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

Explicit Guidance:

• Volume Growth: Expecting mid-single-digit volume growth for the full year and through early 2027, supported by healthy supply/demand fundamentals.
• Operating Ratio (OR): Guidance for Q4 2026 is a sub-60% core adjusted operating ratio, driven by strong volume momentum and network efficiency despite fuel headwinds.
• Tax Rate: Full-year 2026 core adjusted effective tax rate expected to be approximately 24.75%.
• Capital Expenditures (Capex): Full-year 2026 capex guidance is approximately $2.65 billion (a 15% reduction vs. prior year). Long-term Capex guidance remains in the $2.6–$2.8 billion range.
• Fuel Expense: Fuel prices are a 190 basis point headwind to core adjusted OR in Q3 2026; future impact depends on spot price movements, with potential for benefit if diesel prices moderate.
• Revenue/Margins: Expect high single-digit year-over-year RTM (revenue per ton-mile) growth in Q4 2026 and into 2027.

Business-Segment Outlook:

• Grain: Expect continued volume growth through year-end 2026 and early 2027, driven by new crush production facilities in Canada and the U.S. (e.g., LDC at Yorkton) and export demand. While Q3 2026 volumes were record, 2027 comparisons will be tougher due to high base.
• Potash: Anticipate a return to solid growth for the remainder of 2026 following the completion of Portland Terminal maintenance.
• Coal: Expect volume headwinds from mine production challenges to moderate; however, 2027 tonnage visibility remains limited pending Elk Valley Resources' 2027 production plans. A new five-year contract with Elk Valley Resources (EVR) is expected to reclaim ~1.5 trains of traffic, eliminating the Kamloops interchange.
• Automotive: Confident in returning to volume growth in Q4 2026 and into 2027, supported by the end of plant retooling holds and conversion of short-sea traffic to rail.
• Intermodal:
  • Domestic: Driven by strength in Canadian domestic lanes, U.S. lanes, and Mexico cross-border service (SMX with CSX volumes up 30% sequentially).
  • International: Volumes driven by Port of Vancouver strength; new federal funding (approx. $500M) for Port of St. John's is expected to unlock capacity for up to 1 million TEUs, supporting growth through 2027 and beyond.
  • Lazaro Cardenas: Bullish outlook due to potential West Coast U.S. strikes and the existence of a viable rail route to Houston/Midwest markets as a diversification alternative.
• Canada-Mexico Land Bridge: Revenue expected to exceed $600 million annually for 2026 (up from ~$100 million in 2023), representing created growth rather than inherited.

Market and Competitive Outlook:

• Pricing: Management maintains a "bullish" outlook for pricing. Renewals expected to yield 3–4% increases (or higher in some cases). Discipline will remain on pricing to offset inflation and fuel costs.
• Share Gains: Continued discipline expected to drive share gains, particularly in intermodal and truck-to-rail conversion opportunities.
• Competitive Landscape: Management remains confident in the ability to deliver 1–2 percentage points of RTM performance premium over peers/industry over the next few years, contingent on the macro environment turning favorable.
• Tariffs/Fuel Surcharge: Noting price sensitivity in certain markets due to extreme fuel surcharge inflation; customers are evaluating alternative shipping modes month-to-month. Management expects trade flows to normalize as energy prices moderate.

Macro / Industry Outlook:

• Economic Environment: Acknowledges a "tough macro backdrop" but highlights the network's ability to grow through it. Management has stopped guessing on macro timing but believes favorable conditions will eventually provide tailwinds.
• Rail vs. Truck: Confidence in the long-term conversion of truck traffic to rail (intermodal) supported by service reliability and economic efficiency.
• Regulatory/M&A: Strongly opposing the Union Pacific (UP) + Norfolk Southern (NS) merger. Management argues scale and regulatory regimes in the U.S. (STB) differ significantly from Canada (CRTC), making the UPNS deal uniquely risky regarding market power and lack of competitive alternatives.
• Labor: Labor agreements in the U.S. (Midsouth) and Canada (IBEW) ratified, improving operational flexibility.

Strategic Initiatives:

• Elk Valley Resources (EVR) Expansion: New five-year contract to move product from SE British Columbia to Vancouver, reducing supply chain complexity and securing long-term growth.
• Port of St. John's: Leveraging $500M federal investment in port infrastructure, warehousing, and rail efficiency to unlock 1M TEU capacity.
• LOCOMOTIVE FLEET: On track to deliver 300 new locomotives by 2028 (170 from Wabtec, 35 from Progress Rail, plus others). New units have already reduced service interruptions by >35% on Canadian 100-series trains and improved fuel efficiency.
• Technology: Implemented an in-house planning platform ("Plan and Operate") to replace legacy third-party apps, enabling real-time traffic visibility and faster decision-making.
• Supply Chain: Continued development of industrial opportunities in forest products and metals to offset macro softness.

Risks and Headwinds to Outlook:

• Fuel Prices: Significant volatility in diesel prices remains a key headwind to operating ratio, with timing mismatches between surcharge collection and actual costs.
• Weather: Potential for adverse weather in Q4 2026 impacting operations (though currently viewed as favorable).
• Regulatory Uncertainty: The UP/NS merger application and the STB's decision process pose systemic risk to industry dynamics and potential competitive shifts.
• Mine Production Challenges: Ongoing production issues at coal mines (e.g., EVR, Westshore) creating volume uncertainty for 2026 Q4 and 2027.
• Macro Volatility: Housing market softness, tariffs, and global trade dislocations continue to create friction in merchandise and automotive sectors.

Management Tone on the Future:

• Confidence Level: Highly confident ("bullish," "very well positioned"). Management expresses satisfaction with current execution but explicitly states they are "not satisfied" and see "more opportunity to mine."
• Forward-Looking Sentiment: Emphasizes "aggressive" pricing strategy, disciplined capital allocation, and a belief that the unique network is "built for growth."
• M&A Stance: Aggressive and combative regarding the UP/NS merger, characterizing the applicant's behavior as "reckless" and "irresponsible," while framing CPKC as the pro-competition alternative.

Miscellaneous:

• Safety: Personal injury frequency was 20% higher than prior year (1.12), which management notes "does not meet our standard," though train accident frequency improved 60% to 0.46.
• Shareholder Returns: Over $4 billion returned to shareholders via buybacks and dividends in the first three quarters of 2026.
• Headcount: Expecting full-year 2026 headcount to be down slightly, supporting labor productivity.