Canadian Pacific Kansas City Ltd. (CP) Q2 2026 Earnings Report, Transcript and Summary

Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to CPKC's Second Quarter 2026 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. [Operator Instructions]. I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, Tax and Treasurer, to begin the conference call.

Thank you, Leo. 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 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, as outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our -- Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to one. It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Thanks, Chris. And again, thanks for everyone joining us on the call today. As I always do, I'll start by thanking the 20,000 strong team of railroaders we have producing these excellent results. I remain extremely proud to serve with each 1 of you. So thank you for your efforts and your sacrifices. And on the performance, if you look at it, it reflects the strength of the CPKC franchise, the resilience of our business mix and the continued benefits of uniquely connecting Canada, the U.S. and Mexico to the only single-line rail network that uniquely serves all 3 countries. So we brought these railroads together just over 2 years ago to create something unique, a network capable of unlocking new supply chains expanding market access, increasing competition across North America, and we're doing exactly that. With each passing quarter, that vision is becoming a reality. So the results for the quarter, the team delivered volume growth of 4%, revenue growth of 13%, an operating ratio of 61.6%, earnings of $1.27, which is an increase of 13%. The results were driven by a combination of disciplined execution by Mark and the team, strong service performance and continued growth across many of our key franchises. Operationally, the railroad continues to perform at a very high level. During the quarter, we established new records across a number of the key operating metrics with its asset utilization, train velocity terminal fluidity all improved year-over-year, demonstrating the ability to safely and efficiently move more freight across the network while creating additional capacity for John to sell into our future growth. On the growth initiative side, what continues to excite us the most is the opportunities ahead, the rationale for combining CPKC's is pretty simple, create the first and only single-line railroad, that links Canada, the United States and Mexico and leverage the network to generate value for our customers and our shareholders. Today, we're seeing the strategy tenant into these tangible results. During the quarter, we established volume records in grain, energy, chemicals, plastics and automotive. We also advanced several important commercial initiatives to reinforce the long-term growth story of our network and franchise. The launch and the momentum behind our enhanced Southeast Mexico Express service, continued growth on the Mexico Midwest Express service, the opening of another Americold facility this time at the Port of Saint John in Atlantic Canada. We continue to increase traffic flows between Canada and Mexico via the CPKC land bridge that uniquely is enabled by the North American franchise. Perhaps most importantly, as we look forward, our commercial pipeline remains robust. Customers across multiple sectors continue to look for ways to simplify supply chains, reduce friction at borders, increase resiliency, improved transit performance. CPKC is uniquely positioned to help them achieve those objectives. So in closing, as we enter the second half of the year, we do so from a position of strength. So our network is performing extremely well. Our service product is strong. Our growth pipeline continues to expand. And while uncertainty remains in parts of the macroeconomic environment, we're encouraged by the improving market conditions across several markets. It's a growth story, growth in cross-border traffic, growth in new supply chains, growth enabled by a network that is uniquely created in North America by CPKC. We're still in the early chapters of this story, realizing the full potential of the franchise we've led history in revenue and earnings growth for the last 2 years, and we're well positioned to deliver another year of double-digit earnings growth in 2026. So with that said, I'm going to turn it over to Mark. He can elaborate a bit on operations. John abreast color in the markets may Nadeem on the numbers, and we look forward to the Q&A session. Mark, over to you.

Yes. Thank you, Keith, and good afternoon. I'm going to begin by recognizing our team of rail rooms across North America for another outstanding quarter of execution. The commitment, discipline and record levels of operating performance while continuing to provide customers with safe and lot of service. During the quarter, we set second quarter records across a number of key productivity metrics, including train speed, dwell, locomotive productivity and fuel efficiency. These results reflect the strength of our operating model and most importantly, the dedication of our railroad as we continue to execute at a very high load every day. As we marked 1 year since completing the consolidation of our U.S. and Canadian operating systems, the benefits of that work continue to be realized across the network. Our teams are aligned around common process, sharing performance measures and real-time visibility across the network. This is allowing us to identify opportunities quicker and solve issues faster and make better decisions as we continue to realize the benefits of the operating -- the operations as 1 railroad operating performance remains a critical focus area. The visibility and coordination created through the integrated -- integration of our Canadian and U.S. operating systems allow us to manage train execution across the network with great precision and consistency than ever before. The result is a more fluid, efficient and consistent railroad delivered even stronger service and asset utilization across the 3 national systems. Now turning to safety. This remains our top priority. During the quarter, both personal injury frequency and train accident increased versus the year ago, but steel remained 1.0 for FRA train accident and 0.96 for FRA personal injury. While we are disappointed by these results, we remain fully committed to continuous improvement. Safety is a journey that requires constant diligence, learning and engagement. We're taking action to address the underlying trends and remain focused on ensuring every employee returns home safe at every shift while continuing to improve the safety of our operations. Now turning to our locomotive fleet. We have now received all 70 Wabtec locomotives scheduled for delivery 2026. We remain on track to begin receiving progress rate to models in the second half. Building on the 100 locomotives received from Wabtec last year, we continue to make significant improvements for investments of fleet modernization to support the long-term growth and efficiency of our CP network. These investments are already supporting improved reliability, efficiency across the network, particularly on our Transcon operations in Canada where the new units have been deployed. In the digital locomotives under service, we expect further benefit through the improved asset availability, network resilience and operating performance. Finally, engineering team has been consistently delivering exceptional productivity. Their work has supported record grain loadings while maintaining strong network performance. Importantly, rail and tie replacement continues to progress ahead of schedule. Our rail and tie crews have increased year-over-year installation productivity by 18% and 59%, respectively. We fully expect to be off the mainline in Western Canada well before the start of the fall harvest season, positioning us to support customer demand during one of the busiest periods of the year. In closing, our revenue continues to perform at an extremely high level. As I note, Keith, John and I spent some time on the railroad last week, we came away pleased with what we accomplished, while also identifying the areas of further opportunity. That's what true PSR looks like. Always remember, a glass today is be minus tomorrow as we continue to drive for continuous improvement. Strong execution by our employees, the benefits of strengthening our integration disciplined focus on service performance, strategic investments and continued productivity improvements across the business will position us well in the second half. With that, I'll turn it over to John.

All right. Thank you, Mark, and good afternoon. Our second quarter results reflect the strength of CPKC's unique franchise and the benefits of our 3 nation network. This quarter is another great example of how we continue to stack up growth from synergies and new business wins, we're realizing strong price for the value of the service and our capacity. Now looking at our Q2 results. We delivered Q2 record freight revenues, excluding fuel and all-time record GTMs, up 13% and 4%, respectively. Cents per RTM increased 9%, reflecting higher fuel surcharge revenue, sustained pricing strength and moderating mix headwinds. Based on our current outlook for fuel and FX we expect continued strength in yields in the second half of the year. Moving on to the next slide and before discussing the lines of business, I'd like to spend a moment on the consistency of our growth. Reflecting on Q2 since 2023, we've delivered 17% RTM growth or 22% excluding fuel. This performance, despite a challenging macro backdrop is a result of laser-focused commercial execution, unlocked through the strength of our service product, network efficiency and the capacity we can offer into the marketplace. Now taking a closer look at our second quarter revenue performance, I'll speak to FX adjusted results. Starting with bulk. Q2 was another record quarter for grain in revenue, RTMs and carloads with revenue increasing 24% on 19% volume growth. Canadian grain volumes increased 24%, driven by record harvest and continued growth in the markets such as Mexico. U.S. grain volumes increased 14%, also driven by strong demand into Mexico and also to the P&W markets. Looking ahead, we remain optimistic that both supply and demand will remain solid through Q3 and although it's still early to tell, the new crop across our network is off to a pretty good start. Potash revenues were up 10% and a 2% decline in volume, reflecting the impact of port maintenance and lower mine production. Looking ahead, while we continue to expect impacts from port maintenance, export demand fundamentals remain healthy and we are working closely with our customers in this space to maximize our potash volumes into the second half of the year. To round out bulk, coal revenue declined 18% on a 29% reduction in volumes, reducing our total RTM growth by approximately 3% on the quarter. This decline was driven by ongoing production-related challenges at our customer mines, which impacted shipments throughout the quarter. While run rates have stabilized, the shipment levels and the shipment levels are improving, we expect coal to continue to be a headwind in the second half of the year. Moving on to merchandise. Energy Chemicals and Plastics revenue increased 8% on 6% volume growth. The volume growth was driven primarily by higher DRU and conventional crude shipments, partially offset by lower fuel oil shipments into Mexico. Looking ahead, we expect continued growth in ECP driven by improved market fundamentals and new business lines. Forest Products revenue increased 2% and 2% lower volumes. Despite the decline in volumes, we are encouraged to see continued strength in synergies led by lumber shipments into our Southern U.S. markets, highlighting our unique ability to connect supply and demand across North America. In fact, despite higher interest rates and lower housing starts, June marked a record month for lumber synergy shipments across our network. Metals, Minerals and Consumer Products revenue increased 16% on 7% volume growth. Growth was driven by improving steel volumes across both domestic and land bridge lanes, along with continued strength in aggregate shipments supported by new construction activity in the southern part of our network. Moving on to automotive. Revenue increased 19% and 8% volume growth representing another record quarter. Growth was driven by new business wins and extended length of haul as automotive continues to be a compelling example of the value of our 3 Nation network. Closing with our intermodal franchise, revenue increased 11% on flat volumes. Domestic intermodal volumes increased 3% in the quarter. We are encouraged by the early success of our SMX service with CSX with volumes increasing more than 30% from Q1. We are seeing signs of improving truck supported by higher fuel prices, tighter regulatory enforcement and reduced trucking capacity. Both our MMX and FMX services are well positioned to capitalize on these favorable market dynamics. In International, volumes declined 2% as we lapped strong pull ahead on prior year comparisons. Looking ahead, we expect supported by our strong service product as we execute specific growth initiatives at Port of St. John and also Lazaro Cardenas. So in summary, the pipeline of unique growth opportunities is strong, and we continue to capture pricing momentum across our book of business. With improvements in the freight demand trends, continued synergy realization and a growing pipeline of new business wins, I remain very confident in our ability to deliver mid-single-digit volume growth in 2026. With that, I'll pass it over to Nadeem.

All right. Thanks, John, and good afternoon. We delivered another quarter of strong volume growth, disciplined execution and effective cost control. These results underscore the strength of our franchise and our ability to translate our unique opportunities in our earnings and cash flow growth. We continue to realize merger synergies while Mark and his team are delivering excellent operating performance and customer service. I'm very pleased with the underlying performance of the business and the momentum we are carrying into the second half of the year. Now turning to our second quarter on Slide 15. CPKC's reported operating ratio was 54.6%, Our core adjusted operating ratio was 61.6%, up 90 basis points from last year. Diluted earnings per share was $1.15 and core adjusted diluted EPS was $1.20 up 13% versus last year. Taking a closer look at our expenses on Slide 16, I will speak to the year-over-year variances on an FX-adjusted basis. Core adjusted comp and benefits expense was $702 million. The year-over-year increase was driven by higher stock-based compensation, wage inflation and volume-related costs. These were partially offset by ongoing productivity gains, improving train waste and continued operating efficiency improvements. Looking ahead, we expect to continue generating strong labor productivity in the second half of the year with modest headcount growth supporting accelerating volume growth. Fuel expense was up 49% year-over-year. The increase was driven primarily by a 52% increase in on-highway diesel price along with higher volume. This was partially offset by a 4% improvement in fuel efficiency, driven by increased train waste and improved locomotive productivity. Materials expense was up 3% year-over-year. The increase was primarily driven by inflation including the impact of higher fuel price on our non-locomotive fleet, partially offset by efficiency gains from contract optimization and lower locomotive material costs. Equipment rents were 6% lower versus prior year reflecting improved asset utilization, stronger network velocity and improved cycle times. Depreciation and amortization expense was up 5%, driven by a larger asset base. Core adjusted PSNO expense was $585 million. The year-over-year increase was driven by higher casualty costs and inflation, partially offset by productivity initiatives and operating efficiencies across the network. In reviewing the quarter, I'd highlight the strength of the underlying business performance and execution. Strong volume growth, disciplined pricing and continued productivity improvements enabled us to deliver another quarter of double-digit earnings growth while absorbing several notable cost headwinds. Higher casualty costs and stock-based compensation represented a $0.04 impact to EPS and 120 basis point headwind to OR. Year-over-year changes to fuel price growth were 130 basis point headwind to the OR. Despite these impacts, the underlying trajectory of the business remains strong. The combination of volume growth, operating leverage and disciplined cost management allowed us to offset these headwinds and deliver strong earnings growth in the quarter. Moving below the line on Slide 17. And Net interest expense was $237 million or $231 million, excluding purchase accounting. The increase was driven primarily by interest on new debt, partially offset by lower commercial paper balances and debt repayments. Income tax expense was $335 million or $370 million adjusted for purchase accounting and significant items. We continue to expect the full year core adjusted effective tax rate of approximately 24.75%. Turning to Slide 18 and cash flow. Year-to-date, net cash provided by operating activities was up 8%, driven by higher operating income. Our year-to-date capital expenditures were $1.4 billion, and we remain on track to deliver full year CapEx of $2.65 billion, a 15% reduction year-over-year. And year-to-date adjusted free cash was $1.3 billion, up 25% over prior year. During the first half of the year, our disciplined approach to capital management delivered $2.4 billion of shareholder returns through share repurchases and dividends, reflecting a balanced and opportunistic allocation of capital. In closing, we delivered strong financial results in the second quarter, reflecting healthy volume growth, disciplined pricing, ongoing productivity improvements and effective cost management. The business continues to generate strong earnings and cash flow, while our balance sheet and capital allocation priorities remain unchanged. As we look to the second half of the year, continued execution across the network, ongoing efficiency and growth initiatives position us well to achieve our full year guidance and deliver sustainable long-term shareholder value. With that, I'll turn it over back to you, Keith.

Okay. With that, operator, let's open it up for questions. Thank you, gentlemen.

[Operator Instructions]. Your first question comes from Chris Wetherbee with Wells Fargo.

Obviously, a solid quarter. But I guess I wanted to talk a little bit about the -- what we've seen in developments with the transaction between UP-NS, in particular, the agreement with Canadian National. I just want to get a sense of how do you feel if it does change anything from a competitive landscape for CP? Sort of how do you feel like you fit into the dynamics here? And then the growth opportunities that you see from the combined network of CP and KC over the multiyear period of time in light of what we've seen so far?

Chris, you might get a 2-part answer here. When you say the agreement, point out a specific agreement.

So I guess there's so there's 1 that's contingent on the transaction 1 that's not, I guess, in terms of the EJ&E and then the potential access down through Texas, I guess, maybe start there. And maybe if you want to expand on it to include both of them, be curious or take.

Okay. Well, I'm going to go high level, John, I'll let you come in some of the markets. So I try to decouple myself, but it's tough to decouple myself from 17 years of experience, a lot of which the latter years entailed fighting for the right to kind of decouple yourselves from the whims of the Chicago operating experience inside that inter loop. So that EJ&E route that interstate around Chicago to me, is kind of the holy grail in Chicago from a network perspective. And when I have my old add-on. So I'm very sensitive admittedly. I understand the payments separate took. I also understand more so than others, I would argue, the operational benefit of having that asset. So when I think about that deal stand-alone, I think Jim is good on Jim. He understands like I understand the benefit of having that capacity and that release valve and that through kind of interstate route around Chicago. But when I put my CN hat on, if I were to, and I think back and reflect, that's not unlimited capacity you just gave away. That is your insurance cost. And maybe today, you have latent capacity, 10 years from now, do you have latent capacity. And the thing that suggest just because somebody else pays for the capital, there's unlimited right away to build sidings and to build infrastructure at some point, and these are long-term assets and long-term decisions, there's going to be accountability for that decision. You wake up in the middle of the meltdown in Chicago, especially if UP and NS were to realize their ambitions in the most heavily congested, busiest location in North America, and now you're battling with UP trains and CN trains for the same capacity. And then further think this thing out, if I have a bit, how does that impact the overall complex of Chicago now? You just put the JI'm in play. So the questions I have, and I think about this, and I haven't quite gotten to this part of the supplemental information that's provided. I spent maybe way too much time on 84 pages of corrections and then I read Jim's letter and then I got to a little bit of the CGP stuff. I'm wondering how that changes their merger plans and how that gets tweaked and how you integrate that in, number one. And I think about the day when the place melts down and how you decouple now and you have no relief found. So it gives me concern. So what did you get for that? You got access to Mexico via Memphis Gateway. You get the ability to quote to a customer a 2-line move perhaps for the haulage rate as opposed to a 3, but it's still a 3-line move. but still a route over Memphis operationally. It's still controlled and dispatched by the Union Pacific. We still get to the most problematic border point in Mexico with EcoPass. And now you've got 3 railroads fighting for the same capacity going to railroad. And that compared to our network from a competitive standpoint, operationally, going to our key markets that we serve is disadvantaged. So a lot of information to unwind in all that, Ken. I just think in the end, good for Jim to get access in Chicago. I hope that CN doesn't have buyer's remorse in the future, what they gave up versus what they got because I don't think they got a lot in all honesty. When it comes to the merger side, I think that it's a couple of steps for UP to solve a very problematic merger application. It preserves competition perhaps on those 2 to 1 and 3 to 2s where operationally feasible. So that helps take a couple of steps towards solving miles and miles and miles and miles and miles more of problematic steps. And when it comes to access for CN coming to Kansas City, we've already got 4 railroads running between Kansas City and St. Louis. I'd say welcome to the party, come ready to compete because we will. We're not afraid of competition. We never have been as long as we do our jobs and we leverage the benefits of our single-line route, I'll stand that against CN, I'll stand that against UP. John, any commercial comments?

I just would add on, Chris, maybe the Mexico piece, as Keith said, we're not afraid to compete. But I don't view this as very different than maybe when CN had a connection and used the route over Jackson with the legacy KCS to get to Mexico. And then they pivoted to create a route over Chicago with the UP, I think a Falcon or something to run down to Mexico. And now they've extended their haul in another interchange to Memphis to get down to Mexico. It didn't change our approach 3 years ago when they put it in place. I think we've demonstrated really strong growth on our MMX, and it's all on the backs of the service. So I just kind of view it as we've got a product that can't be replicated in the marketplace. It's the reason why -- in 2023, there was $100 million of what I consider we call land bridge business flowing between Mexico and Canada. I see us at $600 million by the end of this year and a path to get to $1 billion. It's just a unique product that we're able to offer. And I'm sure there's going to be certain customers out there that the CMUP product makes sense for on the FXC or in certain markets, and that's fine. So I stand by that. And Keith's comments on Kansas City rings true to me. We have -- there's 4 railroads that come in and out of here existing today from into the East that we compete for business. But even I think back to when we were competing for the KCS, and that was identified as such a big opportunity in lane by our competitor. And frankly, we just haven't seen it. So if they bring to light a big opportunity, it's -- it will be an opportunity for us to compete against it. And we look forward to that opportunity.

And there's one more point, clarifying point that I think is important to understand, too. When John speaks to the business that we won, we've competed for and we continue to see a path to grow to from that $600 million to $1 billion over the future years. The lion's share of that traffic is coming from or going to Western Canada not Eastern Canada. Not saying that sum is not from East, but the biggest opportunity is in the West. And from a network standpoint, CN is dramatically disadvantaged to our network from those Western Canadian origins given that we go to Minneapolis, St. Paul and on the west side of the Mississippi for them to get it to Mexico, whether it's over Chicago, whether it's over Memphis, whether it's over Jackson, they got to go to Chicago. They got to go east to come back West. That disadvantages route miles to a material and significant way.

Your next question comes from Fadi Chamoun with BMO Capital Markets.

John, you have been able to kind of deliver somewhere in the $300 million, $350 million of kind of pipeline synergy revenues for the last couple of years. It sounds like you're bullish on that pipeline. Going into 2027, can you frame kind of what type of opportunity you see kind of idiosyncratic to some of these commercial efforts you're working on? Can we assume that this will continue to kind of play out in a similar fashion that it has done in the last couple of years going to 2027? And a quick follow-up to Nadeem. Just you mentioned several notable expense items. I just wondering if you can kind of elaborate a little bit what these are and how should we think about the expense bridge as we go into second half of the year?

Yes. So I'll start there, Fadi. Thanks for the question. I do see a really good run rate to get to that, let's call it, $1.4 billion, $1.5 billion in synergies as we close out this year. And you're right, that's about a -- actually more than a $300 million step-up in that area. I would call out that it's really coming from all the lines of business. But as I particularly look, let's say, specifically to the next 6 to 18 months, we've just seen tremendous growth in our intermodal synergies specific to that and also our grain. We really didn't scratch the surface, and I'm going to say the early days in terms of leveraging this franchise in our grain network. And I think what we've seen with the strong crop in Canada, actually a strong crop in our upper U.S. network as we've got deeper, deeper into the shipping season, we've seen more and more markets across our network materialize. So that's been strong. I want to say we're up 60%, 70% if you look at grain out of our Northern Territory down into Mexico or the Southern U.S. markets. And again, I can tell you, we're -- I'm proud of where we've moved that needle this year, but I still think we're kind of in the early innings of really kind of figuring out those flows to be to compete. And frankly, I think I talked about this previously. I just spent some time in Mexico looking at these facilities and the capability to enhance their throughput capabilities that will drive volume growth is still out there. As much as I'm proud of that we've taken the MMX service side to about 70% capacity levels, I'm still challenging the team, particularly in this freight environment right now of how we begin to push the envelope to what a second train fair could look like on the MMX. And that's really without not a whole lot of reefer growth that we're still working on that we're just seeing ramp up in that space. So I'm optimistic about that. And then maybe I'd also point out is as much as -- and I think Keith mentioned it, as much as I'm pleased about our closed-loop automotive program, there's still some outliers out there that I expect to make headway in over the next 6 to 12 months in contracts that I think will also look to leverage the benefits we can provide with that. So those are kind of the call-out areas.

I'd just point out a couple of things. Casualty stock comp and incentive comp were about a $0.05 headwind versus a year ago, maybe around close to about 150 basis points. So I think about with those headwinds, if they weren't there, probably closer to a 60% OR. And I'll just leave it at that.

Your next question comes from Jonathan Chappell with Evercore ISI.

Mark, John just laid out a pretty broad-based growth plan. I know a lot of it is unique to CP, but it feels like for the first time since the merger, you've had some real strong macro tailwinds that are building as well. I know you're going to add a little headcount in the second half of the year, but lower than the volume growth expectations. When you think about the next couple of years and the resources -- you've created a lot of productivity thus far in the last couple of years. But how do you think about aligning resources with the type of growth profile that John is laying out over a 2- to 3-year period?

Well, I think it's just the value of how we do business with TSR. But John is talking about what he's doing in the coming months. We're in the background understanding what kind of crews we need, what kind of locomotives we need to put in front of it, containers, box cars, whatever it may be. So we're steadily looking at the demand of equipment, people. On top of that, I'm looking at synergies of the agreement that we just signed with the -- I'd say signed that we just implemented with the south of -- what I would say, south of Heat in Oklahoma down to the border at Laredo, which is the old Mid-South agreement, which I probably too much detail, but it's an agreement that I worked up. It's almost like an hourly agreement. We talk about an hourly agreement, it's a daily agreement. And that would take care of some of the headcount that we need. We'll get some synergies plus headcount out of that. And then we can use that headcount for the future business that John wants to do with grain. But we still have opportunities with doubling up trains. We've got some opportunity with DirectLink that we'll continue to work through, and that's just the southern part. Obviously, we have the agreement just on the north end of North Dakota and Minneapolis, all of those locations. So we have workday schedules, we could change with those to add people quickly or at least time of day quickly. So that's what I would say. We'll stay right in front of John, and we'll communicate constantly to understand what's next, what's the opportunity. Good news is it just don't come on board tomorrow. I mean we've got plenty of time to plan and we have locomotives that's coming on board as well.

Your next question comes from Brian Ossenbeck of JPMorgan.

Maybe, John, for you, can you just give a little bit of commentary on yields here? I know the headline number is a bit noisy with fuel and FX, so maybe some near-term commentary to help set the stage for the third quarter. But where are the underlying core renewals coming in, do you still have potentially some repricing or length of haul opportunities that are still kind of trickling through as you get more of the legacy KCS and CP put together? Or is that pretty much done? So I just want to hear a little bit more about that, especially in the stronger truckload environment.

Yes. We're still seeing a pretty good length of haul, Brian, enhancement. I think this quarter, we're up year-over-year about 3% -- and I talked about some other land bridge opportunities and where I see some synergy growth yet to come. Those are pretty big length of haul opportunities that are needle movers. So there's some of that noise, I think, good noise still at play that sometimes can impact our mix a little bit on that longer length of haul business. Pricing, I'm super pleased. We haven't taken our foot off the gas for -- I don't know, it's been a couple of years now that we've been on sort of the what I would consider right at or the higher end of our guidance. I think at our Investor Day, we guided to 3% to 4% over that multiyear plan. And I would say we've been at the top end, exceeded. Right now, we're probably right in that exact range. And we're not taking our foot off the gas there. I expect that to even potentially accelerate as we see what's kind of going on in the trucking space and as we all watch inflation over the coming years. So when I look at it, I think about the sense for RTM like this, mentioned where renewals came in, mix was a little bit, let's call it, 1 point or 2 of a headwind and kind of the back into the balance was fuel and FX, Brian.

Your next question comes from Steve Hansen with Raymond James.

Keith, I think you might have referenced it earlier indirectly, but I'm just curious how you think the deals or the concessions extracted by CN change your view of any potential concessions you might pursue? Does it put you in a stronger position, a weaker position? Or is it sort of nil or not really that relevant in how you think about it?

Yes. I don't think anything that CN sells is relevant to the things that we will ask for as it changed our math at all and no impact.

Your next question comes from Brandon Oglenski with Barclays.

And Keith, I guess -- sorry to stick on that topic. But I guess more broadly, though, do you believe that what UP and CN has done has put this deal on any better competitive platform. And I guess I heard a little bit of contention there on the expanded competitive gateway pricing. So I don't know if you maybe want to elaborate on that.

Yes. Listen, I'm going to wait and let the regulator get into the weeds, but I'll stay at a high level as best as I possibly can. I think the simple answer is No, I don't think it changes the math. I think that I'm going to give credit where credit is due. I think it's a few steps forward in a positive direction versus where they were. I think it at least signals a bit of a realization that kind of their railroad empire building plans are going to have to bring more to the table to even be considered as a prime official case. I think that's important. I think they did address and kind of back to what Steve said, I missed this point. They did address our concerns relative to undue control in the KCT terminal as well as the TRRA. So I think them for taking that seriously and addressing that. But outside of that, the problems that were there before, and I kind of look at it this way. I look at a lens, some would say I'm biased, I would say I'm biased by experience. I have navigated and I was shaped by the experience that we went through in our own merger application and process. The knowledge that we gained navigating the merger process of the rules, the regulations, the statutes, the old rules, the new rules, coupled with the knowledge of how -- in our experience, how I read the rules and interpret the rules, which has been truly shaped and impacted by how the STB members have done the same. And going back and reading the context of why the rules are written, going back and reading the hearings, going back and listening and thinking and reflecting on Linda Morgan's words, it's the lens that matters when you interpret these facts. And then finally, the last lens I look at is kind of the applicants, the behavior. Past present, future, integration history, day-to-day, anticompetitive behavior or not. Is this an entity that when they present their facts to the customer, present their facts to the railroads, present their facts to the counterarguments to the regulator, is it as they say? Or is it as they believe? There's often a difference in that. Year truth, my truth and the truth. And I think this regulatory body is going to get to the truth. And the truth says these facts are problematic. What was true before their supplemental submission is significant reduction in competitive options. Their enhancement to CGP is some movement, I'll give them that, but it's temporary, and it's not inclusive. So if it's needed at all, is it not needed forever? If it's needed to solve a formula that says you must enhance competition, just stating your long-term solution to enhance competition, defining it as single-line service, if you go back and read the regulations and the hearings, that is not enough. Those are my words, that's one of the Morgan's words. It's important, but it's not the only sole solution, and it will not solve enhanced competition in and of by itself. Again, her words, not my words. Still create significant monopolistic like, those are my words, market concentration, still and now even more significant operational risk because now we've got the J in play, still significant concerns about anticompetitive behavior, past and present. And I don't think any of us would argue the ball about eventual consolidation, if this merger gets approved, that voter is rolling. It. If you read the application, the supplemental, read Jim's letter, I mean, if I've ever read a letter that said, not only is this one good, the second one is better. It's great for America. We need to go to and serve the public's interest in America, we need to be a 2 rail network operation. That's it. And I've had a shutter thinking about that as a human as a consumer. I was reminded of the way of this decision yesterday afternoon when I went home, and I looked at my phone, and it's kind of topical because I give Jim credit, he uses a lot of analogies about flying to Chicago and airlines and direct flights. And when I read American Airlines grounded. -- system-wide regional airlines, mainline airlines, nobody can move. What about a world when only an American or United exists? And 1 of the 2 is grounded. What happens? That's mass chaos in airlines. Now apply that same solution to railroads. You've got one railroad that handles 40% of every move. And forget about the misleading comments about GTMs and worth the saying, come on. A heavily weighted railroad that moves a lot of grain and coal, their GTMs are going to be naturally more than a railroad weighted more to intermodal. News alert, a coal car and a grain car weighs a whole lot more than, say, 10 or 11 intermodal cars. So that's misleading. It's 43 states. In Jim's perfect world or UP's perfect world, it's 2 railroads. One of the 2 or both of the 2 because of a computer glitch gets grounded, that is too big to fail. And I can talk to each of you all day long and perhaps some of you ask and answer, I'm not going to convince you, but that's okay. I don't need to convince the STB. This STB body, and I know from experience, they understand the gravity of this decision. They understand those regulations better than any of us do. They understand the intent and they understand their mandate. And they have the authority to make the right decision. They have the independence to wait the facts. So again, I'll say this. If you're a shipper, if you're a concerned party that's going to comment, pay attention to what's going on. Don't get read down a false narrative. Do your math, do your own homework, form your own opinions and file your comments, state your facts because that's ultimately what the record is going to be decided upon. And if those facts are known and understood, nothing that you see just submitted changes it. The problematic facts, they lead us to a place that is not in the best interest of the public, not in the best interest of this network. That's the way I feel. That's what I believe based on my lens.

Your next question comes from Ken Hoexter with Bank of America.

Keith, you actually started out almost complementary of the deal of what Jim was doing. I would have said almost supportive, but I think your last answer suggests perhaps still not. But he did to us in there mixing up CPKC in the mix with BN and CSX. I'd love to hear your thoughts there. And then, Nadeem, did you just end your answer there with the 60% OR? Was that your -- suggesting your launching point as to what we should look for into the second half, so maybe a sub-60% in the second half. Is that what you were throwing out there?

Yes, that's fair. I think we're going to see sequential improvement in cents per RTM. We're going to see significant acceleration in volumes compared to the first half. And so overall, the revenues are going to be better. We're going to see operating leverage coming out of that. And my expectation would be to have less casualty expense than we had in the first half of the year. So I think some of those items can be very accretive to the earnings and the OR.

And Ken, to your question, I mean, bottom line upfront, I'm adamantly opposed to additional rail consolidation for all those reasons I talked about. But if it's forced, we're not going to stand still. We can't stand still and compete to our best. So I'm not going to tell you what partner. I can make a value proposition case with a host of partners. But rest assured, this industry won't sit still. If UPNS come together, it's a matter of time, there's going to be additional consolidation. There has to be to be able to compete against that of live that would be created. And in any of those scenarios, this team, this network offers pretty compelling value.

Your next question comes from Walter Spracklin with RBC Capital Markets.

Keith, you and BN have both argued that progress can be made, agreements can be signed without the need for mergers. And certainly, this deal between CN and Union Pacific is not contingent on the merger. It happens immediately. I'm referring to the EJ&E and the Eagles Pass through Memphis deal. Does this prompt you now or maybe you've already been doing it, but couldn't you now or will you look to cement your own deals, your own agreements with either the BN or like you have with FMX through CSX is there opportunity to add on to that with CSX? And is there any opportunities that you see when you look at your routing where track swapping or track right swapping with the BN might make sense as well?

Walter, undeniably, in either case, when you've got 2 willing parties, you can do a lot of things. I've looked at our network. There's a menu of options. There's things we can do with BN. There's things we can do with CSX outside of a merger that, quite frankly, we could put a pretty compelling product in the marketplace to go head-to-head. Is it going to be single-line service? No. Is there going to be some advantages to that? Yes. But yes, it's -- again, if this thing becomes a foregone conclusion, then they're going to see motivation increase to be able to do those things. I think right now, people are waiting to see this industry outside of UP and NS and maybe now CN, they didn't want to merge it. Our customers -- if you talk to the customers, I don't care what CN agreed to with UP, what UP is agreeing to with CN, what enhancements they made to CGP, put it all in the same basket. I don't think you're going to have a run to the bank or a run to the SEB saying, gosh, this is the best thing since wide spread. We're going to support, we're going to support because this is a forever decision. You don't unwind this thing. But again, if it gets wound up, we've got a responsibility to respond and we will. And as a result of this, we've never been closer to BNSF. We've never been closer to CSX. We've never developed the market intelligence that we're developing now and the motivation and the route options to present some pretty compelling value propositions on the table. So again, we won't sit still in a merger environment. We won't sit still short of a merger. Good can come out of this. The best outcome is no merger. The best outcome is perhaps in the absence of a merger, UP and CN can do some good things together to create some value for the industry and to create some value for their customers. There's a lot of traffic out there to move. And in turn, you're going to see CP do things with CSX, with VNM with CSX. They can create a whole lot of different parties because people are thinking a whole lot different than they ever have, but those outcomes can occur and UP just showed us they could, not that they didn't already know already or haven't done so already in the absence of a merger, which is exactly what the regulations require to do before they -- before they will approve a merger side note.

Your next question comes from Ravi Shanker with Morgan Stanley.

This is Madison on for Ravi. We're just wondering how you guys are thinking about capacity in your network as the up cycle comes?

Yes. I think I'll be quick with that answer, Mark, if you want to add. We -- if you keep in mind that our merger application required, we made some pretty significant investments to prepare for growth. We have done exactly that over the last 3 years. And what we did not anticipate when we put the railroads together was an economic recession. So we're kind of built ahead for future growth. We're in a very good position relative to locomotives, relative to car capacity, relative to track capacity. The only thing we need to flex up on when the business and the growth comes is add incremental headcount.

Yes. I would say incremental headcount from the agreements that we put together. We've unlocked Shreveport, Louisiana, where we can go in all directions with one agreement. Again, we've got $275 million from the STB promises that we put together for them. We've got the connection to CSX, where we spent a lot of money, 49 hour track that unlocks a lot of capacity going. Again, we've said down in Mexico, we spent $75 million on top of the bridge that we just built, the KCS but that we finished. So yes, capacity is not going to be an issue. And again, in different areas, John and I will stay in front of that regardless of where we go with the business. We're committed to do that.

Your next question comes from Scott Group with Wolfe Research.

Maybe just like a bigger picture version of that question. I think back to the Analyst Day, like we were supposed to get a lot of revenue growth with a lot of operating leverage and margin improvement and mid-teens, high teens type earnings growth. And John, I thought your slide about like the compounding volume growth was helpful, but -- and it's been good, but it probably hasn't been as good as you thought at the Analyst Day. And I think to your point of that last question, Keith, like the macro environment has just been more challenging. I guess, ultimately, what I'm trying to ask is like do you think we're at like an inflection point where you still have some of the synergy opportunity plus now maybe a more supportive macro where like it's all going to -- and now the buyback is kicking in where it's all going to start coming together, and we're going to see like more of a meaningful acceleration in earnings growth back to what you thought it was going to be. Is that kind of where you think we are now?

I'd say it's undeniable since April of '23 that the freight environment is about as bad as we thought it -- we never thought it could be as bad as it was. Despite that, and that was really the point of that slide was to say despite that, we've been able to stack pretty impressive growth up with no -- not a supportive environment. So now looking ahead, I do believe, although all of our growth and a lot of our growth was supported by synergies in the new products we put in place, as I said, we're still in the mid-innings of a lot of those opportunities. So I think your point is really spot on. You continue at the pace of product development, filling in the capacity that Keith and Mark just spoke about, and we start to get a little bit of a tailwind in some of these areas, I think that becomes very compelling.

And then, Dean, do you think like the operating leverage accelerates with that?

Yes, absolutely. I think, Scott, I mean, as you know, the last few years, I think the industry as a whole has been expecting a much more supportive macro. I think we've learned that we can't hope for that macro to recover, and we've taken a more conservative approach, and we've talked a lot about resources and capital investment, et cetera. We were on the front end of that at the beginning of the integration of beginning of our day 1 3 years ago. And if you look at where we are this year, I think headcount is down 500 people and volumes are up 3%, 4% and accelerating, and we're going to be able to accommodate that growth. So when I look at 2027 and next few years, we can accommodate it with that capital envelope that we talked about of $2.6 $7 billion, and that's with a higher Canadian -- or a weaker Canadian dollar that has an impact on capital. So overall, we can accommodate this growth. And with the capital plan that we have, it's going to generate a significant amount of free cash as we've seen so far this year, and that's going to help accelerate earnings. And so to me, the operating leverage story is just beginning. And you're going to see it in the back half of this year, and you've seen it so far in Q2 as well.

Your next question comes from Konark Gupta with Scotiabank.

Keith, when you sit down with your customers and stakeholders, do you feel that they are quite distracted by the ongoing industry developments? And I'm listening to everything from the UPS merger to the CN UP deals as well as the potential downstream effects that everyone is talking about.

Yes. I think probably the way we all feel about this thing. We've been dealing with this for a while. It requires a lot of attention. all these what-if scenarios, whatever it is, just getting on with it and getting to a point where we can kind of lock and focus on what we can control and there's not all these variables, I think, is going to be well received. The customers, quite frankly, John, you can provide a bit more color here. But everyone that I've engaged with, again, not have one that said we want more consolidation. They said we want to protect competitive options. We want optionality. We like the ability to create competitive tension between railroads when it comes to pricing and capacity and our capital decisions and our shipping decisions. And I think that's been a common theme that'registered with us.

Yes. Without a doubt, Konark, since really COVID where we've experienced sort of some of these supply chains, our customers are looking for more options. And frankly, that is why we garnered so much support in putting CP and KCS together on our journey because we truly did enhance competition and open new markets. And I just think to your question, it is a distraction. I think there's a lot of narratives out there, and our customers are trying to figure out what is right and what is the correct source of the truth. And frankly, they've seen the benefits we've been able to create. But I also think are questioning, are they really going to get enhanced competition out of what UP-NS are proposing?

And that's a key difference, John, what you just said. Our merger brought additional options to the table, which included a never before available additional single-line opportunity, for instance, from Chicago to Mexico and in our case, beyond. So it was all additive to. Nothing was diluted. There were no options taken off the table. That's completely different than the beast that we're dealing with now. It's a substitution for and according to the applicants, it's better than. But if you're the shipper, it still means less options. Do you have the same options tomorrow that you have today? And pro forma, if it gets approved, the answer is unequivocally no. You don't. And customers, by and large, after all the years of consolidation in this industry, that does not resonate with the customer when you tell them they have fewer options. I don't care what therapy you give them. They have the memories and the trauma of the prior consolidations in this industry. In some of the worst trauma, I'm sorry, UP, you caused it. And the thought of giving them more power and being exposed to that again requires a therapist in some cases. And I say that in jest, but I'm not kidding. The transportation decision-makers that suffered through that 30 years ago, I've been here at 35, I've been railroads and 35. Jim has been railroads and 45. Those -- a lot of those decision-makers are in senior positions and they still lose sleep at night thinking about those integrations. So operationally or commercially, customer you have fewer options, it doesn't resonate. But with a very small population that might be uniquely advantaged, but it's a small population. So it's single-line service at what cost. And we never took the scale in our combination. We never threatened that. We just added one to the table.

Your next question comes from Tom Wadewitz with UBS.

So John, just had, I guess, maybe a couple for you on the market. So how do you think about coal like kind of, I guess, it gets less worse through the quarter? Is there a point where you say, okay, this is the new run rate for coal that it's like, hey, the mines just can't do what they used to? Or are you optimistic that it gets to 2027, you get back to kind of where they were? And then I guess within ECP, that's been pretty good, but I think refined products in Mexico may be weak. So I don't know any kind of, I guess, thoughts on those 2.

Yes. Thanks, Tom. So yes, definitely, Q2 was what we are looking at is the worst of the worst in terms of impact to our revenue and our volumes related to the coal. I think like Q3 feels like maybe Q1 and progressively, it gets a little better to close out the year. We're staying really close with the customer there. I can tell you they are optimistic around increasing volumes. I would say we've definitely seen an improvement in their production. And our expectation is, and I think their view as they look to 2027 is to get back to those type of levels you would have seen last year. And I know they want to even grow beyond that. So I think your characterization of less worse is probably right as we move into the second half of the year. ECP, you're right. It's sort of the one area that keeps me up at night is the refined fuels into Mexico. It's a really good piece of business and I guess, supply chain solution that we've developed. It really has been pretty well nonexistent here for the last 6, 8 months. We start to see as things sort of improve relative to the situation in the Gulf, -- we begin to see that open back up a little bit. But as soon as things turn again, it closes right back up. I think the good news on that front is we're ready. That supply chain is solid. We've got the customs processes and that in place. So as the market shifts and those arbs open back up, I think we'll benefit from that business again. I just can't tell you exactly when that's going to happen.

Your next question comes from Benoit Poirier with Desjardins.

Just in terms of assumption, given the movement that we've seen in the FX and fuel, I was wondering if there was any change in your assumption for the year? And maybe specifically for the grain, John, you mentioned, are you counting on a stronger grain crop in the second half to kind of offset the coal weakness? Or are you still baking a 3- to 5-year average?

Yes. I'll let maybe Nadeem comment on some of the macro assumptions. But on the grain front, I think we're pretty optimistic that we're going to close out Q3 on the sort of continued strength. I think the question will be sort of when exactly the grain harvest comes on. I'll say right now, I've seen maybe more bullishness relative to CPKC specific growing territory. So Southern Alberta, Southern Saskatchewan, areas that have even last year weren't great in terms of drought conditions being better. So we are optimistic. For the purposes of our Q4, we've sort of modeled what would be the 3- to 5-year average. But I'll tell you last year, our volumes did not move at a record pace. We were a little bit slower out of our Southern territory, and then that kind of picked up, maybe a little bit different than what CN experienced. in the fall. So even at that sort of average run rate, we see some uptick in terms of grain helping be supportive in that. And again, we also believe our U.S. franchise has a pretty good outlook on top of that, Benoit.

Benoit, our assumption hasn't changed much of where we were at the beginning of the year. We were closer to $1.38 on currency. We're closer to $1.40, $1.41 recently. Obviously, fuel is very volatile, and there's timing issues related to fuel surcharge and the lag of what comes with the expenses that we hit directly. So overall, our fuel assumption has increased for at least for the next 30 to 60 days, and we'll see what plays out in the rest of the year. But we're effectively covered. I would just say that it may impact our operating ratio to an extent. just in terms of the taking on those fuel surcharge revenues at 100% operating ratio and the lag impact, which hopefully will turn to become positive by the end of the year.

Your next question comes from David Vernon with Bernstein.

So John, maybe as you think about how the business has grown over the last couple of years, can you help us frame what the cross-border Mexico revenue is on a total shipment basis? And how much of that is actually going Western Canada or West of Chicago versus Eastern or Eastern Canada or the point in the U.S.? Just trying to get a sense for the revenue intensity on the cross-border Mexico stuff because you guys have delivered a lot on the synergy side with KC Mexico.

Well, I can frame it up this way, David. Specific to what I consider our land bridge business, I think I guided towards -- you can see a run rate to get to $600 million on that business this year. And you should think about, as Keith said earlier, 65% of that is between Western Canada and Mexico and the balance is Eastern Canadian business. And I would tell you, it's pretty equally spread between whether that's intermodal business, ECP business, automotive business and grain business. Those are kind of the big 4.

This does conclude our question-and-answer session. I'd be happy to return the call to Mr. Keith Creel.

Thanks, operator. And listen, thanks again for everyone's time. It some nice fulsome robust discussions this afternoon. There's a lot of noise in our industry. There's a lot of noise in the economy, but we think the noise from an economic standpoint is providing a very supportive backdrop that we control what we control. We're set up for a strong second half operationally, commercially with a bit of strengthening freight market demand at our back. We're exceeding not only our '26 guidance, but carrying a whole lot of momentum into '27. Thank you, and we look forward to sharing our third quarter results in October.

This concludes today's conference call. You may now disconnect.