Canadian National Railway Co. Q3 FY2026 earnings call

• Leadership Transition: CFO Ghislain Houle is retiring; Jamie Lockwood will succeed him as CFO on February 1st, with Houle remaining as an advisor until March.
• Operational Excellence: Delivered best third-quarter accident and injury performance in a decade while handling more volume. Locomotive productivity improved 5%, employee productivity improved 7%, and fuel efficiency hit record levels, saving approximately CAD 15 million in fuel costs.
• Fast Track Initiatives: Continuous improvement program 'Fast Track' has delivered CAD 120 million in realized benefits year-to-date, carrying into next year. Focus remains on challenging processes and right-sizing resources.
• Commercial Growth: 'Boots-on-the-ground' efforts generated approximately CAD 300 million in new revenues YTD. Strategic alignment between operations and sales drives reliable service and pricing discipline.
• Capacity and Leverage: Network has available capacity, including over 200 stored locomotives, allowing absorption of additional volume without proportional capital increases. Capital intensity is normalized to North American peer levels.
• Strategic Partnerships: Finalized agreement with Union Pacific Railroad to extend reach into Mexico, positioning CN to compete for a share of the USD 45 billion annual Canada-Mexico trade flow.
• Financial Discipline: Free cash flow increased 25% YTD to CAD 2.9 billion. Share repurchases continued, with close to 4 million shares bought back for CAD 675 million in Q3.

Revenue increased 15% year-over-year, driven by a 4% growth in Revenue Ton Miles (RTM). Key segment RTM changes included Grain and Fertilizer (+12%), Petroleum and Chemicals (+5%), Metals and Minerals (growth driven by steel/aluminum), Automotive (positive due to share gains/import shifts), Forest Products (impacted by market challenges), Intermodal Domestic (impacted by wildfires), and Intermodal Overseas (weaker due to de-marketing/weather). Coal RTMs declined due to production challenges. Specific revenue contribution percentages for each segment were not explicitly detailed in the transcript.

• EPS Growth: Reaffirmed guidance for mid-to-high single-digit adjusted diluted EPS growth based on low single-digit RTM growth. Management notes current tracking toward the upper end of this range.
• Capital Investment: Expecting approximately CAD 2.8 billion in capital investment for full-year 2026, net of customer reimbursements.
• Leverage Ratio: Expect adjusted debt-to-adjusted EBITDA ratio to return to around 2.5 times by end of 2026, earlier than previously projected (2027).
• Fuel Impact: For Q4, if fuel prices remain at current spot rates, expect an EPS tailwind of approximately $0.10, but a 100-150 basis point headwind to the operating ratio.

• Labor Disruptions: Ongoing labor disruption at the Prince Rupert coal terminal is impacting volume throughput, particularly for coal and petroleum coke, with minor impacts on NGLs.
• Regulatory/Legislative: Bill C-39 introduces interswitching extensions which management disagrees with in principle, though current pilots show no material impact on volumes. Collective bargaining negotiations with TCRC are ongoing with a December 2026 expiry.
• Technology Project Failures: A one-time impairment charge of CAD 118 million was recorded related to discontinued portions of technology projects (dispatch system and SAP S/4HANA reorientation) due to vendor selection and execution failures.
• Trade Volatility: U.S.-Canada trade tensions and tariff regimes create volatility, requiring continuous adaptation from customers and CN, though 85% of goods travel tariff-free.
• Weather and External Factors: Wildfires disrupted domestic intermodal volumes, and weather-related disruptions in Asia affected overseas supply chains.

Q: Analyst asked about the Elk Valley Resources (EVR) traffic shift to CN via CPKC interchange starting Jan 1. How does this affect 2027 EPS and operational model?

A: Janet Drysdale explained that under the new contract, half of EVR traffic will interchange further down the line before reaching CN, resulting in one handoff instead of two. This change is expected to reduce EPS by approximately $0.03 in 2027. However, the commercial team is focused on backfilling these contribution dollars through other opportunities, similar to how they offset prior tariff headwinds, and remains confident in maintaining pricing discipline.

Q: Analyst asked about the state of US-Canada trade negotiations and whether shifted trade patterns from tariffs would stick post-resolution.

A: Tracy Robinson noted the journey is not over, with dialogues resuming after a near-miss on USMCA extension. While 85% of goods are tariff-free, sectoral impacts persist. He emphasized that CN has built resilience and nimbleness to manage volatility. Furthermore, a renewed Canadian administration focus on resource development and permitting reforms creates a constructive environment where CN is uniquely positioned to benefit regardless of specific trade resolution outcomes.

Q: Analyst asked about capacity limits in the Western Corridor and when CN might need further investment versus relying on existing infrastructure.

A: Tracy Robinson and Pat Whitehead stated that CN lifted Western Corridor capacity by 25% via double-tracking and fleet improvements, proving effective with record grain movements and improved velocity. With over 220 stored locomotives and furloughed employees still present, significant capacity remains. They indicated that while big-cycle investments are complete, ongoing minor investments continue, and growth within current capacity is manageable without immediate major new capital outlays.

Q: Analyst asked about the cancellation of IT systems causing large impairment charges and governance changes.

A: Tracy Robinson admitted the failures in the dispatch system (PDS) and SAP S/4HANA reorientation were unacceptable but necessary actions. The company reverted to a brownfield approach for SAP and regrouped on PDS. He highlighted that this incident triggered a review of vendor selection and governance up to the leadership level, ensuring stricter oversight and process management for future capital execution to prevent recurrence.

Q: Analyst asked if non-grain business acceleration could drive double-digit volume growth in 2027, specifically regarding energy and automotive.

A: Janet Drysdale described energy as a multi-year, multi-commodity opportunity with steady, ratable growth expected through 2027 and beyond, driven by LNG Canada phase II, frac sand, and new fractionation capacity. She highlighted automotive growth supported by plant restarts and a new Mexico connection via Union Pacific. While she avoided committing to specific double-digit figures for all segments, she expressed strong confidence in the multi-commodity growth profile and the ability to leverage the expanded network for sustained volume increases.