While the Trans-Pacific market is experiencing volatility as a result of tariffs, our diverse port access across North America and reliable service proposition positions us well as trade policy evolves. To close, while the macro and trade policy remains uncertain, we continue to be confident in the unique growth opportunities this franchise has, coupled with strong fundamentals in our bulk business and disciplined pricing. I'm extremely encouraged by this network's resiliency and this team's ability to develop and convert new markets, and I remain confident in our volume outlook for the year. So with that, I'll now pass it over to Nadim.

Great. Thanks, John, and good afternoon. Turning to our first quarter results on slide 12, CPKC's reported operating ratio was 65.3%, and the core adjusted operating ratio came in at 62.5%, a 150 basis point improvement over prior year. Diluted earnings per share was $0.97, and core adjusted diluted earnings per share was $1.06, up 14% versus last year. Taking a closer look at our expenses on slide 13, I will speak to the year-over-year variances on an effects-adjusted basis. Comp and benefits expense was $682 million, or $677 million, adjusted for acquisition costs. The year-over-year decline was driven by lower stock-based compensation and efficiency gains from improved train weights and lower crew costs, partially offset by inflation and volume-driven increases from higher GTMs. As we look to the rest of the year, we expect our average headcount to be roughly flat, driving labor productivity gains against mid-single-digit volume growth. Fuel expense was $481 million, up 3% year-over-year. The increase was driven by 3% higher GTMs, partially offset by lower price and continued improved efficiency. The change in fuel prices was a $22 million or 20 basis point headwind to the quarter. Materials expense was $123 million adjusted for acquisition costs. The year-over-year increase was driven primarily by the long-term parts agreement that was put in place last year, driving higher materials expense favorable offset within PS&O for net savings in the quarter. We also saw higher maintenance expense this quarter driven by unfavorable weather conditions. Equipment rents were $99 million, up 14% year-over-year. The increase was driven by higher volume as we continue to extend length of haul, particularly for our automotive business, along with reduced efficiency from weather impacts in the quarter. Appreciation and amortization expense was up 4%, resulting from a higher asset base. Purchase services and other expense was $573 million, adjusted for acquisition costs and purchase accounting, down 1% year over year. The year-over-year decline was driven by savings from the long-term parts agreement, which I mentioned earlier, along with lower casualty expense. These savings were partially offset by the impact of lapping a $34 million one-time non-competition waiver received last year. Despite the impact of weather this quarter, we continue to drive efficiency and cost energy gains. These gains, along with lower inflation, are driving sustainable improvements to our cost structure. Moving below the line on slide 14, other expense was $7 million in Q1, driven by FX impacts in the quarter. Other components of net periodic benefit recovery was $107 million, reflecting primarily the lower discount rate compared to 2024. Net interest expense was $216 million, or $211 million, excluding the impact of purchase accounting. The year-over-year increase was driven by higher short-term debt balances and new long-term debt issued in the quarter, along with FX impacts. Income tax expense was $292 million or $322 million adjusted for significant items and purchase accounting. For 2025, we continue to expect CPKC's core adjusted effective tax rate to be approximately 24.5%. Now turning to slide 15 in cash flow, Q1 cash provided by operating activities increased 14% to approximately $1.2 billion. We continued our strong level of investment in the network with CapEx spend of $711 million in the quarter. Cash flow remained strong as we delivered $456 million in adjusted free cash for the quarter. The quarter also marked an important milestone as we resumed shareholder returns for the first time since the merger. In late February, aligned with our principles of disciplined and opportunistic shareholder returns, we announced a new 4% share repurchase program. This was an acceleration from our original plan in order to take advantage of volatility in the market. In the first month of the program, we repurchased 3.5 million shares, or approximately 9%. In line with our strategy of a balanced approach to shareholder returns, as Keith mentioned, yesterday we announced a 20% increase to our quarterly dividend. This dividend will continue to be an important avenue to return cash to shareholders, and we intend to gradually increase it over time towards a payout ratio of 20% to 30%. Now, looking at our guidance update, in January we gave a wider guidance range, acknowledging macro uncertainty, and we committed to updating that outlook as we learn more. Four months into the year, we are tracking right on plan with volumes up mid-single digits. The updated guidance reflects our current view of the impacts from trade policies on certain areas of our business, as well as the impact from a stronger Canadian dollar, which at current levels would present a two-point headwind to the guidance we issued in January. Taking a step back and review the quarter, Mark and his team have the network running extremely well. John and his team are driving industry-leading growth, and we are still tracking the mid-single-digit volume growth for the year. We continue to deliver discipline on price and cost control, and we have resumed returning cash to shareholders. While much remains uncertain, the team continues to deliver strong results, and we're very well positioned for another year of double-digit earnings growth. With that, Keith, I'll turn it over back to you.

Okay, thanks, gentlemen. Operator, let's open it up for questions.

Certainly, Mr. Creel. Thank you very much. Ladies and gentlemen, at this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. As previously highlighted, please limit yourself to one question. We go first this afternoon to Scott Group of Wolf Research.

Hey, thanks. Afternoon. So, John, I wanted to start with you. There's seemingly this big sort of import cliff coming into the U.S. I'm wondering, are we seeing, are we expecting to see the same thing into Canadian ports and Mexican ports? And just how you think about the impact of that? And maybe this is silly, but do you think there's opportunities for Canadian ports to be gaining share from U.S. ports, maybe as a workaround with tariffs, and then just to broaden out to the broader tariff thing, what percent of your book of business do you think is ultimately tariff-exposed here? I know there's a bunch, but broadly I'm tariff-exposed.

All right, Scott, let me see if I can work through that a little bit. On the international front, I would say we're very different than I think what the U.S. roads may or I guess may not face here. in terms of that that cliff um you know i would say we we really haven't seen a whole lot of pull ahead on on that front at all as it relates to international um our volumes are i think uniquely positioned strong right now and i think you can definitely see it in the numbers right now, simply on the basis of the partners that we've selected, the growth with Gemini, and they're off to a really good start. And I would tell you those volumes, both at Port of St. John and at Centerm in Vancouver, have been somewhat stronger than we expected. And again, as you know, the majority of our freight over time has somewhat transitioned maybe a little bit more away from cross-border U.S. freight to a higher profile of Canadian-destined freight. And I think we're benefiting from that right now. And maybe to that point, You know, a very small percent of our book, I'm going to say less than 1%, is international freight that would be, let's call it, from China destined to the U.S. through our Canadian ports. So, you know, I would characterize that as a little risk. And honestly, we continue to see strong growth at Lazaro. You know, I think I consistently said it last year, it was the fastest-growing port in North America and, frankly, the world in many cases. And Lazaro continues to show good growth, you know, not only with our domestic service within Mexico, But then also we've seen a steady growth in some of our cross-border business and that continues today. That largely has not been impacted by any tariffs. So I feel really good about what the future holds on our international business right now. You know, broadly speaking, on the tariffs. Certainly the automotive area is an area that presents some risk and choppiness that we've been watching. The steel tariffs are an area that we're keenly focused on and working with our customers on alternatives. As I look ahead, as we get to new crop in the harvest in the US, we'll certainly be watching how our soybean movements progress, you know, export to China and what alternative markets we can develop for that business. And really those are the areas that we're focused on. I think the good news is that, as Keith alluded to, really the balance of our book has been quite strong so far year-to-date. I hope I got most of it.

Really helpful. You got it. Thank you. Thanks, Scott.

Thank you. We'll go next now to Walter Sprackling with RBC Capital Markets. Please go ahead.

Yeah, thanks very much, Operator. Good afternoon, everyone. So my question is really on your volume cadence. And John, you mentioned that your second quarter seems to be starting out even stronger than your first and accelerating. I mean, last week was up almost 20%. And you didn't change your RTM guide as part of the EPS guide. And just wanted to to dive in a little bit more as to what really is leading you to an EPS growth reduction while holding your RTMs, which your RTMs are still at mid single digit and if anything accelerating from here. So just curious the logic there in terms of how you map out your guidance by each of those inputs.

Well, Walter, let me just take that just in terms of where the Canadian dollar has really appreciated since the beginning of the year. Our initial guidance had a Canadian dollar exchange rate around $1.42, $1.43 level. You know, I look today, we're closer to 137, 138. So that in and of itself has an APS impact of about two percentage points. So if you look at the low end of guidance, we went from 12% down to 10. And that's really the big driver of that really around the currency. So, you know, we still anticipate that mid single digit RTM growth, as I mentioned. So that's a big driver.

Appreciate that caller. Thanks, Nadim.

Thanks, Walter. Thank you. Your next question comes from Chris Weatherby of Wells Fargo. Please go ahead.

Yeah, thanks. Good afternoon. Maybe just to follow up on that. So I guess the low end kind of moves with FX. Should we assume that the high end kind of ticks down a little bit more maybe on the lower end of mid-single-digit RTMs? And then I guess maybe if I broaden out the question a little bit for 2025, how do you think about the OR in that context? Maybe you want to answer on 2Q or give some thoughts around the full year, whatever is helpful.

Yeah, I'd say, Chris, I think that's fair in terms of, you know, when we factor in some of the tariff impact and policy changes that could have an impact on the top end of volume. So, you know, maybe it's not six, maybe it's closer to five and that type of level. As far as the OR, you should see sequential improvement from the 62.5. Of course, Q1 has a typically much higher OR than the rest of the year, and I expect that to continue to improve over the course of the year. Traditionally, we've seen two to 250 basis point of improvement in the OR, and I don't see why not, especially in this kind of volume environment where we're seeing... such a strong start to the quarter, and we've got some pretty easy comps into May for the year. I fully expect us to be able to deliver sub-60 OR for the year, and I don't see why we can't do that. You know, you've got fuel prices, there's fuel surcharge coming off that's supportive to the OR, kind of neutral from operating income, but still helpful with the OR. At the end of the day, we're running extremely well. This network, Mark and team have it humming, and so from an efficiency point of view, I think operationally, we're going to see some benefits there. You know, we don't anticipate the labor disruptions that impacted our ports and international volumes last year that impacted our network when we had some of those stop and starts last August. So I think the impact that we had on casualty a year ago has become a big tailwind to the OR. So I'm quite bullish about our ability to get back sub 60 and leverage this great volume that we've got to start the year. That's great. Thank you very much. Appreciate it.

Thanks, Chris. We'll go next now to Brian Ostenbeck of JP Morgan. Please go ahead.

Good afternoon. Thanks for taking the questions. John, maybe for you, I think you mentioned that the cross-border really hadn't seen too much of an impact, so I just wanted to see if you could unpack that a little bit more. Obviously, the 180-181 seems to be a big driver there, but I would have thought with maybe some network issues with your peer in the In the east, that might have been slowed down, especially with the auto headlines as well. So thoughts there would be appreciated. And then, just Nadim, if you can talk about how we should expect the pace of the buyback to ramp up from here off to a pretty strong start in the first quarter. Thank you.

Yeah, Ryan, so maybe a couple of things there. So, you know, certainly as some of these tariff noise rolled on and off, you know, specific to, let's say, autos at the beginning of April, there's no doubt we saw some choppiness in some of those cross-border flows coming out of Mexico onto our network. Now, I can tell you that has progressively smoothed out through the month. And as of the last couple days, I think all of our production facilities are up and running and shipping automobiles. So I feel good on that. You know, the domestic product that you were talking about, the MMX, Those volumes have just continued to be growing and strong. Schneider, I'm excited to say that we've just launched this week over 200 new shipments specific to auto parts in conjunction with Schneider on our network. It's brand new business that we're bringing on. it's really you know our first foray into into a major way of moving that business so i'm quite pleased with that and you know frankly we're still kind of just in the early innings of growth with csx as we as we work on that product to the southeast um you know other areas You know, we've probably seen a little bit of cross-border impact specific to some of our steel business that moves out of Mexico into the U.S. But that being said, we've also seen some new opportunities materialize in which we're actually shipping some steel products out of Mexico up into Canada and some other markets. So, you know, there's certainly some impact there. But the team is not resting. As Keith said, it's an all-out blitz, literally, to do everything we can to make our own luck as all this uncertainty sort of unfolds on the tariff front.

Brian, just on the buyback, so you'll see the filings. I mean, we've been quite aggressive. I think as of yesterday, we bought back 20% of the program, the 4% share buyback for the year. So 20% of that program is complete. You should expect us to finish it by the end of the year, you know, completing about 10% of the program. capacity per month. You know, we've been quite aggressive given the pullback, given the compression in multiples, and given the fact that we're trading at a discount compared to where we should be trading. And so we're going to be aggressive up to the point that we see the stock price getting closer to our intrinsic value. So you should expect this program to be complete by the end of the year. Okay, helpful. Thank you.

Thanks, Brian. Your next question will come from Fatih Shamoon of BMO Capital Markets. Please go ahead.

Thank you. I want to circle back on the volume framework, maybe a little bit more medium term. When this network was put together, the biggest kind of addressable market opportunity felt like being, you know, U.S.-Mexico driven in various end markets and a lot of these end markets feel like they're under attack a little bit with these trade balls, whether it's autos or steel and other things. I mean, from your comment, it doesn't feel like your outlook is dampened by any of these things. I just wanted to get some additional framework from you. Where do you see the opportunity potentially if these end markets kind of do come under attack and ultimately end up being – more punitive from a growth perspective.

But, Fatty, I'll let John provide a little color, but I'll just say at a high level, you know, listen, if these end markets are impacted, that's our job then to shift and create solutions. And when I talk about market makers and I talk about land bridge, You know, if we lose a little bit because of the impact of tariffs on autos or tariffs on steel, number one, we don't think it's going to be material. This thing started to settle out. It's doing exactly what we thought it would do, and the automotive manufacturers are back online. Just making those shifts overnight are impossible to do. There's still a demand in the U.S. for vehicles, and these OEMs are producing them. That said, this crisis that's been created with the uncertainty in Canada and Mexico and lessening their dependence upon U.S. markets has created opportunities. You know, making these numbers that offset some of those headwinds, just over the last month, John can give you more color and names if necessary, but there's over $100 million of new revenue that this crisis has created that originates in Alberta that goes to Mexico. So you start thinking about the puts and the takes, and this, again, this network is uniquely enabled to be able to do that. So if we lose here, we're going to gain there, and it's our job to go out and divert those opportunities. And that's exactly the expectation that John and his team have, and that's exactly what they're doing.

I think, you know, from our team, we're focused on what we can control. And frankly, not that we're not keenly watching the tariffs evolve and understanding those impacts, but we are laser focused on the task at hand. And to Keith's point, That's sales blitzes. That's getting our, you know, we just finished a 60-day sales blitz where we met with over 500 customers. We believe we've developed 100 million of new wins simply in that effort that we'll onboard, mostly in the merchandise and ECT spaces. To Keith's point, we've seen good momentum. You know, largely, I would say, again, in the energy space, but really across all commodities to figure out how we enhance this land bridge and connect Mexico and Canada. But it doesn't stop there. It's, you know, dusting off the conversion files that we talked about back at IR Day. And, you know, there's still $100 million that I've targeted to my team there that is three to two and four to two routes that we can convert and provide a better product for our customer. I guess you put all that together, Combined with the resiliency of our bulk franchise, which again, I think if you look back to recession and pandemic time, that bulk franchise has stood up against a lot of uncertainty. And we feel really good about the demand in coal, potash, and both U.S. and Canadian grain. I fully expect we're going to outperform on our synergies this year. I'll bring you back. I think we can grow by 300 million in run rate on synergies in 2025, and I have no reason to believe we can't do that and potentially even outperform that, and I can assure you we're going to continue to be, and we have been super disciplined on our pricing. The pricing model is held in really strong and super proud of the team, and we're going to keep the foot, we're going to keep it in throttle eight on the pricing front as we look forward.

Fatty, I'm going to give you a case in point. This As a fellow Canadian, I'm going to give you a Canadian success story that this crisis has created. So just last week I was in Toronto, and I was having a conversation with a CEO, fellow CEO of a very large Canadian retailer about opportunities, about diversifying markets, about imports, about exports that might not involve the United States if that's not the desired market or opportunity. the warranted market to go to. And the question about how many things are on Canadian shelves that Canadian consumers purchase that yesterday originated in the United States, but where do they truly originate from? Where are they produced? And if you really get into the detail and you're motivated to create solutions for the customer, you lead them to information that, quite frankly, you see that a lot of these products, in this case, are produced in mexico then they're trucked to the united states to be packaged and labeled and warehoused and then trucked out of the united states to go across the border to the canadian shell so is that good for the environment i'd say no is that good for cost control and for optimizing a supply chain i'd say that's not best in class but when you're a railroad that can uniquely connect the origin and the destination, and the middleman is redundant or not necessary and inefficient. And in some cases, they don't want you to be there. That creates opportunities. So those discussions are being had. They're being had with people that have interested and motivated minds. And for us to be able to help create some of those wins, it's this doll of creative durability that this unique combination has created. Again, creating a solution that, quite frankly, Before was never possible, and even today, only this railroad can create that kind of solution. That's the power of this network.

That's great. I appreciate that he does answer. Thanks.

Thank you. Your next question will come from Robbie Shanker of Morgan Stanley. Please go ahead.

Great, thanks. Good afternoon, everyone. Just to follow up on the point of controlling the controllables here, what is the plan if there is a prolonged cliff in incoming port volumes? Is there a pandemic playbook you can dust off on costs? Anything you can do with labor flexibility, or is it just a wait-and-see approach?

No, it's never going to be a wait and see. We're always paying attention to that, Ravi, and I can tell you I've been doing this for three decades now, and I've been a PSR. leader in this industry for two decades, and I've been through several recessions, up cycles, down cycles. We have metrics in our company. We see slippage when it's occurring, and we take action on a daily and on a weekly basis. So if we see we have visibility to this alleged cliff, we see the ships coming, we know two or three weeks ahead of time, we're not going to wait two or three weeks to take action. We're going to start lining up responsible action. We can adjust crew starts. We can adjust fleet sizes. We can adjust yard expenses. We have all kinds of levers that we, quite frankly, have pretty good muscle memory in swing history of pulling and swinging. In this railroad and those kind of times, we're going to be the best ship in the storm. There's no doubt about it. I don't think that's going to happen. We're not planning for a recession, but we're always prepared for one.

In case I would add, I mean, we're two years in this CPKC, and we're experienced enough now on the southern region that where we can react quite quickly, move power around, crew starts, whatever it is we need to do. Again, I think you said it better, control what we can control, and that's what we will do. It's not an ask. Understood. Thank you.

We'll go next now to Tom Wadowitz of UBS. Please go ahead. Yeah, good afternoon.

So, you know, I think Keith and John, you've had some pretty interesting commentary on kind of pivoting to the, you know, Canada-Mexico opportunity. And you mentioned the $100 million opportunity out of, I guess, Alberta to Mexico. Is there more perspective you can offer? Like, if you said, not sure the right framework, but just trying to think about the size of that relative to if you said, you know, Mexico-Canada relative to the size of your Mexico-U.S. business is, I'm assuming it's a lot smaller, but maybe like what the starting point is. And I guess other examples of where you potentially could see growth outside of ECP, or just to frame it a little bit more, because it seems something new and pretty interesting, but a little hard to get your arms around how to frame it or give it context. Thank you.

yeah tom it's a good question and it's honestly it's uh um as part of this sales blitz we've deployed it's it's really been trying to understand that and and and peg it ourselves um i can tell you between lpg plastics fuels, and frankly, those have been the biggest three so far. The ECP space has led the way. Now, I'll tell you, I was down in Mexico last week meeting with a number of customers, and certainly some of the steel business down there has been impacted by cross-border and that, but getting into a discussion with the CEO of this major steel company and really picking his brain around, well, have you sold into the Canadian market and what products would be conducive? And frankly, you know, maybe not dissimilar to what we stepped into when we took over KCS on the auto front, kind of that crisis and creating something good out of that with our closed loop. We're kind of in the early innings of that in this process. To your point, it probably isn't anywhere to the order of magnitude in terms of like Mexico into the U.S. or Canada. into the U.S., but there's certainly an opportunity there. I'll just give you another example to help frame it up. Grain that moves out of the U.S. today into Mexico does not have to be fumigated. It can move, I'm going to say generally, seamlessly into the market. Grain out of Canada is an area where past regulation has required this grain to be fumigated. And it also requires some different documentation and policy to move into Canada or into Mexico. And it's not that we're not doing it today. We are. But as Keith talked about, these are the things we're working with the governments on both sides of the border to say, you know, how do we foster this? in this case, grain trade in a more seamless way that we can certainly enable through our 8,500-foot grain product out of Canada and Mexico. So a lot said there, and I'll be able to probably hopefully quantify it a lot better as we move down this path. But I would say the most important point is we're not resting on our laurels here. We're attacking this opportunity just like we did the autos a year and a half ago. And we're already starting to see some early results.

So it sounds like it could broaden out from ECP and maybe steel and grain and could be broader than that, but you just need some kind of time to see how that develops. Is that fair?

We've got to sweat it out. Tom, to John's point, talking about grain, speaking to that specifically, we had a move two weeks ago that it was a test move, a new move for us. We got oats that originated in Saskatchewan that went all the way deep into Mexico. It's a 3,000-mile unit train move. That's a pretty exciting move. thing to think about when you think about the power of that. But again, that fumigation is an impediment. It's additional cost. It's additional time. It affects the assets. It affects the rate we have to charge. It affects the customer service. So why does it need to be there? We've got the minds and the motivation now and the attention of the Mexican government. We've got a great spirit of partnership with the Mexican government. We educate, we communicate, we eliminate those unnecessary barriers, and we incent trade, more trade to move between the nations of Canada and Mexico.

Great.

Thanks for the time. Thank you. Your next question comes from Kevin Chang of CIBC. Please go ahead.

Hi, good afternoon. Thanks for taking my question. Maybe just on the auto front, it does feel like, at least with this U.S. administration, reshoring U.S. auto production is definitely key to their industrial policy. And I think over the past few weeks, we continue to hear more D3 OEMs and foreign OEMs. talk about increasing U.S. production. I'd be interested in knowing what discussions you're having with these customers as they look to reshape their supply chain and I guess how CPKC can assist with that.

Well, maybe a couple points on that, Kevin. I guess first of all, as I said at the beginning, we're in a pretty good position on our auto franchise right now. We've got all our production facilities up, running, and shipping. And I can tell you, you know, for the most part, inventories are fairly low across the at least our network and across Canada. So that's been actually pretty supportive of volumes and I do believe the consumer as a whole maybe has been a little more aggressive in looking to buy an automobile. maybe earlier in this year than maybe they had planned. And that's spurring some demand. I can tell you, I met with a leading automotive shipper here a couple weeks ago, and they got 60,000 unfilled orders in Canada alone. Those are sales made where they're waiting on vehicles to get into the marketplace. And that's certainly the area which we do best and we fill. The other piece that I would point to is we got 6,000 available acres across this network in three countries that we can develop. And I think you've heard this story and our land value quite a bit over the years on how we've created, you know, unique opportunities for our shippers and our customers and co-location, you know, across our franchise. And certainly that is something that we've been aggressive to get into the marketplace. And frankly, we just published the nine site-ready locations that we've gone out, and we're actively marketing those locations with, well, not only the OEMs and automotive companies, but all sorts of supportive industry that may be looking to do more or build more in the States. So we'll see what that brings. But, you know, as it stands right now, I fully expect in our automotive franchise to continue to produce at the record rate we've been able to do really last year and through the first quarter.

That's great, Calder. Thank you very much.

We'll go next now to Stephanie Moore with Jefferies. Please go ahead.

Hi, Jeffery, and thank you. One is a quick follow-up question, just your commentary in terms of OR performance for the full year and the second quarter. Did I hear you correctly with the kind of idea that you expect OR to improve as the year progresses? Are you meaning kind of sequentially off of this first quarter level?

Yes, absolutely.

Okay, got it. Thank you. And then second, more of a big picture question here, you know, as you've had, whether it was your sales blitz or just continuing to have conversations with customers, have you, particularly those customers in Mexico or with businesses in and out of Mexico, have you seen any kind of increase in activity of maybe production move? to Mexico or plans to move to Mexico just given the disruptions or potential disruption in trade lanes, you know, from other parts of the world and maybe viewing Mexico as a viable alternative from a manufacturing standpoint? Thanks.

Well, you know what, the industrial device development pipeline, you know, on our network in Mexico, it was really strong. A number of projects underway under development, under construction. I wouldn't characterize, Stephanie, that maybe we're seeing a glut of new. We've certainly seen some pause, but I would say the majority are continuing to push forward, which is something we've watched really close, given some of this uncertainty of those you know, projects would be shelved or changed or, you know, sort of the boardrooms were thinking differently around those investments. And we really haven't seen that at all on a grand scale. So I continue to believe that our Mexican territory is ripe for development, and we're going to continue to certainly push that narrative.

Thank you. Appreciate it.

Yeah. Thank you. We'll go next now to Jonathan Chappell of Evercore ISI. Please go ahead.

Thank you. Good afternoon. John, I feel like if we didn't have the crisis to talk about, there might be a little bit more focus on Gemini. I know you were super excited about it late last year, and you mentioned it a couple times this afternoon. Is there any way to put numbers around what the Gemini potential is, given your positioning with the two partners there, whether it's in units? revenue, and has that changed at all over what's called the 12 to 24-month period, just given some of the uncertainty that's emerged since that partnership started?

You know, John, my enthusiasm around it is not waned one bit. Actually, it started off, I would say, even faster than we anticipated. DP World is doing a tremendous job with Gemini at Centerm. You know, we are tempted to quantify it a little bit for you. But, you know, we're moving quickly towards two trains a day. That's the pressure I'm wanting to put on Mark and the team in Vancouver to get to two trains a day launched out of send term. And the majority of that tied to Gemini. They've done a great job at Port of St. John. You know, Maersk has moved their service. Now it's part of Gemini out of Halifax down to that port. So we're super pleased with that. You know, maybe the one area that we'll watch is Lazaro. We have a lot of opportunity between Mariskin and HAPAG focused on cross-border into the U.S., I would say the momentum hasn't slowed on that. Certainly a portion of that was tied to imports through Mexico from China, so we're watching that and how that may change or not. But honestly, I don't really feel that that's going to be a needle mover at the end of the day. But needless to say, no, I continue to be super excited about what Gemini brings to this network. Thanks, John.

And your next question will come from Ken Hexter of Bank of America. Please go ahead.

Ken Hexter Great. Good afternoon. Sean, or I guess Nadeem, you've had a couple questions in the OR, but I just want to understand the normal post 1Q to 2Q, you get about 260 basis points. I think I just want to understand your comment there. Can you outpace normal performance given the weather you had, or were you saying the weather wasn't too difficult, that it's just going to be a normal path? And then my question, John, on pricing, you haven't really gotten a lot of pricing. You mentioned pricing real quick, but revenue priority, I'm really accelerated, I guess, focused on coal, grain, potash, ECP. Any thoughts you want to talk about seeing some of the accelerating strength in some of those commodities?

Ken, I think that 200 to 250 basis points, a realistic expectation. Obviously, there's areas where we can't control like stock-based comp and If that becomes a tailwind, it could be bigger than that. I'm optimistic it won't, but I think the $200,000, $250,000 is fair.

Thanks. And, Ken, a few comments on pricing. I continue to tell you that this team is the best in the industry in pricing to the value of our service and capacity. And I think that's what we've continued to see. Our renewals are on the very top end, 4% to 5% plus. I'm quite pleased with that. I can tell you in this quarter we've repriced two existing legacy KCS contracts that were out there. There wasn't much left to reprice, and we got through those this quarter in a positive way. So I feel good about that. You know, I think we guided an IR day back then at pricing at 3% to 4%. My expectation is to exceed that. And as I said earlier, VRCPI, came in today at 3.1% for our, you know, 25, 26 crop year. So, we're pleased with where that landed. So, again, we'll keep it on throttle eight as it relates to pricing. Thanks, Sean.

And your next question will come from Steve Hansen of Raymond James. Please go ahead.

Oh yeah, thanks for squeezing me in. Keith, I was pretty taken by your upbeat commentary about the FRA discussions pertaining to technology deployment, and I guess some potential benefits to safety and service. Is there a way to frame the timeframe around that deployment and what you think it could ultimately mean to the efficiency and safety?

Very short term, the changes that Mark spoke to on VAT orders with our grain fleet, there's an optimal design that we've implemented Since spending and investing some money in IFG, which is our terminal there in Kansas City, that allows specifically the legacy KCS gray network to benefit from and takes cars that would have been shuffled up to Kenokee Yard to be battle-ordered repaired and then shuffled back down to be entrained. So we're going to get some relief. with a waiver that allows us to take them out and train at Laredo as well as at IFG, which optimized that supply chain, and that's imminent.

Yeah, that's within the days. We'll have it soon. I've already spoke about it this morning.

And then part two on the redundant air brake test that Mark spoke of, we expect that in the near term as well.

Yeah, so we've had FRA on property for the past two weeks in Laredo, seeing very good signs, doing a good job on our property. our staff down there showing them what we do, how we do it, and we leave within the coming months. It's a really good dialogue back and forth. I know I spent some time in Washington just like you did, and good dialogue with FRA, good dialogue with kind of what they see with data, how we can use that data to embed a lot of different things that were taken away over the past years. That's great to hear. Appreciate the call, Eric. Yeah.

And we'll go next now to Brandon Oglinski of Barclays. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking the question. Mark, I guess following up on that, I know you spoke to the FRA as well in your prepared remarks, but I think you mentioned something along the lines of getting your labor agreements in place is helping the network actually run better. Or maybe I misheard you on that, but What's the plan this year, just looking at it from an operational perspective, combating inflation and getting the efficiency up even further?

Yeah, so a couple of things. First, I would say every year we have GM meetings where we look at taking costs out. We do that first, regardless of what increase that we have as far as cost of living for unions. We look at that first, 50, 60, upward of 70 million that we take out, just cost alone. And then for the stability that we have spoke about is the three unions that we've already signed up this year at 3%. That would be a four-year deal. We're on the cuffs of finishing up TCRC and the RTCs, which is the dispatchers. That will be coming up in the coming weeks. We'll go to coming out of mediation on that and should have that finished up in arbitration here soon. Now, when we turn to the U.S. side, we are still looking at our hourly agreements. We can have hourly agreements across a couple of the southern region, meaning the former Mid-South KCS, some of the LNA territory, if it just takes you back. some of the operating agreements they've had in place. So looking at doing some of those hourly agreements down there. So some of that you can change some of the crew base around. You can also run longer in some areas, which we have implemented toward the New Orleans route. So certainly every opportunity we can take now we're taking, and then once we get new agreements in place, we can build upon that. And I would even say just from the Mexico perspective, we can continue to work with the unions in Mexico to do more. I know it's steady state and we work with them every month and every year to do those agreements, but it's certainly making progress for sure.

Thank you, Mark.

And your next question will come from Ari Rosa of Citigroup. Please go ahead.

Great. Thanks. Good afternoon. Going back to the regulatory discussion, maybe you could talk about what are some of the other areas that you're pursuing and just how impactful you think they could be in terms of the cost savings opportunity or the efficiency opportunity that's gained from that. Thank you.

Yeah, so the cold-wheel technology is something we've had in place for years in Canada, and partly what that does for you is increases the cycles of turns on trains, meaning the equipment of grain hoppers, if it's coal, whatever the cycle may be, includes locomotives, so I can do more with less because I'm spinning the asset so much faster. And if you talk about what we can control, that's what we can control. So when I do the inspections of that, I can certainly pinpoint mechanical work whenever I do have to stop the train to do the inspection. I can understand what I can do at once, not just several times. on inspection so working with fra if we can get that in place with the with the u.s operations we can certainly do that toward the pnw we can certainly do that down toward mexico and again it's a one-stop shop with inspections there's lots of money to be had in that i don't want to quantify it until we can see exactly what we can do with that yet but again there's there's many more opportunities from a safety perspective From hotbox detectors that we talked about, just inspections of the portals that we have where we can do more work and inspect cars and see more defects than we do today from the human eye. And certainly from a technology perspective, that is much better. Not saying it will get away from the human eye. We'll always do that work. But I guarantee you we'll have a safer railroad because of it.

Thank you. We'll go next now to Benoit Poirier of Desjardins Securities.

Yes, thank you very much, and thanks for taking my question. John, with respect to the China vessel surcharge, I was wondering if you have seen any customer react to this potential, any new calls into your ports as customers try to diversify away from U.S. ports? And talking about port movement with respect to St. John, given the increased momentum with Southeast Asia improvement at the Red Sea Canal, have you seen any increased dialogue to ramp up at a faster pace the operation in St. John or through the eastern ports? Thank you.

Yeah, you know what? It's been a while. We've got pretty good momentum at St. John. Again, I feel really good with, you know, the ramp-up of Gemini there, but our existing business with the other steam shift lines has been growing also. And, you know, frankly, we just turned on a number of additional gem sets recently, in that marketplace that's gonna provide export opportunities, frankly, of products that maybe traditionally were coming out of the US, frozen products coming out of the US that now we're working with Canadian producers of similar products for export. And a lot of that's gonna be pointed at St. John for us. So, you know, I overall feel, you know, ongoing positivity around the whole St. John opportunity and on the backs of the growth we already have at that location.

We're getting good upside on capacity as well. I mean, there's plenty of room out there since they've moved out some industry. What was the other part, Benoit?

Oh, with respect to the China vessel surcharge, whether you see a more increased dialogue for people wanting to go to Canada instead?

You know what, I would say pretty minimal at this point. I think overall there's a fair amount of relief on sort of the changes that were implemented versus what that could have been initially when it was talked about. I think the steamship lines will adjust their fleets appropriately, ultimately, you know, for the U.S. ports. I'm not sure that is going to impact us a whole lot one way or the other, whether you think about Mexico and Canada. You know, we are looking at a few opportunities down in the Texas area with some existing business and what alternatives, if in fact some of these applications may apply to that business. But again, these aren't huge opportunities, but certainly it's a wait and see, and we'll understand it more as it progresses as we get closer and closer to October.

Okay. Many thanks. Okay. Thank you.

Thank you. And we have reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel. Thank you.

Thank you. Listen, thank you for your time this afternoon. I hope you walk away with a bit of color. Certainly, in spite of the winter, in spite of the many uncertainties that we're all facing, we produced a very strong first quarter. We're set up well to produce a strong year in 2025. This unique three-nation network is built for times like this. We're going to create solutions, not excuses, that will leave the industry unique. Growth outcomes and value for our shareholders, not just in 2025, but beyond. Thank you, and we look forward to sharing our second quarter results.

Thank you. Ladies and gentlemen, that will conclude today's CPKC's first quarter 2025 conference call. Again, thanks so much for joining us, everyone. We wish you all a great remainder of your day.