All right, thanks, Paul. Hi, everyone. Good morning, and thank you for joining us today on day one of our second, two-day, actually, conference. I'm Konark Gupta, Transportation and Industrials Analyst at Scotiabank. As Paul was mentioning, we have some of the most respected leaders with us in the industrial sector today. I'm really excited to start off this year's conference, sorry, with none other than CN Rail. It's my pleasure to have President and CEO Tracy Robinson with us today.
Hey, Konark. Good to see you.
Absolutely.
Listen, I think Paul gave our presentation already. He talked about all the economics and economic stuff that's going on, the risks, the opportunities. It seems we're not alone.
Absolutely, Tracy. Welcome, and congrats for actually CN's 30th anniversary of privatization. I think you guys were ringing some bells in Toronto and New York.
We did ring the bell both here in Toronto and in New York, 30th anniversary of our IPO. It was, at the time, 30 years ago, the largest IPO in Canadian history. As I understand it, it is still the second largest IPO in Canadian history. It certainly set CN up for the path we are on, and we power the economy. We work with industries to make sure that they can grow and get into the markets that they do. It was a great celebration. Congratulations on the 25th anniversary of this event. We are kind of marking the past together.
Thanks so much. Yeah, maybe, I guess you have some opening remarks for us.
Yeah, so why don't I get a start?
Twenty seconds after that, please.
That's okay. We appreciate being here. It's always a great opportunity to talk about CN and our business, our performance, and how we're driving shareholder value, as Paul said, in this kind of environment. It is an uncertain environment. It's difficult to know where the economic growth is going to go, how the tariff situation is going to play out, where we're going from a trade flow perspective. In this environment, CN is focused on a couple of things: on driving very positive service for our customers, on increasing our margins, on accelerating free cash flow, and in making sure that we are in exactly the right position as we lift out of this into economic growth. I think the last quarter was a demonstration of this kind of focus.
The operation, the network is running at levels that we the best in a decade, and the customer service is right up there as well. We drove 6% EPS growth, and our operating ratio improved 170 basis points to 61.4%, all on flattish volumes. We are poised to come within the guidance range that we set out, although we are probably towards the lower end of it as we go forward. As we think about looking forward in 2026, we are not seeing it'd be interesting to hear what you hear today, but we are not seeing a dramatic lift in the macroeconomic in the next six to 12 months. The focus is going to continue. We have set our 2026 capital program at CAD 2.8 billion, and that is about CAD 600 million less than it is this year.
We are continuing a path of leaning into productivity across the entire organization, but also our asset base. This is driving results. It is driving increasing free cash flow. If you think about shareholder return, we are leaning into our buyback program in Q3. We leaned in pretty hard. We retired 8 million shares, and we are going to continue to be thoughtful about that program. It makes sense at this price point. We will give you a little bit more of our thoughts on 2026 in January when we report on the fourth quarter. At a high level, we are not expecting a tremendous overall growth. Given the macroeconomic, we are going to see strength in some areas, some of our strategic areas and our initiatives.
We're going to see considerable weakness in some of the areas that are impacted by macroeconomic and by tariffs, things like forest products, where we're going to have some headwinds on both volumes and margins as we go and kind of mix as we go into next year. Janet and team are out there focusing on the longer term, the strategic initiatives we have underway, the longer term opportunities that Paul referenced, as well as a boots on the ground effort that's driving kind of real revenue kind of in the near term. Right on our hip is Pat Whitehead, who's got an eye on the customer service levels, making sure we maintain them, but taking the productivity to the next level. All of this with that sharper focus on kind of capital discipline and allocation, stronger free cash flow.
We're positioning ourselves with considerable operating leverage. We've got the capacity, we've got the resources, and we're ready for the turn. We've got incredible operating leverage, and we'll be ready when that happens as well. Maybe we'll go to your questions.
No, that's great overview, Tracy. Thanks so much. I think you had a lot of things in there, which I think perhaps we can unwrap today this morning. Maybe first to begin with, I think on the guidance side of things for this year, I think you're alluding to being within the range, obviously, maybe potentially to the lower end of the range. When we're looking at the traffic numbers so far in Q4, I think you guys are at 5%, 6% or something. That's probably even on the strongest or maybe the strongest quarter this year. Does it set you well, like in terms of at least giving more confidence in the guidance now, given the traffic is good? I think your costs are in check, which we saw in Q3, and maybe we see some more in Q4.
Yeah, so one of the things to think about in Q4 is we are lapping the ILWU strike of last year. Some of the strength, year-over-year strength you're seeing in our volumes right now is because of that, right? We do continue to have strength as you look at the energy sector, the ag sector, some of the industrial production. We continue to be weak in things like forest products and steel and aluminum and some of the auto sector that are impacted by tariffs. As we turn into 2026, we do anticipate landing within the guidance range, as you said, both on volumes and earnings. As we turn into 2026, we still think the macro is not going to be our friend. We've been in a freight recession now since, I think, early 2022.
We are eagerly awaiting the end of the freight recession, but we're also creating our own future with some of the strategic initiatives. You heard Paul talk about all that's going on in Canada around the diversification. CN is uniquely positioned. Our port access, I mean, we want to drive and traditionally drive a lot of, we're some very advantaged position in natural resources and other into the United States and into North American markets. We are uniquely positioned with our port access across Canada that as that diversification continues to happen, that we will benefit from that as well. We'll be in deep discussion with government and industry around how we facilitate that. That is going to take some time to come on.
Next year is going to be a year of a little softer volumes overall, some strengths, some challenges, but a very continued focus on kind of productivity and making sure that we're setting our cost base and our capacity up so that we're ready.
Okay. I think if we, you said, like obviously since 2022, right, we obviously had a freight recession that still apparently is going on to some extent. This would be, this year, 2025, would be probably fourth or fifth year in a row, I guess, right, where the volumes have been kind of positive, but like low single-ish. Historically speaking, when we look at the rails, you guys were always like GDP plus, so always had like that low to mid single-ish kind of volume environment. I mean, has anything structurally changed in your mind in the last four or five years?
No, I think the last few years, so our volume growth has still been towards the upper end of the industry, right? There are a few things that have been affecting it. One is the freight recession, and that affects everybody, right, equally. We all kind of go up and down with the economy and how that works. The second thing for us is in 2023 and 2024, we had a series of port disruptions from labor. One at the tail end of 2023, two in 2024, and we had a rail labor issue in 2024. That masks a lot of the growth that was out there. As we have turned into this year, we are seeing that growth start, but it is offset by the tariff impacts and the softer macro. That structural growth is still there.
We'll ride the economy as it comes out, but we do have these unique benefits of our network sitting on top of this natural resource base as being the farther northern railroad and the access to ports that we will benefit from more so than others over the longer term.
Okay. Now you talked about the network a moment ago, right, with Pat and team. It's been running pretty good, I think. I mean, like last I've seen that kind of curve velocity was maybe in 2016 or before. So you guys are kind of back to where you guys used to be. What's keeping the operating ratio or the margin essentially, right, like not to the levels that we were used to back in the days? I mean, is it inflation only? Is it the mix? It's a lot of things in there.
There is a lot of things in operating ratio. It is an output, is it not? We are at the top since in the last three and a half years, we have been at the top or the second top in operating ratio. We are staying on par with the industry, and we are focused on the efficiency, right? We are seeing it come this year. Q1, we had 20 basis points improvement. Q2, we had 50 basis points improvement. Q3, we had a 770 basis points improvement. There is lots going on within that, as you say. We are focusing on this. We are getting more and more efficient. Our T&E productivity went up, is up 13% this year, 20% in the third quarter. We are focused on continuing that. Pat's next focus is into yards and terminals. That is going to continue.
We've broadened that to include the entire kind of organization and all of our people, including our assets, that next level of productivity. This is railroading. You need to be focused on that all the time. As we turn into, we've got better capital discipline now. As we turn into 2026 and beyond, where the magic happens, we've got now latent capacity. Now that we've finished some of the work we've done in the Western network, we've got latent capacity across the network. We're ready. We've got the resources ready to go. Our locomotive fleet is where it needs to be. You're going to see the magic happen as that volume starts to lift. Even as Janet is out there now, boots on the ground selling every one of those carloads, that goes right to the bottom line given the capacity that we have available.
We're pretty focused on that. You'll see we are a company that has an operating ratio that starts with a five in a normal economic environment. You'll see that come back.
Okay. That is good to hear. Hopefully that is soon enough.
Hopefully that's soon.
Yeah. I mean, from Patrick's perspective, you guys had like not so long ago a co-COO structure. Now Patrick is going to lead as the only COO. How is he going to rethink the whole network strategy and like, I think, make the plan, run the plan? How does that merge?
Doesn't change at all. It's the same strategy. When I came on, we had a number of things to deal with. Other than the operating ratio, rather the operating model that we needed, we went back to scheduled railroading. That was a day-to-day discipline that we struck. We had some significant issues to deal with on the Western network in particular, where we had some bottlenecks. We saw the biggest opportunity for growth. We needed to deal with that. Our capital efficiency and how we plan and execute capital was not where we needed it to be. Our locomotive fleet was the oldest in the industry, and our reliability and availability levels were not at a point where they were supportive of the scheduled operating plan. We had a big piece of work to do there.
The separation of the COOs was a forcing mechanism. We're famous in railroads at focusing on what's happening today. It was a forcing mechanism to make sure we took care of that longer strategic effort. That is, we're now at a place—it'll never be done—but we're now at a place that we're far enough along that it makes sense to bring this back together. The strategy hasn't changed. Patrick has got the right folks in the right place. We've got a growing depth of bench strength in operations, all that understands scheduled railroading. He's focused on the next level of productivity. What he has launched now is the process renewal in yards and terminals, which is the next level of opportunity for us, both from running to plan, right, because the yards have got to operate.
There's always that next level of improvement as well as the next level of efficiency. It is the same strategy. It's about taking it to the next level.
Okay. We'll probably see some fruits of that over time.
We will.
Sure. Okay. Talk about the marketing role, I guess, like Janet kind of came in, Remy was there obviously some months ago. Under Janet's belt as CCO, I guess, Chief Commercial Officer, what's the winning strategy now? Is it changing? Is it evolving? Were you guys doing something differently back then? Now you're going to kind of catch up on that?
You know what? It's not changing. It's just intensifying. What Janet's very focused on, the unique advantage that we have is we'll ride the economy like every other railroad. Separate from that, we have these unique opportunities, what we've been calling the CN strategic initiatives that in working with our customers to use our network. She's very focused on not only pushing those forward and executing those, but replenishing that pipeline. She's also focused, which is critical, particularly in this environment, on that boots on the ground approach. Getting the guys out of the office, out of the analysis, into the field where they've got the authority to make pricing decisions and deal decisions.
Every week we sit down and we look at what happened last week, which ones did we get, which ones did we lose, and why, and what are the next ones that we're chasing. She has done a great job of mobilizing and intensifying that effort, which is good. It does not happen just because we say go. She has created different authorities. We are getting rate quotes out faster. They are being innovated. If you look at it, they have got greater permission to do kind of new types of things. If you look at it, they have got a scrap iron unit train that is now running out there. That has been an effort combined with operations. They are doing new kinds of things out there. The energy has come back in it. They are really excited about it. When you start winning and succeeding, that changes everything about how you do it.
She is pretty focused. She is very, very focused on that. She and Pat are tied at the hip. It is about we have capacity now across the entire network. It is about how do we best drive every carload into that. Because when you have available capacity, whether it is on trains or in the network and corridors, that falls most directly to the bottom line. Every carload counts.
Talking about capacity, I guess you guys just recently announced that, as you said today as well, that CapEx is going to be lower next year. I guess some of that is driven by the fact that you guys had maybe invested a lot of capital to fix the capacity over the last many years or so. How do you feel about the capacity for the next, not just a year, but maybe another two, three, four years? The economy will come back at some point to its normal steam.
I hope.
Hopefully, knock on wood. How do you prepare for that kind of situation?
We have an exercise where once a year we do a pretty thorough look at our capacity levels across the network and what our volume forecasts are out five, six, seven years. We have a long-term view. It's not always right, but we refresh it constantly. As we've done our work over the last three years, we have importantly debottlenecked the Edson Sub, which is our highest density line. That's the line that connects the lines that go to Prince Rupert, lines that go to Vancouver to the rest of the network. Every train running east-west goes through that line. We have debottlenecked that now. More than 60% of that is double track. That builds operating speed. It builds resiliency. We have also increased the capacity of that line by seven trains.
We've got seven trains worth to kind of to sell into on the Edson Sub by going to two from Rupert to Vancouver. On Vancouver, we've seen pretty significant volume growth. We're up 20% since the last peak. We've increased the capacity of that line to accommodate that and to give us some breathing room. We still have another siding that we're working on that we'll finish at the end of 2027. We've put some money into the Northern BC franchise to support the frac sand that's going up to the Montney in conjunction with our customers who are building high-throughput facilities. We're pretty comfortable both in the process, our view of currently of capacity versus demand. We've got a few years, and it will always depend on what happens.
We've got a few years' capacity across the entire network, but we also have the next level of shovel-ready projects. We know exactly what needs to happen as we need to tweak the next bottleneck. We are comfortable in where we are. We are not investing. We've got a siding outside Vancouver. We've got the Zanardi Bridge. We are finishing in Prince Rupert, which is going to free up capacity, right? I know you've been to Prince Rupert. We've just finished the EG&E, which will forever take out a crew change point. It's got a high return on it. We're putting a little money into Milton as a destination terminal for containers. We're still investing. We just went through a very big cycle that we needed to do no regret capital to deal with some of those constraints in the west.
I see. I know you mentioned Prince Rupert, and I think you guys were there obviously not so long ago. I was quite impressed actually to see the amount of groundbreaking and industrialization that was happening there around your customer base and your partners and all that. I mean, does it excite you a lot for the next five years you got there? Like what kind of opportunities will come out of that?
This is a gift. As you know, it's hard to understand until you go up and see it. It has been, I mean, if you think, it's long been an intermodal story, right? If you think about it, it is the closest port in North America to Asia. If you are a container in Asia going to the Midcon, you can get there two days faster by going through the Port of Prince Rupert. There has been a lot of focus on building. That's why the Gemini service is there to get into the U.S.. Increasingly, I mean, diversification is a positive thing. Increasingly, we've been working with our customers to diversify that, given that it's also a great export market if you're going to Asia. In 2022, when I came in, 45% of the volume going through Rupert was carload.
55% was intermodal. Right now, 55% is carload. And by 2030, we think it's going to be 60% carload. It's not because intermodal is shrinking. If you think about the coal, the energy products, the plastics, the grain that is building to go through Prince Rupert, this is going to be a very diversified port. If you think about what's happening in Canada around diversification of trade, Prince Rupert, Prime Minister made big announcements up at Terrace, British Columbia just outside Prince Rupert the other day. This is the focal point of a lot of that. We are open for business there. It's a great kind of community with the opportunity to expand. Anyone who's been there can see that, and that expansion is taking place. I would say we're expecting a 10% CAGR kind of in growth in Rupert over the next few years.
It is just positioned extremely well.
Okay. You mentioned about PM Carney's projects there. Anything specific you're focusing on on the nation-building project list?
Yeah. Listen, we've got this network, as I said, that sits atop the natural resource base in Canada here. And these are commodities that the world needs. North America needs them. You think about potash. You think about the ag products. You think about the energy products. You think about all of it. The increasing critical minerals, which he's very focused on, is creating an environment where the investment in critical minerals and the mines accelerates. Also, those are needed in global markets. We're positioned no matter where it wants to go. We think that the trade between Canada and the U.S. is critically important and always will be. We're seeing the global trade start to increase. This is a very good thing for the nation. We're positioned to help facilitate that.
The nearer term, some of them are longer term, right? Very supportive. We have been around more than 100 years. We will be here another 100 years. Those are very good. Some of the near-term ones are very compelling. LNG Canada, for example, has now turned on the second train of phase I. High on the list of the first kind of nation-building projects was phase II of LNG Canada, which will double that. For us, that means more Northern White Sand into the Montney, which we serve exclusively. It means more NGLs that go over. There are some that go into North America, but it is largely an export play. We are now up to five trains, five vessels a month out of Rupert on propane. The opportunity for that to grow in the near term.
In the second round of nation-building projects, there was a second LNG facility owned by the Indigenous community on the Nisga'a Nation. That needs a pipeline. That will be a little longer out. We have lots of aspirations around that energy business in Canada, without a doubt. There are other energy products as you think about it. A lot of the others are mines in the north that CN would either serve or would be translated onto it. They are all in various different stages of development. I think this is exactly the right thing for him and for us in Canada to be focusing on, which is how do we get those critical resources to the world, including in North America. We are standing right beside them in the efforts to do that.
There's lots to come.
Lots to come.
Okay. That's great. On the Prince Rupert topic, just to wrap things up on that, you said obviously intermodal was 55% of the mix in there. We know obviously a lot of the advantage that Prince Rupert has was useful for goods flowing into the U.S. via Canada. How much of, when you see the next five years, how much of Prince Rupert's growth prospects are dependent on this U.S.-Canada relationship?
We take Canadian business through Rupert as well. What we would like to see is Rupert, I mean, the real magic is Rupert is a service we can provide into the U.S., the differentiated service that we can provide into the U.S. Right now, no one can compete with us. I think the U.S.-Canadian relationship, it's a question mark. It's an interesting thing to watch. We had hoped things would resolve in a much more certain and definitive way by now. Without a doubt, as you look at it, we need each other, right? We need the frac sand that's in Wisconsin, the Northern White Sand up in the Montney, right? They need energy and potash and uranium. There's no real other place for them to get it. We need that trading relationship.
I'm worried about the structural difference in forest products between our countries as we go forward. I'm worried about steel and aluminum a little bit, although they need the aluminum. I do think that there's a path. It's going to be much longer and more uncertain than we expected it to be. There will be trade between Canada and the U.S., without a doubt. I would tell you that Rupert is increasingly an export facility to the world and particularly to Asia. That diversification is important. It's one of the strengths of our portfolio, the diversification between the bulk commodities that are going to the world that are not reliant upon the economic environment that we're in. They are produced and go. And the industrial segment and then the consumer-based segment. That diversification we like, there's always something that's moving.
Again, that's good to hear. There's one topic that's sort of the big elephant in the room these days and across the supply chain is the U.S. consolidation. I'm not going to ask you what you think, but I'm going to ask you how will you position for that if something were to happen? Clearly, obviously, we are hearing a lot of stories from the U.S. in terms of how supportive everyone is about their transaction. I mean, whether or not it goes through, it's a different question. If it goes through, how do you position CN?
I would say that we've been clear on what we think of it. I think the regulators back in 2000, 2001 put in some new rules because they thought consolidation had gone far enough or maybe too far. From a perspective of ensuring we had the right kind of public service and the customers had options. I think that on the technical merits of this, where that merger would have to demonstrate an increase in competition, more competitive options, a betterment to public service, and would have to demonstrate that was providing options that could not be provided in any other way, including collaborative. That's a pretty high bar. They made that high bar. No one's ever tested that bar. We don't know what it looks like. This may very well in this political environment get done.
On the technical merits, I think we would all agree it normally would not get done. If it does, here we sit up north. 85%, what makes us different is 85% of our volumes we originate. When you are on a railroad, if you originate volumes, it is a very good thing. We push volumes down into the U.S.. If there are scenarios and concessions, like if the standard is you have to demonstrate an increase in competition, there is going to have to be some pretty serious concessions in this effort. There are opportunities, perhaps, we will see what they say in those concessions for us around being able to drive deeper into the U.S. market. We are ready to participate in the process. We have not got the application yet. I am sure it is imminent. We are ready to participate in the process. We will see what they are proposing.
That bar is pretty daunting to kind of reach a demonstrated increase in competition in a way that could not be produced any other way.
You talked about keeping some powder dry, given obviously the overlap and obviously the opportunities that may come out. What kind of opportunities do you see in terms of concessions that can fit in?
It's a little early for that. I mean, we would prefer to see what UP and NS is offering in concessions before we start to talk about what we think. Obviously, access to different markets that do not have access now, that we would not have access to now, would be the primary focus of it, driving deeper into the U.S. in ways that we cannot right now. That would be the focus of most of the concessions that we would look at, and I think most of the others.
Okay. Any thoughts on the EG&E advantage you got in Chicago? Is there any risk to that advantage maybe, or is there risk to disruption to that?
I think the EG&E is the primary asset around Chicago. If anyone could get their hands on it, there's a number of folks I'm sure that would love some access over the EG&E. If you think strategically around how we use those assets, there may be an opportunity for us. I see it more as an opportunity than a risk.
Okay. Yeah. Talking about maybe from a balance sheet perspective, I know Jill is not here. I would have asked him this question, first one maybe. The free cash you guys probably will generate next year, the CapEx coming now is going to be quite significant. You are also keeping some powder dry, I guess, for these opportunities you talked about. Any changes in the way you guys are thinking at the board level for shareholder returns for next year or year after?
Capital allocation is really critical. We are pulling back. We have finished what is a structural kind of period of time in our investment in capacity. As we pull back on that, as you say, the free cash is going to increase. That will go back to shareholders in some way. We are thinking through what we do with our balance sheet. We have increased our leverage from 2 to 2.5 in the last three years. I like the flight. That still has room. Healthy balance sheet is an incredible asset, particularly in uncertain times and in times, as I have said, of M&A. We are thinking through what the options are on that. Certainly, that free cash is going to go back to shareholders, without a doubt.
Okay. That's probably a welcome change or acceleration. Just on the technology side, we talk a lot at Scotia about AI advancements that's happening all over the world right now. You guys are obviously being on the maintenance side of things with technology and stuff. Is there an AI adoption at CN? You think that that's going to be incremental over the year?
We're talking about it as much as you are right now. Our focus on AI and on how we use data and synthesize insights and predictive capability and data, as you say, has been focused recently, in the last decade or so, on the operation side. It is continuing to be because that is how we drive the best safety outcomes and the best operating outcomes, the best service outcomes, and what drives the biggest cost. Increasingly, we are looking, and this is what we do with all the data that we pick up from the wayside detection, from the A-TIP cars, from the portals, is how do you use that data to be far more predictive? The next level of that is more the optimization of how we move trains, right? The automation, ultimately, of how we move trains.
The optimization of how we move trains, how we dispatch. There is a next level of how we use that data that we are working through and what that would look like and what that investment is. There is automation in rail yards, right, that we are starting to experiment with. We have one pilot project in Tashiro right now around pin pulling. We are starting to look at the AI in more of the white-collar space as well and what that opportunity is. It is a little harder to immediately eke benefits. It is inevitable as we lean into it, both from a quality and a quantity perspective. We are, like you, thinking about what the future looks like in that and where the right next place is to invest in it. It takes not only the technology piece, but it takes cultural change.
We need to create a digital awareness and a digital capability in all of our people, which is an exciting thing to think about.
Yeah. I guess there's going to be a lot more.
There's going to be a lot more. I think we'll be talking about it considerably.
All right. Absolutely. Thanks so much, Tracy. I think.
Yeah. Listen, let me tell you.
Sure. Thanks.
No, this has been not the easiest environment, but CN's been driving some good consistent results through what is a very tough environment. We are going to continue to do that. In a time when we do not see an economy that has yet kind of pivoted, our focus is going to be the same, driving that service kind of delivery, customer intensity and intimacy as we chase every rail car of freight, the continued focus on productivity and cost management. We know that we have the capacity and the resources and a considerable operating leverage. When this turns, this is going to be a lot of fun as we go forward. We have that kind of renewed focus on capital intensity and on shareholder value, and we are ready for it. Thanks for your time, Connor.
All the best for that. Thanks for coming.
Thank you.
Thank you.