Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's Q1 2026 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 one on your telephone. If you would like to withdraw your question, please press star two. I would now like to introduce Mr. Chris de Bruyn, Vice President, Capital Markets. Please go ahead, sir.
Thank you, Beau. 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. 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 filed 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 if you limit your questions to one.
It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.
Okay, thanks, Chris. Thanks, everyone, for joining us on the call today. As always, I want to start by thanking our 20,000 strong family of railroaders across these three great countries that deliver the results we're honored to share with everyone today. For the quarter, the team delivered revenues of CAD 3.7 billion, volume growth 2% on an RTM basis, operating ratio 63%, and earnings of CAD 1.04. Overall, strong execution across the board operationally, commercially, and financially. They did this in a very dynamic environment. Certainly, the Q1 results, we saw some impacts from volatile fuel and FX markets. That said, that tide has turned, and I'm very pleased with the underlying performance and our strong start to the Q2.
You know, when I step back three years into our journey at CPKC, what gives me continued confidence is not just the quarter itself, but the trajectory that we're on as a network and as a company. On the operating side, the network again performed exceptionally well in the Q1, building on our strong momentum from 2025, delivering Q1 operating results, record levels reflecting continuous improvement we've seen since the merger. Productivity, velocity, and asset utilization all continued to move higher, which tells me two things. First, the railroad is structurally better. Second, our people are executing with discipline each and every day. The gains are translating into better service capacity, improved efficiency, and that's exactly how we intend to continue to railroad. On the labor front and the safety side as well, I'm gonna spend a couple of moments talking about our people.
As we recently announced, reaching long-term tentative agreements with both SMART-TD and the BLET on the legacy KCS is a significant milestone for this company. These agreements improve quality of life for our railroaders while providing the operating stability we need to continue driving performance and service reliability in this key growth corridor. Looking at safety, our focus remains unwavering. We made progress on the personal injury side, and while train accident frequency increased from an all-time low last year, our fundamentals remain extremely strong. The franchise performed very well. We delivered solid volume growth across the networks led by the record grain and continued momentum from our unique North American footprint. The exceptional grain volumes were supported by record harvest and our ability to efficiently connect Canada, the U.S., and Mexico. Automotive, international intermodal, and our MMX service also contributed.
FX, mix, and where macro factors pressured yields in the quarter, of course, regardless, pricing discipline remained strong. As we move through the year, the yields have improved as comparisons normalized and market conditions have become more supported. On shareholder returns from a finance perspective with our balance sheet in a position of strength and the business generating strong cash flow, we announced a new share buyback program to repurchase up to 45 million shares. Yesterday, we announced a 17.5% increase to our quarterly dividend. We're certainly pleased to be in a position to continue returning cash to shareholders, particularly amidst a volatile market. In closing, looking ahead, we feel very good about where we are. The network is running extremely well. Our unique growth drivers continue to remain firmly intact. Comparisons improve as we move through the year.
Most importantly, we have a team that knows how to execute and a franchise that continues to differentiate itself. We're gonna remain focused on disciplined execution, strong service, and delivering long-term value for our customers and our shareholders. Mark, over to you.
Yeah. Thank you, Keith, and good afternoon. I wanna start by thanking our operating employees who delivered Q1 operational results across the record Q1 across the North American network. The quarterly results demonstrate a tremendous job providing strong service, delivering efficiency, managing costs through the winter. As we reflect on the three years as a combined company, our team has done a tremendous job of safely executing on our vision, delivering resilient and industry-leading service to our customers. Now turning to the quarter, I'm very pleased with our network performance, which reflects a clear pattern of continuous improvement since the merger.
Now as I step back since the Q1 of 2024, I can see our train weight and length has increased by 9% and 7% respectively. Our locomotive productivity has improved by 8%, while the fuel efficiency has improved by 2%. Our velocity across the system improved to 4%. These results highlight our progress as ongoing productivity and velocity gains continue to drive improved cycle times, better asset utilization, and dependable customer service for 2024, 2025, and as we look into 2026 for the Q1. While these results are encouraging, we still see opportunity ahead. We are executing several focused velocity initiatives across the key north-south network to drive further improvement in the velocity in our fluidity and capacity.
Now, turning to labor, I'm very pleased to share that CPKC reached a tentative 8-year agreement with SMART-TD and BLET unions. This is an 8-year agreement covering approximately 1,700 train service employees across 11 U.S. states. Once ratified, our hourly agreements will be largely optimized across our U.S. network. This represent a key labor milestone and positions us for a drive for additional operating improvements. Importantly, these agreements bring meaningful improvements in pay, but also quality of life for our railroaders while delivering the stability and flexibility we need for operating efficiently and reliable over the next decade. Now, turning to safety, our focus remains on sustaining strong fundamentals and disciplined execution across the network. As I look at our FRA personal injuries, we landed at a 0.91, and our train accident frequency was a 0.93.
We're continuing to make progress in our personal injury performance. While train accident frequency increased year-over-year, it follows an all-time record low in Q1 of 2025. We remain committed to our Home Safe program and to continue driving continuous improvement across our network. Turning to resource and capital, we remain well-aligned with our growth outlook, expect continued strong productivity improvements in 2026. From a capital perspective, we have received 36 of the 100 new Tier 4 locomotives, in addition to the 100 that we delivered in 2025. These locomotives are delivering meaningful improvement in efficiency and reliability, particularly across the Canadian network. We're continuing to drive and deliver on our merger-related capital improvements. These upgrades continue or combines with focus and velocity initiatives, improving speed and our velocity on the critical North South network.
I'm also pleased to share that we have completed capital improvements on our portion of the SMX East West corridor for connecting shippers to Mexico, Texas, and the U.S. We're now speeds up to 49 miles an hour on this network. In closing, the network is operating from a position of strength with record performance supported by sustained improvements in efficiency, velocity, and service. Our investments in capacity, power, and safety, paired with the labor stability and we are well-balanced in resource network, are reinforcing our ability to deliver reliable services volume growth. As we look through 2026, we remain focused on disciplined execution, delivering long-term value for our customers and our shareholders. With that, I'll pass it over to John.
All right. Thank you, Mark, and good afternoon, everyone. I'm pleased with our Q1 performance and the way this network and team continues to deliver and execute for our customers. Despite a very high bar, this franchise again produced a record Q1 RTM growth, now six of the past seven years, with the only exception being the strike year in 2022. This quarter, we again delivered solid volume growth across the franchise, supported by strong grain shipments, continued pricing discipline, and contributions from synergies and self-help initiatives. While mix and macro factors impacted cents per RTM in the quarter, our underlying performance remains strong, and I'm encouraged by the momentum to start the Q2. Looking at our Q1 results. This quarter, freight revenue was down 3% on a 2% RTM growth. Cents per RTM was down 4%.
We continued to deliver strong pricing, with renewals exceeding the top end of our long-term 3%-4% outlook. Yields in the quarter were impacted by FX, the removal of the federal carbon tax in Canada, and negative mix. In April, cents per RTM has inflected positive, supported by our pricing, lapping the carbon tax removal, macro tailwind from higher fuel prices, and moderating mix headwinds. Taking a closer look at our Q1 revenue performance, I'll speak to an FX-adjusted results. Starting with our bulk business, Q1 was a record quarter for grain across revenue, RTMs, and car loads, with revenue up 14% on 12% volume growth. Canadian grain volumes were up 13%, supported by record harvest that's up 20% year-over-year.
Our U.S. grain volumes rose 12%, driven by a record corn crop and higher volumes to Mexico and the Pacific Northwest. This performance highlights the strength and diversity of our franchise as customers leveraged our unique North American network to access new destination outlets, driving a 50% increase in trains from Canada and the U.S. into Mexico. Looking ahead, we expect grain to continue to deliver outsized growth deep into the current crop year. In potash, revenues were down 2% on 2% volume growth, driven by continued strong demand for export shipments. With solid demand fundamentals and Canpotex fully committed through the H1 of the year, we continue to expect potash to be a solid contributor to our base business in 2026. To round out bulk, coal revenue was down 11% on a 10% reduction in volumes.
This reduction was driven by a number of unexpected production-related issues at customer mines that impacted the shipments through the quarter. As a result, coal alone reduced Q1 RTMs by over 1%. While we expect volumes to stabilize the H2 of the year, we expect coal to continue to be a headwind in Q2 and on, and on the full year. Moving on to our merchandise business, Energy, Chemicals, and Plastics revenue and volume declined 5% in the quarter. This decline was driven by lower refined fuel volumes to Mexico, reduced Pemex heavy fuel oil shipments, and the impact of a plastics plant closure late last year. Looking ahead, we are seeing our ECP volumes continue to stabilize, supported by increases in crude, market share wins, and self-help initiatives. Our forest products revenue declined 14% on a 10% decline in volumes.
Volumes were impacted by tariffs on Canadian lumber exports to the U.S., along with the broader macro softness in housing in the pulp and paper markets. Similar to ECP, we are seeing this business also stabilize with a focus on offsetting headwinds through truck conversion, synergies, and market share gains. Encouragingly, we delivered record volumes of building projects into the Texas market during the month of March, and orders have continued to improve as we move through April. Metals, minerals, and consumer products revenues were down 1% on 3% volume growth. Growth in this space was supported by strong industrial development pipeline and synergies, including new long-haul business in sand, stone, and other aggregates supporting construction activity across our network. This strength was partially offset by ongoing impact of tariffs on our cross-border steel business.
Overall, remain very encouraged by industrial developed momentum on our network and expect to continue mitigating tariff headwinds through targeted sales campaigns across our network. Moving on to the automotive sector, revenue was down 6% on 2% volume growth. Our auto franchise delivered another quarter of volume growth from new business wins, including land bridge shipments from Mexico to Canada with a 13% increase in our average length of haul in this business unit. We delivered this performance despite challenging compares from pull-forward shipments ahead of tariffs last year. While uncertainty remains in this area around production levels in automotive sales, we expect another year of outperformance and growth in automotive, driven by our wins in 2025 and new opportunities that'll come online later this year. Now closing with our intermodal business, revenue was down 1% on 3% volume growth.
I'm pleased to announce that we extended new long-term contracts with Hapag-Lloyd and Loblaw Companies, cementing the foundation of our intermodal franchise and unlocking new growth initiatives with both across Canada, the U.S., and Mexico for years to come. In international intermodal, volumes were up 8% on business into the Port of Vancouver, including continued growth with our partners at Gemini. Looking ahead, comparisons will be more challenging in the Q2 before new product offerings come online at the Port of Saint John and also at Lázaro Cárdenas, and they pick up in the H2 of the year. In domestic intermodal, volumes were down 1% in the quarter. Our MMX train was up 12% year-over-year in Q1, marking the ninth consecutive quarter of double-digit growth on this train.
This growth was offset by a slower ramp-up of our Mexico volumes in January, combined with demarketing low-margin business in domestic intermodal on our Canadian franchise. I'm also encouraged by early traction on our SMX service in partnership with the CSX. Following infrastructure investments made across this route over the past year, I'm excited to announce that we will formally launch a faster SMX product next week. The SMX will offer customers truck-like reliability, linking some of North America's largest production and consumption markets between Mexico, Texas, Georgia, and Florida. Looking ahead, we are encouraged by the timing of this launch as we are seeing early signs of incremental truck-to-rail conversions driven by higher fuel prices, tighter regulatory enforcement, and reduced trucking capacity. To close, our results reflect strong execution, record grain volumes, and continued unique contributions from synergies and self-help.
With good momentum to start the Q2, more favorable comparisons ahead, and improving yields, this network is primed to deliver another solid year of growth. Now with that, I'll pass it over to Nadeem.
All right. Thanks, John, and good afternoon. This quarter's results reflect strong execution and cost control across the network, which drove solid financial performance. While the quarter was impacted by fuel and FX headwinds, I am very pleased with the underlying performance of the business. The resilience of our network and our growth opportunities remain intact. Our core performance continues to be strong, reflecting the strength of our franchise, durability of our operating model, and consistent execution by our team. Turning to our Q1 on slide 12, CPKC's reported operating ratio was 66%. Our core adjusted OR was 63%, up 50 basis points from last year. Diluted earnings per share was CAD 0.94, and core adjusted diluted EPS was CAD 1.04, down 2% versus last year.
The year-over-year decline included approximately CAD 0.04 of impact from a foreign exchange and CAD 0.03 of impact from changes in fuel price. We also saw an additional CAD 0.01 impact from FX losses on cash and working capital below the line. 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 up 2% versus prior year. During the quarter, wage inflation and higher stock-based compensation were partially offset by continued productivity gains from improved train weights and workforce optimization. We expect to generate continued strong labor productivity in 2026, with headcount up modestly on mid-single digit volume growth. Fuel expense was CAD 458 million, down 4% year-over-year.
The decline was driven primarily by the elimination of the Canadian federal carbon tax on April 1, 2025, along with improved efficiency and benefit from a contract discount, partially offset by the impact of changes in diesel benchmark prices. Our 2% improvement in fuel efficiency drove CAD 8 million in year-over-year savings from improved train weights and locomotive productivity. Materials expense was CAD 127 million, up 3% year-over-year. The increase was primarily driven by volume-related expense and inflation, partially offset by efficiency gains from contract optimization and lower locomotive material costs. Equipment rents were CAD 95 million, flat versus last year, driven by efficiency gains offset by volume-related expenses. Depreciation and amortization expense was up 4%, driven by a larger asset base. Purchased services and other expense was down 3% versus prior year.
The improvement was driven by productivity and insourcing initiatives, partially offset by cost inflation. Moving below the line on Slide 14, other expense was CAD 20 million, a CAD 13 million increase year-over-year, driven primarily by FX losses on cash and net working capital. Net interest expense was CAD 228 million, or CAD 223 million excluding purchase accounting. The increase was driven primarily by interest on new debt, partially offset by lower credit facility and commercial paper balances, as well as debt repayments. Income tax expense was CAD 275 million or CAD 305 million adjusted for purchase accounting and significant items. We continue to expect a full-year core adjusted effective tax rate of approximately 24.75%. Turning to Slide 15 and cash flow.
Net cash used in investing activities was down 6%, primarily driven by 7% lower capital spend. We remain well on track to deliver full-year CapEx of CAD 2.65 billion, a 15% reduction year-over-year. We also maintained a balanced and opportunistic approach to shareholder returns, deploying CAD 680 million through share repurchases in the quarter. Along with dividends, shareholder return spend increased 69% in Q1. I'm also pleased to share that yesterday we announced a 17.5% increase to our dividend, reinforcing our commitment to balanced shareholder returns. In closing, with the network continuing to run well, toughest quarter from a comparison perspective behind us and a strong start to the Q2, we are well-positioned to deliver another year of strong results.
The business is executing at a high level, generating strong cash flow and providing meaningful capacity to return cash to shareholders. I fully expect as we return to double-digit EPS growth here in Q2 and the H2, and we'll deliver on our full-year double-digit EPS guidance. With that, let me turn it back to Keith.
Okay. Thank you, gentlemen. Let me go back to the operator. We'll open it up for questions.
Certainly, Mr. Creel. Thank you. Ladies and gentlemen, at this time if you would like to ask a question, simply press star then number one on your telephone. If you would like to withdraw your question, please press star two. As previously highlighted, please limit yourself to one question. We'll go first this afternoon to Fadi Chamoun with BMO Capital Markets.
Yes, thank you. Good afternoon. I think the year was always expected to kind of start slow from a volume growth perspective versus the mid-single-digit guide for the year. You know, maybe if you can, John, share with us, what you are hearing from customer, what does the pipeline look like, and the segment that you expect to kind of lift you to that mid-single-digit range as we go into the balance of the year, and if there's any framework to think about what Q2 volume potentially you're kind of looking for.
All right, Fadi. It was certainly an interesting Q1. It just genuinely started off slow, then we had some pent-up demand, actually February turned out to be quite strong in March, sort of as we expected. As I mentioned, we definitely weren't counting on the drag related to, you know, the coal side of the business.
Looking ahead, I'll tell you, just about everything outside of our coal business has inflected positive. I'm quite pleased despite the tariff headwinds that remain out there and some of the challenges, particularly in our ECP space that we faced in Mexico with refined fuels. Despite that, they've clawed themselves even back to sort of flat year over year on strong demand and growing demand in crude in also our plastics business. Look, I fully expect our bulk business, that being Canadian grain, U.S. grain, and potash to continue to provide really strong numbers as we move through Q2 and into the back half of the year, Fadi.
You know, I'm definitely not counting on our coal business, and that's gonna have to be a headwind that we're gonna have to sort of erase or make up for. As I look at our merchandise ECP forest products business, you know, as challenged as those areas have been, you know, as I monitor our car orders week after week in those three segments, we've seen a pretty steady increase. You know, when I said we sent record, you know, volumes into Texas of building products in March, you know, to be honest with you, a lot of that was Canadian stuff coming across the border. That's a really positive sign and a sign that we haven't seen for quite some time.
I'll tell you, I think a lot of it's driven by there is product moving in some of these traditional lanes. It's been moving truck. I think what we're starting to see is some of this stuff flip back over to rail, not only, you know, in a little bit of an intermodal tailwind in that front, but also a carload tailwind we're seeing in some of these areas. I do believe that's positive. Now we gotta watch it. I'm not spiking the football at all. Certainly there's some upside there. As I go down the list, we're gonna continue to outperform in the automotive sector. Team has just done a really good job to put pucks in the net.
There's some stuff that's coming on yet. There's a little bit of pent-up demand that wasn't moved in the H1 of the year that we're, that we're gonna see. Finally on the intermodal side, I couldn't be more excited about our SMX product. That, that thing's gonna pay dividends this year. We're gonna see growth the back half of the year on that in partnership with the CSX. I think we proved it with the MMX. You, you develop a product that can compete head to head with trucks and they will come. The fact that we're launching this in a really, I think improving environment is only gonna help, I think, our sellers to go out and try to fill that train up.
I hope that helps.
Yeah, sure. Maybe one follow-up on this Loblaw, Hapag-Lloyd contract you talked. Is this a renewal, or is there a scope change in that relationship?
Well, maybe a little bit of both. They are contract renewals, that prior contracts that we had in place that we've extended for long term with both. I think the neat thing about them, and really because of the breadth of this new network, we've been able to intertwine a whole lot of new opportunities within those, both of those contracts. You know, it's frankly staggering the amount of trucks that a company like Loblaws utilize, you know, coming up from Mexico or the United States and how we can create and develop new solutions, not only dry van, but reefer solutions with them.
Also as we've talked about a lot with Hapag-Lloyd, you know, I'm excited about the opportunity, how we are continuing to grow our Saint John. We're excited about what the future might hold with them, if in fact that progresses and goes forward as we look to next year. Hapag continues to win not only in the Mexico intra Mexico market, Fadi, but also we continue to slowly build volumes going northbound and all that coming out of Lazaro. They are traditional contracts that we're extending forward, but they also have quite a bit of sort of new tentacles related to what this network brings to the table.
Appreciate it. Thank you.
Yep.
Thank you. We go next now to Chris Wetherbee with Wells Fargo.
Thanks. Good afternoon, guys. You know, I maybe wanted to pick up on what sort of Nadeem ended with in terms of the guide for the rest of the year. A slower start for earnings growth. Sounds like Q2 you're expecting to re-accelerate into the double-digit growth range for earnings. I guess we heard from John about some of the top-line opportunities. Maybe just sort of help fill out the walk from where we were in Q1 to the ability to get back to that double-digit year-over-year EPS growth in Q2 and beyond.
Sure, Chris. 2 things. Number 1, you know, Q1 was very much according to plan. Like when we look at, John mentioned the revenue cadence, you know, operationally, Mark and team had the railroad running very well, and I'm pleased with some of the productivity initiatives.
That being said, we had our toughest comp from a currency point of view. Canadian dollar was quite weak a year ago in January, and that it created quite a headwind year-over-year. You saw it in the cents per RTM, and that's probably a bit of a surprise as far as the overall cents per RTM. Combine that with fuel and the carbon tax surcharge that went away. Effectively, those headwinds dissipate and in fact fuel turns into a bit of a tailwind. Right? We saw the headwind in March with spot fuel increase our costs right away, but we don't get the fuel surcharge until it's delayed, and so we saw that result here in April.
As we look at Q2, I feel very confident both with record volumes that we're moving today. April's gonna be a record month for us across the board and in CPKC history and combined the two companies. The top lines perform extremely well. The railroad continues to run well. The FX headwinds, we even had some unique things as far as below the line that impacted us just with the volatility on currency.
That goes away. Some of that noise disappears, and the underlying business continues to perform and gives us strong confidence in that strong double digits here in Q2 and a very good back half in what we see as far as both from a volume point of view and what we can de-deliver with this lower cost base. We're pretty bullish, Chris.
Sounds good. Perfect. Thank you very much for the time. Appreciate it.
Thank you.
We'll go next now to Kevin Chiang at CIBC.
Thanks for taking my question. You talked about some of the headwinds related to the coal franchise. I think some of that might be related to maybe some of the adjustments Glencore is making to the Elk Valley Resources play that they acquired from Teck. Just wondering, do you see this as primarily a 2026 issue and they ramp up in 2027, or is this an adjustment that could take a little bit longer and bleed into next year potentially?
Yeah, Kevin. You know, honestly, I think the feedback so far is, we're gonna probably continue to struggle somewhat through Q2. I do believe there's some optimism around some things that they wanna deploy the H2 of the year that could bring some upside to those volumes. You know, at the end of the day, I think the lost opportunity these first four months and the next couple of months will be hard to make up in terms of sort of full year compares. We remain optimistic that the H2 of the year, and I think they remain optimistic that the H2 of the year, will be better.
I know they continue to work through, you know, some of the permitting and issues that have been out there for quite some time now. I don't really have any additional feedback at this time on what that looks like timing-wise, with the federal government.
Okay. That's helpful. Thank you.
Yep.
We'll go next now to Tom Wadewitz at UBS.
Yeah. Good afternoon. Keith, I wanted to ask you about. I know you get this the last couple of calls, but I just saw the, you know, kind of news today on the rail coalition against the coalition against the rail merger. You know, shipper groups, teamsters, rail coalition, CP, you know, CPKC, BNSF. What is your thought on that? You know, it seems like something different than what we've seen in the past. I guess the, you know, what you think the group may do and just how we should, you know, maybe try to understand that as part of the, you know, the process with, UP-NS.
Well, I think at a high level, Tom, the group is more of a collective voice, a unified voice. It's a very similar voice. You know, we've not been very bashful about this. We have very strong views against the merger and the risk that the merger entails and represents for our industry. Many others do as well. The momentum continues to build. We continue to encourage all the stakeholders to make sure that they share their views because at the end of the day, this isn't a 3 or 4-year decision. This is a forever decision.
To, in my mind, push forward with a merger that creates such on such scale unparalleled for this industry in a forever way that not only creates that entity but most likely triggers an eventual duopoly, is essentially putting the nation's rail network at risk. I just don't believe, and I believe there's probably a lot of people that feel the same way that I do, that UP and NS are entitled to do that. They're not playing with house money. This is the nation's economy that depends upon a robust and fluid and efficient rail network. We've had tremendous consolidation. I believe, and I believe others believe we're consolidated enough, and at the end of the day, the facts will bear, if we're correct.
You know, the market concentration, as much as some have been dismissive in their comments about it's much more than just having 39% GTMs and comparing yourself to a
Heavily GTF railroad that moves a lot of grain and moves a lot of coal in a compare that's essentially west of Mississippi Railroad. We're Mississippi River. We're talking about 43 states. We're talking about transnational, the entire continent. So at the end of the day, that's a lot at risk and at stake. The facts will bear it out. I don't think it's as simple as the applicants are presenting. I believe, you know, Jim and Mark are going to present their best story. I'm looking forward to reading their improved story. The last one obviously was grossly insufficient, in my view, and I don't think I'm the only one, again, that shares that view. So again, I think that consolidation and that coalition that you see is just a unified voice of a common concern. Enough is enough.
We've had enough consolidation, for what? Who benefits versus who's at risk? In the end, those rules that the STB will govern by, and I believe this body will be very independent in assessing all these facts. At the end of the day, all the facts stack up and a measurement's going to be made, and to meet public interest and to demonstrate enhanced competition, then all the benefits are going to exceed the harms. I just think it's impossible with the set of facts that are going to be presented given the scale and the market power and the operational risk that it represents. Again, more to come. Let's get the application tomorrow. We're all eagerly looking forward to receiving it and reviewing it. I'll be in Missouri when I receive it.
That's a show-me state, so I'm looking for something to show me to feel differently. At this point, I don't.
Right. Okay. Thank you. Thank you. We'll go next now to Jonathan Chappell of Evercore ISI.
Thank you. Good afternoon. John, as far as this ramp in RTMs, are there other opportunities in energy that have kind of presented themselves recently given what's going on in the Middle East, whether that's crude by rail, fracs and NGLs? Any line of sight on kind of real volume moves there as these hostilities, you know, kind of prolong themselves much longer than anyone anticipated?
Yeah. Thanks, Jonathan. You know, I instantly begin to look to the sort of three Fs, food, fuel, fertilizer. They're usually benefits of, you know, when you see these types of things globally. I do believe we're seeing shoots kind of across all those areas. I'll tell you though, you know, I wouldn't say anything significant has really emerged specifically in those areas. We are definitely seeing an uptick in our plastics business. We have, I would say, very spot related type of crude opportunities that we've seen come on. You know, maybe some unique fertilizer opportunities here and there. Nothing I would consider honestly super needle moving.
The needle movers that are merging are really tied to fuel price and trucker regulation and reduced capacity and those things. That's really where we're starting to see the needle move. As I mentioned, everyone kind of instantly looks at intermodal as the big beneficiary there. I certainly we're gonna see some of that, and we're deep into those discussions on the intermodal front. As much as I'm starting to see it across our consumer base or, you know, merchandise customers in that. That becomes pretty exciting 'cause that's really good business. You know, the challenge will be the team, you know, how do we make it sticky?
How do we not allow that truck to convert or that shipper to convert that to rail? How do we then make them stick with rail? I think there's a great opportunity for that right now. Yeah, that's what we're seeing.
All right. Awesome. Thanks, John.
Thank you.
We'll go next now to Walter Spracklin with RBC Capital Markets.
Yeah, thanks very much. Good afternoon, everyone. When I'm comparing the U.S. rails here and how they did in the quarter relative to the Canadian rails coming a little light, I'm just wondering if there's any divergence you're seeing. I don't know if John, you're the best one to answer this, economic divergence, is it tariff related? Is it the truck regs that are helping U.S. and not Canada? Just related to that divergence, I know the feds in Canada have been talking a lot about larger projects. You know, speaking to our engineering construction companies, they're not billing it in their pipeline yet.
Curious if you're hearing any rumblings about any project development that would, if there is that divergence, kind of contract that divergence a little bit here as we go into 2027 and close out the year.
No, I don't think so, Walter. Our industrial development pipeline, and I think that's kind of what you're somewhat referring to, is pretty robust. Like, it is, you know, you look at our, again, MMX, that business unit is largely our steel franchise, which was heavily dependent on cross-border steel that is still effectively shut off. I don't have the numbers exactly in front of me. I think RTMs are up 5% plus. We haven't seen that for quite some time. I think we are benefiting from some of these industrial development opportunities, construction data centers, that are all supportive of this that I think you also heard from our peers in the U.S.
There's no doubt, our competitor in Canada and us, we're still facing pressures relative to some of these tariffs in steel and forest products in that. But I'm also, you know, pretty encouraged about what our U.S. franchise is producing. I'm gonna say no. I don't think there's a big divergence there.
Well, Walter, it was simply, in both cases, if you look at the yields, you look at the cents per RTM, I think there was a underestimation of the impact of currency on cents per RTM. We had some added headwinds from FX below the line, which again, go away, and then the carbon tax goes away. I think that's what drove a bit of a softness on the top line was really the cents per RTM. Again, that's a temporal issue that goes away. There's nothing structural. I think structurally, if you look at how the Canadians are performing from a volume point of view, from a RTM point of view, I think we're both kind of top of the pack, so no change whatsoever.
Yeah. Even to add to that, Walter, like our automotive franchise, and I said it, saw a 13% jump in average length of haul. You know, I think overall in the quarter, we were up 3% on our length of haul. The truth be told, we just had a lot of areas, short haul steel business to the border that is not moving. We saw kind of a slow start to our automotive franchise coming out of Canada into the U.S. Again, fairly short haul, high cents per RTM. We saw a really good growth, 21% growth of our, what we call our land bridge business. That's business, you know, linking Canada and Mexico.
It just kinda had a perfect storm of business mix and then you throw on top of it record grain movements, which is, you know, on average, a little lower cents per RTM, against the total book. You know, those pressures, those mixed pressures that Nadeem described, you know, I think came through much heavier than even we expected.
Yeah, appreciate the time. Thank you.
Yep.
We'll go next now to Ravi Shanker at Morgan Stanley.
Great day to everyone. Keith, would love your views on the upcoming USMCA negotiation. Obviously, a big catalyst for you guys and your peer. What do you think are the potential puts and takes and kind of the boundary of outcomes there, do you think? You know, how might you react to that in both directions?
Well, I mean, at the end of the day, the bottom line is I think we have three nations that depend upon each other to trade. I think we're in a unique position to enable that trade, Ravi. Short term, I would say buckle up. You know, President Trump has been consistent in his expectations. His objective through these negotiations, renewal of this agreement, as it might be renewed, there'll be some bilateral negotiations between Canada and the U.S. There'll be bilateral, perhaps first between Mexico and the United States and some trilateral. Again, at the end of the day, it all leads to increased trade between the nations. Even a rebalanced trade balance for favoring the United States still involves this network. We're in a good place. We had growth after the last round.
We'll have growth after this round. This network is in a very unique position to participate, some are all a part of that.
Got it. As a quick follow-up, kind of is there any variability to your guide based on the outcomes there or do you think it's gonna be pretty straightforward?
No, it's not dependent on that.
Very good. Thank you.
Thanks, Ravi.
We'll go next now to Brian Ossenbeck at J.P. Morgan.
Afternoon. Thanks for taking the question. Wanted to clarify, Nadeem, if you talked about stock-based comp, I might have missed it, but wanted to see what that headwind was during the quarter and how we should think about that for Q2. For John, you know, we're hearing a lot more about truckload conversion for obvious reasons, but I don't really recall hearing that too much in the past before the merger. Maybe you can help unpack what's different this time. Is it more the investments like that SMX and some of the other cross-border stuff you've been doing? Is there actually more from like the legacy CPKC that's also able and, you know, willing, the shippers are willing to kinda convert more over to your network as well?
Just some thoughts on what we're seeing here now versus prior history would be helpful. Thank you.
Brian, stock-based comp was about CAD 15 million headwind in the quarter, so a little over CAD 0.01.
Yeah. Brian, I would say, you know, actually, when we put our transcon intermodal product in place at CP in the day, we've actually had a lot of success as legacy CP in growing that truck conversion business across Canada. We didn't talk about it a lot, but a lot of vendor conversions with, you know, customers such as Canadian Tire or even Loblaw, who we talked about earlier. That's actually been a pretty good story. In our growth in our reefer business, even across Canada also was a pretty good truck conversion story. You know, specific to CPKC and most recently, it's all about the MMX and the great product that Mark and his team have put in place, and we've been able to execute and grow.
I'll tell you, again, we started with zero on that train and, you know, we're probably running north and south about 70% capacity now. We've done a heck of a job to grow that, and we've just grown it, you know, frankly, on the speed and efficiency of that service. Honestly, I believe if this year continues to shape up and these fuel prices continue to stay where they are, we're gonna pile on quite a bit more freight onto that thing. There might actually be some discussions about what another train pair could look like. I'm not bullish on it. You know, I think we've been very transparent about the SMX. We introduced it during our original investor day.
I think collectively we saw a vision to create a best-in-class product, a competitive product into the southeast. Frankly, you just look at, you know, I think it's close to 40% of Mexico trade is with Texas, Georgia, and Florida. It's just right in the wheelhouse of this product. It's exciting that we got a partner in CSX who's highly motivated. We got a strong sales force in Mexico, in the southern part of our U.S. that is pounding the pavement and selling the benefits of this product. Again, I think a lot what you're gonna see under that product is all gonna be, you know, truck to rail conversion.
John, I would just add just the competition between the railroads now with the new service and from our train trip, I mean, Keith took with the leadership with CSX, we've been able to get that railroad up to 49 miles an hour. We've got a premium package on that, on that end of the railroad that will shine come here, I guess, in a week.
Look, I expect we're gonna run under 40 hours between Dallas and Atlanta. Like, this thing's gonna fly.
In three days, Atlanta to Monterrey.
We'll be three days or better Mexico to Atlanta. And with our secure border, with our bridge capacity and that, it's gonna be a really good product.
Okay. Thanks very much.
Great.
We'll go next now to Brandon Oglenski at Barclays.
Hey, good afternoon, and thanks for taking the question. John or Mark, maybe this is a good follow-up. I mean, I think part of the success you had with MMX, and maybe you can tell me I'm wrong, but is controlling the journey from end to end, right? How are you gonna ensure that operational integrity when it's not just your network it's running on, but you're also partnering with CSX on this, right? Maybe can you elaborate on that?
I can start, Mark. You know, I'll just tell you this, the CSX team is all in. They've invested in that franchise just like we have to get those rail speeds up. There's not been a blink, not been a waiver. You know, whether it's Mike Cory and Mark working on what the ultimate product looks like or myself and Mary Claire and her team, you know, working on how we go to market and what customers optimally, you know, fit onto that train. You're right. It is unique. I also think here's gonna be a great example of where you put two Class I together, you partner, you get like-minded, and you go attack some very specific markets with a best-in-class product.
You know, frankly, we put a lot of capital on both sides. We put some sidings in. We've increased the capacity. You know, we get fixated on Atlanta. It's beyond Atlanta for CSX. How can we continue to grow and build product beyond Atlanta on their side and help them get down to Mexico and Wylie as well? There's plenty of business to do in Wylie.
Brandon, let me put the exclamation point on that. Expectations are set from the top. You know, this whole initiative is something that I've personally been involved in since day one, in partnership with the CSX. Steve is committed to this. I'm committed to this. Top to bottom to top, these two organizations are mobilized and equipped to create a unique market solution that makes that border seamless, that can be replicated in the marketplace. That's what entrepreneurial spirit looks like. That's what creating your own self-help looks like. That's what strategic partnership looks like. That's the difference, and it's undeniably unique. Networking commitment.
Thank you.
Thank you.
We'll go next now to Konark Gupta with Scotia Capital.
Thanks. Going back to the yield comment, early on in the call, it's inflecting up in Q2. Is it referred to as up from last year's Q2, or it's up sequentially from Q1? Just trying to unpack that there. Any sense on fuel impact as we move into the next 3 quarters? You know, I think you are going to be covering some of the costs with the fuel surcharges, so any sense on EPS or OR impact? Thanks.
It's up relative to last year quarter to date about 5% cents per RTM.
Can you repeat the second question?
Yeah. On the fuel side, I think it was a CAD 0.03 headwind in Q1. As you cover the fuel cost with surcharges, what do you expect the EPS impact to be in Q2 and the H2?
Yeah. We'll see a small impact in Q2. The fuel price will be basically a bit higher than we saw in the full quarter in Q1, of course. We'll have the full 3 months of elevated prices. We should be able to offset that with our fuel surcharge. Net, net we'll have a small positive if you think about the delay in the fuel surcharge that went from March into April and Q2. That make sense?
Yeah. Thank you.
Basically a delay of earnings from Q1 to Q2. Think about it that way.
Yeah. Just making sure, like the EPS impact is not going to be as noisy in the future quarters.
Especially with currency and as you asked about cents per RTM and so forth. Effectively, I mean, there's obviously gonna be volatility with kind of the world we live in, but I'd say that the worst is behind us, and we'll start seeing, in fact, a positive certainly from the fuel surcharge. That's what gives us confidence in our Q2 being much stronger as we lap some of this noise with the carbon taxes, et cetera.
Okay. No, I appreciate it. Thank you.
Thank you. We'll go next now to Ken Hoexter with Bank of America.
Hey, great. Good afternoon, Keith and team. Nadeem, just appreciate the double-digit EPS outlook and it's accelerating. Maybe just parsing some mixed contributions. I guess the last 5 years you've averaged about a 250 basis point improvement in the operating ratio from Q1 to Q2. Can you give any thoughts on that level given the impact of fuel that you just talked about with Konark Gupta and kind of the volume growth that John Brooks is targeting? Same thing, thoughts for the full year. Can you beat last year's sub 60 target on adjusted basis? I don't know, maybe thoughts on cost headwinds. Should you focus on, I think you brought up incentive comp before or synergy targets post the merger? Maybe just wrap that all up on the cost side.
Thanks, Ken. I'd say that the same level sequentially year over year, the historical sequential improvement is pretty much in line. We do see despite the fuel surcharge headwind on the OR, because there's a push of revenues effectively from, as I just mentioned, from March into April, you'll see a bit of a benefit. I feel comfortable with that historical sequential improvement of that 200, 250 basis points is doable. For the year, I have confidence that we can improve the OR year-over-year despite again, the headwind from potentially from fuel surcharge.
I think a lot of our cost takeout, cost initiatives and productivity initiatives that we have in place puts us in a position to still be able to improve the OR. I think we were 59.9 last year. I think we could improve on that for 2026.
Yeah. I think another point, to not overlook is we're about to lap Darien. Last year, you know, it's something we all like to forget, obviously.
Yeah.
Something we learned a lot from, but certainly a lot of unnecessary, cost and pain and velocity and assets that started the 1st of May, went through effectively the worst of it, even through August.
Yeah.
Certainly we'll recapture that with very fluid network. Costs is gonna go down, revenue is gonna go up. Those will all be very beneficial and supportive to the comments that Nadeem has made.
Wonderful. Thanks, guys. Appreciate the time.
Thanks, Ken.
We'll go next now to Scott Group with Wolfe Research.
Hey, thanks. Afternoon. Keith, I'm wondering, do you think there's a potential path to a settlement where maybe you're, I don't know, supportive, maybe not that, but maybe less opposed to a merger? I just had a random, like, thought question on fuel. Like, the truckers all do weekly lags. FedEx, UPS used to do monthly lags, now they do weekly lags on their fuel surcharge. Like, ultimately, it doesn't really matter, you eventually get made whole. Why do you think the rails still have these monthly and for some of the rails, you know, two-month lags on fuel? Why does that make sense still?
Well, I'll be simple in my answer, Scott. I think there's zero chance of a negotiated or agreement. No. We're full stop. No merger needed. I'm not interested in negotiating.
Scott, I think it's a great idea. I would remind you, we've already got a. We definitely have the fastest reacting fuel surcharge, I believe, in the industry. I do believe there also is tariff notification laws or rules with the STB that probably somewhat governed both here in Canada and also in the U.S. on how we could announce those changes and still meet those regulations. I'm all about brainstorming idea how we can figure it out, though.
Okay. All right. Just a thought. Thank you, guys.
Yeah.
We'll go next now to Stephanie Moore with Jefferies.
Great. Thank you. Good afternoon. You know, simple one for me here. Maybe just wanted to get a sense on how we can think about maybe some of the capital return increases, particularly the buyback boost. Is there anything you're signaling here that you wanna highlight?
No, I'd say that we're generating significant amount of free cash. I think long-term, CP has always been a one to not sit on cash, and we've been very successful as far as buying back stock at value-creating levels. As we sit here today, we see that continue. Certainly share buybacks are always be a part of our shareholder return philosophy. We also added to our dividend payout and increased our dividend by 17.5%, and that's just reflective of being balanced. When we speak to our shareholders and the evolution of our shareholders, there's those that also like dividends. We are at the lowest payout ratio in the industry, we have room to grow there.
We just see ourselves as the growth opportunity is larger. There'll be time to do the dividend at a more meaningful level, but we needed to start ratcheting that up a little bit. We still see buybacks as a meaningful value creation opportunity.
Thank you.
Thanks.
Thank you. We'll go next now to Ari Rosa with Citigroup.
Hey, good afternoon. I actually wanted to stay on the buyback comment. Keith or Nadeem, I believe you guys made the decision to pull forward the timing of the buyback last year because you felt these shares were undervalued. Here, we're looking at, you know, the stock's up about 15% year to date. You know, it's not necessarily a comment on, you know, over time we continue to think stock compounds nicely. Obviously, there's a compelling case for that. Has there been a shift, I guess, in the appetite for the buyback relative to the dividend? You know, it's a fairly sizable dividend increase. Just trying to understand how you're thinking about that.
Obviously, as the share price moves higher, does it make it harder to hit that target to repurchase 5% of shares, or are you pretty committed to that level of buyback?
Last year we had a 3.5% program or 4% program, which we completed. You know, we're quite aggressive. The stock price in Canadian dollars was closer to about CAD 106, CAD 107. You know, we saw an opportunity, value creation, that was coming off the heels of strengthening our balance sheet and having good discussions with the rating agencies. Had similar discussions when we completed our buyback in November of last year. That's why we came to the conclusion and came to announcing our new buyback in January.
We made it a little larger, and part of that is just showing the resiliency of our balance sheet and our ability to continue to service our debt and the diversity of our franchise and the growth story, et cetera. I think we took advantage of a opportunity in the market to go to take on some additional debt prior to some of the geopolitical noise that raised rates. I think we were very advantageous timing. You know, we see an opportunity to continue to buy back the shares. We're not gonna, you know, hold off. Are we gonna be strategic and buy back at, you know, value-creating prices? Yes. There's times when, you know, we will pause.
Given all the volatility in the marketplace, there is opportunity sometimes to be strategic. You can't get too cute on some of those things, especially when you have a 45 million share authorization. I fully expect we will complete it. We'll complete it by the end of the year. You know, like we've seen today, some near-term pullback with some volatility in the market. You know, we can take advantage of that, and we will.
Very helpful. Thank you.
Yeah. Thanks, Ari.
Thank you. Thank you. Ladies and gentlemen, we have reached our allotted time for Q&A today. I would like to turn the conference back to you, Mr. Creel, for any closing comments.
Okay, just a few comments. Listen, we started this Q2 with a lot of momentum. We're in a very good position to operate, to execute operationally, commercially, and financially. That's exactly what we're focused on and intend to do in the Q2 to continue this very unique value-creating story at CPKC. We look forward to sharing those results soon. Be safe.
Thank you, gentlemen. Ladies and gentlemen, this brings us to the conclusion of CPKC's Q1 earnings call. Thanks so much for joining us, everyone. We wish you all a great evening. Goodbye.