All right, morning everyone. I'm Scott Group, the transport and airline analyst at Wolfe Research. Welcome to the 18th Annual Global Transport and Industrials Conference. There's a couple of firsts at our 18th conference. It's the first time that we are doing the conference, and the Knicks are still in the playoffs with home playoff games, which is a nice welcome change. It's also the first time we're doing the conference here in our own conference center at our global headquarters. If you think about sort of the journey of Wolfe, I'm just looking around. I don't know that anyone here was with us at Fordham Law School back when it started 18 years ago. Okay, Jason, great. We had a couple of years at the Marriott on the East Side, and I don't know if there's ever such a thing as a good COVID casualty.
I think it was that hotel. We had a couple of years, obviously, at home, virtual during the pandemic, and then a few years at the Nomura offices, our alliance partners. It is our first year here. I am happy to say we have over 100 companies across transports, airlines, multis, and aerospace and defense over the next three days. We have over 600 investors registered to attend. This is the biggest conference that we have hosted so far in our offices. If at times it gets a little stressed, please have some patience with us. If there is anything that we can do to help, me, my team, we are all here ready to help and willing to help. Let us know what we can do. The one thing that I think is hopefully not different is the content.
My team and I, we've spent a lot of time coming up with hopefully interesting, maybe at times tough, but hopefully fair questions. We want to engage in constructive dialogues with all of our companies. We want your help too. Please raise your hand, ask questions. It's always better the more people are engaged. From just a transport perspective and what we're hoping to hear, obviously there's so much volatility right now going on in the ocean market with tariff. I think we want to understand a big drop in ocean followed by a surge in ocean. What does that mean for domestic freight volumes? Just beyond the near-term noise of tariff, it's been a rough couple of years for transport stocks broadly.
I promise you at some point, there's going to be a moment when you're all coming to this conference saying, "Thank God I own transport stocks again." I don't know when that moment is, but we're going to get there. Maybe, I think just maybe we might be there right now for the rails. With that, I'm really happy that we're starting our conference with Canadian National. Tracy, if you want to join me, I think we're right on time. That's perfect.
Hey, Scott, where do you want me?
I'm going to be right here.
Okay. Hey, congratulations on the turnout.
Thank you. So we've got Tracy Robinson, President and CEO of Canadian National. Thank you for joining us. I'll pass it to you if you have any sort of opening comments you want to make. Then I've got questions. Again, everyone, please raise your hands, get involved, and we'll see you.
I think maybe you started it off with the way we hope to end is it's a great time for transport stocks. How about that?
I love it.
Listen, as we started off this year with the new Trump administration just coming into place, we knew that it was going to be an interesting year or maybe years. Lots of volatility, you say, lots of uncertainty given the dialogue on and the intentions on tariffs and trade and the like. It has not disappointed from that perspective. Every week, sometimes every day, there's something, new information that's out there. I would say we've got a good bit of information between China and the U.S. a couple of weeks ago that's lifted the markets and the overseas volumes. As you say, there's been a surge in orders. We do remain optimistic, Scott, that there's going to be trade deals done between the U.S. and most countries. Exactly when that happens, exactly what those trade deals will entail, we don't know for sure, of course.
We see some positive signs starting to come, which is good news, I think, for everybody. Still lots of uncertainty. As we sit here now, I think we had a great start on the year. We had a strong first quarter with 8% EPS growth and 20 basis points improvement in operating ratio. We are halfway through the second quarter. This is our, and was always going to be our toughest comp from a volume perspective. It is playing out roughly as we would have expected. If you look at the underlying railroad, it is operating extremely well, very fluid. We are seeing some velocity numbers we have not seen in May for quite a number of years. The operating model is spitting out the right levels of customer service, of velocity. We are running this railroad pretty tight right now.
We've sized towards the bottom end of our range of volume estimates. As we look towards the remainder of the year, we think we're set up pretty well. We've got an easier comp second half. We've got some growth from CN-specific initiatives. We've held on our 10%-15% EPS growth expectation for the year.
There is a little bit of background noise or whatever. If there is any way to try to help with that, that would be great. I will start. You mentioned Q2 was always going to be sort of the toughest comp quarter. RTMs flat to down a little bit to start Q2. How is that sort of trending relative to your expectations? What commodity segments are doing better than you would have thought? What, if anything, is doing worse than you would have thought?
Yeah, overall, as you say, it's pretty much turning out the way that we would have expected. We're on plan. The mix is a little bit different in some areas. Bulk is very strong. Canadian grain continues. We'll see that start to fall off. The farmers are back in the fields again over the next couple of weeks. U.S. grain has been particularly strong this quarter. Potash is high. Coal is up year- over- year. That's the real strength. Intermodal, Rupert continues to be strong, up year- over- year and continuing to get stronger as we go through the quarter. On the other end, there's some softness in forest products that we've seen for some time with lumber. I don't think we'll see that really lift again until we see something happening on interest rates and construction, housing starts.
If we look at, we've had an iron ore mine in the U.S. temporarily closed in this quarter. We are seeing some of that kind of softness. Generally, overall, about where we expected it to be.
On the Q1 call, you guys were very transparent in talking about an air pocket that you were expecting in the second quarter. It does not feel like we have necessarily seen that show up in your volumes or really anyone's volumes yet. Is this just a natural lag of the import cliff that everyone has talked about happened very end of April, beginning of May? Is there just a natural lag of when this should start to show up in international intermodal volumes, or is it maybe that we are just, the ocean is very volatile, but the actual rail volumes and domestic volumes just are not going to be nearly as volatile?
If you look at our portfolio, of course, in Canada and Vancouver and Rupert on the west coast of Canada, we bring in, of course, volumes for Canada as well as volumes for the U.S. There was no blank sailings for volumes in Canada. In fact, our Canadian volumes have been pretty strong. We think we're possibly bringing some U.S. volumes into position in Toronto to be close to the US for when the time is right. The U.S. volumes were structurally set up for Rupert to be strong on U.S. volumes. Rupert continues to be up. It's up week over week since the beginning of Q1. When we looked out, without a doubt, we saw blank sailings coming into all of the west coast ports related to U.S. volumes. If you had U.S. volumes, you were probably looking at that.
We've seen orders rebound quite dramatically. If those goods have been manufactured, then it takes two or three days to load a vessel, and then to Rupert, it's 10-12 days to get to Rupert. We're going to see that kind of close a little bit with the surge, whether we'll see, I think we'll still see an impact in timing. Overall volumes, perhaps less so. We'll see what happens from there from a China-U.S. relationship and tariff perspective.
It sounds like maybe with this 90-day pause, particularly as we get to the end of Q2, beginning of Q3, certainly less of an air pocket maybe than you would have thought.
Less than we expected, but maybe not zero. Overall, I think that you're going to see the volume get stronger as we get into the orders that are now being placed.
I guess then the next wave of uncertainty is what happens after the 90-day pause. Is there a surge of ocean volume that's going to be happening now, and then what happens after that? We'll have to see.
Exactly. I think there's lots of sensitivity over empty shelves in the U.S. in particular. As I understand, if you listen closely to what Scott Bessent said coming out of the discussions with China, there seems to be a little more structure around the way they're talking about tariffs, a little bit of guardrails perhaps. Not lower than, not higher than. Hopefully that is constructive and that we'll be able to continue to see volumes move between China and the U.S.
Just very big picture, just when I look at Q2, your volumes are down a little bit. Every other rail is seeing some degree of volume growth. Is this in your mind just a comp issue, or is there any reason maybe why you're lagging behind?
This is a comp issue. I mean, I think we've been pretty transparent around just what the volume curve was going to look like year- over- year this year. In Q2, we're right where we want it to be. You're going to see as we move into Q3 and Q4 that the comps, the volumes are coming in much more strongly. That's a combination of comps. It's also that some of the CN-specific opportunities start to kind of gain some traction. We're going to see that volume continue to grow.
You still feel good about low to mid-single digit RTM growth for the year?
We do.
Okay. Maybe just talk about sort of the drivers of that in terms of how much of that is, hey, we get to the back half, we have much easier comps versus we have company-specific opportunities that should ramp throughout the year versus, hey, we just think the economy is going to be getting better. If those are the three buckets, how do we frame that?
Sure. You can think about it this way, Scott. If you think about, we guided at low to mid-single digit volume growth. Let's pick up a spot in the middle, say 3% volume growth. We would attribute about half of that volume growth to company-specific initiatives with our customers. About a third of that would be the year-over-year recovery from the labor uncertainties and issues that were in place last year. The remainder, the small bit that remains after that, we do think we still have industrial production slightly positive. We think that there is going to be some gentle lift from economic growth this year. We would attribute the last bit of growth to that as we look at the full year.
The company-specific piece, just give us sort of what are the key drivers of that? Are we seeing that yet? Or is it a time, are there new plants coming or new contracts coming? What changes as we get to the back half of the year on some of the company-specific pieces?
I like this program. I like it because there are growth opportunities across our entire network and across each of our product lines. We have a very diversified book of business. We have quite a far-ranging network. If you think about things like, and some of them, they are all taking traction at different times. If you think about things like our frac sand portfolio, LNG Canada is going live with their first shipments this summer. That means that the amount of gas drilling that will take place up in Northern Alberta and British Columbia is going to be very strong. We are supplying all the frac sand up into that part of the Montney region. We have had three customers now who are putting their own money into building high-throughput frac sand facilities in that area. That sand comes from Wisconsin.
Coming out of that drilling, we have all of the liquids. The gas goes into the pipeline. The liquids come out. They go into rail cars. It goes across North America, but the new market is export to primarily Japan. We have seen growth and continuous growth year- over- year. Those volumes will have the reef expansion in place at Rupert by, I think, end of next year. That is when you will see the next step up function in that. That is all strong. We are partnering with customers who are putting their own money into that. If you think about in Eastern Canada, the fuel facility, phase two of that facility is coming into going operational at the end of this year. You will see those volumes continue to ramp. Phase one is fully operational.
We're now looking at with a customer at phase three of that facility as we go forward. If you look at the crush facilities in both Saskatchewan and in Ohio that have now come online and will get the benefit of the full year volumes. There is something in every part of the network. The big piece that we're seeing delayed is the international intermodal portfolio. We reconstructed that portfolio to fit our network with a focus on Rupert being the point of entry into the U.S. markets. We have a structural advantage with Rupert. It is two days closer sailing from Asia. You have the benefit of Canadian dollar for your port fees. We can get into Chicago faster than any other west coast port. That has been strengthened and made kind of more sticky by the building or the expanding of CanExport.
This is the transloading facility in Rupert where we rail car commodities into Rupert, have them transloaded into containers. Those containers go back loaded. It is also Intermodal X, which is a facility. We are going to be able to transload the full containers, the loaded containers as they come in into 53s, allowing the containers to go back. This all continues to strengthen that structural benefit of Rupert. We are pretty excited about the prospects there. Gemini, of course, decided and chose Rupert as their point of entry to North America. They have been marketing Rupert pretty heavily. It is because of those structural advantages. We are excited about the growth there.
I want to spend a couple of minutes on Rupert. Last year, obviously, there was a lot of labor issues at Canadian ports. Felt like Canadian ports lost some market share to U.S. west coast ports. Part of the opportunity this year was regaining some of that share. I think one of the things you talked about on the Q1 call is that the Rupert to U.S. business has been a little slower than you thought to ramp, but the Rupert to Canada business has been maybe better than you thought. Can you help us understand why we're seeing that sort of divergence?
Certainly. The most competitive business that we're in is in the ocean shipping business because those vessels can land at any port. We have had in Canada issues, the labor issues at the ports for two consecutive falls. That has unfortunately created the necessity for some of our customers to move to U.S. ports. They come back, of course, because of the structural advantages of primarily Rupert. We handle both Canadian destined and U.S. destined volumes through both Vancouver and Rupert. Rupert, we've set up as structurally, we'd like it to be more of the entry point for the U.S. We'd like it to be 70%-ish or more U.S. Right now, it's 50-50. The Canadian volumes continue to be very strong. That port has a capacity of 1.6, could be stretched to 1.8 million TEUs a year. Our peak has been 1.2.
Last year, we were 700. We're expecting about 900,000 probably this year. It is lots of room to grow. We like the Canadian business. It is important to our franchise, but we are really focused on that U.S. business for Rupert. It is coming back. With all of the talk of tariff, it is not coming back as quickly as you say as we had thought it would be earlier this year, but it is up over last year. Sequentially, it has been up week over week since the beginning of the second quarter.
That's not a way to get around tariff, right? You can't send it to Canada and then come to the US as a way to avoid it.
No, I don't think that's going to be the play at all.
Okay. Okay. Is it going to the U.S., it's just going to be longer length of haul, so it's better business than the intra-Canada?
It's just a huge opportunity. The U.S. market is significant. If we can find a way to be very competitive and Rupert does that into the U.S. market, that's a benefit to our customers and it's a benefit to us. It's a way to use our network to the advantage of our customers.
Okay. And then just on the tariff front, what are you seeing in terms of cross-border U.S.-Canada volumes? Anything notable?
For all the talk and all the uncertainty and truth, we haven't seen a big impact on volumes so far this year. As we think about, about 30% of our volume moves across the North American border. 20% of that is southbound from Canada to the U.S. Most of that is grain. It's energy products, a little bit of forest products. The areas where we've seen a lot of dialogue, steel and aluminum. We haven't seen much impact in aluminum, a little bit in steel as they've adjusted and gone to other markets. We'll keep an eye on that. Certainly, there's some question marks about forest products, but that is something that has been the subject of softwood lumber tariffs for quite some time. We'll see how that one plays out. Automotive, I think, is a longer-term game to see how that fares.
It's not as big a part of our business. As we look forward, we're optimistic about kind of where this goes. As I say, I think the trade deals will be made and the tariffs will be resolved over time.
You mentioned in the beginning grain volumes have been very strong, up double digits to start Q2. Is that sustainable? Help us think about what grain should look like in the back half of the year if you have any visibility.
We do expect grain is seasonal, as you know. Right now, the farmers are in the field planting next year's crop. We will probably see those volumes start to kind of peter out over the next couple of weeks leading into end of May, early June. The U.S. crop was particularly large this year in our growing region. We will see that probably last a little bit longer. There was considerable strength there. The question becomes, what does next year's crop look like? It is not in the ground yet, so there are no guarantees. Certainly, if you look at moisture levels and for those folks who predict and watch these things very closely, they are expecting about a similar size crop next year as we had this year.
The grain cap in Canada just up 2%. Why up less than Canadian Pacific in a world where we're only getting 2%? Does that become a margin issue?
A portion of our grain portfolio is regulated grain in Canada. It is subject to a regulated grain pricing. There is an adjustment every year. The formula is a bit opaque. It is not subject to fuel surcharge. Fuel is included in that calculation. As fuel goes up, you normally see that go up. As fuel comes down, you see that go down. It is also related to investment and other things. As we look back, I think you got to look at this over the longer term. Last year, we got 5.5%. The year before, we got 12%. On a compounded basis, we are about 20% over the last three years. I kind of like our position on that.
To your point, if fuel's down, 2% is actually from a price-cost standpoint.
Fuel would have had a big impact on that, yeah.
Okay. That makes sense. Let's just talk about broader pricing trends. We do not really get same-store pricing numbers anymore, but what are we seeing from an underlying pricing trend? It feels like for so long, the story, one of the key parts of the story for rails was just every single year, it was a given, we have inflation plus pricing. Maybe in the last few years, it is less clear that we have gotten that. Part of that maybe is just more inflation, more costs. It feels like maybe we are getting back to that inflation plus pricing. Curious how you think about that.
Yeah. It's difficult for our industry to come up with one definition of pricing. You have all kinds of things that end up in revenue, whether it's fuel and FX, whether it's assessorial charges. This year, there will be an impact from the carbon tax that was removed in Canada. There is all kinds of stuff that go on in the revenue line. From a pure pricing perspective, look at it in two ways. One is the percentage of the amount of the business that you reprice, you renegotiate the price on. The rest is multi-year contracts that have some sort of a mechanism in there to automatically adjust prices as you go forward. All of those are included in price. If you look at same-store price in the first quarter, Remy and his team did extremely well. Came in above what we would plan.
Our objective is, as you say, always we price above rail inflation. That can get more difficult in times of really high inflation, but this year, that definitely is a target. We are pretty confident that that will happen. First quarter results were very strong.
When you look at that underlying price-cost spread, is that accelerating as we look at the balance of 2025? Is that getting, is it compressing? How would you?
We're going to see margin improvement this year. Of course, margin improvement is based on a couple of things on your overall volumes, on the mix, on how you price, and on your ability to control costs. All of those things lead to the margin improvement that we'll deliver this year.
I guess on the Q1 call to that point, you said, hey, there's 200 basis points of margin improvement. So 200 basis points of margin drag from last year that just shouldn't repeat this year.
We'd like that to be the case. The 200 basis points was a combination of the fuel headwinds last year and the disruptions. The disruptions, the labor disruptions are not going to occur this year. Labor is, we've taken care of that. Turns out fuel is going to continue to be a headwind. We're not going to get that back. We have put 200 basis points on the table, and we're pretty confident we can deliver that.
We have got some costs that will not repeat, right? Then we have got pricing, so the combination, and then some degree of volume growth and operating leverage. The combination of those three things you think gets you in the ballpark of 200 basis points of margin improvement this year. What longer term, do we, should we have the best operating ratio in the group, or how do you think about where the operating ratio should be? Should this be a sustainable sub-60 type operating ratio business?
Longer term, we want to have the best earnings in the group. What we are after is earnings. If there are opportunities out there, they are going to be highly accretive to earnings, and that is what we are going to chase. Where we end up on OR depends on the nature of the business, the mix, how much volume there is, which is magic on a big fixed cost kind of organization like ours, on pricing, on our ability to control costs. I have always said that I think that it starts with the five in this organization when in normal operating conditions. I think we hold that position.
To your point about earnings, the guidance this year is 10-15%. Q1 was 8%. You've talked about sort of, again, this air pocket in Q2. Maybe that's also, I do not know if you disagree, but maybe that's sub-10% again in Q2 for earnings growth. The math would be the back half of the year has got to be solid double-digit earnings growth.
That's right.
Do we feel comfortable with that? Is that just, again, is that easy comps and some of the company-specific stuff starting to kick in?
It's a combination of easier comps as we won't have the port outages. We also took a one-day shutdown of their Canadian operations, the railroad last year. All of that leads to about a third of that volume growth that we anticipated to see this year. Half of that volume growth is volumes that are specific to some of the initiatives that we talked about that we're working with our customers. We got good line of sight to those. We feel comfortable with that guidance.
Okay. Good. What are we doing with headcount and maybe just talk about overall cost trends for a little bit?
Given the uncertainty this year, we decided that we would kind of size our resourcing for the railroad at the lower end of the range of our volumes. So we've sized it pretty tight. The guys have done a great job in managing through that. We have the ability to surge, and this is largely the transportation, the conductors, the locomotive engineers, and the guys in the shops and mechanical and engineering. So we've sized it to the tight end with an ability to surge. They've been able to surge up to respond to both the volume and the cold weather and those other types of things. As we look forward, we're going to continue to size it pretty tight. We're running really tight right now. We'll look for those opportunities to bring folks online if we need to.
You should probably see headcount this year roughly flattish year- over year. We are running at good productivity numbers Q1. We were 8% more productive in T&E employees, and we are running about the same level in Q2. We are going to make sure we are highly productive.
You've said now a few times that you're running it pretty tight. Are you, as hopefully you've also said, hey, we're confident we're going to get some trade deals, so hopefully volumes get better. At what point do you say, hey, we can't run it so tight? Is the railroad, you're running it tight, but the railroad's running really well, and you say, hey, we can keep running it tight?
Yeah. We make a new call on that every few weeks as we look at the volumes that are forecasted. Remy's out with customers all the time, and we adjust constantly. We adjust based on the region and the volume forecast for that region. There are always tweaks that are being made. Right now, we're pretty comfortable where we are, but we've got a line of sight on where we need to surge if the volumes really take off.
Maybe just talk about the network overall and how you feel like it's running, and are there areas that you need to be focused on?
Railroad itself is running really well. As I said earlier, we're at velocity levels that we haven't hit in May this time of year for quite a number of years. I think quarter to date, we're 215 car miles a day. Last 28 days, we're 220 or more. This is all well within a sweet spot. As volumes really kind of grow, you'll see the speed slow a little bit. Right now, we're moving fast. Our customer service levels are high, and we're resourced properly.
By the way, I forgot to mention, if there are questions, raise your hand. If not, I can keep going. Just on the state of just the network, you guys have a little bit of a different approach than some of the other rails. You have split the COO role into two. From your perspective, how is that going? Is that the long-term answer, solution at CN, or?
We developed, we went back three years ago to a scheduled operating model that I believe strongly is the right operating model for this railroad. I think that that's proving to be true. No matter what you throw at these guys, whether it's weather or having to shut the railroad down for a labor-related issue or whatever it is, fires, they're able to get through it. More importantly, they're able to get it back to full fluidity very quickly. The operating model is right, and we've got the right team. We've got Derek focused on what needs to happen day-to-day out on the railroad. We've got Pat looking longer term. He's driving improvements in engineering and mechanical. So far this year, we're up double-digit from a productivity perspective in engineering.
If you look at things like tie installation, welding, rail grinding, that is going to bring us the next level of benefit to both OpEx and capital as you look forward. He is able to lift his head and look forward and make sure that we are doing the right things from that perspective. Remy is newer to the organization. He has ramped up extremely well. The three of them work very closely together. This is the model that works for us right now.
You're happy with how it's working?
I am.
Okay. Great. Just because you mentioned labor, are there either, not asking you to, I guess I am asking you to speak for the ports, but you said we've had two years in a row of port labor issues. Are we comfortable that there's no more port issues coming with labor? How about your own labor? When's the next sort of big contract we need to be thinking about?
The TCRC, which is Locomotive Engineers and Conductors, that was up last year and caused the problem. We've gone through an arbitration process that has landed. We have now a three-year deal with a 3% wage escalation each year. The ports went through the same process, and they've also landed that. We have a number of years, a few years ahead of us without any labor outages from that perspective. There are other unions in Canada, but we normally work through those in a much more aligned fashion. We're not anticipating any labor issues over the next few years in Canada.
Okay. And then just last minute or so left, it feels like there's been a little bit more chatter for whatever reason about M&A in the industry. What is your perspective on why there is a little bit more of this chatter and your view of is the timing right to start thinking about another round of rail M&A?
There's always chatter. Always chatter. As long as I've been in this business, there's been chatter. And of course, for good reason, this industry has been consolidated considerably over the there used to be many, many more railroads. I think that since the Trump administration has come into place, there has been more chatter because there's a different kind of perspective out there. As you look at it from a rail perspective, the bar is pretty high. The new rules in 2001 kind of raised the bar a little bit from having to demonstrate that you did not destroy competition to having to demonstrate that you have improved competition. That is a high bar. That does not mean that it is not possible and someone will not take a run at it.
Right now, we're pretty focused on making sure that we're serving our customers well and proving that the best way to do that is with the right kind of partnerships with our connecting railroads, whether they be short lines or class ones.
I guess in the world where it has to be pro-competitive, it seems maybe I'm just focused on one thing specifically, but with your Falcon product, right, with UPEAT, it does feel like that last merger has been pro-competitive. Could a, I don't know if you agree with, would a future M&A have a similar sort of idea?
You never say never on any of these, which is why there's still chatter. I'm sure that everyone does the game theory around the different kind of combinations and permutations. That's the right thing to do from a governance perspective. We should always be looking at the best way to serve our customers. There's different ways to do that. Right now, as I say, we're focused on doing that with our network and our partnerships.
We are going to be having the chairman of the SDB and a rail regulatory panel. I am sure we will spend a little bit more time on that. Unfortunately, we have to wrap. Thank you so much, Tracy. This was great.
Thank you.