Canadian National Railway Company Q2 FY2025 earnings call

• Operating metrics: Car velocity was 213 miles per day, yard state fluid and through dwell improved 1%, local service commitment performance was 95%.
• Cost management: Cut 8% of mainline manifest train starts, had 560 train and engine employees on furlough, T&E labor productivity improved 11% year-over-year.
• Safety: Injury ratio improved by 16% due to proactive field engagement.
• Asset management: Ended quarter with 8,000 system cars in storage and 200 high-horsepower locomotives in storage, locomotive availability hit 92.5% with 8% reduction in unit costs.
• Engineering: Lowest overtime in a decade, tie gangs 7% more productive with 5% lower unit cost.

Bulk volumes were very strong during the quarter, reflecting the advantage network for the ag sector and strong market share. The merchandise and intermodal segment was impacted by tariffs and the weaker industrial economy, with revenues falling 1% on 1% lower RTMs and flat carloads. Bulk volumes contributed strongly to the business, while merchandise and intermodal faced headwinds from trade and mix issues.

• Revised full-year volume assumption to low single-digit RTM growth.
• Revised EPS guidance to mid- to high single-digit growth in 2025.
• Reduced CapEx envelope for the year by about $50 million and removed multiyear guidance for 2024-2026.

• Uncertainty around tariff and trade environment, particularly in Canada.
• Weakening macroeconomic environment impacting sectors like Forest Products, metals, and autos.
• Impact of Canadian carbon tax repeal as a pass-through headwind to revenues.

Q: Comment on progress for covering U.S.-bound international intermodal traffic through Prince Rupert versus last year and thoughts on transcontinental mergers impacting that.

A: Janet said overseas intermodal via Canada to U.S. is less than 5% of revenues, progress at Prince Rupert, tougher at Vancouver; Tracy said they recognize merger chatter, but view is commercial arrangements can provide benefits without merger disruptions.

Q: Question on company-specific volume growth initiatives outlined at Investor Day in 2023 and guidance reduction.

A: Tracy said CN-specific initiatives remain intact despite current environment, fundamentals of growth strategy are strong.

Q: Comment on RTM guide, 3Q volume trend, and RTM versus EPS relationship.

A: Janet said petroleum and chemicals volumes to accelerate as refineries come back, domestic intermodal strong; Tracy said they are proactive in adjusting costs with margins improving despite headwinds.

Q: Elaboration on proactive changes with mix and leverage.

A: Tracy said dealing with mix issues in Forest Products, refined products, etc., and Pat talked about tight resource management and ability to quickly respond to volume changes.

Q: Thoughts on TransCon merger, CapEx, and defending competitive access.

A: Tracy said watching CapEx closely, will rigorously defend competitive access; Fadi was told about CapEx focus on growth with line of sight.

Q: Confidence in volume growth back in business in 2026 and uncertainty.

A: Tracy said staying close to customers, fundamentals of growth strategy intact but uncertainty remains.

Q: Thoughts on mid to upper single digit EPS growth range and factors influencing it.

A: Ghislain said factors like FX, fuel, mix are volatile, but focus is on controlling what can be controlled.

Q: Domestic intermodal market share gains and carbon tax elimination impact on operating ratio.

A: Janet said domestic intermodal gains from good service; Ghislain said carbon tax elimination is a pass-through and masked by other factors in operating ratio.

Q: Customers rethinking supply chain in short and medium term.

A: Janet said metals and minerals adapted with alternative supply chains in short term, longer term focus on reducing U.S. market exposure and going offshore.

Q: Volume trend relative to other rails and margin improvement guide.

A: Janet said different book of business and year-over-year comparables make comparison hard; Tracy said margin improvement still expected with focus on responding to mix and volume changes.

Q: Priorities as interim Chief Commercial Officer and key opportunities.

A: Janet said focus on agility in commercial side, intensity of execution on spot markets and growth pipeline.

Q: Comment on recent Chief Commercial Officer change and team continuity.

A: Tracy said taking team seriously, appreciates Janet stepping in, and team is moving forward.

Q: Cadence of margin improvement in back half and outlook.

A: Tracy said cadence depends on volume and mix, focus on responding quickly to changes.

Q: Executive change perspective and intermodal volume softening.

A: Tracy said not commenting on team change, intermodal volume softening is tariff related; Janet added inventory front-end loading and broader market factors.

Q: New services and out clauses related to mergers.

A: Janet said focusing on driving volume in existing services, no specific comment on out clauses.

Q: CapEx breakdown between maintenance and growth and ROI confidence.

A: Ghislain said good portion of CapEx is maintenance, focus on capital efficiency and IRR for growth CapEx.

Q: Concerns on Class I rails consolidation and competitive access.

A: Tracy said watching merger chatter, will rigorously defend competitive access and focus on execution of strategy.