Q4 2024 Summary
Published Feb 7, 2025, 7:58 PM UTC- CPKC plans to return to increasing shareholder returns, including reinstating their share buyback program and addressing the dividend. They have paid back close to CAD 7 billion of debt, and their leverage is approaching their target levels.
- Strong momentum in their MMX (Mexico-U.S.) intermodal service, which grew 12% quarter-over-quarter and 33% year-over-year, with expectations of continued growth in 2025 as they add direct service to new markets.
- Expectations of improved labor stability in 2025 with recent agreements reached with key unions, leading to reliable operations and enhanced customer service.
- Currency Fluctuations Impacting Financial Stability: The weakening of the Canadian dollar to a 52-week low has hurt the company's balance sheet and leverage ratios. Management stated that "the currency has hurt us a little bit, Canadian dollar depreciating and being at a 52-week low, that certainly hurt our balance sheet and hurt our leverage number." This could impact the company's financial stability and its ability to invest in growth initiatives.
- Uncertainty in Achieving Aggressive Operating Ratio Targets: Management appears cautious about reaching previously envisioned operating ratio goals. When discussing operating ratio targets, it was mentioned that "there's a lot of uncertainty between now and then." This suggests potential challenges in improving operational efficiency to the levels previously expected, which could affect profitability.
- Potential Negative Impact from Tariffs on Energy Transport: Uncertainty around potential tariffs is already affecting the crude-by-rail market, with customers seeking alternatives. Management noted that "the uncertainty has hurt the market a little bit," indicating that tariffs could negatively impact the company's energy transportation revenues if they are implemented.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +3% | Continued integration benefits from the KCS acquisition and higher freight rates drove revenue growth. Improved volumes in grain and energy also contributed. However, slower potash demand and some macro softness partially offset these gains. |
Operating Income (EBIT) | +8% | Revenue expansion outpaced cost increases, aided by KCS-related synergies and operating efficiencies. Inflationary pressures were present, but cost-reduction initiatives (e.g., improved fuel efficiency) helped curb expenses. |
Net Income | +18% | Stronger operating performance and lower interest expenses (due to proactive debt management) boosted profit. Productivity enhancements and favorable foreign exchange further supported net income growth, despite higher purchased services and employee costs. |
EPS (Basic) | +17% | Earnings growth outpaced the increase in weighted-average shares outstanding, leading to a higher EPS. Synergy gains from the KCS acquisition and continued cost discipline were key drivers. |
Proceeds from / Repayments of Debt | -C$874M vs +C$1,287M | The C$2,161 million YoY shift was largely due to increased repayments of long-term debt and reduced new issuances. The prior period included net proceeds that did not recur, reflecting a more conservative financing approach in the current period. |
Net Change in Cash | +C$276M vs -C$144M | The C$420 million YoY difference arose from higher cash flow from operations (bolstered by stronger earnings) and slightly lower investing outlays, partially offset by elevated debt repayment activities. This improved liquidity positions the company to weather potential market shifts. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Volume Growth | FY 2025 | no prior guidance | mid-single-digit volume growth | no prior guidance |
Earnings Growth | FY 2025 | no prior guidance | 12% to 18% | no prior guidance |
RTM Growth | FY 2025 | no prior guidance | mid-single-digit | no prior guidance |
Capital Expenditures (CapEx) | FY 2025 | no prior guidance | $2.9 billion | no prior guidance |
Effective Tax Rate | FY 2025 | no prior guidance | 24.5% | no prior guidance |
Headcount | FY 2025 | no prior guidance | up low single digits | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Synergies from KCS merger | Q1-Q3: Ahead of plans and on track for revenue synergy targets. In Q1, exited at $350M, aiming to double. In Q2, $800M run rate expected by end of 2024. In Q3, ahead of pace for grain, auto, intermodal synergies. | Q4: Exceeded the $800M target and adding $300M in 2025, with optimism for continued synergy capture beyond 2025. | Continued outperformance, exceeding original synergy plans. |
Mexico Midwest Express (MMX) cross-border service | Q1-Q3: Strong growth in cross-border. Q1: volumes up 24%. Q2: volumes up 50% since late 2023. Q3: continues to perform well despite soft market. | Q4: Grew 12% sequentially and 33% year-over-year (excluding short-haul), plans to maximize value of the service and expand routes. | Sustained expansion, consistently cited as a key growth driver. |
Operating ratio (OR) targets & improvements | Q1-Q3: Reported ORs in the mid-to-high 60s but improving sequentially. Q1 was 67.4%, Q2 at 64.8%, and Q3 at 66.1% with expectation of a 500 bps improvement in Q4. | Q4: Reported OR 59.7%, core adjusted 57.1%, aiming to reach sub-60% while considering a potential low-50s in the longer term. | Steady improvement, now below 60%. |
Labor stability & strike/work stoppage | Q1-Q3: Concerns about potential strikes and 4-day stoppage in Q3 impacting RTMs. | Q4: New union agreements (Unifor, BMWE) and upcoming USW talks. Expecting 4-year labor stability, aiming to restore Canada’s supply chain reputation. | More stable outlook, multi-year labor contracts reducing risk. |
Domestic intermodal vs. trucking overcapacity | Q1-Q3: Domestic intermodal faced softness from cheap truck rates. Q1 volumes were flat; Q2 up modestly. Q3 down 7% due to trucking spot rates. | Q4: Domestic intermodal up 4%, helped by refrigerated traffic and MMX cross-border. Trucking still tough but some volume gains realized. | Gradual rebound, maintaining competitiveness despite truck oversupply. |
Bulk commodity demand (grain, potash, coal) | Q1-Q3: Strong grain growth offsetting weaker Canadian crop in Q1. Potash generally up; coal mixed. Q2 had grain +17%, potash +24%, coal +3%. Q3 had grain +10%, potash +7%, coal +8%. | Q4: Grain up 11% with record Q4 performance, potash down 4%, coal down 3% due to outages and strikes. | Grain remains robust; potash and coal seeing mixed demand. |
Tariffs affecting energy transport | Q1-Q3: No direct mention specifically targeting energy transport. | Q4: Uncertainty around tariffs narrowed some markets, but also spurred inbound flows Canada-to-Mexico. Company will adjust to final tariffs. | Minimal impact so far, only mild mention of potential shifts. |
Currency fluctuations impacting financial stability | Q1-Q3: Limited references. Some FX hedge gains in Q1, minimal impact from peso in Q2, no major mention in Q3. | Q4: Canadian dollar depreciation hurts reported leverage; adjusted for FX, leverage is near 2.5–2.6x. Debt repaid close to CAD 7B. | More explicit in Q4, currency a notable factor in reported metrics. |
Shareholder returns (dividends, buybacks) | Q1-Q3: Focus on debt repayment first; aiming for leverage of 2.5x in early 2025, then reinstate buybacks. | Q4: Nearing leverage goal, plans to reintroduce buybacks (~3–4%) and address low dividend yield aiming for a 25–30% payout. | Shifting to enhanced returns as leverage declines. |
Debt reduction and leverage management | Q1-Q3: Generated free cash flow and repaid debt. Leverage at 3.2x in Q2, 3.1x in Q3, targeting 2.5x. | Q4: ~CAD 7B debt repaid historically. Weakened CAD inflated leverage on paper, but normalized near 2.5–2.6x. | Continuing deleveraging, close to target ratio. |
Strategic capacity investments (e.g., Laredo) | Q1-Q3: Q2: Laredo bridge expansion for higher velocity. Q3: Second span due by year-end, doubling capacity. | Q4: Completed second span at Laredo (Patrick J. Ottensmeyer Bridge), doubling capacity and boosting cross-border fluidity. | Major milestone finished, supports ongoing growth. |
Stock-based compensation and casualty cost | Q1-Q3: Q1 had a $23M stock-comp headwind. Q2 saw stock-comp rising plus a $45–50M casualty event. Q3 had a $60M derailment and stock-comp contributed a 300 bps cost headwind. | Q4: Stock-comp was a tailwind but will reverse next quarter; casualty expenses declined, helping overall results. | Volatile year-over-year effects; Q4 trough in casualty costs. |
Uncertain macro environment | Q1-Q3: Executives cautious on strikes, trucking softness, but see synergy-driven growth. Q3 volumes improved in bulk, offset by soft intermodal. | Q4: Still uncertain, but guiding mid-single-digit volume growth and 12–18% EPS growth for 2025, confident in network strengths. | Continued caution, though leadership maintains optimistic 2025 outlook. |
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Operating Ratio Improvement Outlook
Q: How will the operating ratio improve going forward?
A: Management expects the operating ratio to improve to sub-60% again in 2025, with a long-term goal of 100 basis points improvement each year. Over time, they believe reaching the low 50s is within the realm of possibility ,. -
Synergy Capture and Growth Opportunities
Q: Can you expand on synergies and future growth prospects?
A: The company is ahead of its synergy capture plan, exceeding an $800 million run rate in 2024 and targeting an additional $300 million in 2025. Opportunities span automotive, intermodal, and new facilities like Aluminum Dynamics, supporting growth into 2026 and beyond. -
Tariff Impact on Volume Growth
Q: Will potential tariffs affect volume growth projections?
A: Management acknowledges uncertainty around tariffs but remains confident in the mid-single-digit volume growth, citing strong customer investment and critical trade between the U.S., Canada, and Mexico ,. -
Inflation and Pricing Outlook
Q: What are the inflation assumptions and pricing outlook?
A: Inflation has moderated, with non-labor costs closer to 2% and labor costs around 3%. Management anticipates achieving pricing in the 4% to 4.5% range for the year, supporting margin improvements in 2025 ,. -
Share Buyback Plans
Q: How should we think about the share buyback timing and pace?
A: With leverage approaching 2.5%, the company plans to return to the market with a balanced approach, including dividend adjustments and share buybacks, potentially in the range of 3% to 4% annually ,. -
Automotive Growth and Wylie Terminal
Q: How will the Wylie terminal option affect automotive growth?
A: Whether Norfolk Southern exercises its purchase option for the Wylie terminal or not, management believes it will not materially impact their growth plans. They will continue to expand automotive services leveraging their strong network. -
Labor Agreements and Productivity Goals
Q: Are you seeking harmonization in labor agreements across regions?
A: The company is working on engineering initiatives and negotiating hourly agreements to improve productivity, focusing on incremental changes over time in Mexico, the U.S., and Canada ,. -
MMX Service and Intermodal Growth
Q: What's the status of the MMX offering and intermodal growth?
A: The MMX service has grown 12% quarter over quarter and 33% year over year. Management sees significant opportunities to optimize the service and support future intermodal volume growth. -
Crude-by-Rail Business Impact
Q: How might tariffs affect the crude-by-rail franchise?
A: Uncertainty around tariffs has narrowed the market, affecting U.S. customers seeking alternatives. The company is monitoring the situation and exploring opportunities, including increased shipments to Mexico. -
Normalization of Operational Disruptions
Q: Do you expect operational disruptions to normalize in 2025?
A: Management views the 2024 disruptions as episodic and does not expect them to recur in 2025. Recent labor agreements provide stability, leading to a positive outlook for reliable operations.