Executive Summary / Key Takeaways

• CPKC's unique single-line rail network spanning Canada, the U.S., and Mexico is a foundational competitive advantage, enabling differentiated growth opportunities through new trade flows and supply chain solutions like the MMX cross-border service and closed-loop automotive transport.
• The company demonstrated strong operational execution and financial performance in Q1 2025, achieving 8% revenue growth and a 150 basis point improvement in core adjusted operating ratio to 62.5%, driven by volume growth across key segments and disciplined cost control.
• Strategic capital investments, including the completed Laredo Bridge expansion and ongoing network capacity projects, are enhancing fluidity, safety, and efficiency, positioning CPKC to absorb expected mid-single-digit volume growth in 2025.
• Management expects another year of double-digit core adjusted earnings growth in 2025 (12%-18% range), supported by volume growth, pricing power, moderating inflation, and expense synergies, with a target of achieving a sub-60 operating ratio for the full year.
• CPKC is returning capital to shareholders, initiating a 4% share buyback program and increasing its quarterly dividend by 20%, signaling confidence in its financial strength and progress towards its target leverage ratio.

The Transnational Network Advantage

Canadian Pacific Kansas City Limited stands apart in the North American freight rail landscape. As the first and only single-line transnational railway connecting Canada, the United States, and Mexico, CPKC operates a vast network of approximately 20,000 route miles. This unique geographic footprint is not merely a collection of tracks; it is the foundational strength of the company, enabling unparalleled access to major ports and key markets across the continent. This strategic positioning is a direct outcome of the transformative combination of Canadian Pacific and Kansas City Southern, a merger completed in April 2023 that was explicitly designed to unlock new growth opportunities, enhance competition, and create value across the entire North American supply chain.

The strategic vision behind CPKC is to leverage this integrated network to offer customers seamless, efficient, and reliable transportation solutions that were previously unavailable. This is particularly critical in an environment marked by shifting global trade dynamics, increasing focus on supply chain security, and the acceleration of nearshoring and ally-shoring trends within North America. CPKC positions itself as a vital "land bridge," facilitating new trade flows and enabling customers to diversify their end markets. Management actively engages with governments in Canada and Mexico to advocate for policies that incentivize cross-border trade, recognizing the increasing interdependence of these three economies.

In the competitive landscape, CPKC's primary rivals include other Class I railroads such as Canadian National Railway (CNI), Union Pacific Corporation (UNP), CSX Corporation (CSX), and Norfolk Southern Corporation (NSC). While competitors like CNI and UNP boast extensive networks and significant market share (CNI ~20-25% North American, UNP ~25-30% U.S.), CPKC's distinct advantage lies in its single-line haul capability across all three nations. This eliminates the need for multiple handoffs at borders, reducing transit times, improving reliability, and lowering costs for customers shipping goods across Canada, the U.S., and Mexico. For example, services like the MMX 180/181 route between Chicago and Mexico are highlighted as the fastest and most efficient cross-border rail solution in the industry, a direct competitive differentiator against multi-line alternatives offered by peers.

Beyond network structure, CPKC's competitive positioning is reinforced by strategic investments and operational focus. The completion of the second span of the Laredo Bridge, now the Patrick J. Ottensmeyer International Rail Bridge, more than doubles capacity at this critical U.S.-Mexico border crossing, enhancing fluidity and reliability compared to other, more congested gateways involving multiple railroads. This investment directly supports CPKC's ability to handle growing cross-border volumes efficiently. Furthermore, targeted capital projects in Kansas City and Mexico, along with investments mandated by the STB like new sidings and CTC, are designed to improve network fluidity and capacity, ensuring CPKC can absorb growth without compromising service.

While competitors like UNP and CNI may hold advantages in scale or specific cost efficiencies in certain corridors, CPKC's strategic emphasis on cross-border connectivity and tailored supply chain solutions, such as the closed-loop automotive service and developing refrigerated transport ecosystem, allows it to compete effectively and capture market share in high-value segments. The company's ability to offer a differentiated service product is key to its strategy of disciplined pricing, aiming to capture the value of its unique capacity and service reliability.

Operational Excellence and Technological Edge

Operational efficiency and safety are paramount for CPKC and form a critical part of its competitive strength. The company consistently emphasizes its commitment to precision scheduled railroading principles, which drive improvements across key operating metrics. In Q1 2025, despite challenging winter conditions, CPKC demonstrated solid operational performance. Average train weights increased by 5%, primarily due to improved operating plan efficiency and moving longer, heavier Grain trains. While fuel efficiency remained flat year-over-year in Q1 2025, management highlighted ongoing efforts to improve this metric, including the upcoming delivery of 100 new Tier 4 locomotives in 2025, which are expected to enhance both reliability and fuel efficiency.

Safety remains a core focus, with management reporting significant improvements. In Q1 2025, FRA personal injuries were down 14% year-over-year, and FRA train accidents saw a remarkable 58% improvement, reaching a record low of 0.38. This builds on a legacy of industry-leading safety performance and is a testament to the team's dedication and the impact of ongoing safety initiatives.

Technology plays a crucial role in driving both operational efficiency and safety at CPKC. While specific quantitative metrics on the benefits of all technologies were not uniformly available, management commentary highlights several key areas:

• Locomotive Interoperability: Upgrades to the legacy KCS locomotive fleet allow more assets to lead trains in Canada, improving flexibility and efficiency across the combined network. By the end of 2024, approximately 175 locomotives were expected to be fully interchangeable.
• Advanced Inspection Technologies: CPKC is exploring and implementing technologies like cold wheel technology, which identified 30% more defects in Canada compared to standard tests, and broken rail detection, which has detected 150 instances since 2021, preventing potential derailments. These technologies enhance safety by identifying issues proactively and can contribute to operational efficiency by reducing unexpected service disruptions.
• Data-Driven Maintenance: The engineering team leverages data from investments in autonomous geometry testing cars to accurately plan preventive maintenance and capital investments, reducing slow orders and train delays.
• Collaboration with Regulators: CPKC is working closely with the FRA on initiatives to implement process changes and utilize technology to deliver safer and more reliable outcomes. This includes efforts to remove redundant air tests at the U.S.-Mexican border and optimize where bad orders/wheels are changed, aiming to drive yard efficiencies and reduce dwell times at key locations like Kansas City and Laredo.

The "so what" for investors is clear: these operational improvements and technological advancements translate directly into financial benefits. Enhanced efficiency leads to lower operating costs (e.g., improved labor productivity against volume growth, reduced equipment rents through better cycle times). Improved safety reduces casualty expenses. Increased fluidity and reliability allow CPKC to offer a premium service, supporting pricing power and attracting higher-margin business. These factors collectively contribute to operating leverage and margin expansion, underpinning the company's profitability goals.

Financial Performance and Growth Catalysts

CPKC delivered a strong start to 2025, building on the momentum from a solid 2024. In the first quarter of 2025, total revenues increased by 8% to $3.8 billion compared to $3.5 billion in the prior year period. This growth was primarily fueled by a 4% increase in volumes (measured by RTMs) and a favorable increase in freight revenue per RTM, influenced by higher freight rates and the positive impact of foreign exchange fluctuations ($114 million tailwind), partially offset by lower fuel surcharge revenue ($33 million headwind).

Looking at segment performance in Q1 2025:

• Grain revenues grew 8% to $788 million, driven by higher volumes of Canadian grain to Vancouver and Mexico and US grain to the Pacific Northwest and Mexico.
• Coal revenues surged 23% to $257 million, primarily due to higher Canadian coal volumes to key ports and increased revenue per RTM.
• Potash revenues increased 14% to $156 million, benefiting from higher export volumes to Vancouver and the US Pacific Northwest.
• Automotive revenues saw a significant 19% increase to $315 million, reflecting higher volumes on key cross-border lanes (Mexico to US Midwest/Texas, Chicago/KC to Canada) and longer length of haul.
• Intermodal revenues grew 6% to $674 million, supported by strength in domestic intermodal and international volumes through the Ports of Saint John and Lazaro.

Operating expenses increased by 5% to $2.5 billion in Q1 2025. Key drivers included higher materials expense due to insourcing locomotive maintenance and increased track maintenance, higher equipment rents from increased pooled car usage, and increased depreciation/amortization due to a higher asset base and unfavorable FX. Compensation and benefits saw a slight decrease, benefiting from lower stock-based compensation and prior-year tax provision adjustments, partially offset by wage inflation. Purchased services and other increased due to lapping a prior-year one-time fee and unfavorable FX, partially offset by insourcing benefits and lower casualty costs.

The strong revenue growth outpacing expense growth resulted in a notable improvement in profitability. The reported operating ratio improved by 210 basis points to 65.30% in Q1 2025. On a core adjusted basis, which excludes significant items like acquisition-related costs and KCS purchase accounting, the operating ratio improved by 150 basis points to 62.50%. Net income attributable to controlling shareholders increased by 17% to $910 million, leading to a diluted earnings per share of $0.97, up 17% year-over-year. Core adjusted diluted EPS grew 14% to $1.06.

CPKC's liquidity position remains sound. While cash and cash equivalents decreased slightly to $695 million at March 31, 2025, the company maintains access to a $2.2 billion revolving credit facility, which was undrawn at quarter-end. The company actively manages its debt profile, repaying $930 million of maturing notes and issuing $1710 million in new long-term debt in Q1 2025. Net cash provided by operating activities increased by $141 million, demonstrating strong cash generation from operations. Net cash used in investing activities increased due to higher capital additions, reflecting the company's commitment to investing in the network. Net cash used in financing activities increased, driven by debt repayments and share repurchases, partially offset by new debt issuances. Moody's recognized the company's financial progress by upgrading its Long-term debt rating to Baa1 in Q1 2025.

Growth catalysts for CPKC are directly tied to leveraging its unique network and operational capabilities. Key initiatives include:

• Cross-Border Intermodal: Continued ramp-up of the MMX service, which saw volumes increase 42% in Q1 2025, and the development of new joint line routes with partners like CSX to the U.S. Southeast. Partnerships with companies like Americold (STOR) are driving growth in refrigerated transport, with new facilities ramping up.
• Automotive: Expanding the closed-loop service model, which contributed to a record Q1 performance, and leveraging new infrastructure like the Dallas auto compound. CPKC was recently named GM (GM) Supplier of the Year for finished vehicles, highlighting the value of this service.
• Bulk Commodities: Capitalizing on strong agricultural production in its service territory, particularly Canadian grain exports and US grain shipments to Mexico. Increased demand for export potash and coal also presents growth opportunities.
• Energy, Chemicals, and Plastics: Capturing new business from nearshoring trends and supply chain diversification, connecting production centers in Canada and the U.S. Gulf Coast to growing markets in Mexico. Record LPG performance in Q1 2025 is an example.
• Industrial Development: The "Room to Grow" strategy, including the certification of nine "Site Ready" industrial development locations across the network, aims to attract new rail-served businesses.

Outlook and Risks

CPKC management remains optimistic about the company's prospects, projecting another year of strong growth despite ongoing external uncertainties. For 2025, the company expects to deliver mid-single-digit volume growth (RTMs) and core adjusted earnings growth in the range of 12% to 18%. This outlook is underpinned by the continued execution of its operating plan, the realization of synergies and self-help initiatives, disciplined pricing, and moderating inflation. Management specifically targets achieving a sub-60 operating ratio for the full year 2025, a significant improvement from the 62.50% achieved in Q1.

Key assumptions supporting the 2025 outlook include continued operational efficiency gains, roughly flat average headcount driving labor productivity, and the successful ramp-up of new business wins across key segments. The expected Core adjusted effective tax rate for 2025 is approximately 24.50%. Capital expenditures are projected to be approximately $2.9 billion in 2025, slightly higher than previous guidance, partly due to expected FX impacts, reflecting ongoing investment in network capacity and efficiency.

The company is also returning capital to shareholders, initiating a normal course issuer bid to repurchase up to 4% of outstanding shares by March 2026 and increasing its quarterly dividend by 20%. This reflects management's confidence in the company's strong cash flow generation and progress towards its target leverage ratio of 2.5 times, expected to be reached in early 2025. The recent sale of the Panama Canal Railway Company stake for U.S. $350 million further bolsters liquidity and allows for focus on the core North American network.

However, the investment thesis is not without risks. CPKC operates in a dynamic environment subject to various factors that could impact its performance:

• Macroeconomic and Trade Policy Uncertainty: Fluctuations in economic growth, commodity prices, and trade policies (including potential tariffs) can affect freight volumes and demand across various segments. Management acknowledges this uncertainty, particularly regarding trade policies, which influenced the Q1 2025 guidance adjustment.
• Foreign Exchange Fluctuations: A significant portion of revenues, expenses, assets, and liabilities are denominated in USD and MXN. Changes in exchange rates relative to the Canadian dollar can materially impact reported financial results.
• Fuel Price Volatility: Fuel is a significant operating expense. While fuel surcharge programs mitigate some exposure, timing differences and price fluctuations can impact earnings.
• Legal and Regulatory Risks: Ongoing legal proceedings (e.g., Lac-Mégantic, Remington claim, Mexican tax assessment) and regulatory inquiries (e.g., EPA) could result in material liabilities or costs. The outcome of appeals in the Lac-Mégantic case to the Supreme Court of Canada remains a key watchpoint.
• Operational Disruptions: Severe weather, derailments (as experienced in Q3 2024), labor disputes (though recent agreements improve stability in Canada), or other events could disrupt operations, impact volumes, and increase costs.
• Share Price Volatility: Fluctuations in the company's share price directly impact stock-based compensation expense, adding volatility to earnings.

Conclusion

CPKC's investment narrative is fundamentally centered on the strategic power of its unique transnational network. The combination of Canadian Pacific and Kansas City Southern has created a railway with unparalleled reach across North America, enabling differentiated growth opportunities through seamless cross-border service and tailored supply chain solutions. The company's strong Q1 2025 performance, marked by robust revenue growth, operational efficiency gains, and profitability improvement, demonstrates the successful execution of its integration strategy and the ability to capture value even amidst external uncertainties.

Looking ahead, CPKC is positioned for continued growth, underpinned by strategic investments in network capacity, technological advancements driving efficiency and safety, and a strong pipeline of business opportunities across key segments like intermodal, automotive, and bulk commodities. Management's guidance for double-digit earnings growth and a sub-60 operating ratio in 2025 signals confidence in the company's ability to translate its unique competitive advantages into tangible financial results. While macroeconomic conditions, trade policies, and other risks warrant careful monitoring, CPKC's focus on controlling controllable factors, leveraging its distinct network, and returning capital to shareholders presents a compelling investment thesis for those seeking exposure to a rail company with a differentiated growth trajectory in the evolving North American trade landscape.