Canadian Pacific Kansas City Third Quarter 2026 Earnings - CANADIAN PACIFIC KANSAS CITY LTD

Financial Performance:

• Reported third-quarter revenue of $4.2 billion with 6% volume growth.
• Core adjusted Operating Ratio (OR) was 61.9% (reported OR 64.8%), up 120 basis points year-over-year due to fuel inflation.
• Core adjusted diluted EPS reached $1.28, representing 16% growth; Diluted EPS was $1.04.
• Adjusted free cash flow surged 59% year-over-year to $2.4 billion for the year-to-date period.
• Net interest expense increased to $239 million, primarily driven by new debt interest.
• Year-to-date capital expenditures stood at $2 billion, on track to finish the full year at approximately $2.65 billion (a 15% reduction from the prior year).
• Revenue per unit (RTM) increased 9% to 15.6 cents, reflecting sustained pricing strength and higher fuel surcharges.

Guidance and Future Outlook:

• Management reaffirmed expectations for mid-single-digit volume growth for the full year and beyond.
• Forecasted a fourth-quarter Operating Ratio of sub-60%, driven by strong volumes and network efficiency.
• Full-year capital expenditure guidance remains in the $2.6 billion to $2.8 billion range for 2027.
• Expected full-year core adjusted effective tax rate is approximately 24.75%.
• Management anticipates continued revenue premium over peers through 2027-2028, citing the unique network structure and operational execution.
• Expects grain volume growth to continue into early 2027, supported by new crush facilities and healthy supply/demand fundamentals.

Business Segments and Product Lines:

• Grain: Record Q3 revenue with 23% volume growth (Canadian volumes up 35%); U.S. volumes declined 13% due to corn demand shifts to Mexico.
• Intermodal: Record performance with 21% revenue growth and 10% volume growth; domestic intermodal up 7%, international up 11%. The SMX product with CSX saw 30% sequential volume growth.
• Coal: Revenue declined 1% and volumes dropped 11% due to mine production challenges; however, management secured a new five-year strategic agreement with Elk Valley Resources (EVR).
• Bulk (Potash): Revenue up 8% despite a 7% volume decline caused by terminal maintenance; expects a return to solid growth post-maintenance.
• Merchandise/Forest Products: Revenue increased 9% with 2% volume growth; resilient performance noted despite housing softness and tariffs.
• Automotive: Revenue up 5% despite a 5% volume decline from plant retooling; confident in return to volume growth in Q4 and 2027.
• Energy/Chemicals: Revenue up 9% on flat RTMs; trade flows expected to normalize as energy prices moderate.

Market and Competitive Landscape:

• The Canada-Mexico land bridge revenue is projected to exceed $600 million for the year, a significant increase from the ~$100 million pre-merger baseline.
• Announced a new five-year contract with Elk Valley Resources, eliminating a complex interchange at Kamloops to streamline coal logistics to Vancouver.
• Highlighted potential downside risks for competitors due to a potential West Coast longshoremen strike in 2027, positioning CPKC's Lazaro Cardenas route as a viable diversification option.
• Significant federal funding ($500 million) announced for the Port of St. John's, expected to unlock capacity for up to 1 million TEUs.
• Management asserts a "two to three-point revenue/volume premium" relative to the broader market and peers.

Risks and Challenges:

• Fuel Costs: Fuel expenses rose 56% year-over-year due to a 53% increase in average prices, creating a 190 basis point headwind to the Operating Ratio.
• Safety: Personal injury frequency increased 20% to 1.12 compared to the prior year; train accident rates improved 60%.
• Geopolitical/Regulatory: Ongoing regulatory scrutiny and opposition regarding the proposed Union Pacific (UP) and Norfolk Southern (NS) merger.
• Macro Environment: Tough macro headwinds, including housing softness, cross-border tariffs, and energy price volatility affecting commodity flows.
• Weather: Potential seasonal weather impacts in Canada affecting grain and coal volumes in Q4.

Management Commentary and Tone:

• Tone was highly confident and proud of the team's operational execution, describing the railroad as "running extremely well."
• Management emphasized "operational excellence is a journey, not a destination," highlighting continuous improvements in train speed, dwell time, and fuel efficiency.
• Keith Creel (CEO) strongly opposed the UP/NS merger, citing scale, market power, and differences in regulatory regimes (STB vs. CCR) between the U.S. and Canada.
• Management expressed satisfaction with the alignment between commercial and operating teams, attributing growth to disciplined pricing and network fluidity.

Analyst Questions and Answers:

• Elk Valley Resources (EVR): Keith clarified the new agreement recaptures ~1.5 trains of traffic previously interchanged at Kamloops, eliminating complexity and ensuring "cradle-to-grave" service for that volume.
• Pricing Outlook: John Brooks expressed bullishness on pricing renewals (3-4%+) and noted that fuel surcharges remain a dynamic factor.
• 2027 Growth Drivers: Identified grain crush expansion, Mexico land bridge growth, and domestic intermodal (SMX) as key growth vectors for 2027.
• UP/NS Merger: Keith detailed CPKC's opposition filings, arguing the merger would create excessive market power and that the Canadian regulatory safeguards (zone switching) do not exist in the U.S. regime. He also addressed concerns about the "threatening" behavior of applicants during regulatory comments.
• Capacity: Confirmed capital investments in 300 new locomotives by 2028 and network upgrades (e.g., new bridge) are in place to support high single-digit RTM growth.
• Q4 Momentum: Expressed optimism for a strong finish to Q4, citing strong grain carryout and a return to favorable auto volume trends.

Other Key Points:

• Operational Metrics: Train speed improved 8%, dwell time improved 7%, and car miles per car day increased 10% year-over-year.
• Labor Agreements: Reached agreements to simplify U.S. operations under the Mid-South agreement; ratified new contracts with BLAT and SMART on specific lines; ended a strike in Canada via binding arbitration with IBEW.
• Technology: Transitioned to a new in-house planning platform ("Plan and Operate") to provide near real-time network visibility.
• Capital Allocation: Delivered over $4 billion in shareholder returns through dividends and share repurchases in the first three quarters.
• Locomotive Fleet: Received 170 Tier 4 locomotives from Wabtec and 35 from Progress Rail; newer units have reduced service interruptions by over 35% on 100-series trains.