Canadian National Railway Company Q1 FY2025 earnings call

• Tracy Robinson highlighted strong first-quarter results with 8% earnings growth and a 20 basis-point improvement in the operating ratio, expecting earnings growth to pick up in the second half as they lap last year's labor-related disruption. - The arbitration process involving Canadian conductors and locomotive engineers concluded with a three-year deal and 3% annual wage increases. - Progress on labor agreements in the US with nine unions representing half the workforce. - Prince Rupert is seen as key for future growth with ongoing investment in diversifying commodities handled. - Derek Taylor discussed operational performance with strong January but tough February weather impacts, rebounding in March with improved car velocity and GTMs. - Pat Whitehead noted safety remained flat, labor productivity improved by 2% with train engine employee productivity up 8%, and locomotive fleet availability steady at 91% with modernization reducing failures. - Remi Lalonde detailed revenue ton mile growth of 1% with underlying demand strong but impacts from tariffs, and discussed sector-specific reactions like paused shipments and pull-forward demand. - Ghislain Houle provided financial details with EPS of $1.85, up 8%, operating ratio at 63.4%, and free cash flow of over $600 million.

In the first quarter, petroleum and chemicals revenue increased by 3%, reflecting growth in export NGLs to Rupert but offset by lower refined petroleum and biodiesel volumes. Metals and minerals revenues slipped by 6% due to a significant drop in iron ore shipments. Coal exports jumped 9% in both Western Canada and the US. Grain and fertilizers revenue rose by 7% due to higher exports and strong pricing. Intermodal RTMs were flat but revenue fell by 3% due to more Canadian cargo. Automotive RTMs increased by 11% with pull-forward cross-border moves. Revenue was up 4% year-over-year, with a 3.5% tailwind from foreign exchange offsetting a 3% fuel price headwind.

• Full-year EPS growth guidance of 10% to 15% remains unchanged. - Expect RTM growth in the low-to mid-single-digit range. - Recognize increasing risk of recession, but expect to deliver within guidance range as long as year-over-year volume growth is seen. - View of WTI updated to $60 to $70 per barrel, and effective tax-rate in 24%-25% range. - Intend to start share buyback in second quarter and manage leverage to 2.5 times adjusted debt to adjusted EBITDA target.

• Uncertainty around tariffs and trade, with potential impact on volumes. - Heightened risk of recession in Canada and US affecting outlook. - Sector-specific reactions to tariffs like paused shipments, reduced production, and pull-forward demand. - Impact of economic conditions on various segments such as intermodal, metals, and autos.

Q: Get clarity on intermodal, US intermodal, international intermodal and potential supply chain solutions in trade policy changes A: Remi Lalonde mentioned US volume recovery slower than expected, Gemini and Rupert stronger than expected, new intermodal services starting, and working closely with customers to solve problems Q: Clarification on Canada to US exposure and headcount network flexibility A: Remi Lalonde said about 12-13% of total business is international, 1/3 US; Pat Whitehead noted 470 train and engine service furloughs and 50 in mechanical, feeling good about ability to flex up/down Q: Follow-up on operating ratio cadence A: Tracy Robinson said they don't guide quarter-by-quarter, but expect to get more efficient as year progresses, with Remi noting fuel impact neutral in second quarter if prices stay Q: Discussion on competitiveness of Prince Rupert in trade barrier world A: Tracy Robinson and Remi Lalonde stated Rupert has competitive advantage with fast/flat road to Midwest, no congestion, cost-competitive, and significant investments Q: Blank sailings and outlook A: Remi Lalonde said impact on Rupert not as severe as other Western terminals, expecting air pocket but growth in second half Q: Customers reshaping supply chain due to trade barriers and long-term opportunities A: Tracy Robinson and Remi Lalonde mentioned conversations with customers, Dow pausing investment, auto industry rethinking, and strength in frac sand and NGLs Q: Guidance and macro environment impact A: Tracy Robinson said they're on plan, uncertainty increased, but expect to hit guidance range if volume positive; Ghislain Houle discussed FX assumptions Q: Labor picture and resource staffing A: Derek Taylor said 470 furloughed, comfortable chasing upside and decisive if downside, Pat Whitehead mentioned watching network metrics and productivity metrics to make quick decisions Q: Purchase services and P&C growth A: Remi Lalonde said small variance in purchase services, P&C growth due to economic backdrop, market-share wins, NGL business, and refined fuels franchise Q: Volume rebound, air pocket, and cost structure adjustment A: Tracy Robinson and Derek Taylor said they're nimble, watching network and productivity metrics, ready to adjust cost structure quickly if needed Q: Canada to Mexico trading opportunities and rail service A: Remi Lalonde and Derek Taylor said actively engaging customers on NGLs to Mexico, working on interline partners, and new Gulf call services with unique potential Q: Labor and benefits expense step-up A: Derek Taylor explained 5% increase in average comp per employee, 2% due to FX and 3% regular wage inflation Q: Canada direct to Mexico opportunities A: Tracy Robinson said seeing some opportunities like recreational vehicles, in line with Falcon business