Canadian Pacific Kansas City - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered $3.80B revenue (+8% y/y), diluted EPS $0.97, Core adjusted diluted EPS $1.06, and Core adjusted OR 62.5% amid tariff and FX uncertainty.
• Results were modest beats versus Wall Street: EPS $0.74 vs $0.73*, revenue $2.64B vs $2.61B* (SPGI USD basis); guidance trimmed to 10–14% Core adjusted EPS growth (prior 12–18%) due to tariffs and FX.
• Operational resilience: RTMs +4%, OR improved 210 bps to 65.3%, record safety performance (FRA accidents 0.38; injuries 0.98).
• Capital returns re-accelerated: new 4% buyback already ~3.5M shares in March, and dividend hiked 20% to $0.228/quarter (payable July 28).
• Near-term catalysts: policy/FX normalization, continued Gemini/St. John/Lázaro intermodal ramp, and expected ~$230M pre-tax gain in Q2 from Panama Canal Railway sale.

What Went Well and What Went Wrong

What Went Well

• Core execution: OR improved 210 bps to 65.3% and Core adjusted OR to 62.5%; operating income +15% y/y to $1.317B.
• Bulk strength and autos: Grain +8% revenue (record Q1), Potash +14%, Coal +23%, Automotive +19%; RTMs +4% overall.
• Safety and operations: FRA train accidents per million train-miles fell to 0.38 (−58% y/y); locomotive productivity +3%; record March GTMs despite extreme cold.
• Quote: “Crisis creates opportunities… this unparalleled 3 nation network is uniquely built for times like this” — Keith Creel.
• Commercial momentum: MMX 180/181 intermodal volumes +42% in Q1; Schneider auto parts service launched; Gemini alliance ramp at St. John and Vancouver.

What Went Wrong

• Guidance trimmed on macro: EPS growth reduced to 10–14% (from 12–18%) due to tariff uncertainty and CAD FX headwind (~2 pts).
• Cost pressures: Materials expense +32% y/y (parts agreement and weather), equipment rents +21% y/y, depreciation +8% y/y.
• Network metrics: terminal dwell increased to 10.3 hours (+6% y/y) amid winter impacts; intermodal revenue per RTM modestly pressured.
• Tariff exposure pockets: choppiness in autos and steel cross-border flows, though teams are offsetting with Canada–Mexico land-bridge solutions.

Transcript

Operator (participant)

Good afternoon, everyone. My name is Bo, and I will be your conference operator today. At this time, I would 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 placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. I would now like to introduce Mr. Chris de Bruyn, Vice President, Capital Markets, to begin the conference call. Please go ahead, sir.

Chris de Bruyn (VP of 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 two in the press release and in the MD&A file with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on slide three. 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 would appreciate it 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 CEO)

Hey, thanks, Chris. It's certainly great to be here with everyone today. First order of business, I'd be remiss not to pay tribute and express my appreciation to the 20,000-strong team of railroaders we have spread across three nations that I get the privilege to serve with on a daily basis that actually produce these results. Results that certainly demonstrate industry-best performance. First quarter, the team delivered revenue of $3.8 billion, which is up 8%. The revenue growth was driven by volume growth of 4%, an operating ratio of 62.5, which is a 150 basis point improvement, and industry-best earnings growth at 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.

You know, we're undoubtedly off to a strong start in 2025, and we're experiencing a strong start to the second quarter as well. That being said, there's certainly an undeniable macro environment uncertainty that exists: trade policy uncertainty and currency uncertainty. As such, based on what we do know today, we do feel it's prudent and responsible to adjust our guidance at this time. That said, I firmly believe, as a leader, it's our responsibility to drive positive results with those things that we can control. We're not paid to make excuses. Crisis creates 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 in the quarter, and our volumes year to date are driven by strength in our grain portfolio: coal, potash, intermodal, including a record quarter on our Midwest Mexico Express, as well as a new partnership with Gemini. The uncertainty that's created by these shifting trade policies, on a positive side, is also accelerating opportunities that we always eventually felt would develop when we combined these two companies. This unparalleled three-nation network is uniquely built for times like this. We stepped into this trade storm that we're facing to become market makers. We're seeing opportunities with new trade flows between Canada and Mexico. We've got increased refined fuels, LPGs, plastics, grains that our customers in Canada are sending south as they look to diversify their end markets. Our network connects to those new end markets, a land bridge to Mexico uniquely.

The ability to move more appliances is coming north: furniture, food products, finished vehicles, and auto parts from Mexico to Canada as well. CPKC uniquely serves as a land bridge between Canada and Mexico. We're working closely with our customers in creating these industry-unique positive outcomes. It is not just at the customer level that we're driving these results. Our teams are working closely with the government in Canada, at the federal and provincial level, as well as the government in Mexico regarding policies that could further incentivize growing Canada to 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 very encouraging area of opportunity: positive developments and opportunities that we've been actively working on from a regulatory perspective. I'm extremely encouraged by the early discussions with Secretary Duffy and the U.S. Department of Transportation team, especially those in place at the FRA, on their willingness to implement process changes and utilization of technology to deliver safer and more reliable outcomes. It makes too much sense not to do these things. Mark will get into the details. They're fact-based, data-driven results and opportunities that the regulator wants to embrace for best outcomes from a safety perspective as well as from a service perspective. This is all, again, refreshing change in my mind: common sense, best sense, value-creating change.

In line with other value creation opportunities that we realized in the quarter, the PCRC, the Panama Canal Railway, as you've seen early in the month, after careful evaluation, we made the decision to divest our 50% stake in the railroad. The sale of this nine-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 can be deployed to create value for our shareholders elsewhere in our three-nation network. When shareholder returns, another area of strength: last month, having delivered on our commitment to repay debt and reduce our leverage following the merger, we announced a new 4% share buyback program, and just yesterday, we announced a 20% increase in our quarterly dividend.

I'm very pleased for this company to be in a position of strength again to begin returning cash to shareholders, particularly amidst a volatile market. In closing, let me say this: there are short-term uncertainties, undoubtedly, from the macro to trade policies. That said, this network is performing extremely well, and volumes continue to be strong. We've continued the momentum we carried from 2024 to the first four months of 2025, just as we told you we would do. We have the opportunity, the network, and the team to drive a differentiated outcome, and that's exactly what we will do. With that said, I'm going to turn it over to Mark to speak a bit to the operation. John, provide some color on the markets, Nadeem on the numbers, and then we'll open it up for questions. Over to you, Mark.

Mark Redd (EVP and COO)

Okay, yeah. Thank you, Keith, and good afternoon. The operating team did deliver another strong performance for the quarter, demonstrating why they're the best in the business. Their focus on safely delivering our precision-scheduled service model is delivering exceptional results, even during some of the 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 have carried this momentum also into second quarter. Think about the results. We continue to drive strong year-over-year operating improvements. Our train weight and length improved 5% and 4%. Our locomotive productivity improved 3%. Fuel efficiency was flat despite the challenging winter. We delivered on strong demand, and in March, we delivered the strongest daily GTMs in our combined company history.

We met demand safely, efficiently, in part 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, quickly adapt to changes in the operating environment as needed. If I look at safety, FRA personal injuries were 0.98, which is 14% better year-over-year improvement. Our FRA train accident had a record 0.38. That's 58% improvement year-over-year, and noted a record performance as a combined company. Although we never stopped striving to do better, I'm extremely proud of the team for their commitment to our home-safe culture. If I look at the labor update, just turning to labor, I'm pleased on the progress we have made in this space.

Recently, we announced four-year agreements ratified by both Unifor, MWED, 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 in the process of implementing. As we evaluate traffic flows across this new network, combining crew districts in certain areas will allow us to run extended runs, further improve cycle times, and deliver more resilient service to our customers.

Keith, as Keith noted, and very proud, we are working closely with the FRA on a number of initiatives that will enhance safety and generate operational improvements, including removing redundant air tests at the U.S.-Mexican border, also securing the final waiver approval to optimize where we change bat orders—bat order wheels on our network, driving yard efficiencies and also reducing dwell at key locations like Kansas City and Laredo, exploring our cold wheel technology that, when implemented in Canada—or when we did implement in Canada—we've identified 30% more defects than the standard tests, and the ability to better utilize our broken rail detection in dark territories. Since we began this in 2021, we've detected 150 instances of broken rail, preventing numerous derailments. I'm extremely encouraged by the FRA on their willingness to explore the process and technology improvements, which will lead to improved safety outcomes and enhanced service.

As I look at the balance of 2025, our capital plan is built to support safe, efficient, sustainable growth through pinpointed investments. We have capital investments coming online this year, including merger sightings and CTC that we spoke about, along with targeted investments in Mexico and Kansas City area to improve fluidity through those key corridors. We're also beginning to take on delivery of the new Tier 4 locomotives in the coming week that will support our growth and improve reliability and fuel efficiency for our fleet. We will continue to make targeted safety investments across the network, including hotbox detectors and broken rail detectors, which are improving safety and generating material expense savings. In closing, we have a lot of momentum operationally. This network is built to drive growth with the team that executed it.

The operating team and commercial team are closely aligned and work with each other on our customers to adapt quickly to changes in demand and traffic flows. With that, I'll pass it over to John.

John Brooks (EVP and CMO)

All right. Thank you, Mark, and good afternoon, everyone. I'm extremely pleased with the record volumes and revenue, continued strong pricing, and unique value for our customers that we delivered this quarter. This performance is unique, particularly impressive as you think about the weather impacts from February, along with the macro and tariff policy uncertainty. Q2 is off to a strong start, as Keith said, and our network is performing quite well. Although we continue to face this uncertainty, 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, this quarter, we delivered freight revenue growth of 9% on a 4% increase in RTMs. Cents for RTM was up 5%, with strong pricing and FX partially offset by fuel and mix.

Now, taking a closer look at our first quarter performance, I'll speak on an FX-adjusted result. Starting with our bulk business, grain revenues were up 4% on 3% volume growth, a record Q1 performance. Canadian grain volumes were up 12%, driven by increased grain to Vancouver and Mexico if export demand remains steady and we drive unique growth from our synergies. Now, looking forward, our comps remain favorable through the first half of the year. The VRCPI was recently reported at 3.1%, and our outlook for further synergies remains strong. Moving to U.S. grain, volumes were down 5% over prior year, as we saw reduced volumes of U.S. grain exports. However, our U.S. grain franchise remains well-positioned with available grain stocks, and as we look ahead, we expect steady volumes across multiple outlets, including to the PNW, Canada, Eastern U.S., and down to Mexico.

We also had a record Q1 in potash, with revenues up 10% on 8% volume growth. With positive demand fundamentals and Canpotex fully committed at strong levels through the first half of the year, we continue to expect another strong year of potash growth in 2025. To finish out bulk, we closed the quarter with coal revenue up 21% on 10% volume growth. Strength was driven by higher Canadian met coal as we moved more volume to Vancouver and Thunder Bay, driven by inventory drawdowns resulting from the prior 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 from synergies, self-help, market share gains, and they were offset this quarter, though, by lower crude volumes.

We had strong growth from refined fuel shipments and plastics from both the U.S. Gulf Coast and Canada into Mexico. We also posted an all-time record LPG performance in the quarter as our network is efficiently connecting 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 revenues were up 2% on 4% volume growth. We continue to drive synergies and extended length of haul in this space, despite uncertain markets and a softer base demand. Volumes this quarter did benefit from higher wood pulp and paperboard, driven by synergies and a new contract that we secured last fall. Metals, minerals, and consumer products revenue was down 1% on flat volumes.

A softer demand environment, coupled with supply chain shifts, impacted the volumes in the quarter. These declines were partially offset by higher volumes of frac sand and aggregates. Looking forward, we see lower cross-border steel demand resulting from the tariffs. However, we expect to see partial offsets from growth at two new aggregate transload terminals, along with the development of direct steel moves that our network can facilitate between Canada and Mexico. Moving on to the automotive area, revenues were up 18% on 24% volume growth. We posted another record quarter, as this continues to be an area of unique growth for CPKC, driven by our advantaged footprint serving production plants and auto compounds across North America, along with our closed-loop service solution.

While evolving trade policy has resulted in choppy volumes, our long-term outlook remains strong, and we're staying close with our customers to drive growth in this business segment. On the intermodal side, 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 on our MMX 180/181 service, as customers continue to take advantage of the fastest, most efficient cross-border rail solution between the U.S., Mexico, and Canada. Our volumes on this service were up 42% in Q1 and marked with our highest volume month on record. Now, 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 starts ramping up mid-year.

Volumes were flat in the quarter. We saw higher volumes through the Port of St. John in Lazaro, primarily with Hapag-Lloyd, as Gemini vessels started to ramp up in March. However, some of that growth was offset by lower volumes through Vancouver and Montreal. Now, looking forward, we continue to see a lot of opportunity in this space, as the Gemini Alliance increasingly utilizes CPKC serve ports, which you are now seeing in our volumes quarter to date. While the Trans-Pacific market is experiencing volatility as a result of tariffs, our diverse port access across North America and reliable service proposition positions us well as trade policy evolves. To close, while the macro and trade policy remains uncertain, we continue to be confident in the unique growth opportunities this franchise has, coupled with strong fundamentals in our bulk business and disciplined pricing.

I'm extremely encouraged by this network's resiliency and this team's ability to develop and convert new markets, and I remain confident in our volume outlook for the year. With that, I'll now pass it over to Nadeem.

Nadeem Velani (EVP and CFO)

Great. Thanks, John, and good afternoon. Turning to our first quarter results on slide 12, 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 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 on slide 13, I will speak to the year-over-year variances on an FX-adjusted basis. Comp and benefits expense was $682 million, or $677 million, adjusted for acquisition costs. The year-over-year decline was 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. The increase was driven by 3% higher GTMs, partially offset by lower price 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, adjusted for acquisition costs. The year-over-year increase was driven primarily by the long-term parts agreement that was put in place last year, driving higher materials expense with a favorable offset within PS&O for net savings in the quarter. We also saw higher maintenance expenses this quarter, driven by unfavorable weather conditions. Equipment rents were $99 million, up 14% year-over-year.

The increase was driven by higher volume as we continue to extend length of haul, particularly for our automotive business, along with reduced efficiency from weather impacts in the quarter. Depreciation and amortization expense was up 4%, resulting from a higher asset base. Purchase services and other expense was $573 million, adjusted for acquisition costs and purchase accounting, down 1% year-over-year. The year-over-year decline was driven by savings from the long-term parts agreement, which I mentioned earlier, along with lower casualty expense. These savings were partially offset by the impact of lapping a $34 million one-time non-competition waiver received last year. Despite the impact of weather this quarter, we continue to drive efficiency and cost synergy gains. These gains, along with lower inflation, are driving. Moving below the line on slide 14, other expense was $7 million in the quarter.

Other components of net periodic benefit recovery reflecting primarily the 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, new long-term debt issued in the quarter, 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 expect CPKC's core-adjusted effective tax rate to be approximately 24.5%. Now, turning to slide 15 in 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 spend of $711 million in the quarter. Cash flow remained strong as we delivered $466 million in adjusted free cash for the quarter.

Quarterly, we resumed shareholder returns for the first time since the merger. In late February, aligned with our principles of disciplined and opportunistic shareholder returns, we announced a new 4% share repurchase program. This was an acceleration from our original plan in order to take advantage of volatility in the market. In the first month of the program, we repurchased 3.5 million shares, or approximately 9%. In line with our strategy of a balanced approach to shareholder returns, as Keith mentioned yesterday, we announced a 20% increase to our quarterly dividend. This dividend will continue to be an important avenue to return cash to shareholders, and we intend to gradually increase it over time towards a payout ratio of 20%-30%.

Now, looking at our guidance update, in January, we gave a wider guidance range, acknowledging macro uncertainty, and we committed to updating that outlook as we learn more. Four months into the year, we are tracking right on plan, with volumes up mid-single digits. The updated guidance reflects our current view of the impacts from trade policies on certain areas of our business, as well as the impact from a stronger Canadian dollar, which at current levels would present a 2%—a 2-point headwind to the guidance we issued in January. Taking a step back and review of the quarter, Mark and his team have the network running extremely well. John and his team are driving industry-leading growth, and we are still tracking the mid-single digit volume growth for the year. We continue to deliver discipline on price and cost control, and we have resumed returning cash to shareholders.

While much remains uncertain, the team continues to deliver strong results, and we're very well positioned for another year of double-digit earnings growth. With that, Keith, I'll turn it over back to you.

Keith Creel (President and CEO)

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

Operator (participant)

Certainly, Mr. Creel, thank you very much. Ladies and gentlemen, at this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. As previously highlighted, please limit yourself to one question. We go first this afternoon to Scott Group of Wolf Research.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon. John, I wanted to start with you. There's seemingly this big sort of import cliff coming into the U.S. I'm wondering, are we seeing the, are we expecting to see the same thing into Canadian ports and Mexican ports? Just how you think about the impact of that? Maybe this is silly, but do you think there's opportunities for Canadian ports to be gaining share from U.S. ports, maybe as a workaround with tariffs? To broaden out to the broader, like, tariff thing, just, you know, what you, like, what percent of your book of business do you think is ultimately tariff-exposed here? I know there's a bunch, but broadly on tariff.

John Brooks (EVP and CMO)

Yeah. All right. Yeah. Let me see if I can work through that a little bit. On the international front, I would say we're very different than, I think, what the U.S. roads may, or I guess may not face here in terms of that cliff. You know, I would say we really haven't seen a whole lot of pull ahead on that front at all as it relates to international. Our volumes are, I think, uniquely positioned strong right now, and I think you can definitely see it in the numbers right now. Simply on the basis of the partners that we've selected, the growth with Gemini, and they're off to a really good start. I would tell you those volumes, both at Port of St. John and at Centerm in Vancouver, have been somewhat stronger than we expected.

As you know, the majority of our freight over time has somewhat transitioned maybe a little bit more away from cross-border U.S. freight to, you know, a higher profile of Canadian destined freight. I think we're benefiting from that right now. Maybe to that point, you know, a very small percent of our book, I'm going to say less than 1%, is international freight that would be, let's call it, from China destined to the U.S. through our Canadian ports. I would characterize that as a little risk. Honestly, we continue to see strong growth at Lazaro. I think I consistently said it last year, it was the fastest growing port in North America and, frankly, the world in many cases.

Lazaro continues to show good growth, you know, not only with our domestic service within Mexico, but then also we've seen a steady growth in some of our cross-border business. That continues today. That largely has not been impacted by any tariffs. I feel really good about what the future holds on our international business right now. You know, broadly speaking, on the tariffs, you know, certainly the automotive area is an area that presents some risk and choppiness that we've been watching. The steel tariffs are an area that we're keenly focused on and working with our customers on alternatives. As I look ahead, as we get to new crop in the harvest in the U.S., we'll certainly be watching how our soybean movements progress, you know, export to China and what alternative markets we can develop for that business.

Those are the areas that we're focused on. I think the good news is that, as Keith alluded to, really the balance of our book has been quite strong so far year to date. I hope I got most of them.

Scott Group (Managing Director and Senior Analyst)

Really helpful. You got it. Thank you.

John Brooks (EVP and CMO)

Thanks, Scott.

Operator (participant)

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

Walter Spracklin (Canadian Equity Research Management Analyst and Co-head of Global Industrials Research)

Yeah. Thanks very much, Operator. Good afternoon, everyone. My question is really on your volume cadence. John, you mentioned that your second quarter seems to be starting out even stronger than your first and accelerating. I mean, last week was up almost 20%. You did not change your RTM guide as part of the EPS guide. I just wanted to dive in a little bit more as to what really is leading you to an EPS growth reduction while holding your RTMs, which your RTMs are still at mid-single digit and, if anything, accelerating from here. Just curious the logic there in terms of how you map out your guidance by each of those inputs.

Nadeem Velani (EVP and CFO)

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 a Canadian dollar exchange rate around $1.42-$1.43. You know, I looked today, we're closer to $1.37-$1.38. That in and of itself has an EPS impact of about 2 percentage points. If you look at the low end of guidance, we went from 12% down to 10%. That is really the big driver of that, really around. You know, we still anticipate that mid-single digit RTM growth, as I mentioned. That is the big driver.

Walter Spracklin (Canadian Equity Research Management Analyst and Co-head of Global Industrials Research)

Appreciate that, Color. Thanks, Nadeem.

Nadeem Velani (EVP and CFO)

Thanks, Walter.

Operator (participant)

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

Chris Wetherbee (Senior Analyst)

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

Nadeem Velani (EVP and CFO)

Yeah. I'd say, Chris, I think that's fair in terms of, you know, when we factor in some of the tariff impact and policy changes that could have an impact on the top end of volume. You know, maybe it's not six, maybe it's closer to five and that type of level. As far as the OR, you should see sequential improvement from the 62.5%. Of course, Q1 has a typically much higher OR than the rest of the year. I expect that to continue to improve over the course of the year. Traditionally, we've seen 200 to 250 basis points of improvement in the OR. I don't see why not, especially in this kind of volume environment where we're seeing such a strong start to the quarter. We've got some pretty easy comps into May for the year.

I fully expect us to be able to deliver sub-60% OR for the year. I don't see why we can't do that. You know, you've got fuel prices, fuel surcharge coming off that's supportive to the OR, kind of neutral from operating income, but still helpful to the OR. At the end of the day, we're running extremely well. This network, Mark and team have at Humming. From an efficiency point of view, I think operationally we're going to see some benefits there. You know, we don't anticipate the labor disruptions that impacted our ports and international volumes last year that impacted our network when we still had some of those stop and starts last August. I think the impact that we had on casualty a year ago has become a big tailwind to the OR.

I'm quite bullish about our ability to get back sub-60% and leverage this great volume that we've got to start the year.

Chris Wetherbee (Senior Analyst)

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

Nadeem Velani (EVP and CFO)

Thanks, Chris.

Operator (participant)

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

Brian Ossenbeck (Managing Director)

Good afternoon. Thanks for taking the questions. John, maybe a few. I think you mentioned that the cross-border really had not seen too much of an impact. I just wanted to see if you could unpack that a little bit more. Obviously, the 180/181 seems to be a big driver there, but I would have thought with maybe some network issues with your peer in the east, that might have been slowed down, especially with the auto headlines as well. Thoughts there would be appreciated. Nadeem, if you can talk about how we should expect the pace of the buyback to ramp up from here, obviously a pretty strong start in the first quarter. Thank you.

John Brooks (EVP and CMO)

Yeah, Brian. Maybe a couple of things there. You know, certainly as some of these tariff noise rolled on and off, you know, specific to, let's say, autos at the beginning of April, there's no doubt we saw some choppiness in some of those cross-border flows coming out of Mexico onto our network. I can tell you that has progressively smoothed out through the month. As of the last couple of days, I think all of our production facilities are up and running and shipping automobiles. I feel good on that. You know, the domestic product that you're talking about, the MMX, those volumes have just continued to be growing and strong. Schneider, you know, I'm excited to say that we've just launched this week over 200 new shipments specific to auto parts in conjunction with Schneider on our network.

It's brand new business that we're bringing on. It's really, you know, our first foray into a major way of moving that business. I'm quite pleased with that. You know, frankly, we're still kind of just in the early innings of growth with CSX as we work on that product to the southeast. You know, other areas, we've probably seen a little bit of cross-border impact specific to some of our steel business that moves out of Mexico into the U.S. That being said, we've also seen some new opportunities materialize in which we're actually shipping some steel products out of Mexico up into Canada and to some other markets. You know, there certainly is some impact there. The team is not resting.

As Keith said, it's an all-out blitz, literally, to do everything we can to make our own luck as all this uncertainty sort of unfolds on the tariff front.

Nadeem Velani (EVP and CFO)

Yeah, Brian, just on the buyback, you'll see the filings. I mean, we've been quite aggressive. I think as of yesterday, we bought back 20% of the program, the 4% share buyback for the year. So 20% of that program is complete. You should expect us to finish it by the end, completing about 10% of the capacity per month. You know, we've been quite aggressive given the pullback, given the compression in multiples, and given the fact that we're trading at a discount compared to where we should be trading. We're going to be aggressive up to the point that we see the stock price getting closer to our intrinsic value.

You should expect this program to be complete by the end of the year.

Brian Ossenbeck (Managing Director)

Okay. Helpful. Thank you.

Nadeem Velani (EVP and CFO)

Thanks, Brian.

Operator (participant)

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

Fadi Chamoun (Transportation Analyst)

Thank you. I want to circle back on the volume framework, maybe a little bit more medium term. I mean, when this network was put together, the biggest kind of addressable market opportunity felt like being, you know, U.S., Mexico driven in various end markets. And a lot of these end markets feel like they're under attack a little bit with these trade policy, whether it's autos or steel and other things. Like, do you, I mean, from your comment, it doesn't feel like your outlook is dampened by any of these things. I just wanted to get some additional framework from you. Where do you see the opportunity potentially if these end markets kind of do come under attack and ultimately end up being more punitive from a growth perspective?

Keith Creel (President and CEO)

Fadi, I'll let John provide a little color, but I'll just say at a high level, you know, listen, if these end markets are impacted, that's our job then to shift and create solutions. When I talk about market makers and I talk about land bridge, you know, if we lose a little bit because of the impact of tariffs on autos or tariffs on steel, number one, we don't think it's going to be material. This thing started to settle out. It's doing exactly what we thought it would do. The automotive manufacturers are back online. Just making those shifts overnight are impossible to do. There's still demand in the U.S. for vehicles, and these OEMs are producing them. That said, this crisis that's been created with the uncertainty in Canada and Mexico and lessening their dependence upon U.S. markets has created opportunities.

You know, baked in these numbers that offset some of those headwinds. Just over the last month, John can give you more color and names if necessary, but there is over $100 million of new revenue that this crisis has created that originates in Alberta that goes to Mexico. You start thinking about the puts and the takes. This network is uniquely enabled to be able to do that. If we lose here, we are going to gain there. It is our job to go out and convert those opportunities. That is exactly the expectation that John and his team have. That is exactly what they are doing.

John Brooks (EVP and CMO)

Fadi, I think, you know, from our team, we're focused on what we can control. Frankly, not that we're not keenly watching the tariffs evolve and understanding those impacts, but we are laser-focused on the task at hand. To Keith's point, that's sales blitzes. That's getting our, you know, we just finished the 60-day sales blitz where we met with over 500 customers. We believe we've developed $100 million of new wins simply in that effort that we'll onboard, mostly in the merchandise and ECP spaces. To Keith's point, we've seen good momentum. You know, largely, I would say, again, in the energy space, but really across all commodities to figure out how we enhance this land bridge and connect Mexico and Canada. It doesn't stop there. It's, you know, dusting off the conversion files that we talked about back at IR day.

You know, there's still $100 million that I've targeted to my team there that is 3 to 2 and 4 to 2 routes that we can convert and provide a better product for our customer. When you put all that together, combined with the resiliency of our bulk franchise, which, again, I think if you look back to recession and pandemic time, that bulk franchise has stood up against a lot of uncertainty. We feel really good about the demand in coal, potash, and both U.S. and Canadian grain. I fully expect we're going to outperform on our synergies this year. I'll bring you back. I think we can grow by $300 million in run rate on synergies in 2025. I have no reason to believe we can't do that and potentially even outperform that.

I can assure you we are going to continue to be, and we have been, super disciplined on our pricing. The pricing model is held in really strong. I am super proud of the team. We are going to keep the foot, we are going to keep it in throttle eight on the pricing front as we look forward.

Keith Creel (President and CEO)

Fadi, I'm going to give you a case in point. This is a fellow Canadian. I'm going to give you a Canadian success story that this crisis has created. Just last week, I was in Toronto, and I was having a conversation with a CEO, fellow CEO of a very large Canadian retailer about opportunities, about diversifying markets, about imports, about exports that might not involve the United States if that's not the desired market or the warranted market to go to. The question about how many things are on Canadian shelves that Canadian consumers purchase that yesterday originated in the United States, but where do they truly originate from? Where are they produced?

If you really get into the detail and you're motivated to create solutions for the customer, you lead them to information that, quite frankly, you see that a lot of these products, in this case, are produced in Mexico. They are trucked to the United States to be packaged and labeled and warehoused and then trucked out of the United States to go across the border to the Canadian shelves. Is that good for the environment? I'd say no. Is that good for cost control and for optimizing a supply chain? I'd say that's not best in class. When you're a railroad that can uniquely connect the origin and the destination and the middleman is redundant or not necessary and inefficient, and in some cases, they do not want you to be there, that creates opportunities. Those discussions are being had.

They're being had with people that have interested and motivated minds. For us to be able to help create some of those wins, it's just all a creative durability that this unique combination has created, again, creating a solution that, quite frankly, before was never possible. Create that kind of solution. That's the power of this network.

Fadi Chamoun (Transportation Analyst)

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

Operator (participant)

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

Ravi Shanker (Managing Director)

Great. Thanks, everyone. Just to follow up on the point of controlling the controllable here, what is the plan if there is a prolonged cliff in incoming port volumes? Is there a pandemic playbook you can dust off on costs, anything you can do with labor flexibility, or is it just a wait-and-see approach?

Keith Creel (President and CEO)

No, it's never going to be a wait-and-see. We're always paying attention to that, Ravi. I can tell you, I've been doing this for three decades now, and I've been a PSR leader in this industry for two decades. I've been through several recessions, up cycles, down cycles. We have metrics in our company. We see slippage when it's occurring, and we take action on a daily and on a weekly basis. If we see we have visibility to this alleged cliff, we see the ships coming. We know two or three weeks ahead of time. We're not going to wait two or three weeks to take action. We're going to start lining up responsible action. We can adjust crew starts. We can adjust fleet sizes. We can adjust yard expenses.

We have all kinds of levers that we, quite frankly, have pretty good muscle memory in swing history of pulling and swinging in this railroad in those kind of times. We're going to be the best ship in the storm. There's no doubt about it. I don't think that's going to happen. We're not planning for a recession, but we're always prepared for one.

John Brooks (EVP and CMO)

Keith, I would add, I mean, we're two years in this CPKC, and we're experienced enough now on the southern region that we can react quite quickly, move power around, crew starts, whatever it is we need to do. Again, I think you said it better. Control what we can control. And that's what we will do. It's not an ask.

Ravi Shanker (Managing Director)

Understood. Thank you.

Operator (participant)

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

Tom Wadewitz (Senior Equity Research Analyst)

Yeah, good afternoon. You know, I think Keith and John, you've had some pretty interesting commentary on kind of pivoting to the, you know, Canada-Mexico opportunity. You mentioned the $100 million opportunity out of, I guess, Alberta to Mexico. Is there more perspective you can offer? Like, if you said, I'm not sure the right framework, but just trying to think about the size of that relative to, if you said, you know, Mexico-Canada relative to the size of your Mexico-U.S.

business, I'm assuming it's a lot smaller, but maybe like what the starting point is and I guess other examples of where you potentially could see growth outside of ECP or just to frame it a little bit more because, you know, it seems something new and pretty interesting, but a little hard to get your arms around how to frame it or, you know, give it context. Thank you.

John Brooks (EVP and CMO)

Yeah. Tom, it's a good question. Honestly, as part of this sales blitz we've deployed, it's really been trying to understand that and peg it ourselves. I can tell you between LPG, plastics, fuels, and frankly, those have been the biggest three so far, the ECP space has led the way. Now, I was down in Mexico last week meeting with a number of customers. Certainly some of the steel business down there has been impacted by cross-border in that. Getting into a discussion with the CEO of this major steel company and really picking his brain around, have you sold into the Canadian market and what products would be conducive?

Frankly, you know, maybe not dissimilar to what we stepped into when we took over KCS on the auto front, kind of that crisis and creating something good out of that with our closed loop. We're kind of in the early innings of that in this process. I don't, to your point, it probably isn't anywhere to the order of magnitude, you know, in terms of like Mexico into the U.S. or Canada into the U.S. There is certainly an opportunity there. I'll just give you another example to help frame it up. Like grain that moves out of the U.S. today into Mexico does not have to be fumigated. It can move, I'm going to say generally seamlessly into the market.

Grain out of Canada is an area where past regulation has required this grain to be fumigated and also requires some different documentation and policy to move into Canada or into Mexico. It is not that we're not doing it today. We are. As Keith talked about, these are the things we're working with the governments on both sides of the border to say, you know, how do we foster this, in this case, grain trade in a more seamless way that we can certainly enable through our, you know, 8,500-foot grain product out of Canada and Mexico. Look, a lot to said there, but I'll be able to probably hopefully quantify it a lot better as we move down this path. I would say the most important point is we're not resting on our laurels here.

We're attacking this opportunity just like we did the autos a year and a half ago. We're already starting to see some early results.

Tom Wadewitz (Senior Equity Research Analyst)

It sounds like it could broaden out from ECP and maybe steel and grain and could be broader than that, but you just need some kind of time to see how that develops. Is that fair?

Keith Creel (President and CEO)

Yeah. We got to sweat it out. You know, to Tom, to John's point, talking about grain, he's speaking to that specifically. We had a move two weeks ago that it was a test move, a new move for us. We got oats that originate in Saskatchewan that went all the way deep into Mexico. It's a 3,000 mi unit train move. That's a pretty exciting thing to think about when you think about the power of that. Again, that fumigation is an impediment. It's additional cost. It's additional time. It affects the assets. It affects the rate we have to charge. It affects the customer service. You know, why does it need to be there? We've got the minds and the motivation now and the attention of the Mexican government. We've got a great spirit of partnership with the Mexican government.

We educate, we communicate, we eliminate those unnecessary barriers, and we incent more trade to move between the nations of Canada and Mexico.

Tom Wadewitz (Senior Equity Research Analyst)

Great. Thanks for the time.

Operator (participant)

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

Kevin Chiang (Director)

Good afternoon. Thanks for taking my question. Maybe just on the auto front, it does feel like, at least with this U.S. administration, you know, reshoring U.S. auto production is definitely key to their industrial policy. I think over the past few weeks, we continue to hear more D3 OEMs and foreign OEMs, you know, talk about increasing U.S. production. I'd be interested in knowing, you know, what discussions you're having with these customers as they look to reshape their supply chain and, I guess, how CPKC can assist with that.

John Brooks (EVP and CMO)

Maybe a couple points on that, Kevin. I guess, first of all, as I said at the beginning, we're in a pretty good position on our auto franchise right now. We've got all our production facilities up, running, and shipping. I can tell you, you know, for the most part, inventories are fairly low across at least our network and across Canada. That has been actually pretty supportive of volumes. I do believe the consumer as a whole maybe has been a little more aggressive in looking to buy an automobile maybe earlier in this year than maybe they had planned. That is spurring some demand. I can tell you, I met with a leading automotive shipper here a couple of weeks ago, and they have 60,000 unfilled orders in Canada alone. Those are sales made where they're waiting on vehicles to get into the marketplace.

That is certainly the area which, you know, we do best and we fill. You know, the other piece that I would point to is we got 6,000 available acres across this network in three countries that we can develop. I think you've heard this story and our land value quite a bit over the years on how we've created, you know, unique opportunities for our shippers and our customers and colocations, you know, across our franchise. Certainly, that is something that we've been aggressive to get into the marketplace. You know, frankly, we just published the nine site-ready locations that we've gone out, and we're actively, you know, marketing those locations with, well, not only the OEMs and automotive companies, but, you know, all sorts of supportive industry that may be looking to do more or build more in the States.

You know, as it stands right now, I fully expect in our automotive franchise to continue to produce at the record rate we've been able to do really last year and through the first quarter.

Kevin Chiang (Director)

That's great color. Thank you very much.

Operator (participant)

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

Stephanie Moore (SVP)

Hi, good afternoon, and thank you. One is a quick follow-up question and just your commentary in terms of OR performance for the full year and the second quarter. Did I hear you correctly with the kind of idea that you expect OR to improve as the year progresses? Are you meaning kind of sequentially off of this first quarter level?

John Brooks (EVP and CMO)

Yes, absolutely.

Stephanie Moore (SVP)

Okay. Got it. Thank you. Then, more of a big picture question here. You know, as you've had, whether it was your sales blitz or just continuing to have conversations with customers, have you, particularly those customers in Mexico or with businesses in and out of Mexico, have you seen any kind of increase in activity of maybe production move to Mexico or plans to move to Mexico just given the disruptions or potential disruption in trade lanes, you know, from other parts of the world and maybe viewing Mexico as a viable alternative from a manufacturing standpoint? Thanks.

John Brooks (EVP and CMO)

You know what? The industrial development pipeline, you know, on our network in Mexico, it was really strong. A number of projects underway, under development, under construction. I would not characterize, Stephanie, that maybe we are seeing a glut of new. We have certainly seen some pause, but I would say the majority are continuing to push forward, which is something we have watched really close given some of this uncertainty if those, you know, projects would be shelved or changed or, you know, sort of the boardrooms were thinking differently around those investments. We really have not seen that at all on a grand scale. I continue to believe that our Mexican territory is ripe for development, and we are going to continue to certainly push that narrative.

Stephanie Moore (SVP)

Thank you. Appreciate it.

John Brooks (EVP and CMO)

Yep.

Operator (participant)

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

Jonathan Chappell (Senior Managing Director)

Thank you. Good afternoon. John, I feel like if we did not have the crisis to talk about, there might be a little bit more focus on Gemini. I know you were super excited about it late last year, and you mentioned it a couple of times this morning or this afternoon. Is there any way to put numbers around what the Gemini potential is given your positioning with the two partners there, whether it is in units or revenue? Has that changed at all over what is called the 12-24 month period, just given some of the uncertainty that has emerged since that partnership started?

John Brooks (EVP and CMO)

You know what, Jon? My enthusiasm around it has not waned one bit. Actually, it started off, I would say, even faster than we anticipated. DP World is doing a tremendous job with Gemini at Center. You know, we are tempted to quantify it a little bit for you, but, you know, we're moving quickly towards two trains a day. That's the pressure I'm wanting to put on Mark and the team in Vancouver to get the two trains a day launched out of Center, and the majority of that tied to Gemini. They've done a great job at Port of St. John. You know, Maersk has moved their service now as part of Gemini out of Halifax down to that port. We are super pleased with that. Maybe the one area that we'll watch is Lazaro.

We have a lot of opportunity between Maersk and Hapag focused on cross-border into the U.S. I would say the momentum hasn't slowed on that. Certainly, a portion of that was tied to imports through Mexico from China. We are watching that and how that may change or not. Honestly, I don't really feel that that's going to be a needle mover at the end of the day. Needless to say, no, I continue to be super excited about what Gemini brings to this network.

Jonathan Chappell (Senior Managing Director)

Thanks, John.

Operator (participant)

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

Ken Hoexter (Managing Director)

Great. Good afternoon. John, or I guess, Nadeem, just you've had a couple of questions in the OR, but I just want to understand the normal post-1Q to 2Q, you get about 260 basis points. I think I just want to understand your comment there. Can you outpace normal performance given the weather you had, or were you saying the weather was not too difficult that it is just going to be a normal path? My question, John, on pricing, you have not really gotten a lot of pricing. You mentioned pricing real quick, but revenue priority I am really accelerated, I guess, focused on coal, grain, potash, ECP. Any thoughts you want to talk about seeing some of the accelerating strength in some of those commodities?

Nadeem Velani (EVP and CFO)

Ken, I think that 200-250 basis points is a realistic expectation. Obviously, there are areas where we cannot control, like stock-based comp, and if that becomes a tailwind, it could be bigger than that. You know, I am optimistic it will not, but I think the 200-250 is fair.

Ken Hoexter (Managing Director)

Thanks.

John Brooks (EVP and CMO)

Ken, a few comments on pricing. I continue to tell you that this team is the best in the industry in pricing to the value of our service and capacity. I think that's what we've continued to see. Our renewals are on the very top end, 4%-5% plus. I'm quite pleased with that. I can tell you in this quarter, we've repriced two existing legacy KCS contracts that were out there. There wasn't much left to reprice, and we got through those this quarter in a positive way. I feel good about that. You know, I think we guided in IR day back then at pricing at 3%-4%. My expectation is to exceed that. As I said earlier, VRCPI came in today at 3.1% for our, you know, 2025, 2026 crop year. We're pleased with where that landed.

Again, we'll keep it on throttle eight as it relates to pricing.

Ken Hoexter (Managing Director)

Thanks, John.

Operator (participant)

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

Steve Hansen (Managing Director)

Oh, yeah, thanks. Excuse me. Keith, I was pretty taken by your upbeat commentary about the FRA discussions pertaining to technology deployment and, I guess, some potential benefits to safety and service. Is there a way to frame the timeframe around that deployment and what you think it could ultimately mean to the efficiency and safety?

Keith Creel (President and CEO)

Very short term, the changes that Mark spoke to on bad orders with our grain fleet, there's an optimal design that we've implemented since spending and investing some money in IFG, which is our terminal there in Kansas City, that allows specifically the legacy KCS grain network to benefit from and takes cars that would have been shuffled up to Knoche Yard to be bad order repaired and then shuffled back down to be in train. We are going to get some relief with a waiver that allows us to take them out in train at Laredo as well as at IFG, which optimized that supply chain, and that's imminent.

John Brooks (EVP and CMO)

Yeah, that's within the days. We'll have it soon. I've already spoke about it this morning.

Keith Creel (President and CEO)

Part two on the redundant air brake test that Mark spoke of, we expect that in the near term as well.

John Brooks (EVP and CMO)

Yeah. We have had FRA on property for the past two weeks in Laredo, seeing very good signs, doing a good job on our staff down there, showing them what we do, how we do it. We believe within the coming months, we will have some really good dialogue back and forth. I know I spent some time in Washington, just like you did, and good dialogue with FRA, good dialogue with kind of what they see with data, how we can use that data to better a lot of different things that were taken away over the past years.

Steve Hansen (Managing Director)

That's great to hear. Appreciate the color.

John Brooks (EVP and CMO)

Yeah.

Operator (participant)

We will go next now to Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski (Director)

Hey, good afternoon, everyone. Thanks for taking the question. Mark, I guess following up on that, I know you spoke to the FRA as well in your prepared remarks, but I think you mentioned something along the lines of, you know, getting your labor agreements in place is helping the network actually run better. Or maybe I misheard you on that, but I guess what's the plan this year, just, you know, looking at from an operational perspective, combating inflation and getting the efficiency up even further?

Mark Redd (EVP and COO)

Yeah. A couple of things. First, I would say every year we have GM meetings where we look at taking cost out. We do that first, regardless of what, you know, increase that we have as far as cost of living for unions, we look at that first, $50 million, $60 million, upward of $70 million that we take out just cost alone. For the stability that we have spoke about, it is the three unions that we've already signed up this year at 3%. That would be a four-year deal. We're on the cusp of finishing up TCRC and the RTCs, which is the dispatchers that'll be coming up in the coming weeks. We'll go to coming out of mediation on that and should have that finished up in arbitration here soon. Now, when we turn to the U.S. side, we are still looking at our hourly agreements.

We can have hourly agreements across a couple of the southern region, meaning the former Mid-South KCS, some of the L&A territory, just takes you back, some of the operating agreements they've had in place. Looking at doing some of those hourly agreements down there. Some of that, you can change some of the crew base around. You can also run longer in some areas, which we have implemented toward the New Orleans route. Certainly every opportunity we can take now, we're taking. Once we get new agreements in place, we can build upon that. I would even say just from the Mexico perspective, we can continue to work with the unions in Mexico to do more.

I know it's, you know, it's steady state, and we work with them every month and every year to do those agreements, but it's certainly making progress for sure.

Brandon Oglenski (Director)

Thank you, Mark.

Mark Redd (EVP and COO)

Thanks.

Operator (participant)

Your next question will come from Ari Rosa of Citi Group. Please go ahead.

Ari Rosa (Senior Analyst)

Great. Thanks. Good afternoon. Going back to the regulatory discussion, maybe you could talk about what are some of the other areas that you're pursuing and just how impactful you think they could be in terms of the cost savings opportunity or the efficiency opportunity that's gained from that. Thank you.

Mark Redd (EVP and COO)

Yeah. The cold wheel technology is something we've had in place for years in Canada. Partly what that does for you is increases the cycles of turns on trains, meaning the equipment of grain hoppers, if it's coal, whatever the cycle may be, includes locomotives so I can do more with less because I'm spinning the asset so much faster. If you talk about what we can control, that's what we can control. When I do the inspections of that, I can certainly pinpoint mechanical work. Whenever I do have to stop the train to do the inspection, I can understand what I can do at once, not just several times on inspection. Working with FRA, if we can get that in place with the U.S. operations, we can certainly do that toward the PNW. We can certainly do that down toward Mexico.

It is a one-stop shop with inspections. There is lots of money to be had in that. I do not want to quantify it until we can see exactly what we can do with that yet. There are many more opportunities from a safety perspective, from hotbox detectors that we talked about, just inspections of the portals that we have where we can do more work and inspect cars and see more defects than we do today from the human eye. Certainly from a technology perspective, that is much better. Not saying it will get away from human eye. We will always do that work, but I guarantee you we will have a safer railroad because of it.

Operator (participant)

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

Benoit Poirier (VP)

Yes, thank you very much, and thanks for taking my question. John, with respect to the China vessel surcharge, I was wondering if you have seen any customer react to this potential, any new calls into your ports as customers try to diversify away from U.S. ports. Talking about port movement with respect to St. John, given the increased momentum with Southeast Asia improvement at the Red Sea Canal, have you seen any increased dialogue to ramp up at a faster pace the operation in St. John or through the eastern ports? Thank you.

Mark Redd (EVP and COO)

Yeah. You know what? Benoit, we've got pretty good momentum at St. John. Again, I feel really good with, you know, the ramp-up of Gemini there, but our existing business with the other steamship lines has been growing also. You know, frankly, we just turned on a number of additional gen sets in that marketplace that's going to provide export opportunities, frankly, of products that maybe traditionally were coming out of the U.S., frozen products coming out of the U.S. that now we're working with Canadian producers of similar products for export. A lot of that's going to be pointed at St. John for us. You know, I overall feel, you know, ongoing positivity around the whole St. John opportunity and on the backs of the growth we already have at that location. You get good upside on capacity as well.

I mean, there's plenty of room out there since they've moved out some industry.

Benoit Poirier (VP)

Oh, with respect to the China vessel surcharge, whether you see more increased dialogue for people wanting to go to Canada instead?

Mark Redd (EVP and COO)

You know what? I would say pretty minimal at this point. You know, I think overall there is a fair amount of relief on sort of the changes that were implemented versus what that could have been initially when it was talked about. You know, I think the steamship lines will adjust their fleets appropriately. Ultimately, you know, for the U.S. ports, I am not sure that is going to impact us a whole lot one way or the other, whether it is think about Mexico and Canada. You know, we are looking at a few opportunities down in the Texas area with some existing business and what alternatives, if in fact, some of these applications may apply to that business. Again, these are not huge opportunities, but certainly it is a wait and see, and we will understand it more as it progresses as we get closer and closer to October.

Benoit Poirier (VP)

Okay. Many thanks.

Mark Redd (EVP and COO)

Okay. Thank you.

Operator (participant)

Thank you. We have 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 CEO)

Thank you. Listen, thank you for your time this afternoon. I hope you walk away with a bit of color. Certainly, in spite of the winter, in spite of the many uncertainties that we're all facing, we produced a very strong first quarter, and we're set up well to produce a strong year in 2025. This unique three-nation network is built for times like this. We're going to create solutions, not excuses, that will lead the industry to unique growth outcomes and value for our shareholders, not just in 2025, but beyond. Thank you, and we look forward to sharing our second quarter results.

Operator (participant)

Thank you. Ladies and gentlemen, that will conclude today's CPKC's first quarter 2025 conference call. Again, thanks so much for joining us, everyone. We wish you all a great remainder of your day. Goodbye.