Canadian Pacific Kansas City Ltd/Cn Q4 FY2025 Earnings Call

Good afternoon. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's Fourth Quarter and Full Year 2025 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference call.

Thank you, Angela. Good afternoon, everyone, and thank you for being here today. Before we start, I want to remind you that this presentation includes forward-looking information. Actual results may vary. The risks, uncertainties, and other factors that might affect actual results are detailed on Slide 2 in the earnings release filed with Canadian and U.S. regulators. This presentation also includes non-GAAP measures outlined on Slide 3. Joining me today are Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. The formal remarks will be followed by a Q&A session. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Thanks, Chris, and good afternoon. We thank everyone for joining us to review our fourth quarter results as well as full-year results and to allow our team to share how we see an exciting 2026 playing out. Now let me start by expressing gratitude and thanks to the 20,000 strong CPKC family, who, through their dedication, hard work and sacrifice allow us to create the results that we're honored to share today. I can tell you this past week, railroading is a demanding way of life, in fact, a consuming way of life. Times like we have navigated through this past week and in fact, navigate on the daily in Canada. Operating in the winter operation reminds me of just how much sacrifice that takes, which I have the deepest amount of respect and appreciation for. So on to the results, for the fourth quarter, revenue of $3.9 billion, which is up 1% versus last year, an industry best operating ratio of 55.9%, 120 basis points of improvement and earnings per share of $1.33, up 3% versus last year. I'm particularly proud of the job the team did in the quarter, in the face of a demanding demand softening in a number of areas and how they honored our mantra of controlling what we can control in our cost structure. The team demonstrated exceptional execution that allowed us to produce the results we produced on the operating ratio side, and we are setup and carrying momentum well into 2026. As Mark is going to speak to, I also want to applaud the operating team for producing record results across several of our key operating metrics in the quarter. Most importantly, we produced another year of record safety performance. Our network is running well. It's in a great position to execute on the growth opportunities that we have lying ahead of us. Now let's turn our attention to full-year results. Revenue of $15.1 billion, which is up 4%; volume growth of 4% as well. Operating ratio at industry best at 59.9%, a clear industry best improvement of 140 basis points for the year. Core EPS of $4.61, which is up 8%. On '26 outlook, as we look forward in 2026, the way we see it unfolding, we fully expect to deliver another year of mid-single-digit volume growth enabled by the strength in our bulk business and particularly, the unique growth drivers the franchise has, which John will speak to. We expect to continue improving margins and ultimately deliver low double-digit earnings growth. For clarity, this outlook does not assume that we get much out of the macro. Our growth drivers are unique to CPKC and record grain harvest in Canada and the U.S. provides a strong and differentiating base of business. Our story is about continuing to do what we do best, controlling what we can control and executing our PSR model, which remains key to setting CPKC apart and allows us to shine in times of uncertainty. You saw that in the results in the last quarter, and you'll continue to see that in 2026. On the growth outlook, there are a lot of things to get excited about, uniquely enabled by this network. John will talk about them in more detail, but I'll highlight a few. Grain harvest, an all-time record in Canada, 85 million metric tons versus the previous record of 78 million metric tons, a significant amount of grain to move that's carried into the full year of 2026. That's a record harvest, both in Canada and the U.S. The grain is starting to move now, and again, we're going to be busy through the balance of this year, moving grain. Continued growth in intermodal, our MMX-180, 181, the fastest and most reliable service in the industry between the Midwest and deep into Mexico, continues to grow and do extremely well. And we're bringing that same model to Mexico and the U.S. Southeast in partnership with CSX and our Southeast Mexico Express service. That business is just getting started to moving with our partners, we see a ton of opportunity for growth over that corridor as we've created an industry best transit time in partnership with CSX from Atlanta to Dallas over the Meridian Speedway and from Atlanta to Monterrey, truck-competitive to Dallas and superior to truck into Mexico. It can't be replicated about truck into Mexico. We're also excited about the Americold business, that's ramping up this year along with the continued growth on the international intermodal side with Gemini and also continued growth in our automotive franchise. On the capital side, we're going to continue to invest to support the growth. Last week, we announced continued investment with our locomotives, 100 new locomotives joining the fleet in 2026 in addition to the 100 that we added in 2025. So with the combination of our strong top line growth, disciplined investment and our continued cost and efficiency improvements, it's put us in an advantageous position to return cash to shareholders, which you just witnessed as we announced a 5% share buyback program for 2026. So in closing, I'm extremely proud of what we produced amidst a ton of volatility in 2025 and we're super excited about the opportunities ahead. I'll remind you that over the past 2 years, this franchise has outperformed the industry in revenue growth, outperformed the industry in earnings growth. We've got an exciting setup to continue to generate industry-leading performance in 2026 as well. So with that, I'm going to turn it over to Mark for some color on the operations. John will give you a little insight on the markets, Nadeem on the financial details, and then we'll open it up for Q&A. Mark, over to you.

Thank you, Keith, and good afternoon. I want to start by acknowledging the operating employees whose dedication to safe, reliable, and efficient service continues to enhance the strong performance of our network. The operating team excelled this quarter in delivering impressive results. For the quarter, our network achieved outstanding performance, hitting record levels in several key metrics such as train weight, train speed, locomotive productivity, and car velocity. These enhancements can lead to quicker cycle times, increased network capacity, and faster, more dependable customer service. I am particularly proud to share that for the tenth consecutive year, CPKC has received Amtrak's Best Carrier designation with an A+ performance. We are the only railroad to hold this honor, and we value the recognition from our esteemed partner. Reflecting on our progress, we have made significant operating improvements since the merger. Compared to our 2025 operational performance at the time of the 2023 merger, our combined network is 13% faster, locomotive productivity has increased by 13%, and car velocity is nearly 14% stronger. The improvements in the area south of Kansas City are even more significant, with 2025 speeds showing more than a 25% increase and locomotive productivity improving by approximately 20%. Looking ahead, with our operating systems and processes synchronized across Canada and the U.S., we anticipate further enhancements in 2026. The foundational work we’ve established positions us for consistent execution and dependable service as volumes continue to rise. Now, regarding safety for the quarter, the FRA train accident frequency was 0.91, which is a 12% improvement. However, there was a 22% increase in FRA personal injuries, bringing the number to 1.05. For the full year of 2025, the FRA train accident rate was 0.85, showing a 16% decrease, while personal injuries were at 0.92, a 3% improvement. I remain optimistic about our industry-leading performance. For the third year running, CPKC has recorded the lowest FRA reportable train accident frequency among Class 1 railroads, building on CP's legacy of 17 consecutive years, contributing to nearly two decades of best-in-class results. These achievements underscore our strong Home Safe culture and our investments in technology that help prevent incidents before they happen. Shifting to labor, we continue to make strides in this area. Earlier this month, we ratified 16 five-year collective bargaining agreements in the U.S., which cover 700 CPKC employees across 11 states. These agreements highlight our constructive collaboration with unions, ensuring reliable service for our customers and fostering confidence in our network. In terms of resources and capital, we remain well aligned with our growth projections. For 2025, we are expecting 4% growth while maintaining a 1% reduction in average headcount, anticipating ongoing strong operating leverage in 2026. On the capital front, we received 100 Tier IV locomotives in 2025, with an additional 100 set for delivery this year. These locomotives are enhancing the efficiency and reliability of our fleet, positioning us for sustained profitable growth. In 2026, we will continue to fulfill our merger-related expansion commitments to the STB, which includes CTC, additional sidings, and upgrades along the Kansas City to Chicago corridor, as well as improvements towards Shreveport. These enhancements are increasing velocity on the North-South route, thereby strengthening our customer service. In summary, our network is performing at record levels. We are adequately resourced to manage the grain harvest in both Canada and the U.S. Our investments in capacity, safety, and power are yielding sustained and significant performance gains. We are well-positioned to execute our operational plans, support our customers, and fulfill our commitments throughout 2026. Now, I’ll turn it over to John.

All right. Thank you, Mark, and good afternoon, everyone. So this quarter showed the resilience of our book of business with growth across key segments and traction from new wins offsetting areas of deepening softness. Despite macro and tariff pressures, we delivered to our customers, we captured synergies, we maintained disciplined pricing and advanced initiatives that will support our growth in 2026. Now looking at our Q4 results. This quarter, we delivered record revenue up 1% on flat RTMs. Cents per RTM was up 1%. Our pricing remained strong with renewals exceeding our long-term 3% to 4% outlook. Mix partially offset the pricing as longer length of haul and higher bulk traffic lowered our cents per RTM. Now taking a closer look at our fourth quarter revenue performance, I'll speak to an FX-adjusted results. Starting with bulk. Record grain revenues were up 4% on 2% volume growth. Our Canadian grain volumes were up 2% on a record harvest. Export volumes, however, lagged expectations as rain impacted the loading of vessels in Vancouver and farmers chose to store grain volumes, tempering the pace of shipments through the quarter. U.S. grain volumes were also up 2%, with growth led by higher shipments to the P&W and down to Mexico. Our network continues to uncover new markets and this is especially visible with record-setting Q4 and full-year grain shipments into Mexico. Turning to the first half of 2026. The North American crop is shaping up to be a record both in Canada and the U.S. As Keith said, estimates points to an 85 million metric ton Canadian harvest, up 20% from last year. We also have a record U.S. corn crop and solid bean production that has recently started to move the market. Finally, we are encouraged by the recent canola trade settlements and new crush capacity coming online in the first half of the year that are going to further support our positive outlook for grain. Potash revenues were down 2% on 2% volume growth driven by higher export volumes through Vancouver. With solid demand fundamentals and Canpotex fully committed through the first quarter, we expect potash to remain a solid contributor to our overall base this year. To round out both, coal revenue increased 2% on a 1% decline in volumes. Canadian coal volumes were lower, largely due to mix impact of lapping last year's work stoppage and maintenance at Westshore which ran from August into November. These declines were partially offset by higher volumes of U.S. thermal coal. Moving to our merchandise franchise. Energy, chemicals and plastics revenue was down 3% on a 5% volume decline. This decline was driven by lower crude and refined fuel volumes to Mexico along with a softer base demand that primarily impacted our plastic shipments. This was partially offset by growth in LPG shipments from Canada to Mexico as we continue to capitalize and grow our land bridge opportunities. Looking ahead, we expect ECP volumes to stabilize as we move through 2026, although the base business in this industrial segment continues to be impacted by the softer macro environment. Forest Products revenue declined 13% on a 12% decrease in volumes. Volumes were pressured by tariffs on Canadian lumber exports to the U.S., along with ongoing macro softness impacting our pulp and paper business. The team remains laser-focused on project development to continue to try to offset base demand softness and also through extending our length of haul. Metals, minerals and consumer products revenues and volumes were up 1%. Growth in this space was driven by industrial development and synergies with new business coming on in cement and other aggregates supporting construction projects across our network. This strength was partially offset by continued impact of tariffs on our cross-border steel business. Looking ahead, we remain focused on a number of industrial development opportunities as we continue to navigate the tariff and macro headwinds. Moving to automotive, revenue was down 3% on 1% volume growth. Our auto franchise delivered volume growth again this quarter despite the impact of production slowdowns along with aluminum supply challenges and a chip shortage, all of which contributed a $30 million revenue headwind in the quarter. Looking ahead, despite ongoing certainty with production and auto sales projections, we expect to continue to outperform supported by business secured in 2025 that will benefit us in 2026. Now closing with intermodal. Revenue was up 3% on 4% volume growth. International intermodal volumes were up 5% on growth with our key ocean carrier partners and lapping the impact of last year's work stoppage at the Port of Vancouver. We remain encouraged by the strong performance of the Gemini alliance and the growth opportunities it is creating across our entire network. Comparisons will be more challenging in the first half of the year. However, the team is focused on the development of new product offerings at the Port Saint John and also down in Lazaro to enable share gains and volume growth to our network. Domestic intermodal volumes were up 3% in the quarter. We continue to deliver strong growth on our MMX train, which is up approximately 40% year-over-year. As Keith said, our new Americold business is also gaining traction with good visibility for a strong ramp-up as we continue to move through 2026. I'm also extremely excited about the new SMX product with CSX, connecting Dallas and Mexico to the U.S. Southeast. Like our Midwest Mexico product, the SMX train pairs will formally launch in the coming months and will offer the fastest, most reliable service product in these lanes. In closing, with record grain crops, our self-help initiatives, and industrial development projects all coming online, we are well positioned to again offset tariffs and macro headwinds and deliver another year of mid-single-digit RTM growth. We remain focused on execution, disciplined pricing and continuing to capture the full value of our capacity network. With that, I'll pass it on to Nadeem.

All right. Thanks, John, and good afternoon. I'm extremely pleased with the team's strong execution in the quarter. While we did deal with temporary demand softness in some areas, the team responded decisively with strong cost control and operational performance, demonstrating the strength and resiliency of our PSR-driven operating model. The ability to optimize assets, control costs and deliver operationally is embedded in our DNA as precision scheduled railroading at CPKC. Now turning to our fourth quarter on Slide 12, CPKC's reported operating ratio was 58.9%. Our core agenda operating ratio improved 120 basis points year-over-year to a CPKC record, 55.9%. Diluted earnings per share was $1.20, and core adjusted diluted EPS was $1.33, up 3% versus last year. Turning to our full year results on Slide 13, CPKC's reported operating ratio was 62.8%, and the core adjusted operating ratio improved 140 basis points to 59.9%. Diluted earnings per share was $4.51 and core adjusted diluted earnings per share was $4.61, up 8% year-over-year. Taking a closer look at our expenses on Slide 14, I will speak to the year-over-year variances on an FX-adjusted basis. Comp and benefits expense, excluding adjustments, was $626 million, flat versus prior year. During the quarter, productivity gains from improved train weights, efficient resource planning and workforce optimization were offset by wage inflation. We expect continued strong labor productivity in 2026 with head count up slightly on mid-single-digit volume growth. Fuel expense was $430 million, down 8% year-over-year. The decline was driven primarily by the elimination of the Canadian federal carbon tax on April 1 along with improved efficiency from increased train rates. Materials expense was $112 million. The year-over-year decline was primarily driven by an increased focus on capital works in the quarter. Equipment rents were $97 million, up 4% year-over-year. The increase was driven by higher intermodal car hire payments, reflecting the ramp-up of Gemini volumes and lapping the prior year's labor disruption at the Port of Vancouver. This increase was partially offset by efficiency gains driven by improved network velocity and car cycle times across the network. Depreciation and amortization was up 7%, resulting from a larger asset base. Purchased services and other expenses, excluding adjustments, was $514 million. The year-over-year decline was driven by productivity and insourcing initiatives, partially offset by cost inflation and higher casualty. Moving below the line on Slide 15. Other components of net periodic benefit recovery were $94 million or $103 million, excluding acquisition-related costs. Net interest expense was $230 million or $225 million, excluding purchase accounting. The increase was driven by interest on new debt issued earlier in the year. Income tax expense was $400 million or $407 million adjusted for significant items of purchase accounting. The core adjusted effective tax rate in the quarter came in at approximately 25%, which is a $40 million headwind versus our Q4 2024 rate. In 2026, we expect a core adjusted effective tax rate of approximately 24.75%. Turning to Slide 16 and cash flow. 2025 net cash provided by operating activities increased 1% to $5.3 billion, while net cash used in financing activities was up 40%, driven by the share repurchase program. CapEx was $3.1 billion, above our $2.9 billion outlook, largely due to a pull-forward of maintenance capital projects during the fourth quarter to take advantage of work of weather and network conditions. In 2026, we are reducing our capital outlook by 15% to $2.65 billion. Now turning to share repurchases. Throughout last year, we took advantage of market volatility to reward shareholders, completing our $37 million share repurchase program in late October. Given the strong value that we continue to see in our share price, I'm pleased to announce that our Board has approved a new 5% share repurchase program, allowing us to continue returning cash to shareholders through disciplined and opportunistic capital allocation. Looking ahead, while macroeconomic conditions and trade policy remain uncertain, we are focused on what we can control, operating a safe, efficient and disciplined PSR railroad while capitalizing on our unique growth opportunities. We expect to deliver low double-digit earnings growth supported by another year of mid-single-digit RTM growth. With industry-leading execution, a compelling growth pipeline and strong free cash growth, the future is extremely bright. With that, let me turn it over back over to Keith.

Thanks, gentlemen. Operator, we'll open it up for questions.

Our first question comes from Walter Spracklin with RBC Capital Markets.

I'd like to discuss your volume growth assumption of mid-single digit. Last year ended somewhat weakly, and this year hasn't started off strong either. We are facing some weather conditions that might result in some loss. Given that challenge, mid-single digit growth is impressive. Can you elaborate on which sectors provide you with the confidence to achieve mid-single digit growth? How much of that is due to the integration of last year's successes, and how much comes from new opportunities you expect this year?

Thanks, Walter. A couple of comments. So really up until last Friday, January was kind of playing out how we expected it to play out. Certainly, we realize we've got tougher comps. We had pull-ahead volumes in international and automotive and such. And frankly, we knew Q1 was going to be a little bit more of a challenge on that front, Walter. Certainly, this weather event was a little bit of a setback. But I'm also pretty optimistic on sort of what we had in our base plan for grain in February and March. And my gut sense and what our customers are telling us is there's a pretty good opportunity for us to exceed and claw back maybe some of that, that we gave away here the last week during that time period. There's no doubt, though, I do believe Q2, Q3, the balance of the year is where we'll see the momentum build. Specifically, I think grain is, as we've talked about, both sides of the border continues to be an opportunity. We've got a strong export potash plan. So our bulks, kind of a similar story to 2025, I think presents a really good opportunity for us. And then we kind of shift to the synergies and self-help initiatives, and that's where we've got to lean in and create our own luck. But I think that's something we've proved we've been able to do. I look at intermodal. We still got a fair amount of growth on our MMX train that we'll be targeting. We're going to be launching the new SMX with CSX here in the coming months. And I can tell you, we're looking at transit times out of Central Mexico into markets of Atlanta, Charlotte, Jacksonville in roughly 4 days or less. This is going to be really fast. As Keith said, better than truck-like service. And the early bidding prognosis, we're looking at current bids of about 80,000 loads a year with one particular client that we're working on. So I'm pretty optimistic around those opportunities. We haven't scratched the surface on really our launch of the Americold building in Kansas City. And in that business, that reefer business, that is just starting to ramp up. And I'll remind you, up in Canada at Port Saint John, Americold will open their second building on us that will open up around the July timeframe. So just in the intermodal sector, Walter, there's no doubt there's going to be headwinds and ongoing challenges, but I think we've created enough unique products in the marketplace that I think allow us to go out and sell and do things maybe a little differently than what our competitors do out there. And that gives me some confidence, particularly on those areas.

I want to highlight that as we move into the second quarter and the beginning of the third quarter, we will have overcome the integration period when we transitioned our IT systems. This transition did incur some additional costs and impacted our revenue, but now that our operations are running smoothly, we expect to see a positive impact on our results for 2026.

So Keith, I wanted to see if you could weigh in on reciprocal switching as it's been proposed right now. Obviously, yourselves and others have kind of grown up with that in Canada. Do you think that's really applicable to the U.S.? Would you be concerned if that were to be extended to the U.S. in terms of how it's proposed right now? And I guess, ultimately, do you expect the industry to have to deal with this, whether or not there is M&A?

Yes, number one, if you do your job and you provide good service, you don't have to worry about it. You don't have to worry about somebody coming in your backyard and being able to do better than you are. That said, what's being proposed now versus what's in Canada, there's still a unique difference. With the inter switch in Canada, you've got the other carrier handling the switch to the interchange location and then you take the line haul to the next destination. What they're proposing is literally what I started with that somebody else coming in and providing service. So again, that said, if it were to happen, we'd respond to it. I don't see it as a threat to us at all. But ultimately, if a customer can't get their service, I agree they should have an alternative. They shouldn't be captive to terrible deteriorating service. I just think that, again, it needs to be fair. It needs to be balanced, and we need to think about the unintended consequences. It's not so complex that kind of what we go through ends up doing more damage to the customer than good.

I guess as you're thinking about 2026, I mean obviously, you finished '25 on a very strong note from an operating perspective, sub-56% OR. I guess how do you think about sort of the algorithm? When you're at a mid-single-digit RTM growth, I think pre sort of merger, we thought about the potential for that type of RTM to maybe drive decent OR improvement, potentially very high incremental margins and obviously, earnings power, and you're guiding to that. Kind of curious, how do you think about the OR potential as you move forward here? Obviously, for 2026, but maybe also bigger picture, are you kind of hitting stride? It seems like the network is running well. Just kind of get your thoughts on how you think about it as we move forward.

Yes, Chris. I mean, a year ago, we sat here, we talked about sub-60%, first we wanted to get to that level, which we've accomplished now. And beyond that, obviously, the goal isn't to just lower operating ratio but generate earnings and generate long-term return on invested capital. And so our earnings algorithm is kind of in that mid-single-digit RTM growth, layer on strong price and price to the value of our service. And then generate additional kind of value through free cash that's going to help bring it to the bottom line and get kind of that double-digit EPS growth over time. So the operating leverage that I think we're going to get given the strong bulk opportunity we have in front of us, we're coming in, as you said, with a very solid footing as far as Q4 with our cost structure. We've done some things on the workforce side to help us get to a better spot. From a resourcing point of view, we've got new locomotives coming in. I think there's opportunities on the fuel efficiency side and overall efficiency. So I do think kind of getting back into that 100 basis point type of operating ratio improvements per year if you're doing things right, if you are generating strong volumes and strong pricing, that should be how it plays out. So I think over time and kind of our long-term guidance of 100 basis point improvement in the OR is what you should expect from us if we're delivering and executing the way we should.

Just a couple of things. So on the revenue side, can you help us kind of bridge the volume to revenue? I think last year, you had a lot of mix issues and RTM revenues were kind of aligned. But as we think about this year, what does kind of mid-single-digit RTM mean to revenue, what's kind of the mix like as you look at the book of business that you're talking about? And maybe a quick one for Mark. Is the network set up to handle this book of business that John is talking about with current head count level? What are you envisioning on that front from a head count perspective?

Yes, Fadi. So I think probably the Q1, Q2, we're probably going to see some of those challenges that you described, yes, given the strong bulk business in those quarters that we're projecting that maybe is a little less natural than what we would normally see, probably does create some of that mix headwind during that time period. Plus I would tell you, we had tariff impacts of north of $200 million, 1%, 1.5% of our revenue in RTMs. And a lot of those tariff impacts were on really profitable, positive cents per RTM business that just is not available to us under this tariff environment. So I expect to see kind of some headwinds earlier in the year and then see that stabilize. I think there's probably a couple of points, if RTMs and revenue matched up even in '25, there's probably a couple of points of upside on the revenue as we're looking towards 2026, if that helps you out.

Yes, I would just add, in Q1, we'll lap the initial carbon tax. So we got one more quarter of that or a couple more months here from where we are today. So that will be a bit of a headwind to mix. And then the Canadian dollar just continues to appreciate. So I think we're at about $1.35 today at Bank of Canada held. And a year ago, we were closer to $1.43. So that's going to be a headwind. Now it's going to help us on our leverage. It's going to help us overall as far as you think about our balance sheet from that perspective and interest payments and things like that. So there is a net benefit elsewhere, but it will hurt our cents per RTM.

Yes. Regarding headcount, I mentioned that it will remain flat or slightly increase. We expect to have strong operating leverage as a result. Additionally, we will be focused on train size again. We are currently negotiating with some of our labor unions that will impact headcount. So we will be addressing that aspect.

Yes. And Fadi, like nonemployee head count, contractors and so forth are kind of, for the most part, off the property as well in Q4 as part of our cost focus. So I think overall, I'm going to push Mark as well on keeping that low single digit or keep it closer to flat. So I think we can accommodate it.

Nadeem, I understand the need to focus on the short-term, but it's important in this role. John highlighted several challenges we faced in the first quarter, including weather issues and the ongoing carbon tax and exchange rate fluctuations. As we consider achieving mid-single-digit revenue ton miles and particularly double-digit earnings per share, do you anticipate a slower start in the first quarter followed by a gradual improvement throughout the year? It seems we may need to catch up in the latter half of the year rather than seeing a quick rise right away.

Yes, the first quarter will be the most challenging of the year, especially when considering the significant traffic from Liberation Day last year, which presents tough comparisons. However, as Keith mentioned earlier, we will face much easier comparisons in the second and third quarters. So, while the beginning of the year will be more challenging for earnings, I'm not worried about it. Regarding the carbon tax, it doesn't negatively impact our earnings; it may slightly affect cents per RTM but ultimately contributes positively to our overall margins.

So there's talk of the harbor maintenance tax exemption kind of potentially going away and kind of potential implications there. So I would love to know if you guys have any views on what impact there might be on cross-border volumes if it happens or not.

Frankly, Ravi, the cross-border volume business is so small in our book today specific to that. I really don't give it much credence or that much of a concern right now in our book, maybe 4, 5, 6 years ago, where certainly, we saw that volume much stronger. But at this point, I really don't see that being much of an impact if they change some of those fees or regulations.

Keith, I'm kind of shocked that hasn't come up yet, but I think everyone respects your view on M&A. And obviously, the application was rejected on some maybe technical grounds, maybe not. But nonetheless, maybe get your updated thoughts there and especially in regards to the development that you have with CSX going from Dallas and Texas and Mexico into the Southeast. Really appreciate it.

Okay. Well, I think we say everyone respects that might be true, but I don't think everyone agrees with my views. That said, they remain to be the same. I think that rejection by the STB said loudly what I believe to be true in the first place, the facts are going to matter. This is not a fait accomppli. This is a complex merger that has a tremendous impact on the U.S. rail network as well as Canadian and Mexico. It's all ultimately one network, but obviously, the STB is seized with making sure they do what's right to protect the strength of the U.S. rail network, which supports the strength and obviously vitality of commerce and the economy in the United States of America. So again, it's not going to matter. I think this is what they're saying about how the applicants may feel, just tell them what the facts are. That's what that said. And that application was short on facts. It had a lot of positives, a lot of aspirational growth projections in there. And I'm not saying they can't be achieved. I'm saying that's a big bar to meet. And given that we're headquartered in Missouri now, I'd say it's the show-me state. That's what we want. We want to see the facts. We want all the facts to be revealed so we all can opine on those facts and how they impact each of us, and that's railroads, that's customers, that's communities. There's a public interest test that has to be solved to which includes strongly defined by enhanced competition. Those rules were written after the brakes were put on consolidation. Linda Morgan, who was chairing the STB back in 2001 when that moratorium was issued, she didn't just pump the brakes. She slammed the brakes on. And she went back and looked at what the nation needed going forward from a rail network standpoint. And a lot of people would benefit if they would actually go back and read and study not just what's written in the regulations, but the perspective on that.

Love the passion, Keith, and everyone focused on positive outcomes here.

Keith, I wanted to hear your thoughts on the overall view of USMCA and the risks involved, particularly regarding renegotiation. You have provided helpful insights on what you believe has been lost due to tariffs and the impact of Liberation Day. It's clearly challenging to have strong confidence about the outcomes related to tariffs. At a high level, do you perceive significant risks? What are your thoughts on the timing of this? Have you already faced most of the challenges resulting from Liberation Day?

Yes. Let me start with kind of the last question. We've already absorbed a pretty significant hit from all the uncertainty. I think about $200 million of revenue impact, maybe higher. So we felt it on the balance sheet already. I don't have the crystal ball to tell you exactly where the need is going to land. I believe, and I've said from the beginning, President Trump is going to adjust the balance of trade between our 3 nations. He is going to make decisions in that renegotiation, which to his satisfaction and to his view, benefits the United States of America. That said, I think that can be true and a positive renewal on USMCA can be true at the same time because trade between these 3 nations, even if it gets rebalanced a bit is critically important to all 3 nations success. We depend upon each other. That's undeniable. When USMCA was created, trade grew after the fact. After the pandemic, even more critical important about cross-border trade between these 3 nations. So sitting in the seat we're in, we've gone through some choppy waters. They may get more choppy. But at the end of the day, we'll get through the storm. These 3 nations will trade together, and we uniquely because of our network enables it, we connect with hard infrastructure, the rail network that allows that trade to flow Canada to the U.S., U.S. to Canada, Mexico to the U.S., U.S. to Mexico and now because of these trade tribulations, even more so than before, Canada to Mexico and Mexico to Canada. We are the only network that can do that. We truly are a success enabler for North America. We are North America's railroad, heavily committed to the United States, heavily committed to Canada, heavily committed to Mexico. We're going to enable success across these 3 great nations in a trilateral way that allows everyone to succeed, including CPKC.

Do you have any sense on what the most likely timing might be? Or is it just tough to say as well?

Yes. I'm reading the same things you're hearing. My guess is it's going to really get active this summer. So that's my view. I think in the summer, it's going to get renewed maybe hopefully, I would think before the midterm. Again, that's just me speculating based on the way I'm reading the tea leaves. I don't control the agenda, but that to me would be a possible and a probable outcome.

Just on the free cash, just wondering a couple of things real quick here. The free cash conversion you guys talked about at the Investor Day, 90% in that context, where do you see things shake out this year? And then for the CapEx, even if we adjust the pull forward of maintenance projects, the CapEx is seemingly down in '26. Where are you cutting CapEx on? And is there some flex?

Free cash conversion is in the 75% range, and looking ahead, we mentioned a target of 90% in 2028 and beyond. The current CapEx level is something we can maintain in the foreseeable future. With a weaker Canadian dollar, CapEx could decrease even further, while a stronger dollar may lead to a slight increase. There has been a shift in the timing of our capital investments; we've accelerated some infrastructure spending. Over the past three years, we focused on synergy and integration-related capital investments, such as the Laredo Bridge and various siding extensions to support integration and growth investments like Americold and Transload. Overall, there has been a change in our capital spending. We no longer have certain integration costs in our systems, leading to reduced capital needs. While we are investing in locomotives with Wabtec, we have decreased investments in railcars. Overall, this accounts for about a 15% reduction in CapEx, driven primarily by timing and siding extension and infrastructure investments, as well as some IS-related investments.

My question back in November, the Canadian government announced new measure to help the Canadian steel and lumber companies. One of this measure was the government would work with the rail to subsidize freight rates by 50% beginning in spring of 2026. I was wondering if you could give an update on this and whether it could be kind of a volume tailwind in the back half this year.

Yes. Thanks, Benoit. Certainly, we've got our GA folks working through still the mechanics of how all this will be accounted for sort of between all the parties, the customer, the government and ourselves. Our analysis says, yes, maybe there is some opportunity, particularly in maybe some long-haul transload type movements across the country. But I'm not looking at sort of needle-moving type numbers there, Benoit. So we'll see. As I said, there's still a fair amount that has to be sorted out. And then we'll see how it sort of ripples through the marketplace. And we're keeping our hands on the pulse of that if there's an opportunity, we'll be right there to try to capture it, but I'm not looking at big numbers.

So one of the other rails was talking about pickup in inflation. How are you feeling about price and just overall price cost this year? And then maybe just along those lines, just given some of the Q1 commentary on, any thoughts about how to think about operating ratio in Q1?

We'll stop through a. I think year-over-year, we'll see a potential for improvement in the operating ratio. I'll keep it at that. From an inflation point of view, we're not seeing that same sort of issue. And again, Canadian dollar does help us in terms of some of our costs and capital investments in U.S. dollar conversion. But overall, our true inflation, like which is locked in with labor, we signed some very unique deals and favorable deals for labor and for management. And those are in that 2.5% to 3% range. So as far as our inflation, you should expect that level of inflation overall, and we're pricing above that. So that spread should be positive and will be part of our benefit to our margins overall.

Nadeem, could you clarify whether the year-over-year improvement you mentioned for the first quarter was specific to that quarter or related to the overall operational results? Also, what are your thoughts on the synergy targets? Where do you believe you currently stand, and what additional contributions do you expect this year and next?

Yes. So we'll see year-over-year improvement in Q1 in the operating ratio, and I expect to see year-over-year improvement annually in the operating ratio as well. We talked about Q1 being a little bit more challenging just given volume won't be as strong in Q1, but I still see outside of a major winter event or disruption that we'll see some improvement in the operating ratio given the low cost structure we entered January with. And remind your second part of your question.

Synergy question, yes. So Ken, we exited 2025 at about a $1.2 billion run rate, $1.2 billion. We see an opportunity for another $200 million plus about $1.4 billion as we close out 2026. So well on our way of meeting the commitments we made relative to this integration opportunity.

So I wanted to ask maybe a little bit longer term. It's been interesting to see there's been quite a bit of convergence here between kind of valuations across the Class I rails. Keith, as we think about the growth prospects for CP over the long term, maybe speak about your level of confidence that CP can continue to outgrow the industry and kind of what are the drivers behind that as we think about 3, 5 years out and particularly how potentially a UP-NS situation could alter that?

Let me start with the last part first. If UP-NS aligns with the necessary adjustments and concessions to address enhanced competition, I view that as a positive outcome, provided there is a fair playing field without any anticompetitive practices. I expect Jim to assure us that this will not be the case. Regarding synergies and our growth strategy, consider our current performance without macroeconomic support. We are experiencing low single-digit growth in a challenging environment. Moving forward, we anticipate continuing synergies and creating unique opportunities, like the new SMX product which wasn't part of our initial targets. If we reach a stage where economic conditions improve with slight GDP growth and normal shipping patterns, we can sustain synergies, maintain pricing, and replicate successful behaviors in the coming years. This is a challenging endeavor, but our extensive network allows us to craft customer solutions that weren't previously possible. We benefit from trade among the three nations and distinctive routes that UP-NS cannot match. This positions us well to confidently achieve the growth targets we have established.

Just a question on the grain harvest given its size. I think you've already described it as a tailwind for the year. I was a bit surprised you didn't move more in the fourth quarter on the back of the weak harvest. And just curious whether or not you think the normal pattern will evolve this year in the sense we'll move the bulk of the harvest in the first 1.5 quarters or 2 quarters? Or would you think that pattern will extend into the third quarter as well, just given, again, the size of the carryover this year?

Yes, Steve. You and I both were surprised. Certainly, the wet weather out there in Vancouver didn't help. And I know we talked about it on the Q3 call, like we were excited about the level of freight that we had sold with the grain companies and gearing up for that. It does feel like maybe there is a little bit of a shift. We'll see if this is unique or not as we get towards harvest next year. I'm not really sure yet. I do believe it sets us up for a very ratable, which we like as a railroad shipment profile of grain. And frankly, with the soybeans not moving very much in the U.S., we're kind of excited about what that might bring as we move through the mid part of the year. So I met with one of our very largest grain customers last week. And they told me they fully expect to be kind of sold out to busy levels right through August in new crop. We got pretty good snow levels up across Canada right now. We exited with pretty decent moisture. And I know we're really in early innings right now, but I can tell you there's already a little bit of bullishness around could there be a repeat. And certainly, the Canadian farmer has built a lot of storage. So they've been able to put this crop away, but I think there's a pretty big confidence that this is going to have to move and move throughout the year. And then we'll see what happens next fall.

So John, maybe can you talk a little bit about how you're thinking about the tariff environment in terms of building out the mid-single-digit RTM guide? Like are you expecting things to kind of stay volatile, stay the same, get a little better, get a little worse? And then how are you guys thinking about the next iteration of the USMCA and how that might sort of impact some of the opportunities for you guys in the next 3 years?

Well, David, we've assumed that this situation isn't going to change significantly. So we've planned to account for this headwind through 2026. We were able to backfill it; for example, our land bridge volume increased by about $140 million year-over-year in those areas. We see potential to expand that significantly. It's undeniably frustrating, as it has been a considerable challenge. If we receive any positive developments, we will definitely welcome the return of that traffic, but it hasn't been part of our plans. Looking ahead, I can assure you that we are going to boost our sales efforts in our Mexico operations. There is plenty of potential there to support the broader network, whether through land bridge opportunities into Canada or aiding the American economy. We have yet to capitalize on this to the extent that our sales team does across Canada and the U.S. So, stay tuned for more updates, as I anticipate significant growth from our Mexico operations in the coming years.

And anything that Carney and the team are doing to kind of promote trade with other partners that might have an impact? I know there's been talk about the Chinese EVs, that kind of stuff.

Well, I think certainly, there's a fair amount of work. And actually, we've got some of our ag folks down there in the coming weeks to promote better ag shipments between the 2, eliminate some of the red tape and bureaucracy in terms of the customs movements of those products. I think we're making some headway on those fronts. I can tell you also, as we think about products intermodally moving all the way between Canada and Mexico, David, also, there is an effort to try to streamline some of those customs processes related to those products early. So I do believe there's some momentum there, but we're kind of in the early innings on some of that stuff.

We have reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel. Thank you, everyone, again for spending your time with us some really good questions. I think some active discussions, certainly a very topical time of change for our industry. We're going to stay close to that as we have stayed close to that, again, to make sure that our facts are heard and understood as well as the industries and as well as our customers, our joint customers. And we'll see how it all shakes out. More to come on that. These next several months will be very telling once that application is resubmitted, and we all have a chance to digest it and comment on that. In the meantime, we're going to focus on our core competencies, which is running a safe and efficient railroad for the benefit of our customers and for the benefit of commerce, which is going to produce a very solid and we think unique value-creating financial outcome for those that choose to invest in our company. We take that responsibility seriously. We appreciate your trust. We look forward to sharing results on the next call. Stay safe, stay warm, and we'll see you out on the rail.

This concludes today's conference call. You may now disconnect.