Q2 2025 Canadian National Railway Co Earnings Call
It will be a question and answer session during which we ask that you kindly limit yourself to one question.
Speaker Change: At this time I would like to turn the call over to Stacie Alderson C and assistant Vice President of Investor Relations, Ladies and gentlemen, Ms Alderson.
Stacie Alderson: Thank you Christa welcome everybody and thank you for joining us for <unk> second quarter, 'twenty 2025 financial and operating results conference call joining us on the call today are Tracy Robinson, our president and CEO, Derek Taylor, our Chief Field operations Officer, Tom Whitehead, our chief.
Good afternoon, my name is Krista and I will be your operator today. All participants are now in the list and only mode.
After this, the speaker's remarks will be a question and answer session during which we ask that you kindly limit yourself to 1 question.
Speaker Change: Network operations Officer, Janet Drysdale, our interim Chief commercial officer, and just like Who's our Chief Financial Officer.
Speaker Change: As note we have forward looking statements and non-GAAP definitions for your reference on page two of our presentation.
Thank you, Krista, welcome everybody. And thank you for joining us for cn's second quarter, 20 2025 financial and operating results conference calls.
Speaker Change: These forward looking statements include estimates schools and predictions about the future based on our current information and educated assumptions.
Speaker Change: These come with risks and uncertainties and with that there is always the possibility that the outcomes may differ from the expectations that being said forward looking statements arent guarantees and factors like economic conditions competition fuel prices and regulatory changes could affect actual results.
Joining us on the call. Today are Tracy Robinson, our president and CEO Derek Taylor. Our chief field operations officer pat Whitehead, our chief network operations, officer Janet, drisdale our interim, Chief commercial officer, and Justa our Chief Financial Officer.
As note, we have, forward-looking statements and non-gaap definitions for your reference on page 2 of our presentation.
Speaker Change: It is now my pleasure to turn over the call to <unk>, President and Chief Executive Officer, Tracy Robinson, Thank Stacy and thanks, everyone for joining us on today's call now as you no doubt saw on yesterday's press release, Janet Drysdale, who most of you know is stepping in as interim Chief commercial officer following lemons departure.
These 4 looking statements, include estimates goals and predictions about the future, based on our current information and educated assumptions.
Speaker Change: Now I want to welcome Janet to the role she knows our company well she knows our markets She's a long standing leader within our company and our sector and Janet is here in the room with us today and she'll take us through the commercial performance and the market trends in just a few minutes.
These come with risks and uncertainties and with that, there is always the possibility that the outcomes May differ from the expectations that being said, or looking statements, aren't guarantees and factors like economic conditions, competitions fuel prices and Regulatory changes could affect actual results.
Speaker Change: So we're going to start with the quarter today, and then we'll move on to the outlook for the remainder of the year.
Speaker Change: We delivered 2% adjusted EPS growth this quarter on flat year over year carloads, and a 1% reduction in our teams and we knew heading into the year that Q2 would be a tough compare from a volume perspective, but it held up well against the positive Q2 last year. When we had some pull forward demand ahead of a potential labor disruption.
Speaker Change: Bulk volumes were very strong through the quarter. Now this is great business and it reflects our advantage network for the AG sector and the strength of our share.
It is now my pleasure to turn over the call to CNS, president, and chief executive officer. Tracy Robinson. Thanks Stacy. And thanks everyone for joining us on today's call. Now, as you no doubt saw on, yesterday's press release. Janet Del who most of, you know, is stepping in. As in term, Chief commercial officer, following Remy's departure. Now, I want to welcome Janet to the role. She knows our company. Well, she knows our markets. She's the long-standing leader within our company and our sector and Janet is here in the room with us today and she'll take us through the commercial performance and the market trends in just a few minutes.
So we're going to start with a quarter today and then we'll move on to the outlook for the remainder of the year.
Speaker Change: And the merchandise and intermodal segments, we started in Q2 to see the impact of tariffs and a weaker industrial economy now this shift in traffic mix with less merchandise created a drag on our revenues and margins. Despite continued same store pricing ahead of inflation.
We delivered 2% adjusted EPS growth this quarter on Flat year-over-year Car loads in a 1% reduction in rtms. Now we knew heading into the year that Q2 would be a tough compared from the volume perspective, but it held up well against a positive. Q2 last year when we had some pull forward demand ahead of a potential Labour disruption.
Speaker Change: I'll get into the details on the volumes and the revenues with Janet in just a few minutes.
Speaker Change: Our network is running very well, our operating metrics velocity dwell customer service, they're all in the right spot.
Bulk volumes were very strong through the quarter. Now, this is great business and it reflects our advantage Network for the, a sector and the strength of our share.
Speaker Change: And it's important that as our volumes or mix shift that we respond quickly and this team has proactively and progressive we adjusted the operating plan and resources throughout the quarter, maintaining good tension between cost and network fluidity and performance and this helped US drive 50 basis points year over year improvement in margin and 100.
In the merchandise and model segments. We started in Q2 to see the impact of tariffs and weaker industrial economy. Now, this shift in traffic mix with less merchandise, created a drag on our revenues and margins despite continued same store, pricing ahead of inflation and we'll get into the details on the volumes and the revenues with Janet and in just a few minutes.
Speaker Change: 50 basis points betterment over Q1, no everyone across this organization is focused on containing costs.
Speaker Change: <unk> adjust this team is aligned we're focused and we're disciplined.
Speaker Change: Now as we look forward to the next six months, we need to consider the current environment.
Speaker Change: A few months ago, the trade deal seemed imminent and instead, there is an increasing uncertainty around the tariff and trade environment, particularly in Canada, and some concerns over a weakening macroeconomic environment.
Our network is running very well, our operating metrics, velocity, dwell customer service, they're all in the right spot. Uh, and it's important that as our volumes are mixed shift that we respond quickly and this team has proactively and progressively adjusted. The operating plan and resources throughout the quarter, maintaining good. Tension between costs and network fluidity and performance and this helped us drive 50 basis points. Year-over-year Improvement in margin and 150 basis points. Betterment over q1. Now, everyone across this organization is focused on
Speaker Change: And we are seeing impacts in our forest products metal and our autos business.
Speaker Change: And there was a question on what happens to the international volumes for the last half of the tariff discussions continue.
On containing costs is volumes adjust. This team is aligned, we're focused and we're disciplined.
Now, as we look forward to the next 6 months, we need to consider the current environment.
Speaker Change: And we know that these questions will be resolved with time and will have greater certainty on the traditional and perhaps some newly emerging trade flows.
Speaker Change: In the immediate term the uncertainty makes calling the merchandize and intermodal volumes for the second half with more of a challenge the range of outcomes is broader and it seems more likely that the current softness in certain sectors will persist in the near term.
A few months ago, the trade deals seemed imminent. And instead there is an increasing uncertainty around the Tariff and trade environment, particularly in Canada, and some concerns over weakening macroeconomic environment.
And we are seeing impacts in our Force products, a metals and our auto business.
Speaker Change: And we're watching all of this closely as it unfolds across our business lines and we're controlling what we can control in an uncertain environment.
And there is a question on what happens to the international volume to the last half as the Tariff discussions. Continue.
Speaker Change: Here's what we're doing.
Speaker Change: We have efforts underway with our customers to further leverage the benefits of the strength in our diversified book.
Speaker Change: We have a very strong Balkan energy energy franchises. For example, these businesses will continue to grow and there is work underway in Canada to develop better access to global markets, particularly in the energy space and these may provide further opportunity.
These questions will be resolved with time, and we'll have greater certainty on the traditional and perhaps some newly emerging trade flows. Now, in the immediate term, the uncertainty makes calling the merchandise and inmortal volumes for the second half more of a challenge. The range of outcomes is broader and it seems more likely that the current softness in certain sectors will persist in the near term.
Speaker Change: And the areas that are impacted by tariffs, we're working closely with our customers on getting them to other markets. So in metal for example, following the escalation of U S tariffs on Canadian made steel and aluminum, which rose to 50% in June we worked with our customers on intra Canada and enter U S moves and we were able to mitigate some of the loss of the.
And we're watching all of this closely as it unfolds across our business lines and we're controlling what we can control in an uncertain environment.
And here's what we're doing.
We have efforts underway with our customers to further leverage, the benefits of the strengths in our Diversified book.
Speaker Change: Cellphone float and we believe there is more opportunity here.
Speaker Change: We are doubling down on leveraging our service performance to increase volumes. We've had some wins for example in domestic intermodal based on our ability to deliver for our customers.
We have a very strong Balkan energ energy franchises. For example, these businesses will continue to grow and there's work underway in Canada to develop better access to global markets, particularly in the energy space. And these May provide further opportunity,
Speaker Change: And we're managing our cost structure in response to shifts in both mix and volumes to protect our margins and we made good progress on this in Q2 and Theres more to come we are all over that.
Speaker Change: And we delivered a solid Q2 in this environment.
Speaker Change: But there is ongoing uncertainty as we look forward.
In the areas that are impacted by tariffs, we're working closely with our customers on getting them to other markets. So in metals, for example, following the escalation of us, tariffs on canadian-made steel and aluminum, which rode to 50% in June, we worked with our customers on intra Canada and intra us moves and we were able to mitigate some of the loss of the southbound flows. Now, we believe there is more opportunity here
Speaker Change: As a result, we believe it is appropriate to soften our expectations for the remainder of the year and we're adjusting to low single digit RPM growth.
We are doubling down on leveraging, our service performance to increase volumes. We've had some wins for example, in domestic and Immortal based on our ability to deliver for our customers.
Speaker Change: Now make no mistake about it.
Speaker Change: This is a great network. It has try coastal access it serves the resource and energy rich regions of Northern Canada uniquely bypass the Chicago congestion and has a well diversified book of business and.
And we're managing our cost structure in response to shifts in both mix and volumes to protect our margins. And we make good progress on this in Q2, and there's more to come. We are all over that.
Now we delivered a solid Q2 in this environment.
Speaker Change: And remember we also originate over 85% of our book and originate and terminate more than 65% of our business more than any class one and this means we control more of the service at origin and destination and a strong partnership with our customers that we can build on I'm going to turn it over to the team to get more to give you more detail.
But there is ongoing uncertainty as we look forward. As a result, we believe it is a appropriate to soften our expectations for the remainder of the year, and we're adjusting to low single digit. RTM growth.
Now make no mistake about it.
This is a great Network, it has tricco daxis, it serves the resource and energy rich regions of Northern Canada.
Speaker Change: In the quarter and how we're thinking about the balance of the year Derek alternative first yeah. Thanks, Tracy and good afternoon, everyone.
Uniquely bypasses, Chicago congestion and and has a well Diversified book of business.
Derek Taylor: I'll be speaking to slide six.
Derek Taylor: I'm pleased with our operational performance and the operating team has maintained a very fluid and very healthy network throughout the second quarter.
Derek Taylor: I said on our Q1 call that we would take decisive actions to tightly manage costs as demand evolves.
Derek Taylor: What we've done this quarter.
Derek Taylor: We are acting quickly and decisively and we will continue to do so as we balance operational and service requirements in this dynamic environment.
And remember we also originated over 85% of our book and originated and terminate more than 65% of our business more than any class 1. And this means we control more of the service at origin and destination and have strong Partnerships with our customers that we can build on. I'm going to turn it over to the team to get more uh to give you more detail on the quarter. And how we're thinking about the balance of the Year Derek. I'll turn it to you first. Yeah, thanks Tracy. And good afternoon everyone.
Derek: I'll be speaking on slide 6.
Derek Taylor: In the second quarter, we cut 8% of our mainline manifest train starts versus last year in response to a 7% decrease in merchandize workload.
Derek: I'm pleased with our operation for performance. Is the operating team has been attained a very fluid and very healthy Network, throughout the second quarter.
Okay workloads were up 9% and we handle that was only 4% more bulk train starts.
Derek: Now I said on our q1 call that we would take decisive action to tightly manage costs as demand evolves and that's just what we've done this quarter.
Derek Taylor: At the end of the quarter, we had 560 train and engine employees on furlough across the network. We are continuing to actively manage resourcing is we keep an eye on volumes.
Derek: We are acting quickly and decisively and will continue to do. So, as we balance, operational and service requirements in this Dynamic environment,
Derek Taylor: This is all about striking the right balance between service costs and network health.
Derek Taylor: We know it's viewed as a cost but we also know that we can keep this railroad fluid with car velocity of up to 100 miles per day.
Derek: In the second quarter, we cut 8% of our Mainline manifest train starts versus last year. In response to a 7% decrease in merchandise workload,
Derek Taylor: Our focus is on pulling costs leavers, while still maintaining solid operating metrics that ensure network fluidity.
Derek: Both workloads were up 9%, and we handle that with only 4% more Volk train starts.
Derek Taylor: With that in mind car velocity was 213 miles per day, driven in large part by faster network train speed increased 3% over last year.
At the end of the quarter, we had 560 training engine employees, on Furlow across the network, and we are continuing to actively manage resourcing as we keep an eye on volumes.
Derek Taylor: Our yard stay fluid and through dwell improved 1%.
Derek: This is all about striking, the right balance between service costs and Network Health.
Derek Taylor: Lastly, we continue to deliver for our customers with a local service commitment performance of 95%.
Derek: We know speed has a cost, but we also know that we can keep this railroad fluid with car velocity of about 200 m per day.
Derek Taylor: So all in all really solid operating metrics were delivered.
Derek: Our focus is on pulling cost levers while still maintaining solid operating metrics that ensure Network fluidity.
Derek Taylor: Wildfire season started early this year, but fortunately so far we have had very little impact on the mainline.
Derek Taylor: There have.
Derek: With that, in mind Carvalho city was 213 m per day driven in large part by a faster Network, train speed that increased 3% over last year.
Derek Taylor: However, been several branch line outages.
Derek: Our yard stayed fluid and through dwell improved 1%.
Derek Taylor: Our firefighting trains and tank cars are deployed in stages across the western region to protect the network and to support local communities, where we can.
Derek: Lastly, we continue to deliver for our customers with a local service commitment performance of 95%.
Derek Taylor: I can proudly say they have been very effective.
Derek Taylor: Now coming into July.
Derek: so, all in all really solid operating metrics were delivered,
Derek Taylor: Had a couple of events and incidents in the south which has put pressure on velocity in that region.
Derek Taylor: Meanwhile, the west and the east continue to perform well.
Derek: Wildfire Seasons started early this year, but fortunately so far, we have had very little impact on the main line.
Derek Taylor: Overall month to date car velocity is nearly 210 car miles a day and we expect to build on that for the rest of the quarter.
Derek: there have however, been several Branch line outages
Derek Taylor: We've been doing what we have to do in this dynamic operating environment.
Derek Taylor: We will continue to act with urgency to keep attention tight between cost and the operating and service metrics.
Derek Taylor: I know I can count on the team for pulling every lever and deliver the outcome that is required.
Pat: I'll pass it over to Pat.
Pat: Thanks, Derek let's start with safety.
Pat: This quarter I want to call out our injury ratio, which improved by 16%.
Pat: This is not by chance. It is a direct result of our teams proactively engaging in the field.
Pat: Identify at risk behaviors before they turn into incidents.
Pat: Our conviction is simple.
Pat: Everyone goes home safely every day and that standard is not negotiable.
Pat: While the Resourcing side, we're tightly managing our cost base, staying lean and nimble our teeny labor productivity improved 11% year over year, mostly through targeted furloughs that we acted on early to realign to demand.
Pat: We're hiring only for the hardest to fill locations and were timing every training class in close partnership with what the commercial team is seeing in terms of the volume outlook.
Pat: On the assets on the asset side were also reacting quickly preserving optionality in protecting margins as volume shifts.
Pat: We ended the quarter with 8000 system cars in storage twice as many as at the end of the first quarter and 200 high horsepower locomotives or roughly 12% of the fleet.
Pat: These moves combined with careful train planning shield us from the unnecessary expenses and lifted both our gross ton miles per horsepower and our fuel efficiency by 1%.
Pat: Sticking with locomotives, we're seeing real traction on our reliability, which means we're doing more with less.
Pat: Locomotive availability at 92, 5% with failures down 3% year over year.
Pat: Driven by rooting out systemic failures and enhancing our predictive maintenance capabilities. The result, an 8% reduction in locomotive unit cost year over year.
Pat: As control and efficiency delivery delivered.
Pat: And engineering, our lowest over time in a decade indicates we're executing to plan and not playing catch up.
Pat: Ty gangs or 7% more productive with 5% lower unit cost.
Pat: Org block delays are down across the network.
Pat: By moving more work in house, or gaining greater cost control and driving efficiency delivering more with the resources we have.
Pat: This shift is helping us to stay on schedule improved quality and manage our costs.
Pat: As we look to the second half of the year, we're maintaining a proactive approach and taking decisive action when and where necessary.
Pat: Early moves on safety cost and asset management means we're set up to respond quickly safeguard the bottomline and capitalize on opportunity as markets rebound.
Pat: The railroad is running very well and we're going to keep it that way no matter how markets evolve with that I'll pass it on to Janet.
Janet Drysdale: Thanks, Pat Good afternoon, everyone. It's great to be here I really appreciate the opportunity to step in as interim Chief commercial officer.
Janet Drysdale: So today I'm going to do my best to give you some color on the quarter as well as what we're seeing at this point in terms of the outlook for the second half.
Janet Drysdale: As you've just heard the railroad is operating very well and that translates directly into solid service for our customers.
Janet Drysdale: That is foundational in terms of our focus on driving growth no matter what type of external challenges we face.
Janet Drysdale: Revenues in the quarter fell, 1% on 1% lower archaeas and flat car loans, reflecting weaker market fundamentals.
Janet Drysdale: Ongoing U S trade and tariff actions and uncertainty.
Janet Drysdale: We also had an unfavorable mix impact more details on that in a minute.
Janet Drysdale: Lower applicable or HD prices versus last year were a headwind of about 2%.
Janet Drysdale: In addition, the Canadian carbon tax surcharge was repealed on April 1st which impacted revenues by about $70 million in a quarter. This is a pass through to customers and so it will be a headwind of roughly the same amount for the next three quarters.
Janet Drysdale: Foreign exchange was a slight tailwind to revenue of less than 1%.
Janet Drysdale: Same store pricing continues to come in ahead of our rail cost inflation, but revenue per <unk> was flat as a result of mix.
Janet Drysdale: Year over year, we moved less merchandise business with the key mix impact being driven by forest products.
Janet Drysdale: Find petroleum products chemicals and metals.
Janet Drysdale: So I'm going to provide you a few key highlights on the quarter before moving to the outlook you have the numbers in front of you so I'm not going to repeat them.
Janet Drysdale: Petroleum <unk> chemicals were impacted by lower volumes of refined products due to extended turnarounds at about 50% of the western Canadian refineries that we serve which is really unprecedented to have that many refineries down at the same time now.
Janet Drysdale: Now we did partly backfill some of those moves from the U S and eastern Canada, but those are much shorter haul.
Janet Drysdale: We had lower shipments for renewable mainly the result of policy changes in the U S and Canada those policy changes drove producers to source.
Janet Drysdale: Inside Canada versus Iowa, and Louisiana. So that's also part of the mix issue.
Janet Drysdale: Within metals <unk> minerals iron ore shipments were impacted by weaker demand fundamentals, including a mine closure on our line.
Janet Drysdale: We also saw lower sand volumes due to our bridge fire that was on the branch line that Derek referred to that pause shipments early in the quarter and as we exited the quarter lower gas prices drove less drilling activity.
Janet Drysdale: Steel and aluminum shipments came under pressure from tariffs, but as Tracy mentioned, we did have some compensating moves intra Canada and then for U S.
Janet Drysdale: Challenging market fundamentals are continuing to unfavorably impact forest products volume.
Janet Drysdale: Turning to cold Canadian met coal exports were up due to the quintet mine restart last fall while U S. Coal volumes were impacted by back to back longwall moves at two of our Illinois basin thermal coal mines.
Janet Drysdale: Now the real bright spot for the quarter was grain and fertilizers with a 12% increase in revenues we.
Janet Drysdale: We saw stronger grain shipments on both sides of the border with grain volumes up 6% in Canada and U S volumes up almost 30% that was due to the higher U S corn exports, new ethanol projects as well as the Iowa Northern acquisition related volumes.
Janet Drysdale: Potash, our cans were up almost 30% driven by strong exports to the port of St. John.
Janet Drysdale: Now in terms of intermodal, we expected increased blank sailings and Thats, what we got.
Janet Drysdale: And primarily impacted units through Vancouver, which were down 4% printer.
Janet Drysdale: Prince Rupert units, However, rose, 14% led by new Gemini volume.
Janet Drysdale: And domestic wholesale volumes were up particularly in the transcon in eastern Canada lanes.
Janet Drysdale: And automotive both finished vehicles and parts were below last year's levels and we certainly saw some shift in flows with auto manufacturers moving around production met.
Janet Drysdale: Mexico to Canada was up and as you would expect volumes between Canada and the U S were down.
Janet Drysdale: Turning now to the outlook.
Janet Drysdale: The on again off again tariffs are forcing customers to rethink their supply chain.
Janet Drysdale: Based on what we saw in Q2 and what we're hearing from customers, we have reduced our volume outlook for the back half of the year and consequently updated our full year volume assumption to low single digit Archie M growth versus 2024.
Janet Drysdale: I would say our perspective has changed most notably for international intermodal and forest products.
Janet Drysdale: In intermodal, we still expect to see solid year over year growth in the back half of the year as we lap last year's labor related disruptions.
Janet Drysdale: But our view hasn't been tempered by the tariff situation and the recent pull forward of inventory.
Janet Drysdale: Within merchandise, we see continued risk exposure in lumber with higher software duties for Canadian imports coming in August.
Janet Drysdale: Lingering threat of the U S section 232 lumber investigation as well as a slower than expected housing recovery.
Janet Drysdale: Lumber mill Curtailments also have a direct impact on other forest products, including wood pulp wood pulp.
Janet Drysdale: On petroleum and chemicals will have some continued pressure from turnarounds within the refining segment into Q3, but those are expected to be resolved by Q4 <unk>.
Janet Drysdale: And we're expecting a ramp up in volumes into the fuel distribution facility in Toronto with phase II coming online.
Janet Drysdale: And for those of you that were able to join us in Prince Rupert in June Youll recall, we also expect continued growth in export propane through the altra gas facility overall, we're projecting growth in P&C for the balance of the year.
Janet Drysdale: For other trade sensitive commodities metals minerals automotive, we're navigating ongoing market shifts by staying close to our customers and adapting to changing supply chain.
Janet Drysdale: And bulk it's still a little bit too early to call the Canadian grain crop size, and we'd probably need a bit of help from mother nature. Nonetheless, we expect to see the normal seasonal uptick as we get into September I do want to note that were just two weeks left in the current year crop we have already set an all time record for the most bulk grain.
Janet Drysdale: And process screen product shipped ever in Western Canada.
Janet Drysdale: We're forecasting a smaller domestic potash fill program in Q3, followed by higher export shipments to Saint John in Q4, as we lap last year's terminal outage Cole is going to continue to benefit from the new production in northeast B C.
Janet Drysdale: So the broader market hasn't developed in our favor but were actively driving our growth initiatives and are committed to continuing to build our growth pipeline.
Janet Drysdale: Let me wrap up.
Janet Drysdale: The railroad is running exceptionally well and we are delivering for our customers.
Janet Drysdale: We're controlling what we can including the intensity with which we drive our growth agenda, especially our CN specific growth opportunities.
Janet Drysdale: Thank you.
Janet Drysdale: Cebu Janet bonuses I mean, it's up to us.
Janet Drysdale: Visit the values of notice is it does reduce empty miles.
Derek Taylor: Turning to slide 13 for the quarter, we reported EPS of $1 87 up 2% versus last year's adjusted EPS of $1 84.
Janet Drysdale: Revenues were down 1% year over year on 1% lower rpms.
Janet Drysdale: The operating team took swift action to adjust the train package to our revolving volume mix, which allowed us to deliver an operating ratio of 61, 7%.
Janet Drysdale: The 50 basis point improvement versus last year's adjusted operating ratio of 62, 2%.
Janet Drysdale: Moving to slide 14, let me break down the earnings drivers for the quarter.
Janet Drysdale: Volumes were lower due to macro and tariff overhang.
Janet Drysdale: We also had unfavorable mix shift and the fuel price headwind of <unk>.
Janet Drysdale: On the plus side, we're very pleased with our solid cost takeout and same store pricing above rail inflation.
Janet Drysdale: Finally, we had a two center, we're not FX year over year.
Janet Drysdale: Over the average FX was 72 cents in Q2 versus the 70 or so and then our plan so a headwind of two <unk>.
Janet Drysdale: I will remind everyone that every penny of appreciation of the Canadian dollar to the U S. Dollar represents a headwind of five cents of EPS on an annualized basis.
Janet Drysdale: On Slide 15, let me provide you with more details on some of the operating expense categories in the quarter, which I'll speak to on an exchange adjusted basis.
Janet Drysdale: Labor was essentially flat versus last year with general wage increases, mostly offset by lower average headcount, resulting in increased productivity.
Janet Drysdale: Purchased services and material was also flat versus last year with higher maintenance and repair costs offset by lower outsourced services.
Janet Drysdale: Fuel expense decreased 25% versus the same period last year due to the elimination of the carbon tax in Canada, and a 23% decrease in price per gallon.
Janet Drysdale: Other costs were up about $40 million or 25% versus last year, mostly driven by higher incident cost and higher software and support costs as we continue to transition our legacy technology infrastructure to the cloud.
Janet Drysdale: We generated over $1 $5 billion of free cash flow towards the end of June up 5% versus the same period last year, mostly driven by lower capital expenditures.
Janet Drysdale: Leverage at the end of Q2 was two five times and we'll continue to execute on our current share buyback program, which runs through February sort of next year.
Janet Drysdale: We continue to maintain a two five times adjusted debt to adjusted EBITDA target.
Janet Drysdale: Moving to slide 16, let me provide some visibility into 2025.
Janet Drysdale: The current macroeconomic environment has become increasingly volatile with ever changing tariff rates and policies.
Janet Drysdale: The uncertainty in the direct tariff impact on our customers is putting pressure on volumes.
Janet Drysdale: Even as we deliver on our CN specific growth initiatives, we are revising our volume growth assumption in terms of our Tms to now be in the low single digit range.
Janet Drysdale: We continue to assume double your ti to be in the range of 60 to 70 in U S dollar per barrel and now it's from foreign exchange for the balance of year to be between 75% and 70 670 570 675.
Janet Drysdale: Versus approximately 70 previously.
Janet Drysdale: Our effective tax rate continues to be in the range of 24% 25%.
Janet Drysdale: With our revised volume assumption and corresponding mix impact as well as a higher Canadian dollar assumption for the balance of year, we are revising our guidance to mid to high single digit EPS growth in 2025.
Janet Drysdale: We're also looking at reducing our capex envelope for the year by about $50 million and we'll continue to look for opportunities to further tighten capex for this year and next year.
Janet Drysdale: At the same time, we are removing our 2024 to 26 multi year guidance, giving the short runway remaining.
Janet Drysdale: Tariff policies have had a meaningful impact on tariff on traffic volumes and mix.
Janet Drysdale: We are staying close to our customers and continue to manage our costs and resources tightly.
Janet Drysdale: In conclusion, let me reiterate a few points.
Janet Drysdale: The network continues to operate very well with strong operating and service metrics.
Janet Drysdale: We expect to have volume growth in the second half of the year as we lap labor disruptions from last year.
Janet Drysdale: Tightly managing costs in this uncertain environment controlling what we can control.
Janet Drysdale: We are pleased with our Q2 results and are well positioned to deliver on our revised guidance, Let me pass it back to Tracy.
Tracy Robinson: Thanks for that and.
Speaker Change: So we'll go to questions now.
Speaker Change: Thank you we will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourselves to one question.
Speaker Change: First question comes from Cheryl Lynn Radbourne with TD Cowen. Please go ahead.
Speaker Change: Thanks, very much and good afternoon.
Speaker Change: I Wonder if you could comment on what progress has been made for covering U S bound international intermodal traffic through Prince Rupert versus last year, and given that merger seemed to be the topic does your could.
Speaker Change: Could you comment on whether you think too hypothetical trans continental mergers would impact principally for its ability to attract that traffic in the future.
Janet Drysdale: Thanks, Cherilyn listen I'm going to turn the first part of that question over to Janet and I generally don't think Oklahoma.
Speaker Change: So Cheryl and I would just remind everyone that in terms of overseas intermodal via Canada to the U S that actually represents less than 5% of our total revenues.
Janet Drysdale: I would also say that when you look at our business from the West Coast, It's really destined to mainly Chicago Memphis and Detroit.
Janet Drysdale: On CN. So it has not been interchanged further so I think those are important mitigating considerations in the context of how we're doing and getting that U S. Traffic back I think we've seen good progress at Prince Rupert.
Janet Drysdale: A little bit tougher at Vancouver and of course, we have this stopwatch clicking around the tariff deadline of the Chinese tariffs in August 12, and so there is some interest I would say of the overseas companies to make sure that they can get their product landed on U S soil before that deadline, so it's been a bit tougher.
Janet Drysdale: I'd say on the Vancouver side and the merger question I'll hand, it over to you Tracy Thanks Shannon.
Janet Drysdale: Listen let me just say this Sharon we recognized on the merger front that the chatter is out there and we're obviously paying attention to that.
Tracy Robinson: It would make no sense for us to speculate on the potential of mergers or even what other class one intentions are but I'll say this our view.
Janet Drysdale: <unk> remains that.
Janet Drysdale: There are similar benefits to be gained from commercial arrangements without the pretty disruptive effects of a major merger and the hurdles.
Janet Drysdale: Emergent and not insignificant the regulatory barriers are high and untested.
Janet Drysdale: But whether it is rupert or other parts of our network right. I mean, we would expect that any transaction would.
Janet Drysdale: Protect at least or enhance the competitive options that we would have and we certainly participate in that to the fullest extent when it comes to our business in our network in that scenario.
Janet Drysdale: It's important to know as I said in my comments, we've got a really strong origination network and more than 85% of our volume originates on our on our lines.
Janet Drysdale: When it comes to destination the majority of our freight move.
Speaker Change: Moves more than 65% of it in fact from an origin on CN to a destination on C. N. So this makes our business pretty resilient and as Janet said in the case of Rupert Rupert advantage with persist that volume goes largely to Chicago to the Midwest into other points in our line and so the Rupert advantage would would remain intact.
Speaker Change: So we're watching all of this very closely but I must say that our focus is on driving execution to our strategy on what we think is a pretty advantaged network.
Speaker Change: Thank you. Thank you.
Speaker Change: Your next question comes from the line of Walter <unk> with RBC capital markets. Please go ahead.
Speaker Change: Thanks, very much operator, good afternoon, everyone. So my question is on the company specific.
Speaker Change: Volume growth initiatives that you outlined at Investor day in 2023, obviously they were.
Speaker Change: They were quite significant now the reason for your guidance reduction we appointed two to tariffs and trade Herb you did make some make the change with <unk>.
Speaker Change: In your executive rank just wondering is there any.
Speaker Change: Has there been any challenges or any changes in your optimism around your company specific.
Speaker Change: Company specific initiatives as you look out the next few years.
Walter: Not at all Walter I mean, I would tell you that those.
Walter: Specific initiatives were all based on the advantages of our network whether it is the intermodal volume using Rupert Vancouver.
Walter: The facts and.
Walter: Stronger and stronger Montreal, whether it is the energy how we're positioned in the northern part of Alberta, and British Columbia, Saskatchewan on the energy front and the growing demand for that energy in global markets, whether it is the sand that is driven into that market in order to support the gas drilling whether it is some of the can.
Walter: NOLA crush that is increase of the yields and the production of canola.
Walter: And that creates multiple moves into the crush facilities, and then with the meal going offshore.
Walter: Whether it is some of what we're doing in the southern part of our network to integrate the Iowa, northern and to make sure that the crush facilities down there are as productive as they intend to be.
Walter: So all of this remains intact, what's happening right now is the.
Walter: The environment given the tariff situation is pretty uncertain and it's pretty volatile and so we are seeing the direct impact in some lines. Some sector. Some of our lines of business, but the fundamentals of the growth given where our network is and what's happening.
Walter: <unk>. This is just going to be a timing issue. We know that you know the tariff deals will ultimately done or at least we believe that that'll be the case and that we'll see more of the normal kind of flows emerging as we said maybe even some new ones certainly in Canada. There is lots of effort around kind of new trade flows and we think that that's a.
Walter: It could be a great opportunity for us as well so it's all intact I and we are ready.
Tracy Robinson: Thank you Tracy.
Speaker Change: Your next question comes from the line of Chris Wetherbee with Wells Fargo. Please go ahead.
Chris Wetherbee: Yeah, Hey, Thanks. Good afternoon wanted to ask you about the Artyem guide, particularly for the second half of the year so looks like.
Speaker Change: <unk> is off to start this a little bit slower with volume down kind of mid to high single digits on the RPM side.
Speaker Change: The easier comps here, but what do we need to see change in the next few weeks to sort of get that moving in the right direction.
Speaker Change: Does it make sense to leave a little bit more cushion I guess as you think about the <unk> outcome relative to the EPS outcome. If you sort of towards the flatter end is that what we're assuming sort of the mid single digit earnings growth could come in just wanted to get a sense of how to think about that RPM versus EPS relationship. John why don't you take that one yeah. Thanks for the question, Chris So I would say.
Speaker Change: In the context of our petroleum and chemicals in particular, we.
Speaker Change: Some of those lingering refinery outages now those are going to start to come back so we.
Speaker Change: We do expect the volumes to accelerate as we move through the quarter. We've seen good strength in domestic intermodal on the overseas side, a little bit of weakness.
Speaker Change: But we will see this improve and certainly the grain crop is going to come on you know in the September timeframe.
Speaker Change: So yeah, we we will we will see the volumes increase and I would add to that as well if you think about and <unk>.
Speaker Change: Transition that.
Speaker Change: Over to the the the earnings outlook right and we're not standing still in the midst of changes in volume and mix as well. So we have a very kind of as I called it a progressive and proactive effort underway to make sure that our costs are adjusted as our volumes and our mix adjusted and we've had we've got great track.
Speaker Change: And on that.
Speaker Change: 50 basis points improvement in margins. Despite some of the headwinds in Q2, and we are intensifying that as we go. So that's an important part of this equation.
Speaker Change: Your next question comes from the line of Brian <unk> with J P. Morgan. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hey, good afternoon, maybe.
Speaker Change: Maybe tracey if you can elaborate a little bit more.
Those practice changes with mixed because I think as I understand janet's comments correctly.
Speaker Change: Forest products refined products renewables like those things don't seem like they're going to reverse all that quickly. So how far along are you on this path what are sort of the levers you can pull or is it all labor maybe you can elaborate a little bit more on that thanks, Yeah, I'll start on that and I'm going to turn it over to Pat to talk about the Resourcing.
Speaker Change: But what happened in Q2 was.
Speaker Change: As you heard today, but we'd break bulk program or bulk volumes were very very strong and that's very good business, we love that business.
Speaker Change: And you know our network is built well for that business. Our share is continuing to increase which is very good that what we had what we saw on the offset is the reduction enforced products, given where particularly in lumber.
Speaker Change: Whereas we saw the housing starts kind of continue to go down there are some tariff actions that have been long standing in lumber, but where we're seeing that intensify as well.
Speaker Change: The impact on our other merchandise sections like the steel and the aluminum some of the metals. We did we were able to mitigate some of that in the case of those two sectors. That's likely to continue until we see some sort of an agreement it's difficult to know where that's going to go. We thought we were on a good track, we had 25% tariffs on steel and aluminum.
Speaker Change: Instead of going down those went up to 50%. That's when we saw the impact I don't know where these tariffs are going to go but we are anticipating that that's not going to be you know, it's not going to be resolved immediately.
Janet Drysdale: And we think about what Janet said on more of the energy sector, the petroleum and chemicals those are more one time issues.
Janet Drysdale: The tariff impact we're not seeing it on those that's going to come back to the third quarter and we expect it to be strong in the fourth so the mix equation is not going to be the same it'll it'll mitigated as we move into the tail end of the year, a little bit, but we are going to have the weakness that we expect until theres some arrangements or deals made in the forest products and <unk>.
Speaker Change: And aluminum the relative weakness so Pat can I ask you to spend a few minutes on how we're responding to them.
Speaker Change: So I would say first first off we've been very successful with the cost takeout initiatives and we will continue to manage resources very tightly as I look at how we snapped back.
Speaker Change: We're in a great position.
Speaker Change: To meet a quick rebound in volumes, we have 740 <unk> employees furloughed, we have mechanical employees furloughed and I've talked about the storage efforts of locomotive fleet is running better than it ever has.
Speaker Change: Locomotives store that we can quickly put back in service.
Speaker Change: Look at it as volume would ramp up.
Speaker Change: These folks that we recall they only take a few weeks for a refresher training versus someone that we would hire taking nine months to be fully trained. So we are we are well positioned to reactive volumes.
Derek Taylor: Turn down as we have we're also positioned well to make a quick rebound and once you heard Derek say as well around how we've responded and train starts relative to volumes, which has been very.
Derek Taylor: Very impressive in and let these guys have done so I think our job is there's lots out going on out there that we can control our job is to manage what we can control and I'm really pleased with the way the team is doing that.
Speaker Change: Your next question comes from the line of fatty chime in with BMO capital markets. Please go ahead.
Speaker Change: Thank you.
Speaker Change: I wanted to follow up on earlier question about the cash corn module potentially here and I have a question on Capex.
Speaker Change: Is it fair to assume CN.
Speaker Change: As an observer.
Speaker Change: Yes.
Speaker Change: Framework.
Speaker Change: Potentially looking at.
Speaker Change: And ultimately we'll look to defend your competitive access.
Speaker Change: STB processes March was the worst will be announced in the future is that kind of a fair statement.
Speaker Change: To think about and really my question is on <unk>.
Speaker Change: I mean volume have been relatively locked for the last five six years.
Speaker Change: Your gross Capex envelope have remained relatively elevated than we would see kind of a degradation in cash conversion obviously.
Speaker Change: The result of that is this.
Speaker Change: Is this kind of more of a longer term thinking on your part you are investing are still at a very high level is there an opportunity here for.
Speaker Change: Tightening.
Speaker Change: The spend in general ultimately.
Speaker Change: Given just the growth environment is a little bit more muted.
Speaker Change: So let me let me say this you heard you say that were <unk> 50 million out of a budget that was $100 million less than it was last year. So we are watching capex pretty closely couple of levers on that.
Speaker Change: Pat and his team are doing a lot of work to make sure that the maintenance capex that we put into the system. All capex that we put into the system is done at.
Speaker Change: At higher levels of productivity as every month goes on and we're seeing the traction in that so that's going to be a benefit for us we'll continue to invest for growth as we have line of sight.
Speaker Change: And certainty on that growth and so we are doing some of that in the western corridor, where we've got line of sight to be energy exports into into.
Speaker Change: The frac sand improvements and some of the other specific growth most of our growth capital right. Now is focused on that western part of the network and so we will look at this constantly.
Speaker Change: We'll always keep our network up to the level that we need to to make sure that runs safely and efficiently.
Speaker Change: We're built for growth only here as we have line of sight and in all cases to the first part of your question, we will vigorously defend our competitive access whether it's related to mergers or anything else and.
Speaker Change: I hope I covered all that you asked for their fatty.
Speaker Change: Your next question comes from the line of David Vernon with Bernstein. Please go ahead.
Hey, good afternoon, and thanks for taking the question so.
Speaker Change: I guess Tracy humans, Youre looking out from 'twenty five baking in some more tariff headwinds in the back half of the year I'm, assuming those are probably going to bake into the first half of the year I'm just wondering from a timing perspective as you go across the <unk> initiatives that you've got out there.
Speaker Change: How confident are you that you can get some some volume growth back into the business in 2006, where do we think we're still going to be kind of slogging through this very uncertain environment again next year.
Speaker Change: I was hoping maybe you could tell me when the tariffs were going to be settled in the trade deals will be done we don't know what we've learned is that.
Speaker Change: I'm surprised at where I'm surprised at where we are now and I can't I'm not the person to someone who can predict exactly what the what's going to happen here. What I can tell you that we are staying very close to our customers and there are cases, where we can help them get into different markets and to mitigate the impact there are some cases where customers.
Speaker Change: Are very proactively looking at diversifying into other markets and we think that we can be helpful in that but as long as we are in the kind of uncertainty in the tariff environment that we are I think that you're going to see enough uncertainty in the marketplace.
Speaker Change: We may see an impact on that the fundamentals of the growth strategy on this network remained intact and were very strong and if you think about some of what we've talked about on AG and energy and some of the others those persist in any regard.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Ken <unk> with Bank of America. Please go ahead.
Ken <unk>: Hey, great good afternoon.
Speaker Change: Thoughts on the range of the mid to upper single digit in terms of EPS growth, but maybe talk about what gets you to the top or bottom end I know.
Speaker Change: Janet ran over a few of the revenues that can snap back but is it purely revenue was it cost do we see more margin gains.
Speaker Change: Within that your volumes are down slightly in the first half down as you mentioned, 6% <unk> to date the guidance low single digit growth, maybe just talk about the confidence of that relative to that EPS growth target range.
Speaker Change: Yeah.
Speaker Change: Normally can't at this time of the year, we'd be narrowing our guidance, but there are a number of factors that play here.
Speaker Change: Either it's mixed volume its currency its fuel so all of those play a role in what would move us to that guidance range and we thought through you know.
Speaker Change: The volatility in some of those niches do you want to make some comments on that thanks.
Speaker Change: Thanks, Tracy some some of these factors are very volatile Ken as you know so we started the year thinking that FX. For example was a 70 <unk> incentives now at 73 and as I said in my remarks every one penny of appreciation of Canadian to U S is five cents on EPS on an annualized basis. So.
Speaker Change: We've assumed now the range would be 70 to 75.
Speaker Change: FX for the balance of year, we will see but as you know it is the Canadian dollar continues to appreciate then that's going to be a headwind.
Speaker Change: And if it depreciates then it's going to be a tailwind a little bit at the same on fuel always see in double UTI.
Speaker Change: We're assuming right now that <unk> will stay for the balance of year about at the current spot rates, because we don't know.
Janet Drysdale: Thats very volatile so and then of course the mix is something that hit us quite a bit this year as Janet mentioned and those are all the things that we can't control, but what we can control is how we respond to it and that is our key focus as we go through a period of uncertainty like this.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of <unk> Gupta with Scotiabank. Please go ahead.
Speaker Change: Thanks, Good afternoon, just on the domestic intermodal side I think you guys talked about the market share gains there. It seems like volumes are running pretty good can you talk about where the gains are coming from and what's driving it and just a quick clarification question on the carbon tax elimination just the Q2 operating ratio did benefit from the elimination or was it neutral.
Speaker Change: Yeah.
Speaker Change: So I can start off with the first question on the domestic intermodal. The answers are pretty straightforward Con Ark is a really good service and so we've been able to with the help of the operating team.
Speaker Change: Just really demonstrate to customers that we have a fluid network a fast network when it needs to be for the case of domestic intermodal and we've gained some share there on the other piece you Slam passenger car.
Speaker Change: Going back on the carbon tax elimination.
Speaker Change: It is a complete flow through to customers as Jonathan pointed out now maybe it's tough to put your finger on it because it's a bit masked by the other factors that you saw in the earnings drivers that we demonstrated in Q2, including the mix.
Speaker Change: It's masked by those factors.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead.
Ravi Shanker: Great. Thanks, John.
Speaker Change: John Great to have you back on the call you said in your prepared remarks that your customers you're talking to.
Speaker Change: They are rethinking their supply chain can you talk about what changes there talking about both in the short term as well as the medium to long term.
Speaker Change: Yes, certainly I think the metals <unk> minerals segment is a good example of how they've been able to adopt in the short term and you may recall about a third of our business as trans border two thirds going south one third coming north.
Speaker Change: That's the the segment most impacted I would say by the trade and tariff situation and so we have a strong franchise independently in both Canada and the U S and so in the case of some of that in metals and minerals, we have been able to do alternative supply chains intra Canada intra U S. We've been able to capitalize on some different.
Speaker Change: Automotive lanes.
Speaker Change: These are the short term things are where the customers are starting to talk to US about now is what can we do on a longer term basis to reduce.
Speaker Change: Their exposure to the U S market and to think about how to get more goods offshore. So that's something that we're certainly focused on.
Speaker Change: I'd say frankly, both with our customers as well as with the.
Speaker Change: With the Canadian government and and other stakeholders along the supply chain.
Speaker Change: Your next question comes from the line of Scott Group with Wolfe Research. Please go ahead.
Speaker Change: Hey, Thanks afternoon, nice to hear you on the call Jonathan I'm.
Speaker Change: Im not sure. If this is for you or Tracy I know a few people have already asked about volume, but just big picture like volume Archie M or down in Q2 down to start Q3.
Speaker Change: Every other rails positive I, just don't know that I recall, many other times with one rail as an outlier without there being some sort of like operational issue and that's obviously not the case right. Now so do you have or just some explanation for the relative volume trend versus others and then maybe just separately Tracy I know last quarter you were talking.
Speaker Change: About our path to 200 basis points of margin improvement for the year, what's embedded in the guide now and if you can thank you.
Speaker Change: Thanks, Scott I can start off a little bit on the volume side and it's always very hard to compare I think across the rails and we've got different books of business and we also have different year over year comparable so sometimes.
Speaker Change: If somebody who is up this year is because they had a weaker year last year I would say the two segments on the U S side that have been particularly strong as intermodal.
Speaker Change: As well as the thermal coal and I think that's kind of why you see some of their volumes coming through I would say what was a little bit unusual for us in the quarter was the amount of impact that we had in that petroleum and chemical segment.
Speaker Change: And really most of those are kind of transient issues. So they're going to resolve themselves as we kind of work our way through Q3 now as you've seen it's not you know in the first couple of weeks of Q3, its going to take a little bit of time, but we do feel those are going to come back.
Speaker Change: Okay.
Speaker Change: And is.
Speaker Change: As it relates to your question on the operating margin improvement of the year.
Speaker Change: We are going to expect we do expect margin improvement in 2025, this hasnt changed.
Speaker Change: <unk> seen some improvement in Q1 and Q2 the easier compares as you know our Q3 and Q4, we've outlined the headwinds.
Speaker Change: Particularly the traffic mix, so hitting 200 basis points, maybe a little bit more of a challenge than it was before but it's not completely off the table as always it depends on volume and mix, but what is going to support it is the velocity with which we are kind of responding as we see changes in mix and volume of the property and the extent to which we can.
Speaker Change: Make sure that our resources match kind of what we're trying to move.
David Vernon: Your next question comes from the line of David <unk> with Barclays. Please go ahead.
David Vernon: Hey, Thanks for squeezing me in here.
Speaker Change: German company.
David Vernon: The anthro.
Speaker Change: As your kind of priorities, where do you see as key opportunities for <unk>.
David Vernon: Regionally or by product focus.
David Vernon: Yeah, I think David I think the key focus is to really try and get a little more agility.
David Vernon: Into.
David Vernon: The commercial side of the business, it's it's a brave new market out there in terms of the way things are moving and we do see more opportunities on the spot market as supply chain kind of evolve in relation to trade and tariffs. So I think the focus is really around.
So hitting 200 basis points may be a little bit more of a challenge than it was before, but it's not completely off the table. There's always, it depends on volume and mix but what is going to support it is, um, the velocity with, which we are kind of responding as we see changes in in mixing, volume out in the property and, uh, the extent to which we can make sure that our resources match kind of what we're trying to move.
David Vernon: The intensity of execution.
David Vernon: Around those spot markets our ability to.
Your next question comes from the line of David zazula with Barkley. Please go ahead.
David Vernon: Drives that growth pipeline, that's more specific to CN.
Hey, thanks for squeezing me in here.
David Vernon: And to be able to adapt as these markets evolve potentially including the offshore so intensity of execution I guess is the way I would frame it up.
Janet is you're coming in uh, for the interim. I guess. What are your kind of priorities? What do you see as key opportunities for
David Vernon: Hi.
David Vernon: Your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.
Steve Hansen: Yes, good afternoon, everyone. Thanks for the time.
Steve Hansen: I think this question is for you can you maybe just perhaps speak to the recent change in.
Steve Hansen: Commercial officer position, certainly applaud Jennifer stepping in your own preferred notice, but it's hard not to observe I'd say the lack of continuity in the C suite over the last five years do you think youre getting closer to the team that you need.
Steve Hansen: The continuity of the issue I'm, just trying to get a sense for why the change.
Operator: After the speaker's remarks, there will be a question and answer session, during which we ask that you kindly limit yourself to one question.
Steve Hansen: Current environment.
Steve Hansen: So listen.
Steve Hansen: Wont comment on any specific change.
Stacy Alderson: At this time, I would like to turn the call over to Stacy Alderson, CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson. Thank you, Krista. Welcome, everybody, and thank you for joining us for CN's second quarter 2025 Financial and Operating Results Conference Call.
These markets the ball's potentially uh including to Offshore. So intensity of execution, I guess is the way I would Frame It Up.
Steve Hansen: But what I will say is that it's my job to make sure that we've got the right team cross commercial across the organization to execute on our strategy and I take that very very seriously.
Speaker Change: And I very much appreciate Janet stepping into the position. So let me just leave it there.
Your next question comes from the line of Steve Hansen with Raymond James, please go ahead.
Steve Hansen: It's got the right team and we're moving forward.
Steve Hansen: Yeah.
Speaker Change: Your next question comes from the line of Stephanie more with Jefferies. Please go ahead.
Stacy Alderson: Joining us on the call today are Tracy Robinson, our President and CEO, Derek Taylor, our Chief Field Operations Officer, Pat Whitehead, our Chief Network Operations Officer, Janet Drysdale, our Interim Chief Commercial Officer, and Ghislain Houle, our Chief Financial. As note, we have forward looking statements and non gap definitions for your reference on page two of our presentation. These four looking statements include estimates, goals, and predictions about the future based on our current information and educated assumptions.
Speaker Change: Hi, Good afternoon. Thank you maybe following up on.
Speaker Change: On a previous question in terms of the margin improvement or improvement for the year could you talk a little bit about the cadence as we think about the back half of that or if there's a lot of moving pieces here admittedly I would love to get your thoughts on how we should think about kids in the back half.
Yeah. Good afternoon everyone. Thanks for the time. Uh, Tracy. I think this question is for you. Can you maybe just perhaps speak to the recent change in the the 2 commercial officer position. Certainly applaud Janet for stepping in here, I'm pretty sure notice but it's hard not to observe, I'd say the lack of continuity in the C Suite, over the last 5 years, do you think you're getting closer to the team that you need? Do you think that the continuity is an issue? Just trying to get a sense for, you know, why the change uh, in the current environment like
Speaker Change: In conjunction with your outlook for it is still see improvement for 2025, I think the cadence is difficult to say and it's going to match kind of the volume and the thing is you heard Derek talk about and Pat. The fact that we can we're positioning ourselves to move as quickly as possible as we see changes in mix and volume on the downside.
Stacy Alderson: These come with risks and uncertainties, and with that, there is always the possibility that the outcomes may differ from the expectations. That being said, board-looking statements aren't guarantees, and factors like economic conditions, competition, fuel prices, and regulatory changes could affect actual results.
Listen um you know I won't comment on any specific change. Uh see but what I will say is that it's my job to make sure that we've got the right team across commercial across the organization uh to execute on our strategy. And I take that very very seriously and, um, I very much appreciate Jen at stepping in at this position. So let me just leave it there. Um, got the right team and we're moving forward.
Speaker Change: They've demonstrated.
Speaker Change: The level of acuity around getting that done quickly it is impossible to match. It on the downside dollar for dollar given the timelines of of getting locomotives.
Your next question comes from the line of Stephanie Moore with Jeffrey's please go ahead.
Tracy Robinson: It is now my pleasure to turn over the call to CM's President and Chief Executive Officer, Tracy Robinson. Thanks, Stacy. And thanks, everyone, for joining us on today's call.
Speaker Change: Out of the system or getting them kind of furloughs in place, but what they also have an eye on and which we need to be equally nimble at is responding on the upside and so we're staying very close to the folks that have been furloughed, we want them to be able to come back quickly Pat is making sure that the locomotive fleet is ready to go so it's really going to depend on how and when the volume.
Tracy Robinson: Now, as you no doubt saw in yesterday's press release, Janet Drysdale, who most of you know, is stepping in as Interim Chief Commercial Officer following Remi's departure. Now, I want to welcome Janet to the role. She knows our company well. She knows our markets. She's a long standing leader within our company and our sector. And Janet is here in the room with us today.
Speaker Change: Show up and where they show up from a mix perspective, I don't think we could put a cadence on kind of the margin improvement over the second half.
Tracy Robinson: And she'll take us through the commercial performance and the market trends in just a few minutes.
Speaker Change: Your next question comes from the line of Tom Waterworks with UBS. Please go ahead.
Tracy Robinson: We're going to start with a quarter today and then we'll move on to the outlook for the remainder of the year. We delivered 2% adjusted EPS growth this quarter on flat year-over-year carloads and a 1% reduction in RTMs. Now, we knew heading into the year that Q2 would be a tough compare from a volume perspective, but it held up well against a positive Q2 last year when we had some pull-forward demand ahead of a potential labor disruption. Both volumes were very strong through the quarter. Now, this is great business, and it reflects our advantage network for the ag sector and the strength of our share.
Tom Waterworks: Yes, good afternoon.
I guess.
Tom Waterworks: Going back to the executive change.
Speaker Change: Tracy you Didnt want offer too much perspective on that but was there something related to that where you would say like if there was kind of execution of the strategy. There wasn't right or maybe we didn't quite have the strategy right or is it just.
Hi, good afternoon, thank you. You know, maybe following up on a, for a previous question in terms of the, the margin Improvement or our Improvement for the year because you talk a little bit about just Cadence, as we think about the back half of that. Oh, and there's a lot of moving pieces here. Admittedly. So we would love to get your thoughts on how we should think about Cadence in the back half. Um, in conjunction with your, your outlook for still see Improvement. 42025 thank you. I think the Cadence is difficult to say and it's going to match kind of the volume. And, you know, the thing is, you heard Derek talk about and Pat the fact that we can, we're positioning ourselves to move as quickly as possible as we see changes in mix and volume on the downside. Uh, you know, they've demonstrated, uh, you know, a level of Acuity around getting that done quickly. Uh, it is impossible to match it on the downside dollar for dollar, uh, given the timelines of of, you know, getting locomotives, uh, out of the system or getting, um, you know, kind of Furs in place. Uh, but what they also have an eye on and, which we need to be equally Nimble at
Tom Waterworks: Not related to that.
Tom Waterworks: And then I guess.
Tom Waterworks: On the intermodal topic is that it doesn't sound like it's tariff related in terms of softening in second half is that more kind of just demand and macro related so maybe your thoughts on those two I appreciate it. Thank you.
Tracy Robinson: In the Merchandise and Intermodal segment, we started in Q2 to see the impact of tariffs and a weaker industrial economy. Now, this shift in traffic mix with less merchandise created a drag on our revenues and margins, despite continued same-store pricing ahead of inflation.
Is responding on the upside. And so, we're staying very close to the folks that have been furloughed. We want them to be able to come back quickly. Pat is making sure that the locomotive Fleet is ready to go. So it's really going to depend on how and when the volume show up and, and where they show up from a mixed perspective, I don't think we could put a Cadence on, uh, kind of the margin improvement over the the second half.
Tom Waterworks: So I'm not going to make many comments on on you know that the team the issue our concerns and what the headwinds are in this environment right now are related to tariffs and related to the impact of those tariffs on certain sectors and the impact of all of that on kind of some of the questions around the macroeconomic.
Your next question comes from the line of Tom wits with UBS. Please go ahead.
Tracy Robinson: We'll get into the details on the volumes and the revenues with Janet in just a few minutes. Our network is running very well. Our operating metrics, velocity, dwell, customer service, they're all in the right spot. And it's important that as our volumes are makeshift, that we respond quickly. And this team has proactively and progressively adjusted the operating plan and resources throughout the quarter, maintaining good tension between cost and network fluidity and performance. And this helped us drive 50 basis points year-over-year Everyone across this organization is focused on containing costs as volumes adjust. This team is aligned, we're focused, and we're disciplined.
Uh, yeah, good afternoon. Um, I I guess.
Tom Waterworks: This is not new.
Tom Waterworks: Economy will recover we've been here before we will get I think ultimately certainty in the in the tariff and trade deal front and as we see that then you you know our strategy is the right one for our networking and our diversified book of business.
Going back to the executive change, I know. Uh, Tracy, you didn't want to offer too much perspective on that. But was there something related to that? Where you'd say like, you know, if there was kind of execution of the strategy that wasn't right? Or maybe we didn't quite have the strategy.
Janet Drysdale: We strongly believe in it we need to move urgently to executed as Jan just said and when I look at the construct of this team at every part of the organization is with a long term view.
Strategy, right? Or is it just not related to that and and then I guess uh on the inner modal topic is is that it doesn't sound like it's Terror related in terms of softening. And second half, is that more kind of just demand and macro related? So, anyways, any thoughts on those 2? Appreciate it. Thank you.
Janet Drysdale: And with how we're building the capabilities and the muscle to be able to do this not just now but into the future and from an intermodal volume perspective, you know I'll, let Janet kind of chime in on this but it is tariff related some of what we've got a we've constructed a great portfolio of international intermodal customers, we like it a lot.
Tracy Robinson: Now, as we look forward to the next six months, we need to consider the current environment. A few months ago, the trade deal seemed imminent, and instead, there is an increasing uncertainty around the tariff and trade environment, particularly in Canada, and some concerns over weakening macroeconomic environments. And we are seeing impacts in our forest products, our metals, and our auto business. And there is a question on what happens to the international volumes for the last half as the tariff discussions continue. And we know that these questions will be resolved with time, and we'll have greater certainty on the traditional and perhaps the newly emerging trade .
Listen, I'm not going to make many comments on on, uh, you know, the the team issue, our uh, you know, concerns and what the headwinds are in this environment right now or related to tariffs and related to the impact of those tariffs on certain sectors and the impact of all of that on kind of, um, the questions around the macroeconomic. This is
Janet Drysdale: They're driving volume through Rupert even at a time when most of the shipping lines are racing to get onto U S soil. It as quickly as possible because of timeline around tariffs and so this is a tariff related issue underneath it what we can see for sure is really the strength of consumer sentiment and consumer demand and I think that will unfold over time.
Janet Drysdale: Janet did you have anything else I could just add a couple more comments I think you know certainly since post COVID-19.
Tracy Robinson: In the immediate term, the uncertainty makes calling the merchandise and intermodal volumes for the second half more of a challenge. The range of outcomes is broader, and it seems more likely that the current softness in certain sectors will persist in the near future. We're watching all of this closely as it unfolds across our business lines and we're controlling what we can control in an uncertain environment.
Janet Drysdale: That fall intermodal peak has become a pretty elusive concept.
Speaker Change: What we're seeing right now across the marketplace and this is not specific to CN is that theres been some inventory front end loading it's quite possible that July may have been the peak season.
Speaker Change: Gonna depend on how consumer sentiment as Tracy mentioned plays out from here I would add as well that you know.
Tracy Robinson: Here's what we're doing. We have efforts underway with our customers to further leverage the benefits of the strengths in our diversified book. We have a very strong bulk in energy energy franchises, for example, these businesses will continue to grow and there's work underway in Canada. develop better access to global markets, particularly in the energy space, and these may provide further opportunities. In the areas that are impacted by tariffs, we're working closely with our customers on getting them to other markets. So in metals, for example, following the escalation of U.S. tariffs on Canadian-made steel and aluminum, which rose to 50% in June, we worked with our customers on intra-Canada and intra-U.S.
Speaker Change: The goods that we're moving it's not just China. It's also Korea. It's also Japan, there are meaningful tariffs on those countries as well in there and they are on higher value goods that may be sensitive as well too.
Not new. Uh, the economy will recover, we've been here before we will get, I think ultimately certainty in the in the Tariff and trade deal front. And as we see that, then you, you know, our strategy is the right 1 for our Network and, and uh, our Diversified book of business. Um, we strongly believe in it, we need to move urgently to execute it as Janet has said. And when I look at the construct of this team, at every part of the organization, it's with a long-term view, uh, with how we're building the capabilities and the muscle to be able to do this, not just now, but into the future. And from an intermodal volume perspective, you know, I'll let Janet kind of chimed in on this, but it is ta'rif related. Some of what? We've got a, we've constructed a great portfolio of international Intermodal, customers, we like it a lot. Uh, you know, they're driving volume through Rupert, even at a time when most of the shipping lines are racing to get onto US soil as quickly as possible because of timeline around tariffs. And uh, so this is a carefully.
Speaker Change: Nintendo Playstation for example, you put a 25% of them that is perhaps a meaningful in the context of the consumer so.
Is really the strength of consumer sentiment and consumer demand. And I think that will unfold over time. Janet, did you have anything else? Yeah, I could just add a couple more.
Speaker Change: I think we're holding our share really well and I think that's a testament to the service that we're providing and I think it is a tougher marketplace and you guys have good visibility on that when you look at you know.
Speaker Change: How transpacific rates are falling and when you look at how capacity has been pulled down to those lane. So we're going to wait and see but we're going to protect our share and we're going to see what we can do to leverage our service to drive more.
Tracy Robinson: moves, and we were able to mitigate some of the loss of the southbound flows. Now, we believe there is more opportunity. We are doubling down on leveraging our service performance to increase volumes. We've had some wins, for example, in domestic intermodal based on our ability to deliver for our customers. And we're managing our cost structure in response to shifts in both mix and volumes to protect our margins. And we make good progress on this in Q2, and there's more to come. We're all over that. Now we delivered a solid Q2 in this environment. But there is ongoing uncertainty as we look forward.
I think, you know, certainly since, uh, postco, um, that fall Intermodal Peak has become a pretty elusive concept. I think what we're seeing right now across the marketplace and this is not specific to CN. Is that there's been some inventory front end loading. It's quite possible that July may have been the peak season. Um, is going to depend on how consumer sentiment is tracing. Mentioned plays out from here. Um, I would add as well that, you know,
Speaker Change: Your next question comes from the line of Jonathan Chappell with Evercore ISI. Please go ahead.
Jonathan Chappell: Thank you good afternoon.
Jonathan Chappell: Going back to some of the recent headlines as it relates to some of the new services, you've created with the players and.
Jonathan Chappell: And that speculation is there anything as far as out clauses or.
Jonathan Chappell: How long some of the agreements are that we should be focused on.
Tracy Robinson: As a result, we believe it is appropriate to soften our expectations for the remainder of the year. And we're adjusting to low single digit RTM growth. Now, make no mistake about it. This is a great network. It has tri-coastal access. It serves the resource and energy-rich regions of northern Canada. It uniquely bypasses Chicago congestion and has a well-diversified book of business. And remember, we also originate over 85% of our book and originate and terminate more than 65% of our business more than any class one. And this means we control more of the service at origin and destination and a strong partnership with our customers that we can build on.
Jonathan Chappell: Specifically I'm thinking about premium and things for me.
Jonathan Chappell: Yes.
Speaker Change: You kind of cut out on US there John Yeah at the last little bit I'm not clear what your question is could you repeat it.
Speaker Change: Yeah, well I'll just be more direct about it as it relates to the merger.
Of the goods that were moving. It's not just China. It's also Korea. It's also Japan. There are meaningful tariffs on those countries as well and they're, and they're on higher value Goods. Uh, that may be sensitive as well to, uh, you know, Nintendo PlayStation. For example, you put a 25% on that is perhaps, uh, meaningful than the context of the consumer. So, um, I think we're holding, uh, our share really well and uh, I think that's a testament to the service that we're providing, but I think it is a tougher Marketplace and you guys have good visibility on that. When you look at, you know how um trans-pacific rates are falling when you look at how capacity is being pulled out of those Lanes. So we're going to wait and see, but we're going to protect our share and we're going to see what we can do to uh leverage our service to drive more.
Speaker Change: Headlines do you have to talk and premium service with Union Pacific. So are there any out clauses associated with that do we know how long that agreements or anything we should be worried about.
Your next question comes from the line of Jonathan Chappelle with evercore isi, please go ahead.
Speaker Change: If there is any change in ownership or <unk>.
Speaker Change: Collaboration with an east Coast rail look no I would just.
Speaker Change: Remind everybody that that service is really Mexico to Canada.
Tracy Robinson: I'm going to turn it over to the team to get more to give you more detail on the quarter and how we're thinking about the balance of the year.
Thank you. Good afternoon. Um going back to some of the recent headlines, as it relates to some of the new Services you've created with the players. Um in that speculation is there anything uh as far as out Clauses or
Speaker Change: North South.
Speaker Change: Other important part of that piece, so I'm, we're going to.
Derek Taylor: Derek, I'll turn it to you first. Thanks Tracy and good afternoon everyone. I'll be speaking of slide six. I'm pleased with our operation performance. The operating team has maintained a very fluid and very healthy network throughout the second quarter. Now, I said on our Q1 call that we would take decisive action to tightly manage cost as demand evolves, and that's just what we've done this We are acting quickly and decisively and will continue to do so as we balance operational and service requirements in this dynamic environment. In the second quarter, we cut 8% of our Mainline Manifest train starts versus last year in response to a 7% decrease in merchandise workloads.
Speaker Change: Driving that volume.
How long some of the Agreements are that we should be focused on? Um you know specifically I'm thinking about something premium and things from the US.
Speaker Change: Thank you.
Ari Rosa: Your next question comes from the line of Ari Rosa with Citigroup. Please go ahead.
You kind of cut out on us there. John, at the last little bit. I'm not clear what your question is. Could you repeat it?
Ari Rosa: Hi, Good afternoon, I wanted to follow up just on the Capex point I was hoping you could break down for us or remind us at least what share of your capex is maintenance versus growth.
Speaker Change: And it's been some time, if we go back and look at kind of the history. It's been sometime since we've seen meaningful.
Speaker Change: Growth in Rpms I'm, just wondering how you get confidence that you are seeing the appropriate rois from that elevated level of Capex spent.
Yeah, well, I'll just be more direct about it is, is it relates to the, you know, the the merger, uh, headlines you have the Falcon premium service, um, with Union Pacific. So, are there any out Clauses associated with that? Do we know how long that agreement's for anything? We should be worried about, uh, if there's any change in in ownership or, um, you know, collaboration with the East Coast rail. Look, no, I I would just um, remind everybody that that service is really Mexico to Canada. Um, north south.
Speaker Change: Yeah, I can I can talk about it and Tracey if you want to jump in you're welcome to do it but that's really a good portion of our Capex envelope is maintenance like like all of the other rails. When we do invest in capacity a lot of it is in Western Canada like Bath mentioned, we do invest.
Derek Taylor: Volk workloads were up 9% and we handle that with only 4% more Volk train starts. At the end of the quarter, we have 560 train and engine employees on furlough across the network, and we are continuing to actively manage resourcing as we keep an eye on volume. This is all about striking the right balance between service, cost, and network health. We know speed has a cost, but we also know that we can keep this railroad fluid with car velocity above 200 miles per day. Our focus is on pulling cost levers while still maintaining solid operating metrics that ensure network fluidity.
Does the other important part of that piece? So, um, we're going to continue driving that volume.
Thank you.
Your next question comes from the line of arri. Rosa with Citi group, please go ahead.
Speaker Change: Invest with a thought of capital efficiency I E. We want to make sure that about 100% of our investment goes in the ground.
Speaker Change: And then with the growth capex related to customers.
Speaker Change: We look at the internal rate of return and we want to make sure that the internal rate of return is above our threshold internally and we've got detailed business cases on this to make sure that we are we have the benefits coming in and we go and track those after these investments are done.
Derek Taylor: With that in mind, car velocity was 213 miles per day, driven in large part by a faster network train speed that increased 3% over last year. Our yard stayed fluid and through-dwell improved 1%. Lastly, we continue to deliver for our customers with a local service commitment performance of 95%. So, all in all, really solid operating metrics were delivered. Wildfire season started early this year, but fortunately so far, we have had very little impact on the main line. There have, however, been several branch line outages. Our firefighting trains and tank cars are deployed and staged across the western region to protect the network and to support local communities where we can.
Hi, good afternoon. Um, I I wanted to follow up just on the capex point. Uh, I was hoping you could break down for us, uh, or remind us at least what share of your capex is maintenance versus growth. Uh, and you know, it's been some time if we go back. Uh, and look at kind of the history, it's been some time since we've seen meaningful uh, growth in rtms. I'm just wondering how you get confidence that you're seeing the appropriate rois from that elevated level of capex. Uh, spent thanks
Speaker Change: I'd say that Thats basically Tracey I think you made the point is when we look at our maintenance Capex. The key here is to do it more efficiently and we're very happy with the changes we've done in engineering lately, where we can see some of this productivity and efficiency coming in.
Yeah, I can. I
Speaker Change: And allowing us to invest more.
Speaker Change: At a lower cost and.
Speaker Change: And let me just add a little bit to that so our capex I don't think we give the breakdown in capex between maintenance Capex and growth, but it also includes I T.
Speaker Change: The capital that we spend and if you look at we watch very closely the returns on the growth Capex and as Jason said a lot of it is in a very specific to some of the growth primarily not completely but primarily in the western part of the network.
Derek Taylor: I can proudly say they have been very effective. Now coming into July, we've had a couple of incidents in the south, which has put pressure on velocity in that region. Meanwhile, the West and the East continue to perform well. Overall, month-at-a-car velocity is nearly 210 car miles a day, and we expect to build on that for the rest of the quarter. We've been doing what we have to do in this dynamic operating environment. We will continue to act with urgency to keep the tension tight between cost and the operating and service metrics. I know I can count on the team to pull on every lever and deliver the outcome that is required.
Welcome to, to do it. But uh really a a good portion of our capex envelope is maintenance like like all of the other rails when we do invest in capacity, a lot of it is in western Canada like that mentioned, we do uh, invest with a thought of capital efficiency. I we want to make sure that about 100% of our investment goes on the ground. Um, and then with the growth capex related to customers, um, you know, we look at the, the, uh, the internal rate of return. And we want to make sure that the internal rate of return, uh, is above our internally. And we've got detailed business cases on this, to make sure that we, uh, we have the benefits coming in and we go and track those after these Investments are done.
Speaker Change: And it's tied to <unk>.
Speaker Change: Volume through usually commercial contracts that protect the return on that and so that volume is showing up.
Speaker Change: We have had to you know volume declines in other parts of the network that create for us capacity in the magic will happen Derek was speaking earlier, but if we can fill trains and fill corridors.
I mean, I say that that's basically and and Tracy, I think you made the point is when we look at our maintenance capex, the key here is to do it more efficiently and we're very happy with the changes. We've done in engineering lately where we can see some of these productivity and efficiency coming in. Uh and allowing us to invest more uh, at the at a lower cost.
Speaker Change: Where we have capacity more related to the south and eastern parts of our network.
Speaker Change: Okay.
Speaker Change: The last question comes from the line of Bascom majors with Susquehanna. Please go ahead.
Speaker Change: Thanks for taking my questions looking back four years CN was drawn into a merger situation, but face resistance from regulators and shareholders and that ultimately led to some changes in management and both the board.
Patrick Whitehead: I'll now pass it over to Pat. Thanks, Derek. Let's start with safety. This quarter, I want to call out our injury ratio, which improved by 16%. This is not by chance. It is a direct result of our teams proactively engaging in the field. Identifying at-risk behaviors before they turn into Our conviction is simple. Everyone goes home safely every day and that standard is not negotiated.
Speaker Change:
Speaker Change: If the class one rails did consolidated to transcon networks in the U S. What is the biggest competitive certain concern that you would have in the CNS experience from 'twenty to 'twenty, one and 'twenty two keep you on the sidelines from what May transpire over the next 12 to 18 months or are there scenarios, where you would actually want to be.
Patrick Whitehead: On the resourcing side, we're tightly managing our cost base, staying lean and nimble. Our T&E labor productivity improved 11% year over year, mostly through targeted furloughs that we acted on early to realign to demand. We're hiring only for the hardest to fill location. And we are timing every training class in close partnership with what the commercial team is seeing in terms of the volume. On the assets side, we're also reacting quickly, preserving optionality and protecting margins as volumes shift. We ended the quarter with 8,000 system cars in storage, twice as many as at the end of the first quarter, and 200 high horsepower locomotives, or roughly 12% of the These moves, combined with careful train planning, shield us from the unnecessary expenses and lifted both our gross ton miles per horsepower and our fuel efficiency by one percent.
To protect the return on that. And so that volume is showing up. Uh, we have had the, you know, volume declines in other parts of the network that create for us capacity in the magic will happen as Derek was speaking earlier. If we can fill trains and Phil corridors, uh, you know, where we have capacity more related to the South and the Eastern parts of our Network.
Speaker Change: Active participant from a defensive situation. Thank you.
Speaker Change: Listen, we're not going to speculate on the whole merger question.
The last question comes from the line of Basco Majors with cesca Hannah. Please go ahead.
Speaker Change: We are focused right now on driving execution to our plan on our network and we think that that's the right thing for us to be focused on in any scenario, we would very rigorously defend our competitive access and our growth prospects and I'm going to leave it at that thank you.
Yes, thanks for taking my question. You know, looking back for your CN was drawn into a merger situation but faced resistance from regulators and shareholders and that ultimately led to some changes in management and both the board, um,
Speaker Change: That concludes our question and answer session I would like to turn the call back over to Tracy Robinson.
If the class 1 rails, did consolidate into 2 Trends. Kind networks in the US.
Speaker Change: Thank you Christa well. Thank you all for joining US today, we are indeed in uncertain times.
Speaker Change: While we can't predict exactly where tariffs and trade and the economy will go we are very intensely focused on doing the things that we can do both with our customers and in controlling our costs to make sure that we protect our margins and are well positioned to execute our growth strategy as we go forward.
What is the biggest competitive concern that you would have? And does CNS experience from 2021 and 22? Keep you on the sidelines? From what may transpire over the next 12 to 18 months or are there scenarios, where you'd actually want to be an active participant from a defensive situation? Thank you.
Patrick Whitehead: Sticking with locomotives, we're seeing real traction on our reliability, which means we're doing more with less. Locomotive availability hit 92.5% with failures down 3% year over year, driven by rooting out systemic failures and enhancing our predictive maintenance capabilities. The result, an 8% reduction in locomotive unit cost year over year. Now that's control and efficiency delivered.
Speaker Change: <unk> for your time today, and we look forward to talking soon.
Speaker Change: The conference call has now ended thank you for your participation and you may disconnect your lines.
Listen. Uh, we're not going to speculate on the whole merger question. And um, we are focused right now on driving execution, to our plan on our Network. And we think that that's the right thing, uh, for us to be focused on in any scenario, we would very rigorously defend, uh, our competitive access and, uh, our growth prospects. Uh, and I'm going to leave it at that. Thank you.
That concludes the question and answer session. I would like to turn the call back over to Tracy Robinson.
Patrick Whitehead: In engineering, our lowest overtime in a decade indicates we're executing to plan and not playing catch. Tie gangs are 7% more productive with 5% lower unit Work block delays are down across the By moving more work in-house, we're gaining greater control and driving efficiency, delivering more with the resources we have. This shift is helping us to stay on schedule, improve quality and manage As we look to the second half of the year, we're maintaining our proactive approach and taking decisive action when and where necessary. Early moves on safety, cost and asset management means we're set up to respond quickly, safeguard the bottom line and capitalize on opportunity as market The railroad is running very well, and we're going to keep it that way, no matter how markets evolve.
Patrick Whitehead: With that, I'll pass it on. Thanks, Pat.
Janet Drysdale: Good afternoon, everyone. It's great to be here. I really appreciate the opportunity to step in as Interim Chief Commercial Officer. So today I'm going to do my best to give you some color on a quarter as well as what we're seeing at this point in terms of the outlook for the second half. As you've just heard, the railroad is operating very well, and that translates directly into solid service for our That's foundational in terms of our focus on driving growth, no matter what type of external challenges we face. Revenues in the quarter fell 1% on 1% lower RTMs and flat car loads, reflecting weaker market fundamentals amid ongoing U.S.
Janet Drysdale: trade and tariff actions and uncertainty. We also had an unfavorable mixed impact. More details on that in a minute. Lower applicable OHG prices versus last year were a headwind of about 2%. In addition, the Canadian carbon tax surcharge was repealed on April 1st, which impacted revenues by about $70 million and a quarter. This is a pass-through to customers, and so it will be a headwind of roughly the same amount for the next three quarters. Foreign exchange was a slight tailwind to revenue of less than 1%. same store pricing continues to come in ahead of our rail cost inflation, but revenue for RTM was flat as a result of Year over year we move less merchandise business with the key mix impact being driven by forest products, refined petroleum products, chemicals and metals.
Janet Drysdale: I'm going to provide you a few key highlights on the quarter before moving to the outlook. You have the numbers in front of you, so I'm not going to repeat them. Petroleum and chemicals were impacted by lower volumes of refined products due to extended turnarounds at about 50% of the Western Canadian refineries that we serve, which is really unprecedented to have that many refineries down at the same time. Now we did partly backfill some of those moves from the U.S. and Eastern Canada, but those were much shorter haul. We have lower shipments for renewables, mainly the result of policy changes in the U.S.
Janet Drysdale: and Canada. Those policy changes drove producers to source from inside Canada versus Iowa and Louisiana. So that's also part of the mix issue. Within metals and minerals, iron ore shipments were impacted by weaker demand fundamentals, including a mine closure on our line. We also saw lower sand volumes due to a bridge fire that was on the branch line that Derek referred to. That paused shipments early in the quarter, and as we exited the quarter, lower gas prices drove less drilling activity. Steel and aluminum shipments came under pressure from tariffs, but as Tracy mentioned, we did have some compensating moves intra-Canada and intra-US.
Janet Drysdale: Challenging market fundamentals are continuing to unfavorably impact forest products. Turning to coal, Canadian Metcol exports were up due to the Quintet mine restart last fall, while U.S. coal volumes were impacted by back-to-back longwall moves at two of our Illinois Basin Thermal Coal Mines.
Janet Drysdale: Now the real bright spot for the quarter was grain and fertilizers with a 12% increase in revenue. We saw stronger grain shipments on both sides of the border, with grain volumes up 6% in Canada, and U.S. volumes up almost 30%. That was due to the higher U.S. corn exports, new ethanol projects, as well as the Iowa northern acquisition-related volume. Potash Arcams were up almost 30% driven by strong exports to the Port of St. John.
Janet Drysdale: Now, in terms of intermodal, we expected increased blank sailings, and that's what we got. primarily impacted units through Vancouver, which were down 4%. Prince Rupert units, however, rose 14% led by new Gemini volumes. In domestic, wholesale volumes were up, particularly in the Trans-Con and Eastern Canada. n Automotive, both finished vehicles and parts were below last year's levels. And we certainly saw some shift in flows with auto manufacturers moving around production. Mexico to Canada was up, and as you'd expect, volumes between Canada and the U.S. were down.
Janet Drysdale: Turning now to The Outlook. The on-again off-again tariffs are forcing customers to rethink their supply Based on what we saw in Q2 and what we're hearing from customers, we have reduced our volume outlook for the back half of the year and consequently updated our full-year volume assumption to low single-digit RTM growth versus 2024.
Janet Drysdale: I would say our perspective has changed most notably for international intermodal and forest products. In intramodal, we still expect to see solid year-over-year growth in the back half of the year as we lap last year's labour-related disruptions. But our view has been tempered by the tariff situation and the recent pull forward of inventory. Within merchandise, we see continued risk exposure in lumber with higher softwood duties for Canadian imports coming in August. The lingering threat of the U.S. Section 232 Lumber Investigation, as well as the slower-than-expected housing recovery. Lumber mill curtailments also have a direct impact on other forest products, including wood pulp.
Janet Drysdale: Petroleum and Chemicals will have some continued pressure from turnarounds within the refined segment into Q3, but those are expected to be resolved by Q4, and we're expecting a ramp up in volumes into the fuel distribution facility in Toronto with Phase 2 coming online. And for those of you that were able to join us in Prince Rupert in June, you'll recall, we also expect continued growth in export propane through the AltaGas facility. Overall, we're projecting growth in PNC for the balance of the year. For other trade sensitive commodities, metals, minerals, automotive, we're navigating ongoing market shifts by staying close to our customers and adapting to changing supply In bulk, it's still a little bit too early to call the Canadian grain crop size, and we probably need a bit of help from Mother Nature.
Janet Drysdale: Nonetheless, we expect to see the normal seasonal uptick as we get into September. I do want to note that with just two weeks left in the current year crop, we have already set an all-time record for the most bulk grain and processed grain product shipped ever in Western Canada. We're forecasting a smaller domestic potash fill program in Q3, followed by higher export shipments to St. John in Q4, as we lap last year's terminal outage. Coal is going to continue to benefit from the new production in Northeast BC.
Janet Drysdale: So the broader market hasn't developed in our favor, but we're actively driving our CN growth initiatives and are committed to continuing to build our growth pipeline.
Janet Drysdale: Let me wrap up. The railroad is running exceptionally well, and we are delivering for our customers. Controlling what we can, including the intensity with which we drive our growth agenda, especially our stand-specific growth opportunities.
Ghislain Houle: Flying over to you.
Ghislain Houle: Merci beaucoup, Janet. Bon après-midi à tous. C'est plaisir de parler de nos résultats du deuxième test. Turning to slide 13 for the quarter, we reported EPS of $1.87, up 2% versus last year's adjusted EPS of $1.84. Revenues were down 1% year-over-year on 1% lower RTP. The operating team took swift action to adjust the train package to a revolving volume mix, which allowed us to deliver an operating ratio of 61.7 percent, a 50 basis point improvement versus last year's adjusted operating ratio of 62.2. Moving to slide 14, let me break down the earnings drivers for the quarter.
Ghislain Houle: volumes were lower due to macro and tariff over We also had unfavorable mix shift and a fuel price headwind of $0.04. On the plus side, we're very pleased with our solid cost takeout and same store pricing above rail inflation. Finally, we had a two-cent tailwind on TAPEX year over year. However, the average FX was $0.72 in Q2 versus the $0.70 assumed in our plan, so a headwind of $0.02. I will remind everyone that every penny of appreciation of the Canadian dollar to the U.S. dollar represents a headwind of five cents of EPS on an annualized basis.
Ghislain Houle: On slide 15, let me provide you with more details on some of the operating expense categories in the quarter, which I'll speak to on an exchange-adjusted basis. Labour was essentially flat versus last year with general wage increases, mostly offset by lower average headcount resulting in increased productivity. Purchase services and material was also flat versus last year with higher maintenance and repair costs offset by lower outsourced services. Fuel expense decreased 25% versus the same period last year due to the elimination of the carbon tax in Canada and a 23% decrease in price per gallon. Other costs were up about $40 million or 25% versus last year, mostly driven by higher incident costs and higher software and support costs as we continue to transition our legacy technology infrastructure to the cloud.
Ghislain Houle: We generated over $1.5 billion of free cash flow through the end of June, up 5% versus the same period last year, mostly driven by lower capital expenditu- Leverage at the end of Q2 was 2.5 times and will continue to execute on our current share buyback program which runs through February 3rd of next year. We continue to maintain a 2.5 times adjusted debt to adjusted debit dot target.
Ghislain Houle: Moving to slide 16, let me provide some visibility to 2025. The current macroeconomic environment is becoming increasingly volatile with ever-changing tariff rates and policy . The uncertainty and the direct tariff impact on our customers is putting pressure on volume. Even as we deliver on our CN-specific growth initiatives, we are revising our volume growth assumption in terms of RTMs to now be in the low single-digit range. We continue to assume WTI to be in the range of $0.60 to $0.70 per barrel, and now assume foreign exchange for the balance of the year to be between $0.75 and $0.70 to $0.75 versus approximately $0.70 per year.
Ghislain Houle: Our effective tax rate continues to be in the range of $24,000 to $25,000. With a revised volume assumption and corresponding mixed impact, as well as a higher Canadian dollar assumption for the balance of year, we are revising our guidance to mid to high single-digit EPS growth in 2025. We're also looking at reducing our CAPEX envelope for the year by about $50 million, and we continue to look for opportunities to further tighten CAPEX for this year and next.
Ghislain Houle: At the same time, we are removing our 2024 to 2026 multi-year guidance, giving the short runway remainder. tariff policies have had a meaningful impact on tariff on traffic volumes and mix We are staying close to our customers and continue to manage our costs and resources tightly.
Ghislain Houle: In conclusion, let me reiterate a few points. The network continues to operate very well with strong operating and service met We expect to have volume growth in the second half of the year as we left labor disruptions from last year. We are tightly managing costs in this uncertain environment, controlling what we can control. We are pleased with our Q2 results and are well positioned to deliver on a revised guidance.
Tracy Robinson: Let me pass it back to Tracy. Thanks, Ghislain.
Operator: And Crystal, we'll go to questions now. Thank you. We will now begin the question-and-answer session. As previously mentioned, we ask that you kindly limit yourselves to one question.
Cherilyn Radbourne: The first question comes from Cherilyn Radbourne with T.D. Cowan. Please go ahead. Thanks, Cherilyn.
Janet Drysdale: Listen, I'm going to turn the first part of that question over to Janet, and Janet, I'll take the second part. So Cherilyn, I would just remind everyone that in terms of overseas intermodal via candidate to the US that actually represents less than 5% of our total revenue. I would also say that when you look at our business from the West Coast, it's really destined to mainly Chicago, Memphis, and Detroit on CN. So it's not being interchanged further, so I think those are important mitigating considerations. In the context of how we're doing in getting that US traffic back, I think we've seen good progress at Prince Rupert, a little bit tougher at Vancouver, and of course we have this stopwatch clicking around the tariff deadline of the Chinese tariffs on August 12th.
Tracy Robinson: And so there is some interest, I would say, of the overseas companies to make sure that they can get their products landed on US soil before that deadline. So it's been a bit tougher, I would say, on the Vancouver side.
Tracy Robinson: And the merger question, I'll hand over to you, Tracy. Thanks, Janet. Let me just say this, Cherilyn, you know, we recognize on the merger front that the to that. You know, it would make no sense for us to speculate on the potential of mergers or even what, you know, other Class I intentions are. But I'll say this, you know, our view remains that, you know, there are similar benefits to be gained from commercial arrangements without the pretty disruptive effects of a major merger. And the hurdles, you know, to a merger, they're not insignificant. The regulatory barriers are high and untested.
Tracy Robinson: But whether it is, you know, Rupert or other parts of our network, I mean, we would expect that any transaction would protect at least or enhance the competitive options that we would have. And we would certainly participate in that to the fullest extent. When it comes to our business and our network in that scenario, it's important to know, as I said in my comments, we've got a really strong origination network, more than 85% of our volume originates on our lines. And when it comes to destination, the majority of our freight moves, more than 65% of it, in fact, from an origin on CN to a destination on CN.
Tracy Robinson: So this makes our business pretty resilient. And as Janet said, in the case of Rupert, the Rupert advantage would persist. That volume goes largely to Chicago, to the Midwest, and to other points on our line. And so the Rupert advantage would remain intact. So we're watching all this very closely. But I must say that our focus is on driving execution to our strategy on what we think is a pretty advantaged network. Thank you.
Walter Spracklin: Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead. Thanks very much, operator. Good afternoon, everyone.
Walter Spracklin: So my question is on on the company specific volume growth initiatives that you outlined that investor day in 2023, obviously, they were, they were quite significant. Now, the reason for your guidance reduction, you pointed to, to tariffs and trade, however, you did make them make the change with in your executive rank, just wondering, is there any, has there been any challenges or any changes in your optimism around your company specific, your company specific initiatives as you look out the next few years? Not at all, Walter. I mean, I would tell you that those CN specific initiatives were all based on the advantages of our network, whether it is the intermodal volume, using Rupert, Vancouver, you know, Halifax, and, you know, a stronger and stronger Montreal, whether it is the energy, you know, how we're positioned in the northern part of Alberta, British Columbia, Saskatchewan on the energy front and the growing demand for that energy in global markets, whether it is the sand that is driven into that market in order to support the gas drilling, whether it is some of the canola crush, that has increased the yields and the production of canola, and that creates multiple moves into the crush facilities.
Tracy Robinson: And then with the meal going offshore, you know, whether it is some of what we're doing in the southern part of our network to integrate the Iowa northern and to make sure that the crush facilities down there are as productive as they intend to be. This is just going to be a timing issue. We know that, you know, the tariff deals will ultimately done, or at least we believe that that will be the case, and that we'll see more of the normal kind of flows emerging, as we said, maybe even some new ones. Certainly in Canada, there's lots of effort around kind of new trade flows, and we think that that could be a great opportunity for us as well.
Tracy Robinson: So it's all intact, and we're ready.
Chris Wetherbee: Your next question comes from the line of Chris Wetherbee with Wells Fargo. Please go ahead. Hey, thanks. Good afternoon.
Chris Wetherbee: I wanted to ask about the RTM guide, particularly for the second half of the year. So looks like TreeQ's off to, you know, start this a little bit slower with volume down, kind of mid high single digits on the RTM side. So I get the easier comps here, but what do we need to see change in the next few weeks to sort of get that moving in the right direction? And does it make sense to leave a little bit more cushion, I guess, as you think about the RTM outcome, relative to the EPS outcome, if you're sort of towards the latter end, is that what we're assuming sort of the mid single digit earnings growth could come in, just want to get a sense of how to think about that RTM versus EPS relationship?
Derek Taylor: Yeah, why don't you take that one? Yeah, thanks for the question, Chris. So I would say, in the context of petroleum and chemicals in particular, we've got some of those lingering refinery outages. Now those are going to start to come back. So we do expect the volumes to accelerate as we move through the quarter. We've seen good strength in domestic intermodal, on the overseas side, a little bit of weakness, but we will see this improve. And certainly the grain crop is going to come in the September timeframe. So, yeah, we will see the volumes increase.
Tracy Robinson: And I would add to that as well, if you think about, you know, if you transition that over to the earnings outlook, right, we're not standing still in the midst of changes in volumes and in mix as well. So we have a very kind of, as I called it, a progressive and proactive effort underway to make sure that our costs are adjusted as our volumes and our mix adjust. And we've had, we've got great traction on that, 50 basis points improvement in margins, despite some of the headwinds in Q2. And, you know, we are intensifying that as we go.
Tracy Robinson: So that's an important part of this equation.
Brian Ossenbeck: Your next question comes from the line of Brian Ossenbeck with JP Morgan. Please go ahead. Yeah, hey, good afternoon.
Tracy Robinson: Maybe Tracy, if you can elaborate a little bit more on those proactive changes with mix, because I think as I understand Janet's comments correctly, so the forced products, refined products, renewables, like, those things don't seem like they're going to reverse all that quickly. So, you know, how far along are you on this path? What are sort of the leverage you can pull? Is it all labor? Maybe you can elaborate a little bit more on that. Thank you.
Tracy Robinson: Yeah, I'll start on that and then I'm going to turn it over to Pat to talk about the resourcing. But what happened in Q2 was, you know, as you heard today, we had a great bulk program. Our bulk volumes were very, very strong and that's very good business. We love that business and, you know, our network is built well for that business. Our share is continuing to increase, which is very good. That what we had, what we saw on the offset is a reduction in forced products, given where, particularly in lumber. Whereas we saw the housing starts kind of continue to go down, there are some tariff actions that have been long standing in lumber, but we're seeing that intensify as well.
Tracy Robinson: We saw the impact on other merchandise sections, like the steel and the aluminum, some of the metals we did, we were able to mitigate some of that in the case of of those 2 sectors, that's likely to continue until we see some sort of an agreement. The relative weakness.
Patrick Whitehead: So, Pat, can I ask you to spend a few minutes on how we're responding to that? So I would say first off, we've been very successful with the cost takeout initiatives, and we'll continue to manage resources very tightly. As I look at how we snap back, we are in a great position to meet a quick rebound in volumes. We have 740 T&E employees furloughed, we have mechanical employees furloughed, and I've talked about the storage efforts of locomotive. The fleet is running better than it ever has, and we have locomotives stored that we can quickly put back in service.
Patrick Whitehead: So as I look at it, as volume would ramp up, these folks that we recall, they only take a few weeks for refresher training versus someone that we would hire taking nine hours.
Unknown Executive: ***PAUSE*** Organizer, Canada Rail Services and Organizer, Canada Rail Services and And what you heard Derek say as well around how we've responded in train starts relative to volumes, which has been very impressive in what these guys have done. So I think, you know, our job is, there's lots going on out there that we can't control. Our job is to manage what we can control. And I'm really pleased with the way this team is doing that.
Fadi Chamoun: Your next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please go ahead. Thank you.
Fadi Chamoun: I want to follow up on an earlier question about the Transcon merger potentially here, and I have a question on CapEx, but Is it fair to assume CN is an observer in this kind of framework that we're kind of potentially looking at, and ultimately, you will look to defend your competitive access in an STD process if mergers were to be announced in the future? Is that kind of a fair framework to think about?
Tracy Robinson: And really, my question is on, I mean, volumes have been relatively flat for the last five, six years and Your gross capex envelope have remained relatively elevated and we've seen kind of degradation and cash conversion obviously as a result of that. Is this Is this kind of more longer term thinking on your part? You're investing still at a very high level. Is there an opportunity here for tightening, you know, that, that, that spend and, you know, ultimately, you know, given just the growth environment is a little bit more muted. So, Fadi, let me say this.
Tracy Robinson: You heard Jez say that we're pulling $50 million out of a budget that was $100 million less than it was last year. So, we are watching CAPEX pretty closely. A couple of levers on that. Pat and his team are doing a lot of work to make sure that the maintenance CAPEX that we put into this system, well, all CAPEX that we put into this system is done at higher levels of productivity as every month goes on, and we're seeing the traction in that. So, that's going to be a benefit for us. We'll continue to invest for growth as we have line of sight and certainty on that growth.
Tracy Robinson: And so, we are doing some of that in the western corridor where we've got line of sight to the energy exports and to the frac sand improvements and to some of the other specific growth. Most of our growth capital right now is focused on that western part of the network. And so, we look at this constantly. We will always keep our network up to the level that we need to to make sure that it runs safely and it operates efficiently. We will build for growth only as we have line of sight. And in all cases, to the first part of your question, we will rigorously defend our competitive access, whether it's related to mergers or anything else.
Tracy Robinson: And I hope I covered all that you asked for there, Fadi.
David Vernon: Your next question comes from the line of David Vernon with Bernstein. Please go ahead. Hey, good afternoon, and thanks for taking the question. So I guess, Tracy and Tim, as you're looking out from 25, baking in some more tariff headwinds in the back half of the year, I'm assuming those are probably going to bake into the first half of the year.
Tracy Robinson: I'm just wondering, from a timing perspective, as you go across the CN initiatives that you've got out there, like how confident are you that you can get some some volume growth back into the business in 26? Or do we think we're still going to be kind of slugging through this very uncertain environment again next year? Thanks.
Tracy Robinson: I was hoping maybe you could tell me when the tariffs were going to be settled in the trade deals will be done. I you know, we don't know what we've learned is that I'm surprised that where we I'm surprised at where we are now. And I can't I'm not the person someone who can predict exactly what this what's going to happen here. What I can tell you that we are staying very close to our customers. And there are cases where we can help them, you know, get into different markets and mitigate the impact. There are some cases where customers are very proactively looking at diversifying into other markets.
Tracy Robinson: And we think that we can be helpful on that. But as long as we are in the kind of uncertainty in the tariff environment that we are, I think that you're going to see enough uncertainty in the marketplace, you know, that we may see an impact on that.
Tracy Robinson: The fundamentals of the growth strategy on this network remained intact and are very strong. And if you think about, you know, some of what we've talked about on ag and energy and some of the others, those persist in any regard. Okay, I am.
Ken Hoexter: Your next question comes from the line of Ken Hoexter with Bank of America. Please go ahead. Hey, great. Good afternoon.
Ghislain Houle: Thoughts on the range of the mid to upper single digit in terms of EPS growth, but maybe talk about what gets you to top or bottom end. I know Janet ran over a few of the revenues that can snap back. But is it purely revenue? Is it cost? Do we see more margin gains? And within that, your volumes are down slightly in the first half down, as you mentioned, 6% 3Q to date, the guides low single digit growth, maybe just talk about the confidence of that relative to that EPS growth target range.
Ghislain Houle: Yeah, you know, normally, Ken, at this time of the year, we'd be narrowing our guidance, but there are a number of factors at play here. You know, whether it's mix, it's volume, it's currency, it's fuel. So all of those play a role in what would move us through that guidance range.
Ghislain Houle: And we thought through, you know, the volatility in some of those, but Gis, do you want to make some comments on that? Yeah, some. Yeah, thanks, Tracy. Yeah, some of these factors are very volatile, Ken, as you know. So we started the year thinking that FX, for example, was at 70 cents, and it's now at 73. And as I said, in my remarks, every one penny of appreciation of Canadian dollar to US is 5 cents on EPS on an annualized basis. So I mean, we've assumed now the range would be 70 to 75 cents FX for the balance of year.
Ghislain Houle: We'll see. But as you know, if the Canadian dollar continues to appreciate, then that's going to be a headwind. And if it depreciates, then it's going to be a tailwind. A little bit of the same on fuel, OHD and WTI. We're assuming right now that OHD and WTI will stay for the balance of year about at the current spot rates, because we don't know. And that's very volatile. So and then, of course, the mix is something that hit us quite a bit this year, as Janet mentioned. And those are all the things that we can't control.
Tracy Robinson: But what we can control is how we respond to it. And that is our key focus as we go through a period of uncertainty like this.
Konark Gupta: Thank you. Your next question comes from the line of Konark Gupta with Scotiabank. Please go ahead. Thanks. Good afternoon. Just on the domestic and demodal side, I think you guys talked about the market share gains there. It seems like volumes are running pretty good. Can you talk about where the gains are coming from and what's driving it?
Janet Drysdale: And just a quick clarification question on the carbon tax elimination, just the Q2 operating ratio, did it benefit from the elimination or was it So I can start off with the first question on the domestic intermodal. The answer is pretty straightforward, Conarch. It's a really good service. And so we've been able to, with the help of the operating team, just really demonstrate to customers that we have a fluid network, a fast network, when it needs to be for the case of domestic intermodal, and we've gained some share there.
Ghislain Houle: On the other piece, Ghislain, I'll pass it to you. Yeah, Conarch, on the carbon tax elimination, it is a complete flow-through to customers, as Janet pointed out. Now, maybe it's tough to put your finger on it because it's a bit masked by the other factors that you saw in the earnings drivers that we demonstrated in Q2, including the mix. So it's a bit masked by those factors. Okay. Thank you.
Ravi Shanker: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead. Great, thanks everyone. Janet, great to have you back on the call. You said in your prepared remarks that the customers you're talking to say that they're rethinking their supply chain.
Janet Drysdale: Can you talk about what changes they're talking about, both in the short term as well as the medium to long term? Yeah, certainly, I think the metals and minerals segment is a good example of how they've been able to adapt in the short term. And, you know, you may recall about a third of our business is transborder, two thirds going south, one third coming north. That's the the segment most impacted, I would say, by the trade and tariff situation. And so we have a strong franchise, independently in both Canada and the US. And so in the case of some of that metals and minerals, we've been able to do alternative supply chains intra Canada, intra US, we've been able to capitalize on some different automotive lanes.
Janet Drysdale: These are the short term things, what the customers are starting to talk to us about now is what can we do on a longer term basis to reduce their exposure to the US market and to think about how to get more goods offshore. So that's something that we're certainly focused on, I would say, frankly, both with our customers, as well as with the with the Canadian government and, and other stakeholders along the supply chain.
Scott Group: Your next question comes from the line of Scott Group with Wolf Research. Please go ahead. Hey, thanks. Afternoon. Nice to hear you on the call, Janet. I'm not sure if this is for you or Tracy. I know a few people have already asked about volume, but just big picture, like volume, RTM are down in Q2, down to start Q3. Every other rail is positive. I just don't know that I recall many other times with one rail as an outlier without there being some sort of like operational issue. And that's obviously not the case right now.
Scott Group: So, I don't know, do you have just an explanation for the relative volume trend versus others?
Tracy Robinson: And then maybe just separately, Tracy, I know last quarter you were talking about a path to 200 base points of margin improvement for the year. What's embedded in the guide now, if you can? Thank you. Thanks, Scott. I can start off a little bit on the volume side. And it's always very hard to compare, I think, across the rails. And we've got different books of business. And we also have different year over year comparables. So sometimes, you know, somebody who's up this year is because they had a weaker year last year, I would say the two segments on the US side that have been particularly strong is intermodal, as well as the thermal coal.
Tracy Robinson: And I think that's kind of why you see some of their volumes coming through. I would say what was a little bit unusual for us in the quarter was the amount of impacts that we had in that petroleum and chemicals segment. And really, most of those are kind of transient issues. So they're going to resolve themselves as we kind of work our way through Q3. Now, as you've seen, it's not, you know, in the first couple weeks of Q3, it's going to take a little bit of time, but we do feel those are going to come back.
Tracy Robinson: And as it relates to your question on, you know, the operating margin improvement of the year, you know, we are going to expect, we do expect margin improvement in 2025. This hasn't changed. You've seen some improvement in Q1 and Q2. The easier compares, as you know, are Q3 and Q4. We've outlined the headwinds, you know, particularly the traffic mix. So hitting 200 basis points may be a little bit more of a challenge than it was before, but it's not completely off the table. As always, it depends on volume and mix. But what is going to support is the velocity with which we are kind of responding as we see changes in mix and volume out on the property and the extent to which we can make sure that our resources match kind of what we're trying to move.
Janet Drysdale: Your next question comes from the line of David Zazula with Barclays, please go ahead. Hey, thanks for squeezing me in. Janet, as you're coming in for the intro, I guess, what are your kind of priorities? What do you Unknown Speaker, Unknown Speaker, Unknown Speaker, Yeah, I think David, I think the key focus is to really try and get a little more agility built into the commercial side of the business. It's a brave new market out there in terms of the way things are moving. We do see more opportunities on the spot market as supply chains kind of evolve in relation to trade and tariff.
Janet Drysdale: So I think the focus is really around the intensity of execution around those spot markets, our ability to drive that growth pipeline that's more specific to CN, and to be able to adapt as these markets evolve potentially, including to offshore. So intensity of execution, I guess, is the way I would frame it up.
Unknown Executive: Your next question comes from the line of Steve Hansen with Raymond James.
Stephanie Moore: Please go ahead. So listen, you know, I won't comment on any specific change, but what I will say is that it's my job to make sure that we've got the right team across commercial, across the organization to execute on our strategy. And I take that very, very seriously. And I very much appreciate Janet stepping into this position. So let me just leave it there. We've got the right team and we're moving forward.
Stephanie Moore: Your next question comes from the line of Stephanie Moore with Jefferies. Please go ahead. Hi. Good afternoon. Thank you.
Ghislain Houle: You know, maybe following up on a previous question in terms of the margin improvement or OR improvement for the year, could you talk a little bit about just cadence as we think about the back half of that OR? I think there's a lot of moving pieces here, admittedly, so I'd love to get your thoughts on how we should think about cadence in the back half in conjunction with your outlook for the improvement for 2025. Thank you. I think the cadence is difficult to say, and it's going to match kind of the volume. And, you know, the thing is, you heard Derek talk about, and Pat, the fact that we can, we're positioning ourselves to move as quickly as possible as we see changes in mix and volume on the downside.
Tracy Robinson: You know, they've demonstrated, you know, a level of acuity around getting that done quickly. It is impossible to match it on the downside dollar for dollar, given the timelines of, you know, getting locomotives out of the system or getting, you know, kind of furloughs in place. But what they also have an eye on, and which we need to be equally nimble at, is responding on the upside. And so we're staying very close to the folks that have been furloughed. We want them to be able to come back quickly. Pat is making sure that the locomotive fleet is ready to go.
Tracy Robinson: So it's really going to depend on how and when the volumes show up and where they show up from a mix perspective.
Tracy Robinson: I don't think we could put a cadence on kind of the margin improvement over the second half.
Tom Wadewitz: Your next question comes from the line of Tom Wadewitz with UBS. Please go ahead. Unknown Speaker Yeah, good afternoon. I guess Going back to the executive change, I know, Tracy, you didn't want to offer too much perspective on that, but was there something related to that where you'd say, like, you know, there was kind of execution of the strategy that wasn't right? Or maybe we didn't quite have the strategy right? Or is it just not related to that? And then I guess, on the intermodal topic, is that it doesn't sound like it's tariff related in terms of softening in second half?
Tracy Robinson: Is that more kind of just demand and macro related? So anyways, any thoughts on those two? Appreciate it. Thank I'm not going to make many comments on the team issue. Our concerns and what the headwinds are in this environment right now are related to tariffs and related to the impact of those tariffs on certain sectors and the impact of all of that on the questions around the macroeconomic. This is not new. The economy will recover. We've been here before. We will get, I think, ultimately, certainty in the tariff and trade deal front. As we see that, our strategy is the right one for our network and our diversified book of business.
Janet Drysdale: We strongly believe in it. We need to move urgently to execute it, as Janet has said. When I look at the construct of this team at every part of the organization, it's with a long-term view with how we're building the capabilities and the muscle to be able to do this, not just now but into the future. From an intermodal volume perspective, I'll let Janet chime in on this, but it is tariff-related. Some of what we've got, we've constructed a great portfolio of international intermodal customers. We like it a lot. They're driving volume through Rupert even at a time when most of the shipping lines are racing to get onto U.S.
Janet Drysdale: soil as quickly as possible because of timeline around tariffs. And so, this is a tariff-related issue. Underneath it, what we can't see for sure is really the strength of consumer sentiment and consumer demand, and I think that will unfold over time. Janet, did you have anything else? Yeah, I could just add a couple more comments.
Tracy Robinson: I think, certainly since post-COVID, that fall intermodal peak has become a pretty elusive concept. I think what we're seeing right now across the marketplace, and this is not specific to CN, is that there's been some inventory front-end loading. It's quite possible that July may have been the peak season. It's going to depend on how consumer sentiment, as Tracy mentioned, plays out from here. I would add as well that of the goods that we're moving. It's not just China. It's also Korea. It's also Japan. There are meaningful tariffs on both countries as well. And they're and they're on higher value goods that may be sensitive as well to, you know, Nintendo PlayStation, for example, you put a 25% on that is perhaps meaningful in the context of the consumer.
Janet Drysdale: So I think we're holding our share really well. And I think that's a testament to the service that we're providing. But I think it is a tougher marketplace. And you guys have good visibility on that when you look at, you know, how transpacific rates are falling when you look at how capacity is being pulled out of those lanes. So we're going to wait and see, but we're going to protect our share. And we're going to see what we can do to leverage our service to drive more.
Jonathan Chappell: Your next question comes from the line of Jonathan Chappell with Evercore ISI. Please go ahead. Thank you. Good afternoon. Going back to some of the recent headlines as it relates to some of the new services you've created with the players. In that speculation, is there anything as far as out clauses or, you know, how long some of the agreements are that we should be focused on? You know, Foundation. Thank you.
Tracy Robinson: You kind of cut out on us there, John, at the last little bit. I'm not clear what your question is. Could you repeat it? Yeah, well, I'll just be more direct about it. As it relates to the, you know, the merger headlines, you have the Falcon Premium service with Union Pacific. So are there any out clauses associated with that? Do we know how long that agreement's for? Anything we should be worried about? If there's any change in ownership or, you know, collaboration with the East Coast Rail? Look, no, I would just remind everybody that that service is really Mexico to Canada.
Tracy Robinson: North-South is the other important part of that piece. So we're going to continue driving that volume.
Ariel Rosa: Thank you. Your next question comes from the line of Ari Rosa with Citigroup. Please go ahead. Hi, good afternoon. I wanted to follow up just on the CapEx point. I was hoping you could break down for us or remind us at least what share of your CapEx is maintenance versus growth. And, you know, it's been some time, if we go back and look at the history, it's been some time since we've seen meaningful growth in RTMs. I'm just wondering how you get confidence that you're seeing the appropriate ROIs from that elevated level of CapEx spent.
Ghislain Houle: Thanks. Yeah, Ari, I can, I can talk about it. And Tracy, if you want to jump in, you're welcome to, to do it. But really, a good portion of our CapEx envelope is maintenance, like, like all of the other rails. When we do invest in capacity, a lot of it is in Western Canada, like Pat mentioned, we do invest with a thought of capital efficiency, i.e. we want to make sure that about 100% of our investment goes in the ground. And then with the growth CapEx related to customers, you know, we look at the the internal rate of return, and we want to make sure that the internal rate of return is above our threshold internally.
Ghislain Houle: And we've got detailed business cases on this to make sure that we we have the benefits coming in, and we go and track those after these investments are done. I mean, I say that that's basically and Tracy, I think you made the point is when we look at our maintenance CapEx, the key here is to do it more efficiently. And we're very happy with the changes we've done in engineering lately, where we can see some of this productivity and efficiency coming in. And allowing us to invest more at a lower cost.
Tracy Robinson: And let me just add a little bit to that. So our CapEx, I don't think we give the breakdown in CapEx between maintenance CapEx and growth, but it also includes IT, the IT capital that we spend. And if you look at, we watch very closely the returns on the growth CapEx. And as Gilles has said, a lot of it is in a very specific to some of the growth, primarily, not completely, but primarily in the western part of the network. And it's tied to volume through usually commercial contracts that protect the return on that. And so that volume is showing up.
Tracy Robinson: We have had volume declines in other parts of the network that create for us capacity. And the magic will happen, as Derek was speaking earlier, if we can fill trains and fill corridors, you know, where we have capacity more related to the south and the eastern parts of our network.
Bascome Majors: The last question comes from the line of Bascome Majors with Susquehanna. Please go ahead. Thanks for taking my questions. You know, looking back four years, CN was drawn into a merger situation, but faced resistance from regulators and shareholders. And that ultimately led to some changes in management and both the board If the Class 1 rails did consolidate into two transcon networks in the U.S., what is the biggest competitive concern that you would have? And does CN's experience from 2021 and 22 keep you on the sidelines from what may transpire over the next 12 to 18 months?
Tracy Robinson: Or are there scenarios where you'd actually want to be an active participant from a defensive situation? Thank you. Listen, we're not going to speculate on the whole merger question. And we are focused right now on driving execution to our plan on our network. And we think that that's the right thing for us to be focused on in any scenario, we would very rigorously defend our competitive access and our growth prospects. And I'm going to leave it at that.
Tracy Robinson: Thank That concludes the question and answer session. I would like to turn the call back over to Tracy Robinson. The conference call has now ended.
Operator: Thank you for your participation and you may disconnect your lines.