Earnings Call Transcript - CP Q1 2025

Operator, Operator

Please stand by, we are about to begin. Good afternoon, everyone. My name is Bo, and I'll be your conference operator today. At this time, I'd like to welcome everyone to CPKC's First Quarter 2025 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. All lines have been muted to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference call. Please go ahead, sir.

Chris de Bruyn, Vice President, Capital Markets

Thank you, Bo. Good afternoon everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2, in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. With me here today is 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 Q&A. In the interest of time, we'd appreciate if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Keith Creel, President and Chief Executive Officer

Hey. Thanks, Chris. It's certainly great to be with you, here with everyone today. First order of business, I'd be remiss not to pay tribute and express my appreciation to this 20,000 strong team of railroaders that I have the privilege to serve with on a daily basis that actually produce these results, results that certainly demonstrate industry best performance. In the first quarter, the team delivered revenue of $3.8 billion, which is up 8%. Revenue growth was driven by volume growth of 4%, an operating ratio of 62.5 which represents a 150 basis point improvement and industry-best earnings growth of 14%, producing $1.06 of earnings. Finally, most importantly, a record performance from a safety perspective, driving tremendous improvement on both train accidents as well as personal injuries. We got off to a strong start in 2025, and we're experiencing a strong start to the second quarter as well. That being said, there certainly exists an undeniable macro environment and uncertainty, including trade policy and currency uncertainty. Based on what we know today, we feel it's prudent and responsible to adjust our guidance at this time. However, I firmly believe as the leader it's our responsibility to drive positive results for those things that we can control. We're not paid to make excuses; crises create opportunities, and that's how we're approaching this uncertainty around tariffs and trade policies. Our base business remains strong. It's reflected in the results of the quarter and our volumes year-to-date, driven by the strength of our grain portfolio, coal, potash, and intermodal, including a record quarter in our Midwest-Mexico Express, as well as a new partnership with Gemini. The uncertainty created by these shifting trade policies is also accelerating opportunities that we always eventually felt would develop when we combine these two companies. This unparalleled three-nation network is uniquely built for times like this. We've stepped into this trade challenge that we're facing to become market makers. We're seeing opportunities with new trade flows between Canada and Mexico. We have increased refined fuels, LPGs, plastics, and grains that our customers in Canada are sending south to diversify their end markets. Our network connects to these new end markets uniquely, allowing us to move more appliances, furniture, food products, finished vehicles, and auto parts from Mexico to Canada. CPKC serves as a land bridge between Canada and Mexico, and we're working closely with our customers to create these industry-unique positive outcomes. It's not just at the customer level where we're driving these results. Our teams are also working closely with the Canadian federal and provincial government, as well as the government of Mexico regarding policies that could further incentivize growing Canada-Mexico trade volumes. We're hearing from both governments a genuine desire to see the Canada-Mexico trade relationship mature and deepen, and we're playing a major role in supporting that agenda. Now let's talk more on the U.S. front with the FRA, another area of encouraging opportunity regarding positive developments we've been actively working on from a regulatory perspective. I'm extremely optimistic about the early discussions with Secretary Duffy and the U.S. Department of Transportation team, especially those at the FRA, regarding their willingness to implement process changes and utilize technology for safer and more reliable outcomes. It makes too much sense not to do these things. Mark will provide detailed, fact-based, data-driven results and opportunities that the regulator wants to embrace for better outcomes from both a safety and service perspective. This is all, again, a refreshing change in my mind, common sense and value-creating change. Speaking of value creation opportunities that we realized in the quarter, the PCRC, the Panama Canal Railway, as you've seen earlier this month, after careful evaluation, we decided to divest our 50% stake in the railroad. The sale of this non-core asset to a key strategic partner, a major customer of the PCRC, allows us to focus on our core business and generates additional capital that we can use to create value for our shareholders elsewhere in our three-nation network. Regarding shareholder returns, we delivered on our commitment to repay debt and reduce our leverage following the merger. Last month, we announced a new 4% share buyback program. Just yesterday, we announced a 20% increase in our quarterly dividend. I'm very pleased that this company is in a position of strength again to begin returning cash to shareholders, particularly amidst the volatile market. In closing, let me say this: the short-term uncertainties undoubtedly exist from macro and trade policies. That said, our network is performing extremely well, and volumes continue to be strong. We've carried the momentum we had in 2024 into the first four months of 2025, just as we told you we would. We have the opportunity, the network, and the team to drive a differentiated outcome, and that's exactly what we will do. So with that said, I'm going to turn it over to Mark to discuss operations. John will provide some color on the markets and perhaps the numbers, and then we'll open it up for questions. Over to you, Mark.

Mark Redd, Executive Vice President and Chief Operating Officer

Yes. Thank you, Keith, and good afternoon. The operating team delivered another strong performance for the quarter, demonstrating why they are the best in the business. They're focused on delivering our precision scheduled service model, which is yielding exceptional results even amidst challenging winter operating conditions throughout most of February. Dealing with three consecutive weeks of extreme cold is no easy feat, and I'm particularly proud of how quickly our network bounced back to produce a record March. We've carried this momentum into the second quarter as well. In terms of the results, we continue to drive strong year-over-year operating improvements. Our train weight and length improvements were 5% and 4%, respectively, while our locomotive productivity improved by 3%. Fuel efficiency remained flat despite the challenging winter. We met strong demand, and in March, we delivered the strongest daily GTMs in our combined company history. We safely and efficiently met this demand by leveraging our prior investments in locomotive interoperability, allowing us to send power from the southern portion of the network to the western portion of Canada, where we saw a significant surge in GTMs. A resilient network is well-positioned to maintain this momentum and quickly adapt to changes in the operating environment as needed. Looking at safety, the FRA personal injuries rate was 0.98, a 14% year-over-year improvement. Our FRA train accident rate was at a record 0.38, marking a 58% improvement year-over-year and noted record performance as a combined company. Although we will never stop striving to do better, I'm extremely proud of the team for their commitment to our safety culture. Turning to the labor update, I am pleased with the progress we have made in this area. Recently, we announced four-year agreements ratified by both Unifor, Mwrd, and USW in Canada, representing our mechanical engineering and clerical forces. We're also working closely with the unions in the U.S. to expand our hourly agreements. These hourly agreements will support some of the redefined crew districts that we are implementing, allowing us to run extended runs, improving cycle times and delivering more resilient service to our customers. As Keith noted, we are working closely with the FRA on numerous initiatives that will enhance safety and generate operational improvements, including removing redundant air tests at the U.S.-Mexico border and securing final waiver approvals to optimize where we change better orders and better wheels on our network, driving yard efficiencies and reducing dwell at key locations like Kansas City and Laredo. We're exploring cold wheel technology, which when implemented in Canada has detected 30% more defects than the standard tests, and we have identified 150 instances of broken rail since we began this initiative in 2021, preventing numerous derailments. I'm extremely encouraged by the FRA's willingness to explore process and technology improvements, which will lead to enhanced safety outcomes and improved service. Looking over 2025, our capital plan is designed to support safe, efficient, and stable growth through targeted investments. We have capital investments coming online this year, including merger settings and CPC improvements, along with targeted investments in Mexico and the Kansas City area to improve fluidity through those key corridors. We are also beginning to take delivery of new Tier 4 locomotives in the coming weeks that will support growth and improve reliability and fuel efficiency for our fleet. We will continue to invest in targeted safety initiatives across the network, including hotbox detectors and broken rail detectors, which are improving safety and yielding material cost savings. In closing, we have a lot of operational momentum. This network is built to drive growth with a team equipped to execute it. Our operating team and commercial team are closely aligned, working together to adapt quickly to changes in demand and traffic flows. With that, I will pass it over to John.

John Brooks, Executive Vice President and Chief Marketing Officer

All right. Thank you, Mark, and good afternoon, everyone. I'm extremely pleased to report record volumes and revenue, along with continued strong pricing and unique value for our customers that we delivered this quarter. This performance is particularly impressive given the weather impact from February, along with macro and tariff policy uncertainties. Q2 is off to a strong start, as Keith mentioned, and our network is performing quite well. Although we continue to face uncertainties, the team is laser-focused on what we can control, and I'm confident in our ability to deliver disciplined growth to this network. Now, looking at our Q1 results: we delivered freight revenue growth of 9% on a 4% increase in RTMs. Our RTM was up 5% with strong pricing and foreign exchange effects, partially offset by fuel and mix. Taking a closer look at our first-quarter performance, I'll speak to FX adjusted results, starting with our bulk business. Grain revenues increased by 4% on 3% volume growth, marking a record Q1 performance. Canadian grain volumes were up 12% driven by increased shipments to Vancouver and Mexico. If export demand remains steady, we will drive unique growth from synergies. Looking forward, our comps remain favorable through the first half of the year. The VR CPI was recently reported at 3.1%, and our outlook for further synergies remains strong. Moving to U.S. grain, volumes decreased by 5% compared to the prior year as we saw reduced U.S. grain exports. However, our U.S. grain franchise remains well positioned with available grain stocks, and we expect steady volumes across multiple outlets, including to the Pacific Northwest, Canada, Eastern U.S., and Mexico. We also had a record Q1 in potash, with revenues up 10% and 8% volume growth. With positive demand fundamentals and Canpotex fully committed at strong levels for the first half of the year, we expect another strong year of potash growth in 2025. Completing the bulk segment, we closed the quarter with coal revenue up 21% on 10% volume growth. Strength was driven by higher Canadian met coal volumes being shipped to Vancouver and Thunder Bay, following inventory drawdowns from previous labor strikes and weather impacts. Now, moving to our merchandise business segment, energy, chemicals, and plastics revenue grew 3% on flat volumes. Our base ECP franchise continues to deliver volume growth across multiple commodities through synergies, self-help, and market share gains, though it was offset this quarter by lower crude volumes. We had strong growth from refined fuel shipments and plastics from both the U.S. Gulf Coast and Canada to Mexico. Additionally, we posted an all-time record LPG performance in the quarter as our network efficiently connected Canadian production with destinations in the U.S. and Mexico. Looking ahead, we have a very positive outlook for this business segment, with opportunities across multiple commodities, improving crude fundamentals, and new opportunities for trade directly between Mexico and Canada. Forest products revenue was up 2% on 4% volume growth. We continue to drive synergies and extended lengths of haul in this space, despite uncertain markets and softer base demand. This quarter's volumes benefited from higher wood pulp and paperboard driven by synergies and a new contract that we secured last fall. Metals, minerals, and consumer products revenue decreased by 1% on flat volumes. A softer demand environment, coupled with supply chain shifts, impacted this quarter's volumes, which were partially offset by higher volumes of frac sand and aggregates. Looking forward, we see lower cross-border steel demand due to tariffs. However, we expect to see partial offsets from growth in two new aggregate transload terminals and the development of direct sale moves that our network can facilitate between Canada and Mexico. Moving on to the automotive area, revenues increased by 18% with 24% volume growth. We achieved another record quarter as this continues to be a unique growth area for CPKC, driven by our advantageous footprint and service offering to production plants and auto compounds across North America, along with our closed loop service solution. While evolving trade policy has caused volume choppiness, our long-term outlook remains strong, and we're maintaining close collaboration with our customers to drive growth in this segment. In the intermodal segment, revenue and volumes were up 4%. Starting with domestic intermodal, we delivered solid performance this quarter with volumes up 8%. We are seeing steady volumes with our Canadian retail customers, and strong momentum from our MMX180/181 service as customers continue to take advantage of the fastest and most efficient cross-border rail solution between the U.S., Mexico, and Canada. Volumes on this service were up 42% in Q1, and March was the highest volume month on record. Looking ahead, we have good line of sight to domestic intermodal growth, as our business with Schneider National continues to outperform and Americold's cold storage warehouse, co-located in Kansas City, ramps up mid-year. On the international intermodal front, volumes were flat in the quarter, seeing higher volumes through the Port of St. John and Lazaro as Gemini vessels started to ramp up in March. However, some of that growth was offset by lower volumes through Vancouver and Montreal. Looking forward, we continue to see significant opportunity in this space as the Gemini Alliance increasingly utilizes CPKC-served ports, as evidenced by the quarter-to-date volumes. While the transpacific market experiences volatility due to tariffs, our diverse port access across North America and dependable service proposition position us well as trade policy evolves. To wrap up, while macro and trade policy remain uncertain, we remain confident in the unique growth opportunities this franchise presents, coupled with strong fundamentals in our bulk business and disciplined pricing. I'm extremely encouraged by the resiliency of this network and the team's ability to develop and convert new markets. I remain confident in our volume outlook for the year. With that, I'll now pass it over to Nadeem.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Great. Thanks, John, and good afternoon. Turning to our first quarter results, CPKC's reported operating ratio was 65.3%, and the core adjusted operating ratio came in at 62.5%, a 150 basis point improvement over the prior year. Diluted earnings per share was $0.97, and core adjusted diluted earnings per share was $1.06, up 14% versus last year. Taking a closer look at our expenses, the year-over-year variances on an FX-adjusted basis were driven by lower stock-based compensation and efficiency gains from improved train weights and lower crew costs, partially offset by inflation and volume-driven increases from higher GTMs. As we look to the rest of the year, we expect our average headcount to be roughly flat, driving labor productivity gains against mid-single-digit volume growth. Fuel expense was $481 million, up 3% year-over-year, driven by 3% higher GTMs, partially offset by lower prices and continued improved efficiency. The change in fuel prices was a $22 million or 20 basis point headwind to the quarter. Materials expense was $123 million; the year-over-year increase was driven primarily by the long-term parts agreement established last year, leading to higher materials expenses with a favorable offset within GSNO for net savings in the quarter. We also saw higher maintenance expenses this quarter due to unfavorable weather conditions. Equipment rents reached $99 million, up 14% year-over-year, driven by higher volume as we continue to extend the length of haul, particularly for our automotive business, combined with reduced efficiency due to weather impacts this quarter. Depreciation and amortization expenses were up 4%, resulting from a larger asset base. Purchased services and other expenses were $173 million, down 1% year-over-year. This decline was driven by savings from the long-term parts agreement mentioned earlier, alongside lower casualty expenses, although these savings were partly offset by a $34 million one-time non-competition waiver received last year. Despite this quarter's weather impact, we continued to drive efficiency and cost synergy gains. These improvements, along with lower inflation, are creating sustainable enhancements to our cost structure. Moving below the line, other expenses amounted to $7 million in Q1, driven by FX impacts. Other components of net periodic benefit recovery were $107 million, mainly due to a lower discount rate compared to 2024. Net interest expense was $216 million, or $211 million excluding the impact of purchase accounting. The year-over-year increase was driven by higher short-term debt balances and newly issued long-term debt, along with FX impacts. Income tax expense was $292 million, or $322 million adjusted for significant items and purchase accounting. For 2025, we continue to anticipate CPKC's core adjusted effective tax rate to be roughly 24.5%. Now looking at cash flow, Q1 cash provided by operating activities increased 14% to approximately $1.2 billion. We continued our strong level of investment in the network with CapEx spending of $711 million this quarter. Cash flow remains strong as we delivered $456 million in adjusted free cash for the quarter. This quarter also marked an important milestone as we resumed shareholder returns in late February, aligned with our principles of disciplined and opportunistic shareholder returns. We announced a new 4% share repurchase program that was an acceleration from our original plan to take advantage of volatility in the market. In the first month of the program, we repurchased 3.5 million shares or approximately 9%. As part of our balanced approach to shareholder returns, as Keith mentioned, just yesterday, we announced a 20% increase to our quarterly dividend. This dividend will remain an important avenue to return cash to shareholders, and we plan to gradually increase it over time toward a payout ratio of 20% to 30%. Now turning to guidance updates, in January, we issued a wider guidance range acknowledging the macro uncertainties we faced and committed to updating that outlook as we learned more. Four months into the year, we're tracking right on plan with mid-single-digit volume growth. Our updated guidance reflects our current view of the impact of trade policies on certain areas of our business as well as the effects of a stronger Canadian dollar, which, at current levels, poses a 2% headwind to the guidance we issued in January. Reflecting on the quarter, the teams are right on track. Mark and his team have the network running extremely well. John and his team are generating industry-leading growth, and we are tracking mid-single-digit volume growth for the year. We're continuing to maintain discipline on pricing and controlling costs, and we've resumed returning cash to shareholders. While uncertainties remain, the team is delivering strong results and we are well-positioned for another year of double-digit earnings growth. With that, Keith, I'll turn it back over to you.

Keith Creel, President and Chief Executive Officer

Okay. Thanks, gentlemen. Operator, let's open it up for questions.

Operator, Operator

Thank you very much, Mr. Creel. We will begin this afternoon with Scott Group from Wolfe Research.

Scott Group, Analyst

Hey, thanks for the afternoon. John, I wanted to start with you. It seems like there’s a significant import cliff approaching in the U.S. Are we expecting something similar at Canadian and Mexican ports, and how do you view the potential impact of that? Also, do you think there are opportunities for Canadian ports to capture market share from U.S. ports as a way to navigate tariffs? On a broader note regarding tariffs, what percentage of your business do you believe is exposed to these tariff issues? I know it's a significant amount, but broadly, what would you estimate that percentage to be?

John Brooks, Executive Vice President and Chief Marketing Officer

Sure, Scott. Let me see if I can work through that a little bit. On the international front, I would say we're very different from what the U.S. roads may face regarding that cliff. We really haven't seen much pull ahead on that front at all as it relates to international flows. Our volumes are uniquely strong right now, and you can see it reflected in our numbers, mainly due to the partners we've selected, particularly the growth with Gemini, which is off to a really good start. Overall, the volumes at the Port of St. John and Centrum in Vancouver have been stronger than we anticipated. As you know, the majority of our freight over time has transitioned a bit more from cross-border U.S. trade to a higher profile of Canadian dust and freight. I think we're benefiting from that right now. Regarding your question about the tariff exposure, a very small percent of our book, I'm going to say less than 1%, is international freight that comes from China destined for the U.S. via our Canadian port. I would classify that as a minor risk. We continue to see strong growth at Lazaro; it was the fastest-growing port in North America last year and continues to see good growth, both in domestic service within Mexico and in some of our cross-border business. So reliable trade is ongoing and hasn't been affected by tariffs so far. On the broader perspective of tariffs, certainly the automotive area presents some risk and creates choppiness, and we’re closely monitoring that. As we approach the new crop harvest in the U.S., we'll also monitor soybean movements to China and explore alternative markets for that business. The good news is that as Keith mentioned, the rest of our book has remained quite strong so far this year.

Scott Group, Analyst

Very helpful. You got it. Thank you.

Operator, Operator

We go next now to Walter Spracklin with RBC Capital Markets. Please go ahead.

Walter Spracklin, Analyst

Yes. Thanks so much, operator. Good afternoon. My question is really on your volume cadence. And John, you mentioned that your second quarter seems to be starting out even stronger than your first quarter and accelerating, I mean, last week was almost 20%. And you didn't change your RTM guidance as part of the EPS guidance. I'm curious about what is leading you to an EPS growth reduction while holding your RTMs, which are still mid-single-digit and maybe accelerating from here.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Walter, let me just take that. Just in terms of where the Canadian dollar has really appreciated since the beginning of the year, our initial guidance had the Canadian dollar exchange rate around CAD1.42, CAD1.43 level. Today, we're closer to CAD1.37, CAD1.38. So that alone has had an EPS impact of about 2 percentage points, leading to the low end of guidance moving from 12% down to 10%. This is the primary factor for that change in guidance; we still expect mid-single-digit RTM growth, as I mentioned earlier. So that's the primary driver.

Walter Spracklin, Analyst

Appreciate that color. Thanks, Nadeem.

Operator, Operator

Thank you. Your next question comes from Chris Wetherbee of Wells Fargo. Please go ahead.

Chris Wetherbee, Analyst

Yes. Thanks. Good afternoon. Maybe just to follow up on that. So I guess the low end kind of moves with FX. Should we assume that the high end ticks down a little bit more on the lower end of mid-single-digit RTMs? And if I broaden the question a bit for 2025, how do you think about the operating ratio in that context? Maybe you can touch on 2Q or give some thoughts regarding the full year, whatever is helpful.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Yes. I think, Chris, that's fair in terms of factoring in some of the tariff impact and policy changes that could impact the top end of volume, so maybe it's not six, but closer to five. Regarding the operating ratio, you should see sequential improvement from the 62.5. Traditionally, Q1 has a much higher OR than the rest of the year. I expect that to continue improving over the course of the year. Historically, we've seen 200 to 250 basis points of improvement in OR, and I don't see any reason why we can't achieve that this year, especially considering the current volume environment.

Chris Wetherbee, Analyst

That's great. Thank you very much. Appreciate it.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Thanks, Chris.

Operator, Operator

We'll go next now to Brian Ossenbeck of JPMorgan. Please go ahead.

Brian Ossenbeck, Analyst

Afternoon. Thanks for taking my questions. John, it seems you mentioned that the cross-border business hadn't seen too much of an impact. Could you elaborate on that further, especially since the 180/181 seems to be a big driver there? I thought there might have been some network issues with your peer in the east that could have slowed down capacity, especially with the automotive headlines as well; your insights would be appreciated. And Nadeem, could you discuss the buyback pace and how you expect it to ramp up from here, especially given a strong start in Q1?

John Brooks, Executive Vice President and Chief Marketing Officer

Yes, Brian. A few points here. We have certainly seen some interruptions due to tariffs affecting cross-border flows, particularly as we began April, but those impacts have progressively smoothed out through the month. As of the last couple of days, I think all our production facilities are fully operational and shipping automobiles smoothly. For example, domestically, the MMX service continues to grow strong via our business with Schneider, where we just launched over 200 new shipments specific to auto parts in conjunction with Schneider. We're only beginning to ramp up this service between our network and CIS and the Southeast. We've also seen some cross-border steel business impact, but that too has resulted in new opportunities, where we're now shipping some steel products out of Mexico into Canada and other markets. We are proactively working on adapting to these changes and aligning with our customers.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Hi, Brian, regarding the buyback, you can see our filings. We're quite aggressive; as of yesterday, we've bought back about 20% of the program—4% share buyback for the year. You should expect us to finish it by the end of the year, completing about 10% of the capacity per month. We've accelerated this program due to market volatility and the stock price trading at a discount to its intrinsic value. Therefore, you can expect this program to be complete by year-end.

Brian Ossenbeck, Analyst

Okay, helpful. Thank you.

Nadeem Velani, Executive Vice President and Chief Financial Officer

Thanks, Brian.

Operator, Operator

Your next question will come from Fadi Chamoun of BMO Capital Markets. Please go ahead.

Fadi Chamoun, Analyst

Thank you. I want to circle back on the volume framework. Maybe a little bit more medium term. When this network was put together, the biggest addressable market opportunity felt like it was driven by U.S.-Mexico in various end markets. Many of these end markets seem to be facing challenges with trade policy. Do you see your outlook dampened by these developments? I would appreciate your perspective on where you see potential opportunities if these end markets experience challenges.

Keith Creel, President and Chief Executive Officer

Fadi, I'll let John provide some color on that, but fundamentally, if these end markets are impacted, it's our responsibility to create solutions. When I talk about being market makers, if we lose traction due to tariffs on autos or steel, we don't believe it's material. The situation has begun to stabilize as expected, which allows automotive manufacturers to resume production. There remains strong demand for vehicles in the U.S. market. The ongoing crisis resulting from uncertainty in Canada and Mexico is fostering opportunities to diversify. Just in the past month, John could share specifics, but we have generated over $100 million of new revenue originating from Alberta heading to Mexico. So while there are some losses in certain areas, we are finding opportunities to offset, and that is our job—to capitalize on those market changes, which we are doing.

John Brooks, Executive Vice President and Chief Marketing Officer

Fadi, as I mentioned, our team is focused on what we can control. We're actively pursuing sales efforts via a recent blitz where we met over 500 customers, leading to over $100 million in new wins, mainly in merchandise and ECP. We see strong growth in energy, and we’re paying attention to converting previous opportunities mentioned earlier. The amenities and strong demand in coal, potash, and grain bode well for us despite uncertainties.

Keith Creel, President and Chief Executive Officer

Just to provide an example, I want to share a Canadian success story arising from the ongoing crisis. Recently in Toronto, I spoke with the CEO of a significant Canadian retailer about diversifying markets and how certain products on Canadian shelves have been originating from the U.S. but could come from Mexico directly through our unique rail connections, cutting costs and optimizing supply chains while also addressing environmental impacts. Discussions are ongoing, and interest is high in finding new solutions, which creates significant new opportunities for our rail network.

Fadi Chamoun, Analyst

That's great. I appreciate the detailed answer. Thanks.

Operator, Operator

Thank you. Your next question comes from Ravi Shanker of Morgan Stanley. Please go ahead.

Ravi Shanker, Analyst

Great. Thanks. Good afternoon, everyone. Just a follow-up on controlling the controllables. What is the plan if there is a prolonged cliff in incoming port volumes? Do you have a pandemic playbook you can dust off on costs? Can you adjust labor flexibility, or is it just a wait-and-see approach?

Keith Creel, President and Chief Executive Officer

No, we'll never adopt a wait-and-see strategy. We're always paying attention, and I can tell you—having done this for three decades and being a PSR leader for two decades—I can recognize slippage when it occurs. We'll take action swiftly when needed. We'll have insights on visibility to potential declines, and we're equipped to implement responsible action. We can adjust crew starts, fleet sizes, and yard expenses as necessary; we possess muscle memory to navigate through these challenges. I don't anticipate this cliff unfolding; we're not planning for a recession but are always prepared.

Mark Redd, Executive Vice President and Chief Operating Officer

I would add that we’ve been operating as CPKC for two years now and have garnered enough experience in the southern region to react quickly to evolving situations. We can adjust power allocation, crew starts, and other operational flows to meet demand.

Ravi Shanker, Analyst

Understood. Thank you.

Operator, Operator

We'll go next now to Tom Wadewitz of UBS. Please go ahead.

Tom Wadewitz, Analyst

Yes, good afternoon. Keith and John, you’ve talked a lot about the Canada-Mexico opportunity and mentioned the $100 million opportunity from Alberta to Mexico. How does that compare in scale to your Mexico-U.S. business, and can you provide more examples of potential growth areas outside of ECP? It seems new and interesting, but it's tough to put into context.

John Brooks, Executive Vice President and Chief Marketing Officer

Tom, that's a great question. Our sales blitz aimed to quantify and explore potential growth avenues. As of now, we're approaching two trains a day from Gemini, facilitated by North American service arrangements. With Maersk’s service shift, we're making strides at Port St. John. Although we may not see a glut of new business, the momentum remains steady amidst uncertainty. We'll observe if these developments continue or if existing projects are delayed or modified. But overall, our Mexican territory holds promise for growth.

Keith Creel, President and Chief Executive Officer

To provide perspective, just two weeks ago, we executed a successful test move of oats from Saskatchewan deep into Mexico—a 3,000-mile unit train move. This is exciting and represents potential! However, fumigation presents hurdles that we continuously address working with the involved governments, making trading more seamless and efficient.

Operator, Operator

Thank you. Your next question comes from Kevin Chiang of CIBC. Please go ahead.

Kevin Chiang, Analyst

Hi. Good afternoon. Thanks for taking my questions. About the auto front—there seem to be political efforts to enhance U.S. auto production. I’m interested in hearing about your discussions with customers as they refine their supply chains and how CPKC can assist.

John Brooks, Executive Vice President and Chief Marketing Officer

To that end, we are in a solid position due to our infrastructure and the operational readiness of our facilities. Many of our production facilities have low inventories and high demand, summed up by the 60,000 unfilled orders currently in Canada. We believe this trend points to a demand surge for vehicles serviced by our network. Further, we have 6,000 acres of property available across the network for development, which potential customers can utilize for their distribution centers or production enhancements. We're actively promoting these locations to not only OEMs but also various supportive industries.

Kevin Chiang, Analyst

That's great color. Thank you.

Operator, Operator

We'll go next now to Stephanie Moore with Jefferies. Please go ahead.

Stephanie Moore, Analyst

Hi, good afternoon. Thank you. One follow-up question regarding your commentary about operating ratio performance for the full year and in the second quarter. Did I hear you correctly that you expect OR to improve as the year goes on? Are you referencing sequential improvement off the first quarter level?

Nadeem Velani, Executive Vice President and Chief Financial Officer

Yes, that's absolutely correct.

Stephanie Moore, Analyst

Got it. Thank you. And for a more significant question, having had ongoing conversations with customers in Mexico or with businesses engaged in that region, have you noticed an uptick in production plans moving to Mexico due to disruptions in trade lanes from other areas of the world?

John Brooks, Executive Vice President and Chief Marketing Officer

The industrial development pipeline in our Mexican region remains strong. Several projects are underway, without significant shelving or changes due to uncertainty that we've been monitoring. We expect ongoing development in the region while being flexible and responsive to customer needs.

Stephanie Moore, Analyst

Thank you. I appreciate it.

John Brooks, Executive Vice President and Chief Marketing Officer

Yes, absolutely.

Operator, Operator

Thank you. We'll go next now to Jonathan Chappell of Evercore ISI. Please go ahead.

Jonathan Chappell, Analyst

Thank you. Good afternoon. John, we haven’t focused on Gemini much; it seems quite promising. Can you give more context around the revenue potential with your partners and whether anything has changed in the 12 to 24 month timeframe considering uncertainties since the partnership started?

John Brooks, Executive Vice President and Chief Marketing Officer

My enthusiasm for Gemini remains high, and it’s progressing well in terms of volume. We're moving toward operating two trains a day; DP World has successfully launched services at Centerm. Maersk has also shifted its service under Gemini. Despite uncertainties, the growth trajectory and partnership remains very promising.

Jonathan Chappell, Analyst

Thanks, John.

Operator, Operator

And your next question will come from Ken Hoexter of Bank America. Please go ahead.

Ken Hoexter, Analyst

Hi. Good afternoon. John or perhaps Nadeem, we've gone over questions on operating ratios, but I want to understand that the typical post Q1 to Q2 improvement is about 260 basis points. Can you clarify if you expect to meet or exceed this normative performance?

Nadeem Velani, Executive Vice President and Chief Financial Officer

Yes, I think the 200 to 250 basis points is a realistic expectation based on empirical data. Optimistically, we hope not to have significant stock-based comp tailwinds that could affect this measure.

Ken Hoexter, Analyst

Thanks.

John Brooks, Executive Vice President and Chief Marketing Officer

On pricing, we enjoy strong robust pricing in our values. Our renewals are on the upper end of the pricing spectrum, with expected growth of 4% to 5%. We’re also excited about the positive repricing environment that remains.

Ken Hoexter, Analyst

Thanks, John.

Operator, Operator

Your next question will come from Steve Hansen of Raymond James. Please go ahead.

Steve Hansen, Analyst

Thanks for squeezing me in. Keith, I was impressed with your positive commentary on the FRA discussions regarding technology deployment and potential benefits to safety and service. How can you frame the timeline around deployments and the potential impact on efficiency and safety?

Keith Creel, President and Chief Executive Officer

These changes are short-term, and we're already seeing immediate benefits from the bad order changes on our grain fleet’s optimal design, as well as from the waiver granted to group cars at IFG and Laredo, which improves efficiency significantly.

Mark Redd, Executive Vice President and Chief Operating Officer

We've engaged with the FRA personnel personally, and we've had good discussions about how to continue evolving and improving existing inspections and processes to quickly achieve these goals. They are showing eagerness to collaborate and understand how we use data to enhance safety.

Steve Hansen, Analyst

That’s great to hear. Appreciate the insights.

Mark Redd, Executive Vice President and Chief Operating Officer

You bet.

Operator, Operator

And we'll go next now to Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski, Analyst

Hey, good afternoon, everyone. Thanks for taking my question. Mark, just following up on your previous comments, I recall you mentioned the FRA, and in your prepared remarks indicated that securing those labor agreements would help the network run better. Can you detail what the plan looks like for this year from an operational perspective? How can you combat inflation and push for enhanced efficiency?

Mark Redd, Executive Vice President and Chief Operating Officer

Each year, we engage in GM meetings specifically to examine cost-saving mechanisms. This year, the focus has been on achieving upwards of $60 to $70 million in reductions. Positive stability is evidenced by our union agreements ratified this year. We have another labor agreement in the works that will further enhance crew districts, allowing for extended operations efficiently. We are also utilizing this engagement to optimize service in the southern region.

Brandon Oglenski, Analyst

Thank you, Mark.

Mark Redd, Executive Vice President and Chief Operating Officer

You bet.

Operator, Operator

And your next question will come from Ari Rosa of Citigroup. Please go ahead.

Ari Rosa, Analyst

Great. Thanks. Good afternoon. Just diving deeper into the regulatory discussion, could you detail what other areas you're pursuing, and how impactful you believe they could be regarding cost savings or efficiency?

Mark Redd, Executive Vice President and Chief Operating Officer

Yes. We've had cold wheel technology in operation for some time in Canada, which can enhance equipment cycles and efficiencies stemming from inspections. As we pursue FRA collaboration, similar inspection improvements could lead to significant cost savings. Advanced detection systems will further contribute to our operational effectiveness and safety levels.

Operator, Operator

Thank you. We'll go next to Benoit Poirier of Desjardins Securities. Please go ahead.

Benoit Poirier, Analyst

Yes, thank you, and thanks for taking my question. John, regarding the situation with the China vessel surcharge, have you noticed any customer reactions to avoid U.S. ports by potentially directing their business to ours? Additionally, can you comment on the momentum we're seeing at the Port of St. John, especially with the increased activity from Southeast Asia?

John Brooks, Executive Vice President and Chief Marketing Officer

We’re excited about the momentum at St. John, and it continues to grow. Our recent improvements in infrastructure allow us to enhance our export opportunities, including those products that traditionally relied on U.S. routes. As for the China vessel surcharge, we're not witnessing significant increases in traffic as a direct reaction yet. However, we're keeping a watchful eye on the matter, aware that shifts could occur near the implementation deadline.

Benoit Poirier, Analyst

Thanks very much.

John Brooks, Executive Vice President and Chief Marketing Officer

Sure thing.

Operator, Operator

Thank you. And we've reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel.

Keith Creel, President and Chief Executive Officer

Thank you. I appreciate your time this afternoon. I hope you walk away with some valuable insights. Despite the winter conditions and uncertainties we face, we've produced a strong first quarter. We're well-positioned to continue this trajectory in 2025, leveraging our unique three-nation network. We will generate solutions to create value for our shareholders, not just in 2025 but beyond. I look forward to sharing our second quarter results.

Operator, Operator

Thank you. Ladies and gentlemen, that will conclude today's CPKC's First Quarter 2025 Conference Call. Again, thank you so much for joining us. Wishing you all a great remainder of your day. Goodbye.