All right. I think we are going to kick off this first session here. Thank you very much everyone for joining us at our eastern conference. It is my pleasure to introduce Ghislain Houle from CN Rail. I think a man that does not need any introduction here.
With a gray beard.
We have Nicolas Schmidt from CN, Senior Manager of IR, in the audience as well. I have got a bunch of questions here. It will be a fireside chat. If anyone has any questions in the audience, please raise your hand and I will call you out. Ghislain, thank you for joining us here in Montreal.
Thank you, Kevin. [Non-English content] webcast, thanks for you guys to be here today. It is a pleasure to be here, Kevin, and thanks to the people on webcast listening and taking interest in our great company called Canadian National Railway. If you agree, Kevin, I will make a few introductory remarks.
Yes
And even if you don't, I'll make a few introductory remarks, and then we can go through the questions.
Let's do it.
Listen, let's start talking about our volumes. I think our volumes, we're very pleased with where our volumes are, either in quarter to date or year to date. As you know, our volumes, and we talk volumes in terms of revenue ton miles, because that's a better proxy versus car loads. Our volumes are up 4.5% quarter to date, and they're up 4% year to date. This is a lot on the back of Canadian grain. As you know, we have, and we're benefiting from a bumper crop in Canada this year, which is good because that allows us to move grain well into the third quarter, which is quite unusual. Typically, when you have an average crop, you typically run out of grain by the end of Q2.
This is extremely good. I must tip my hat on the operating team. They're very, very efficient to move that volume every week for the Canadian grain farmers. If you exclude grain, then our volumes quarter to date are up 1%, and our volumes year to date are up also 1%. There's other sectors that are doing quite well. The energy sector is doing quite well. The metals is doing quite well. Automotive, believe it or not, is doing very well. Then there's sectors that we continue to see softness, which we anticipated. Obviously, lumber is one of them. Intermodal International is another one. This is really related to broader market conditions that we are currently facing.
Now, as you know, we are starting to lap tougher comps as we speak, and we will have that until the end of the year. From an operating standpoint, I am very happy with the way the network is working. As you know, you have a question, I think, that you have noticed that our car velocity is north of 200 car miles per day. That always bodes well. That means that your network is fluid, especially when you are able to move more volumes. We are very pleased with that. From a productivity front, I think it is going quite well. When I look at crew productivity, it is up 13% in the first half of the year. Locomotive utilization is up 7%. We are setting a record fuel efficiency in the first half of the year, and that is up 3% on a year-over-year basis.
From a cost-saving standpoint, I am going to repeat what Pat Whitehead, our COO, talked a little bit about during our Q2 earnings call. He gave an update on Fast Track Initiative. What is Fast Track Initiative? It is really taking a blank sheet of paper and reviewing all the processes of every yard that we have.
Every terminals, auto compounds, which are the facilities that we have finished vehicles. Looking at our fleet, believe it or not, we have about 5,000 vehicles at CN, and making sure that we are as productive as we need to be. He reported on Q2 that first half of the year, we delivered close to CAD 100 million of savings. That is very well, and that is very good. On the capital allocation standpoint, we are well on our target to invest our CAD 2.8 billion, which is a significant reduction versus 2025. With good, decent results, I think that bodes very well for us to deliver solid free cash flow and free cash flow conversion. On share buybacks, we have been extremely opportunistic, and we will continue to be opportunistic on our share buyback from now up until the end of the program at the end of January.
We had a ramp-up in our share price. Thank you very much. I am very happy. I am a shareholder of the company. I own a few shares. Look at the proxy. We still believe that we are cheap, and we are going to continue to be opportunistic in buying back our shares. Maybe on this, I will pause—
Okay.
—and I'll turn it over to your questions.
Great update, Ghislain. Maybe if I were to round out some of the updates you provided. Diesels clearly had a huge run-up. You gave us a framework in terms of how to think about fuel surcharge on the Q2 call. Clearly, fuel is at a different price point. Maybe give us an update in terms of how we should think about the fuel surcharge tailwinds or headwinds—
Yeah.
—today versus the Q2 update or that being provided in Q2.
If you remember in Q2, I did say that if the fuel price stayed the same, then we would have a tailwind on EPS of CAD 0.15 in Q3 and CAD 0.10 in Q4. To your point now, the fuel prices have gone up. It went up, WTI, almost to $105 per barrel. Now I think it's back down to $92. But still, fuel prices are going up, and my fuel surcharge, because of two-month lag, then it's pretty much locked in for the quarter. So that CAD 0.15 on EPS is more like CAD 0.10 now.
The CAD 0.10 in Q4 is more like CAD 0.05- CAD 0.10 on Q4. In terms of OR, again, when fuel prices go up, typically it is dilutive to OR because you are adding revenue and expenses at 100 OR. If fuel prices stay the same from now until the end of the year, it would be a negative impact on OR by about 50 basis points.
In Q4, it would be a negative impact by 150 to 200 basis points.
Okay.
As you know, it is very volatile and it moves a lot. But if they stay the same, that would be the numbers.
Okay. That is very helpful. I will just throw it out there. It feels like you are tracking very well to your full-year guidance. It does not feel like there is any real concern in terms of achieving those targets.
Well, we're comfortable. I'm comfortable—
Yeah.
—with our full-year guidance. Again, we're getting again, tougher comps.
I must say as well, and I think you know this, that the grain crop—
Yeah.
—we won't benefit from a bumper crop this year with a new grain crop. And there in catchment area, the grain is a little bit delayed because it's very wet, so the farmers are a bit delayed in harvesting the grain. Nevertheless, we're comfortable that we will hit our guidance.
Okay. The Canadian government is introducing a Productivity Mega Deduction to essentially allow companies to write off about 100% of their capital in terms of depreciation. This seems like it's a potential free cash flow lift for capital-intensive industries such as yourselves. Is there a way to frame what that benefit could be—
Yeah.
—for CN from a free cash flow—
Yeah.
—a lift perspective?
Yeah. We're very pleased by the way. We've been advocating for this—
Right.
—for a long time, so we're very pleased with the outcome. And I must say, to your point, it's a free cash flow lift. It has no impact on EPS because it's really related to cash taxes. And the current estimate that we have is would be a benefit in free cash flow for next year of about CAD 150 million. For 2028, it would be a benefit of north of CAD 200 million.
Does that change your capital allocation priorities at all, or with this incremental free cash, do you lift CapEx? Do you deploy more towards the buyback?
Yeah. In terms of CapEx, we have had that question quite often, and people were asking, "Is the reduction of CapEx that you have done in 2026 versus 2025, is this a one-year thing? We said, "No, it is not," because we are very well on capacity.
We're good on our railcars, on our locomotives, and therefore, we can see that the level of capital as a percentage of revenue will continue to be in line with the U.S. peers going forward for at least the next couple of years. It doesn't change. Will we be more aggressive a little bit on our share buyback with that capital?
With that cash? Maybe. That's to be determined. As you know, right now, we decided this year to temporarily lift our leverage.
We were at 2.5 to 2.7. We've said publicly that we would go back to 2.5x adjusted debt to adjusted EBITDA next year. This is something we debate on a regular basis. How much leverage should we carry on our balance sheet? We'll continue to do that, but you can assume that our capital allocation will not significantly change—
Okay.
—even with that cash.
Okay. Maybe I'll pause here to see if there's any questions in the audience. Okay, I'll keep on going here. You mentioned in your prepared remarks the network is running well, about 200 car miles per day or above. How should we think about what that means for incremental margins as volumes continue to move up here? You mentioned you have excess capacity to absorb this. Labor productivity is going well. How does incremental margins play out here as revenue continues to grow?
Well, first of all, the network and the operations, the first thing is to have great customer service.
As you know, when Tracy arrived in 2022, we went back to a scheduled operating model, and this is the model that works at CN. It offers more reliable service because now you are getting your trains to go on time instead of waiting to have big trains and not showing up at the customer when the customer is waiting for you. The other thing that the scheduled operating, and then I will talk about your margin in two seconds, but the other thing that the scheduled operating model does, and people do not realize, but it increases car velocity.
By increasing car velocity, you are sweating your assets, and therefore you are able to move more product with less cars.
That is the notion, and I have seen it. When we started implementing it, we moved about 6% more volume with about 7% less cars.
If we own the car, then we get the car ownership savings. A lot of our business are in private equipment, which means the customer owns the car.
Well, when that happens, then they get the car ownership savings. But then when we go for pricing, we are able to demonstrate that our service is reliable and that they save money—
Right.
—moving the same amount of product, it makes the pricing discussion easier. Now, obviously, all of this put together, we are working to improve the margins, for sure. And we said every year in, year out, we need to improve margins, and you can expect that. That is what we are working on. We are lifting all of the rocks. I talked about crew productivity before. We are very tight on labor. In HQ, for example, we are trying to push on automation.
We are pushing on, and this is what shareholders have told us. They said, "Listen, we are in a very volatile macroeconomic environment. There is a lot of things you do not control. We want you to push on everything you can control.
That is what we are doing at CN, and incremental margin is one of them.
You talked about the uncertainty out there in the macro. Clearly, trade between Canada and the U.S. has had a bit of a speed bump here. What are you seeing on the ground? What are you hearing from your customers?
Yeah. Like a lot of customers, some sectors, first of all, are more impacted than others. The ones that are impacted, a lot of them, they will try to find alternative markets.
Okay? I will give you an example. Metals is one of them. We will have one of the best years in metals, and as you know, metals have 50% tariff going to the U.S. So metal is going, significantly reduced, going to the U.S., but metals found its way now to stay within Canada, and now we are moving metals from Ontario to Vancouver. I think you were in Sault Ste. Marie.
Yeah.
By the way—
That is right.
And you saw a couple of—
That's right.
—cars of metals.
That's right, yeah.
This is a long haul, so this is great business for us. Metals is an example. We've seen increased imports of autos coming in in Halifax and Vancouver, which is why automotive is doing very well this year. Aluminum, with 50% tariff, still finds its way to the U.S. because they don't have the capacity to be able to fill their demand, and they don't have access to the cheap energy that we have to produce aluminum in northern Quebec.
Right.
Then we have started to move unit trains of scrap metal. Water is finding its way, basically.
Right.
The sector that continues to be soft, obviously, is lumber, for a couple of reasons. Number one, it has 45% tariff, but number two, when you look at housing starts in the U.S., it is muted at 1.3 million housing starts. Then mortgage rates, believe it or not, are now close to 7%.
Unless this environment changes, I think lumber will continue to be soft for quite a while.
Right. That makes sense. Maybe turning to the MOU you signed with Union Pacific.
Maybe first off, how does that change your revenue pipeline as you extend your network through this MOU?
Well, first of all, this is new. First of all, I will tell you that I'm very excited with this MOU. I'm very excited with the deal we have with UP. Believe it or not, we've been trying to go to Mexico since 1998. I remember under the leadership of Paul Tellier, I've been around for a few years. When we bought the IC, at the time, the notion was that CN be the NAFTA railroad connecting Canada, U.S., and Mexico, and at the time, we didn't have the balance sheet to buy both Kansas City Southern and IC, so we bought the IC, and we implemented a marketing agreement with Kansas City Southern at the time.
But if you listened to Laguna last week, Tracy mentioned that between Mexico and Canada, the trade is about CAD 45 billion of goods that are valued between the two countries. And 80% of that either goes to or comes from eastern Canada.
We have the best network to go to Mexico from eastern Canada for a couple of reasons. Number one, our route is about 400 mi shorter than the route of our Canadian competitor.
The second thing is we're the only railroad that can go through Chicago on our own track. Therefore, by owning the dispatching going through Chicago, it allows you to be way more reliable, and it allows you to be more fluid. The other thing that this deal will help us is we'll extend our length of haul. As you know today, we interchange traffic with UP in Chicago.
Tomorrow, we'll interchange traffic with UP in Memphis.
We get all of this without having to pay CAD 30 billion to go to Mexico.
I think this is pretty good. Listen, will this change our revenue pipeline? Listen, there's three ways to grow your volumes as a railroad. It's very simple. You either grow with your customers.
You either convince somebody to build a facility on your line, therefore, you have them committed for many, many years, or you extend your network reach, because although the strength of a rail is you can't replicate, like you wouldn't be able to build 20,000 mi of rail in North America today.
We own 8,000 bridges.
But the weakness of rail is you go to where you go.
Right
You don't go to where you don't go. So now we have access to a new market called Mexico. I think we're going to grow this. I think Janet now is boots on the ground, and the team, and we're very optimistic. As I said, we've got the best route from eastern Canada going there, so I think stay tuned on that one, and this is for the long term. I think this will be outstanding.
Should we think of this as complementary to the Falcon partnership you have with UP, or are you targeting different commodities, maybe outside of intermodal maybe?
Falcon was more intermodal.
Converting long-haul trucking, because believe it or not, you still have trucks that go from Monterrey to Toronto. It is 2,000 mi.
With the Falcon service, we can do that now in five days. There is no reason why that should not come on a train. This deal here is about autos.
Right
It's about ag. It's not just intermodal. Falcon was really focusing on converting long-haul trucking to rail, which by the way, as you know, has been the most over-promised and under-delivered. I say to people, "Market share between rails over time is muted.
Yeah.
You brag on winning a contract, somebody else will brag. The rails lost their market share in the 1950s to the truck.
And we all know that trucks are very competitive in the 500 mi-700 mi radius. But when you look at our length of haul at CN, either domestic or international, it's about 1,800 mi. There's no reason why a box should be on a truck for 2,000 mi.
Right.
It should be on rail, and this is what we're trying to do. But it takes time.
Right.
Because if customers have been used to give that box to a truck for the last 25 years, they are not going to give you all that business tomorrow morning. It is going to take some time. They are going to test you out and so on. We are at it on Falcon Premium.
Now we are going to try to develop all the other commodities through that deal that we have with the UP.
You mentioned one of the benefits is you can basically divert traffic by avoiding the pinch points of Chicago by leveraging your network with The J.
The J, yeah.
What are the guardrails you have in place so that as UP brings volumes up there, that it does not—
Yeah.
—congest a key asset on your network?
I would not worry about that, Kevin. Right now we have excess capacity on The J. Doing this deal with UP and letting them on The J is a way for us to monetize our excess capacity.
Right.
If eventually we have lots of business coming from UP on The J that requires capacity, then rest assured that UP will fund that required capacity in one way, shape, or form. I would not worry about this. I think The J is a beautiful thing, and again, I want to reemphasize, we are the only railroad, and I have ridden trains, because I used to be a locomotive engineer, around Chicago, and I remember that before The J, to do 40 mi, to go through Chicago, would take about 10 to 12 hours on a good day, because you do not own the dispatching. You get to the other rail, and the light is red, then it is red, and you do not move. We go through Chicago in one hour.
One hour, because it's 40 mi—
Right
—and we go 40 mi an hour.
That's right.
That's our track speed. The J's a beautiful thing, and having UP come on it will be beneficial for both companies.
Excellent. Any questions from the audience? On the right here. Is it dependent on the agreement going through, the merger going through?
No.
Okay.
No.
Any other questions?
No. The deal with Mexico is not dependent on the merger. Our access, what's dependent on the merger is we will have access to Kansas City. That's dependent on the merger, but not the deal to Mexico.
Maybe on the Kansas City one, how do you see that market developing for you if this merger goes through? You gain access to a market today that you don't have access to.
Again, we have access. Again, like I said—
Yeah.
—one way to grow your volume is to extend your network reach, and all of a sudden we are extending our network reach to a new market, and this will be done for the next 20, 25 years.
Right.
That is how you grow your volume. At CN, we are trying to not be dependent. Railroads are cyclical, so you are dependent on the economy. We are trying to do as much as possible to reduce our dependence on the economy. Now, we will never be able to reduce 100% of it, but like boots on the ground is another thing. We have the development we are doing, northern B.C.
Right
For example, as you know. The specific initiatives that we have, these initiatives are not dependent on the economy. We have the fuel distribution facility.
Okay? So customers invested hundreds of millions of dollars in our MacMillan Yard. Guess what? They will use it.
That's not dependent on the economy. We're pushing to try to reduce our dependence on the economy, and those are the examples of what we're trying to do.
You mentioned northern B.C. there, and I think it aligns well with maybe what the Canadian government's trying to do in terms of a shift in its industrial policy, investing in natural resources, building more resilient supply chains. When you see the things coming out of the federal government in terms of major projects, the Major Projects Office, how do you see CN positioned to benefit from that?
Well, listen, I think, and you saw the new bill that came out and so on. This is very positive, by the way, because if Canada will reduce the bureaucracy in approval of projects, and reduce the time that it takes for a project to lift, well guess what? That should, I hope, and I think the intent and purpose is to have more investments and have more people, have more companies investing in Canada. Of course, being the biggest railroad in Canada, we will and we should benefit from it, whether it's bringing material to the site, or whether we will benefit from it. So I think we see this as very positive, and a good step in the right direction.
Looking more short-term, we have seen trucking rates move up very quickly this year on the back of capacity exiting the truckload market, primarily in the U.S. Are you seeing modal shift back to intermodal as your rates look more competitive versus—
Yeah.
—where spot rates are on the trucking side?
Listen, as I said, Kevin, the railroads compete head-to-head with trucks on a 500 mi- 700 mi radius, and this is the market of the eastern rails, like CSX and NS. With our length of haul, 1,800 mi, we very little compete head-to-head with trucks. But yeah, when the truck market tightens, it is helpful. We do compete with trucks in certain lanes like Montreal to Toronto or Montreal to Detroit and things like that, but it is not big for us. It is a little bit beneficial, but it is not big.
Okay. Any questions from the audience? Maybe turning to the Fast Track Initiative you mentioned earlier, CAD 100 million in savings. It feels like you are going through every opportunity to improve efficiency. What is the North Star there? Do the savings go to CAD 200 million, CAD 300 million? If this was a baseball game, what inning are you in in terms of executing against this strategy?
Listen, I think it's not CAD 200 million - CAD 300 million.
Yeah.
I think CAD 100 million. We're not done.
Yeah.
There's not another CAD 200 million or CAD 300 million. There's not another CAD 100 million or CAD 200 million. I think we'll see where we are. I'm not going to give a guidance on where we're going to finish on Fast Track because we're still in it.
Yeah. Right. For sure.
We are still in it. But CAD 100 million, we are not done. We are lifting all of the rocks. We are looking not only at the yards and the terminals, but as I said, we are looking at the vehicles. Is 5,000 vehicles too many? Do we have too many vehicles? Because remember, if you have too many vehicles and you are maintaining these vehicles that you should not have in the first place.
We are looking at the buildings. We have a lot of facilities, okay? A lot of small facilities used by engineering people, for example. Do we need these facilities? Or could we get rid of them and save in real estate taxes?
We are lifting all. But I would tell you that the lion's share—
Yeah.
—has been achieved.
Okay.
But, we're not done.
Okay. I'm sure in that envelope is some of the technology initiatives you're doing. When I think of the productivity and efficiency initiatives you have more broadly, you have the portals and the track inspection. Where are you on your technology and AI journey, and what does it mean to the bottom line?
So—
Or to safety?
We started in AI.
Yeah.
We are using AI. We put a good governance.
The first thing we did is we put governance around it.
Right.
I would tell you it is not huge.
We are on it. I am on the steering committee of AI. We are pushing automation. We are pushing automation, for example, in accounting
in my shop, in accounting to try to do things by a machine versus having somebody, versus having a human do it. In terms of technology, we are continuing. My view on technology is it will be the next leg of safety and the next leg of productivity. At the end of the day, scheduled railroading, like all the railroads are using it now. The next leg of safety is, and of productivity, is technology. The thing when you talk about the portals and you talk about the ATIP, what we need though is the government is very happy for us to implement these technologies and they are getting us more safe. The problem is they want us to continue to do the manual—
Right.
—the manual, because these are high-paid blue collar jobs. So we need some help from the government to have us stop doing the manual inspections. For example, the portal, it is crazy. We have a 12,000-ft train outside of Symington and the two mechanical people take an hour and a half while the train sits there to try to look under the undercarriage of the cars before the train can go.
That train, we should avoid this, that train should go right through a portal with 38 high power resolution cameras and algorithms. Now you see all the issues before they arrive, and that makes it more productive.
Sure.
But we're not allowed yet to. And we call this a certified car inspection.
Right.
But we still have to continue to do the manual process.
Right. And maybe with the last minute, are you finding more receptiveness in terms of adopting this technology in Canada or the U.S., or do you find both regulatory bodies are moving slow?
It is the same.
Yeah.
Look, I mean, in the U.S. with positive train control, we had the technology to have one-person crew.
Yeah.
Yet it has been mandated to have two people in the cab.
Right.
Maybe just on closing remarks—
Yeah.
—Kevin, before we close.
Yes.
Listen, I think I am very happy with the year so far. I think that with all of what is happening, I think we are doing quite well. I am comfortable with our guidance. I think that we still need, though, we still have about four months to go, three, four months to go to the end of the year, so we need a big push. I think the future of CN is looking great. I think that from a long-term standpoint, I think that, again, we are the railroad of the north. We sit on Canada's natural resources. We have a great network, with the three coast access and then going through Chicago down to New Orleans, and I think the team is having fun.
I think under the leadership of Tracy, I think the team is having fun. Pat Whitehead is doing an outstanding job in operations. Janet, I hope you can sense when you listen to the earnings call
the energy that she brings, and I have known Janet for years. She is bringing a sense of energy and a sense of urgency in the commercial team that is very refreshing to see. We are having fun, and when you are having fun, you deliver results.
Well, Ghislain , we're out of time. Great update.
Thank you very much.
And best of luck as you close out 2026 here.
All right. Thanks very much.
Thank you very much, everyone. Thank you.