Canadian Pacific Kansas City Limited (CP:CA) Q4 2025 Earnings Call Transcript
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Overview
The earnings call highlights strong earnings growth, optimistic guidance, and strategic initiatives like locomotive fleet expansion and intermodal growth. Positive sentiment is reinforced by share repurchases and expected margin improvements. While Q&A reveals some concerns about Q1 challenges and unclear responses, the overall outlook is positive, with double-digit earnings growth and strong grain and intermodal prospects. The lack of market cap data suggests a moderate positive impact, aligning with a 2% to 8% stock price increase.
Key Financial Performance
Fourth Quarter Revenue $3.9 billion, up 1% year-over-year. Reasons for change: Exceptional execution amidst demand softening in several areas.
Fourth Quarter Operating Ratio 55.9%, improved by 120 basis points year-over-year. Reasons for change: Strong cost control and operational performance.
Fourth Quarter Earnings Per Share (EPS) $1.33, up 3% year-over-year. Reasons for change: Effective cost management and operational efficiency.
Full-Year Revenue $15.1 billion, up 4% year-over-year. Reasons for change: Volume growth of 4% and strong operational execution.
Full-Year Operating Ratio 59.9%, improved by 140 basis points year-over-year. Reasons for change: Industry-leading operational performance and cost control.
Full-Year Core EPS $4.61, up 8% year-over-year. Reasons for change: Strong top-line growth and disciplined investment.
Grain Revenue (Fourth Quarter) Up 4% year-over-year on 2% volume growth. Reasons for change: Record Canadian grain harvest and higher shipments to Mexico.
Potash Revenue (Fourth Quarter) Down 2% year-over-year on 2% volume growth. Reasons for change: Higher export volumes offset by other factors.
Coal Revenue (Fourth Quarter) Up 2% year-over-year on a 1% decline in volumes. Reasons for change: Higher U.S. thermal coal volumes offset Canadian coal declines.
Energy, Chemicals, and Plastics Revenue (Fourth Quarter) Down 3% year-over-year on a 5% volume decline. Reasons for change: Lower crude and refined fuel volumes to Mexico and softer base demand.
Forest Products Revenue (Fourth Quarter) Down 13% year-over-year on a 12% volume decline. Reasons for change: Tariffs on Canadian lumber exports and macroeconomic softness.
Automotive Revenue (Fourth Quarter) Down 3% year-over-year on 1% volume growth. Reasons for change: Production slowdowns, aluminum supply challenges, and chip shortages.
Intermodal Revenue (Fourth Quarter) Up 3% year-over-year on 4% volume growth. Reasons for change: Growth with key ocean carrier partners and strong performance of the Gemini alliance.
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Operating Highlights
MMX-180 and 181 service: Fastest and most reliable service in the industry between the Midwest and Mexico, with plans to expand similar models to other regions.
Southeast Mexico Express (SMX): New service in partnership with CSX, connecting Atlanta to Monterrey with competitive transit times.
Americold business: Ramping up in 2026, contributing to intermodal growth.
Grain transportation: Record grain harvests in Canada (85 million metric tons) and the U.S. are driving significant growth opportunities.
Intermodal growth: Continued growth in international intermodal with Gemini alliance and domestic intermodal with MMX and SMX services.
Automotive franchise: Growth supported by new business secured in 2025, despite challenges like chip shortages.
Operational metrics: Record results in train weight, speed, locomotive productivity, and car velocity, leading to faster cycle times and greater network capacity.
Safety performance: Industry-leading safety performance with lowest FRA reportable train accident frequency for three consecutive years.
Labor agreements: 16 five-year collective bargaining agreements ratified, covering 700 employees across 11 states.
Locomotive investments: 100 new locomotives added in 2025, with another 100 planned for 2026 to support growth.
Share repurchase program: New 5% share buyback program announced for 2026.
Capital investments: $2.65 billion planned for 2026, focusing on network expansion and efficiency improvements.
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Risk or Challenges
Demand Softening: The company faced demand softening in several areas during the quarter, which could impact revenue and operational efficiency.
Regulatory and Trade Policy Uncertainty: Uncertainty in macroeconomic conditions and trade policies, including tariffs on Canadian lumber exports to the U.S. and cross-border steel business, poses risks to revenue and market stability.
Labor Challenges: While progress has been made with collective bargaining agreements, labor challenges and workforce optimization remain areas of focus, especially with potential headcount increases in 2026.
Supply Chain Disruptions: Rain impacted the loading of vessels in Vancouver, delaying grain exports and tempering shipment pace.
Economic and Macro Pressures: Ongoing macroeconomic softness is impacting base demand in industrial segments such as energy, chemicals, plastics, and forest products.
Automotive Supply Chain Issues: Production slowdowns, aluminum supply challenges, and chip shortages in the automotive sector contributed to a $30 million revenue headwind in the quarter.
Casualty and Cost Inflation: Higher casualty costs and cost inflation are pressuring the company's expense management.
Capital Expenditure Risks: The company is reducing its capital outlook by 15% in 2026, which may impact its ability to support growth and maintain infrastructure.
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Guidance & Outlook
Volume Growth: CPKC expects to deliver mid-single-digit volume growth in 2026, driven by strength in the bulk business and unique growth drivers such as record grain harvests in Canada and the U.S.
Earnings Growth: The company anticipates low double-digit earnings growth in 2026, supported by improved margins and operational efficiencies.
Grain Harvest: Record grain harvests in Canada (85 million metric tons) and the U.S. are expected to provide a strong base of business throughout 2026.
Intermodal Growth: Continued growth in intermodal services, including the MMX-180/181 service and the new Southeast Mexico Express service in partnership with CSX, is expected to drive volume increases.
Automotive and International Intermodal: Growth is anticipated in the automotive franchise and international intermodal business, supported by partnerships and new business wins.
Capital Investments: CPKC plans to invest in 100 new locomotives in 2026, in addition to the 100 added in 2025, to support growth and improve operational efficiency.
Shareholder Returns: The company announced a 5% share buyback program for 2026, reflecting confidence in its financial position and growth prospects.
Operational Improvements: CPKC expects further operational improvements in 2026, including enhanced train speeds, locomotive productivity, and car velocity, building on gains achieved since the 2023 merger.
Capital Expenditures: Capital expenditures are projected to decrease by 15% to $2.65 billion in 2026, reflecting a focus on disciplined investment.
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Shareholder Return Plan
Share Buyback Program: The company announced a 5% share buyback program for 2026, following the completion of a $37 million share repurchase program in late October 2025. This decision reflects the company's strong financial position and commitment to returning cash to shareholders through disciplined and opportunistic capital allocation.
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Key Q&A
Q:Can you elaborate on your volume growth guidance of mid-single digits, considering the weaker start to the year and weather challenges?
A:John Brooks explained that while January started as expected, weather events caused setbacks. However, he is optimistic about grain opportunities in February and March and expects momentum to build in Q2 and Q3. Key growth areas include grain, export potash, intermodal growth (e.g., MMX and SMX trains), and new facilities like the Americold building in Kansas City and Port Saint John.
Q:What are your thoughts on reciprocal switching as proposed in the U.S., and how does it compare to Canada?
A:Keith Creel stated that good service negates the need for concern about reciprocal switching. He noted differences between the U.S. proposal and Canada's inter-switching system. While he doesn't see it as a threat, he emphasized the need for fairness and balance to avoid unintended consequences.
Q:How do you view the operating ratio (OR) potential for 2026 and beyond, given mid-single-digit RTM growth?
A:Nadeem Velani highlighted that the company achieved a sub-60% OR and aims for further improvements. With mid-single-digit RTM growth, strong pricing, and operational efficiencies, they target 100 basis point OR improvements annually, supported by bulk opportunities, workforce adjustments, and fuel efficiency.
Q:Can you bridge the volume to revenue for 2026, considering mix and tariff impacts?
A:John Brooks noted challenges in Q1 and Q2 due to strong bulk business and tariff impacts, which affected profitable business. He expects stabilization later in the year, with potential revenue upside of a couple of points compared to RTM growth.
Q:What is the outlook for Q1 and the path to mid-single-digit RTMs and double-digit EPS growth?
A:Nadeem Velani acknowledged Q1 as the toughest quarter due to weather, carbon tax, and exchange rate headwinds. However, he expects easier comparisons in Q2 and Q3, with a ramp-up in performance throughout the year.
Q:What is your view on the potential removal of the harbor maintenance tax exemption and its impact on cross-border volumes?
A:John Brooks stated that cross-border volumes related to this tax are currently small and unlikely to have a significant impact.
Q:What are your updated thoughts on M&A, particularly regarding the UP-NS merger application?
A:Keith Creel emphasized the importance of facts and public interest in M&A decisions. He expressed concerns about the potential risks of large-scale mergers, including integration challenges and anticompetitive behavior. He stressed the need for concessions and enforceable regulations to ensure fair competition.
Q:What is your perspective on USMCA renegotiation and its potential impact?
A:Keith Creel acknowledged a $200 million revenue impact from tariffs and uncertainty but remains optimistic about the importance of trade between the U.S., Canada, and Mexico. He expects active discussions in the summer and believes trade will continue to grow despite challenges.
Q:What is the outlook for free cash conversion and CapEx in 2026?
A:Nadeem Velani expects free cash conversion around 75% and a reduction in CapEx due to timing shifts and completed integration-related investments. Future CapEx will focus on locomotive investments and other efficiency improvements.
Q:What is the potential impact of Canadian government measures to subsidize freight rates for steel and lumber?
A:John Brooks mentioned ongoing discussions about the mechanics of the subsidy. While there may be opportunities, he does not expect significant volume increases.
Q:How do you view pricing and cost inflation for 2026?
A:Nadeem Velani expects inflation in the 2.5%-3% range, with pricing above inflation, contributing to margin improvements.
Q:What is the progress on synergy targets and their contribution to growth?
A:Keith Creel reported achieving a $1.2 billion run rate in 2025 and expects to reach $1.4 billion by the end of 2026, meeting integration commitments.
Q:What are the long-term growth prospects for CP, and how could a UP-NS merger affect them?
A:Keith Creel expressed confidence in CP's unique network and growth opportunities, including synergies, new products like SMX, and trade between the U.S., Canada, and Mexico. He sees potential benefits from a UP-NS merger if fair competition is ensured.
Q:What is the outlook for grain shipments in 2026?
A:John Brooks expects a ratable shipment profile for grain, with strong demand through August and potential bullishness for the next harvest. He noted improved storage capacity and favorable conditions for grain movement.
Q:How are you addressing tariff challenges and leveraging the Mexico franchise for growth?
A:John Brooks stated that tariff headwinds are built into 2026 plans, with efforts to backfill lost revenue through land bridge opportunities and increased sales activity in Mexico. He sees significant growth potential in the Mexico franchise.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the potential impact of the harbor maintenance tax exemption removal, stating that cross-border volumes related to this tax are small. Additionally, while they acknowledged challenges in Q1, they did not provide precise guidance on operating ratio improvements for the quarter.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Atlanta
Creel
Dallas
FRA train
Gemini
Mexico Southeast
Midwest Mexico
PSR model
Port Vancouver
SMX
adjustment
capital outlook
car velocity
commitment
demand softness
digit RTM
harvest Canada
harvest record
ratio basis
record Canada
record grain
record harvest
record result
repurchase program
result record
row CPKC
sacrifice
share repurchase
shipment
speed productivity
stoppage
tariff headwind
time
ton
traction
truck Mexico
velocity improvement
volume coal
way life
week
CP Transcript
Canadian Pacific Kansas City Limited (CP:CA) Q4 2025 Earnings Call Transcript
Positive1-28
The earnings call highlights strong earnings growth, optimistic guidance, and strategic initiatives like locomotive fleet expansion and intermodal growth. Positive sentiment is reinforced by share repurchases and expected margin improvements. While Q&A reveals some concerns about Q1 challenges and unclear responses, the overall outlook is positive, with double-digit earnings growth and strong grain and intermodal prospects. The lack of market cap data suggests a moderate positive impact, aligning with a 2% to 8% stock price increase.
Canadian Pacific Kansas City Limited (CP:CA) Presents at UBS Global Industrials and Transportation Conference Transcript
Neutral12-2
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Neutral11-24
Canadian Pacific Kansas City Limited (CP:CA) Q3 2025 Earnings Call Transcript
Positive10-29
The earnings call reveals a positive outlook due to strong earnings growth, strategic partnerships, and operational improvements. Despite some concerns about competition and infrastructure, the company's robust grain and automotive segments, along with optimistic guidance and mid-teens EPS growth expectations, suggest a favorable stock price reaction. The Q&A section supports this positive sentiment with management's confidence in achieving growth despite challenges.
CP Report
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