Canadian Pacific Kansas City Ltd. (CP) Earnings

Management highlights

### Merger Integration & Synergy Progress - The company remains on track to reach $1.4-1.5 billion in total annual synergies by the end of 2024, with a more than $300 million annual run rate step-up in synergies this year - Intermodal and grain network synergies are the fastest growing area, with the company still in early innings of optimizing new cross-border grain flows from Canada/upper U.S. to Mexico and the southern U.S - The MMX intermodal service is already at 70% capacity, and the team is evaluating adding a second daily train pair to capture additional growth without major additional capital investment - New growth opportunities remain in the closed-loop automotive supply chain segment, with new contract wins expected over the next 6-12 months ### Operational Capacity & Resource Planning - The company completed significant pre-merger capacity investments ahead of schedule, and built capacity ahead of projected demand, leaving it well-positioned for an upcycle in demand - Existing locomotive, rail car, and track capacity is sufficient to handle projected growth over the next 2-3 years; only incremental headcount will need to be added to support volume growth - New union work agreements (including the recently signed hourly agreement and Iowa corridor work schedule changes) are expected to generate headcount synergies that free up labor to support new growth, while also enabling faster flexible adjustments to meet demand shifts - Completed major network expansion projects, including upgraded 49-mile-per-hour track connecting to CSX and $75 million in Mexican network improvements, have unlocked significant additional network capacity ### Industry Consolidation Position - CEO Keith Creel is adamantly opposed to the proposed CN-UP merger, arguing it will reduce competitive options for shippers, create excessive market concentration, and create systemic operational risk from a single railroad controlling ~40% of North American rail volume - Management notes that the proposed CN-UP concessions only make minor, temporary changes and do not resolve core anti-competitive concerns, and that the STB regulator will ultimately evaluate the full public interest impact of the merger - If the CN-UP merger is approved and triggers further industry consolidation, CPKC will not stand still; the company already has closer relationships with BNSF and CSX, and can develop compelling competitive route and partnership options to compete effectively in a consolidated landscape - Even without merger approval, management sees new opportunities to develop collaborative commercial and routing agreements with other railroads (including CSX and BNSF) to improve customer service without industry consolidation

Guidance

- Operating ratio (OR): Without casualty, stock compensation, and incentive compensation headwinds, the underlying OR would be near 60% currently, with sequential improvement in operating metrics and OR expected in the second half of 2024, hitting sub-60% OR in H2 2024 - Pricing: Management expects to maintain pricing at the upper end of its long-term 3% to 4% annual yield growth target, with potential for acceleration given ongoing trucking industry and inflation dynamics - Capital expenditure: Full-year capital expenditure is expected to remain in the $2.6 billion to $2.7 billion range, even with a weaker Canadian dollar increasing domestic capital costs, which is sufficient to accommodate all projected growth through 2027 - Earnings growth: Management believes the combination of remaining synergy opportunities, improving macro conditions, and existing capacity will drive accelerating earnings growth with significant operating leverage starting in the second half of 2024, back toward previous long-term targets; operating leverage is expected to grow in 2025 and beyond - Foreign exchange and fuel: Full-year macro assumptions are largely unchanged from the start of the year, with an average assumed USD/CAD rate of ~1.38; near-term fuel assumptions have increased, but the company is mostly hedged, with any temporary operating ratio impact expected to reverse by the end of the year - Grain volumes: Management expects continued strong grain volume growth in the second half of 2024, supported by strong crops in CPKC's core growing territories in southern Alberta, southern Saskatchewan, and the upper U.S - Coal volumes: Q2 2024 represented the trough for coal volumes, with gradual improvement expected through the second half of 2024, and a return to 2023 volume levels by 2027

Segment performance

No full segment-level financial results with absolute revenue figures or revenue contribution percentages were presented in the provided Q&A transcript. Only volume and growth commentary for specific business verticals is included: intermodal and grain are seeing strong growth, with grain volumes from northern North America to Mexico and the southern U.S. up 60-70% year-over-year; the closed-loop automotive program is seeing progress on new contracts; coal volumes saw their weakest performance in Q2, with improvement expected in the second half of the year; refined fuels (ECP) shipments to Mexico have been largely inactive for 6-8 months due to Gulf market conditions. The land bridge cross-border Mexico business is targeting a $600 million annual run rate in 2024, with 65% of this business connecting Western Canada to Mexico and the remaining 35% connecting Eastern Canada to Mexico.

Risks & headwinds

- Industry consolidation risk: The proposed CN-UP merger would reduce competitive options for shippers, create excessive monopolistic market concentration, and create systemic operational risk where a single service disruption at a large merged railroad could cause widespread network chaos across North America - Customer uncertainty: Ongoing discussions of potential industry consolidation create uncertainty for customers, who generally prefer to maintain multiple competitive shipping options and have lingering negative experiences from past railroad consolidation integration disruptions - Refined fuels (ECP) volatility: ECP shipments to Mexico have been inactive for 6-8 months due to ongoing Gulf market dynamics, and the timing of a rebound in this business is uncertain - Fuel price volatility: Near-term fuel price increases create temporary operating ratio headwinds due to lags in fuel surcharge pass-through, though this impact is expected to reverse by year-end - Macroeconomic risk: The freight market has been significantly weaker than expected since April 2023, which has delayed full realization of projected growth and earnings targets

Analyst Q&A

• Q: Management is bullish on the commercial pipeline. Can you confirm this trend will continue to 2027, and elaborate on the notable expense items driving the second half expense bridge?

  A: Intermodal and grain synergy growth is on track to hit $1.4-1.5 billion in total synergies by end of 2024. Grain flows from northern North America to Mexico/southern U.S. are already up 60-70%, and growth is still in early innings, with expansion potential for a second MMX train and new automotive contract wins. Casualty, stock compensation, and incentive compensation created a ~$0.05 per share headwind (150 bps) year-over-year; excluding these, the underlying operating ratio would be near 60%.

• Q: With strong macro tailwinds and broad growth plans, how will CPKC align resources with projected growth over the next 2-3 years?

  A: CPKC uses its PSR operating model to plan for incremental demand by matching crew, locomotive, and equipment needs to growth projections. Synergies from new union work agreements will free up headcount to support new grain growth, with existing opportunities to increase capacity via longer trains and adjusted work schedules. Growth comes gradually, giving the company time to plan, and new locomotives are already on order to meet future demand.

• Q: How does the CN-UP concession agreement change CPKC's view of the proposed merger and its competitive position?

  A: The concessions do not change CPKC's core opposition to the merger. While the concessions are a small step forward and address specific concerns around undue control of the KCT terminal and TRRA, they do not resolve core issues: they are temporary, incomplete, and do not fix the reduction in competitive options and excessive market concentration the merger would create. The STB will ultimately evaluate the full public interest impact of the merger. If the merger is approved, CPKC will pursue competitive partnerships to maintain market position.

• Q: Are we at an inflection point where synergy opportunities and a better macro will drive earnings growth back to original analyst day targets?

  A: Since April 2023, the freight environment has been much weaker than expected, but CPKC still delivered steady growth from synergies and new products. With many synergy opportunities still in mid-inning, and improving macro conditions adding a demand tailwind, earnings growth will accelerate. Operating leverage is just beginning to build, and will show clear improvement starting in the second half of 2024, with sufficient existing capacity to accommodate growth within the current capital expenditure envelope.