Canadian Pacific Kansas City Ltd. Q3 FY2026 earnings call

• Operational Efficiency: The railroad demonstrated strong execution with train speed improving 8%, dwell time down 7%, and car miles per car day up 10%. Fuel efficiency improved by 3%, generating $21 million in savings.
• Safety Concerns: Personal injury frequency rose 20% to 1.12, which management acknowledged does not meet internal standards, though train accident rates remained stable.
• Labor Relations: New collective agreements were secured with BLAT, SMART, BKC, and IBEW, ending a strike involving approximately 300 signal and communication employees. Simplification of the Mid-South Agreement continues to enhance operational flexibility.
• Capital Investments: CPKC is receiving new Tier 4 locomotives from Wabtec and Progress Rail, aiming for 300 new units by 2028. Significant investments are underway at the Port of St. John ($500 million) to unlock capacity for up to one million TEUs.
• Strategic Partnerships: A five-year contract with Elk Valley Resources (EVR) eliminates complex interchanges, recapturing traffic onto CPKC’s cradle-to-grave route. The Canada-Mexico land bridge revenue is projected to exceed $600 million annually, significantly up from $100 million post-merger.
• Technology Upgrades: Implementation of a new in-house planning platform provides near real-time visibility into network conditions, replacing legacy third-party applications to improve decision-making.

Total revenues reached $4.2 billion, with adjusted EPS growing 16% year-over-year. Key segment performance includes: Bulk Grain, which posted record revenues driven by a 23% volume increase (Canadian volumes up 35%, U.S. volumes up 13%); Potash, where revenue rose 8% despite a 7% volume decline due to terminal maintenance; and Coal, where revenue declined 1% amid an 11% volume drop. In Merchandise, Energy, Chemicals, and Plastics, revenue increased 9% on flat RTMs, with Forest Products up 9% and Metals/Minerals up 13%. The Automotive segment saw a 5% revenue increase despite a 5% volume decline. Intermodal was the standout performer, with revenue jumping 21% on 10% volume growth, achieving all-time records in both domestic and international lanes.

• Volume Growth: Management maintains guidance for mid-single-digit volume growth for the full year, supported by strong grain fundamentals and diversification efforts.
• Revenue & Pricing: Renewal rates are expected to remain disciplined at 3-4% or higher. Management anticipates favorable demand through the end of the year and into early 2027.
• Operating Ratio: Q4 operating ratio is expected to be sub-60%, benefiting from strong October volumes and weather conditions, despite fuel price headwinds.
• Capex: Full-year capital expenditures are targeted at approximately $2.65 billion, representing a 15% reduction from the prior year.
• Cash Flow: Adjusted free cash flow is tracking strongly, with YTD figures up 59% to $2.4 billion.

• Safety Performance: A 20% increase in personal injury frequency poses reputational and operational risks, requiring reinforced safety fundamentals.
• Fuel Price Volatility: A 53% increase in average fuel prices created a 190 basis point headwind on the operating ratio, impacting margins despite efficiency gains.
• Regulatory Uncertainty: Potential West Coast longshoremen strikes in 2027 and ongoing STB review of the UP/NS merger create external market uncertainties.
• Coal Volume Decline: Production-related challenges and mine outages have led to an 11% drop in coal volumes, with EVR tonnage expected to be down 15%+ year-over-year.
• Market Sensitivity: Extreme fuel surcharge inflation is causing price sensitivity in certain truckload markets, potentially driving customers to alternative transport modes.

Q: Steve Hansen asked for details on the Elk Valley Resources (EVR) agreement, specifically how service reliability and recent investments influenced the deal's terms and share capture. / A: CEO Keith Creel explained that the previous contract involved a complex interchange at Kamloops with competitor CN, which introduced supply chain inefficiencies. The new five-year contract eliminates this handoff, reclaiming approximately 1.5 trains' worth of traffic back to CPKC’s direct origin-to-destination route. This simplifies the supply chain, reduces costs, and secures a strategic partnership, positioning CPKC to grow alongside EVR despite current production challenges.