Canadian National Railway Co Q2 FY2025 Earnings Call

Good afternoon. My name is Christa, and I will be your operator today. 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, Christa. Welcome, everybody, and thank you for joining us for CN's Second Quarter 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; Pat Whitehead, our Chief Network Operations Officer; Janet Drysdale, our interim Chief Commercial Officer; and Ghislain Houle, our Chief Financial Officer. As noted, we have forward-looking statements and non-GAAP definitions for your reference on Page 2 of our presentation. These forward-looking statements include estimates, goals, and predictions about the future based on our current information and educated assumptions. These come with risks and uncertainties, and with that, there is always a possibility that the outcomes may differ from the expectations. That being said, forward-looking statements aren't guarantees and factors like economic conditions, competition, fuel prices, and regulatory changes could affect actual results. It is now my pleasure to turn over the call to CN's 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 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. 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 the 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. Bulk volumes were very strong through the quarter. Now this is a great business, and it reflects our advantage network for the ag sector and the strength of our share. In the merchandise and intermodal segment, we started in Q2 to see the impact of tariffs and the 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. I will get into the details on the volumes and the revenues with Janet in just a few minutes. And our network is running very well. Our operating metrics, velocity, dwell, and customer service, they're all in the right spot. And it's important that as our volumes or mix 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. This helped us drive a 50 basis points year-over-year improvement in margin and 150 basis points spanning over Q1. Now everyone across this organization is focused on containing costs as volumes adjust. This team is aligned, we're focused, and we're disciplined. 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. Instead, there is increasing uncertainty around the tariff and trade environment, particularly in Canada and some concerns over the weakening macroeconomic environment. We are seeing impacts in our Forest Products, metals, and our autos business. There is a question of what happens to the international volumes in the last half as the tariff discussions continue. We know that these questions will be resolved with time, and we'll have greater certainty on the traditional and perhaps newly emerging trade flows. The immediate term uncertainty makes calling the merchandise and intermodal volumes for the second half a more significant 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. 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. Here's what we're doing. We have efforts underway with our customers to further leverage the benefits of the strength in our diversified book. We have a very strong bulk and energy franchise, 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. In the areas that are impacted by tariffs, we're working closely with our customers on getting them to other markets. For 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. moves, and we were able to mitigate some of the loss of the southbound flow. We believe there is more opportunity here. 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'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 there's more to come. We are all over that. We delivered a solid Q2 in this environment, but there is ongoing uncertainty as we look forward. 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. 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. We uniquely bypass Chicago congestion and have a well-diversified book of business. Remember, we also originate over 85% of our book and originate and terminate more than 65% of our business, more than any Class I. This means we control more of the service at origin and destination and have a strong partnership with our customers that we can build on. I'm going to turn it over to the team to get more details on the quarter and how we're thinking about the balance of the year. Derek, I'll turn it to you first.

Yes. Thanks, Tracy, and good afternoon, everyone. I'll be speaking to Slide 6. I'm pleased with our operational performance as the operating team has maintained a very fluid and healthy network throughout the second quarter. 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. We're 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 workload. Both workloads were up 9%, and we handled that with only 4% more bulk train starts. At the end of the quarter, we had 560 train and engine employees on furlough across the network, and we are continuing to actively manage resourcing as we keep an eye on volumes. 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. 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 state 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. I can proudly say they have been very effective. Now coming into July, we've had a couple of incidents in the South, which have put pressure on velocity in that region. Meanwhile, the West and the East continue to perform well. 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. 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 type 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. 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 incidents. Our conviction is simple. Everyone goes home safely every day, and that standard is not negotiable. 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 locations, and we are timing every training class in close partnership with what the commercial team is seeing in terms of the volume outlook. On the asset 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 fleet. These moves, combined with careful train planning, shield us from the unnecessary expenses and lifted both our gross ton miles for horsepower and our fuel efficiency by 1%. 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 costs year-over-year. Now that's control and efficiency delivered. In engineering, our lowest overtime in a decade indicates we're executing to plan and not playing catch-up. Tie gangs are 7% more productive with 5% lower unit cost. Work block delays are down across the network. By moving more work in-house, we're gaining greater control and driving efficiency, delivering more with the resources we have. 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 mean we're set up to respond quickly, safeguard the bottom line, and capitalize on opportunity as markets rebound. 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.

Thanks, Pat. Good afternoon, everyone. It's great to be here. I really appreciate the opportunity to step in as interim Chief Commercial Officer. 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. As you just heard, the railroad is operating very well, and that translates directly into solid service for our customers. That's foundational in terms of our focus on driving growth no matter what external challenges we face. Revenues in the quarter fell 1% on 1% lower RTMs and flat carloads, reflecting weaker market fundamentals amid ongoing U.S. trade and tariff actions and uncertainty. We also had an unfavorable mix impact, and more details on that in a minute. Lower applicable OHD prices versus last year were a headwind of about 2%. In addition, the Canadian carbon tax surcharge was repealed on April 1, which impacted revenues by about $70 million in a quarter. This is a pass-through to customers, 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 per RTM was flat as a result of mix. Year-over-year, we moved less merchandise business with the key mix impact driven by Forest Products, refined petroleum products, chemicals, and metals. 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 in 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. We did partly backfill some of those moves from the U.S. and Eastern Canada, but those are much shorter haul. We have lower shipments for renewables, mainly the result of policy changes in the U.S. and Canada. Those policy changes drove producers to source from inside Canada versus Iowa and Louisiana, which is 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 our bridge fire, that was on the branch line that Derek referred to. That paused shipments early in the quarter. 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-U.S. Challenging market fundamentals are continuing to unfavorably impact Forest Products volumes. Turning to coal. Canadian met coal exports were up due to the Quintette 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. The real bright spot for the quarter was grain and fertilizers with a 12% increase in revenues. 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. Potash RTMs were up almost 30%, driven by strong exports to the Port of St. John. In terms of intermodal, we expected increased blank sailings, and that's what we got, primarily impacting units through Vancouver, which were down 4%. Prince Rupert units, however, rose 14% and were led by new Gemini volumes. In domestic, wholesale volumes were up, particularly in the TransCon and Eastern Canada lanes. In automotive, both finished vehicles and parts were below last year's levels and we certainly saw some shift in flows, with auto manufacturers moving production around, where Mexico to Canada was up and volumes between Canada and the U.S. were down. Turning now to the outlook. The on-again, off-again tariffs are forcing customers to rethink their supply chain. 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. I would say our perspective has changed most notably for international intermodal and Forest Products. 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, but our view has been tempered by the tariff situation and the recent pull-forward of inventory. In 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. 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. 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 petroleum and chemicals for the balance of the year. For other trade-sensitive commodities, metals, minerals, and automotive, we're navigating ongoing market shifts by staying close to our customers and adapting to changing supply chains. 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. 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 should continue to benefit from the new production in Northeast B.C. 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. Let me wrap up. The railroad is running exceptionally well, and we are delivering for our customers. We're controlling what we can, including the intensity with which we drive our growth agenda, especially our CN-specific growth opportunities. Ghislain, over to you.

Turning to the quarter, we reported earnings per share of $1.87, which is a 2% increase compared to last year's adjusted earnings per share of $1.84. Revenues decreased by 1% year-over-year, attributed to a 1% lower revenue ton miles. The operating team quickly adjusted the train package to accommodate our changing volume mix, enabling us to achieve an operating ratio of 61.7%, which is a 50 basis point improvement from last year's adjusted operating ratio of 62.2%. Regarding the earnings drivers for the quarter, volumes were lower due to macroeconomic factors and tariff concerns. We faced an unfavorable mix shift and a $0.04 headwind from fuel prices. Conversely, we are pleased with our effective cost management and pricing in line with rail inflation. Additionally, we saw a $0.02 benefit from foreign exchange year-over-year. However, the average foreign exchange rate was $0.72 in the second quarter compared to our plan of $0.70, resulting in a $0.02 headwind. It’s important to note that any appreciation of the Canadian dollar against the U.S. dollar represents a $0.05 headwind to earnings per share on an annual basis. In terms of operating expenses, labor costs remained flat compared to last year, as general wage increases were largely offset by a reduction in average headcount, leading to improved productivity. Spending on purchased services and materials was also flat year-over-year, with increased maintenance costs balanced by lower outsourced services. Fuel expenses fell by 25% compared to the previous year, driven by the removal of the carbon tax in Canada and a 23% decrease in price per gallon. Other costs increased by approximately $40 million or 25% compared to last year, primarily due to higher incident and software support costs as we transition our technology to the cloud. We generated over $1.5 billion in free cash flow by the end of June, a 5% increase compared to the same period last year, mainly due to decreased capital expenditures. Our leverage at the end of the second quarter stood at 2.5 times, and we will continue our share buyback program until February 3 of next year, while maintaining a target of 2.5 times adjusted debt to adjusted EBITDA. Looking ahead to 2025, the macroeconomic environment is becoming more volatile due to fluctuating tariff rates and policies, which are contributing to pressure on volumes. Although we are executing our growth initiatives, we are adjusting our volume growth expectations for revenue ton miles to the low single-digit range. We continue to expect West Texas Intermediate crude oil prices to range between $60 and $70 per barrel, and we are now projecting foreign exchange rates for the remainder of the year to be around $0.75, revised from approximately $0.70. Our effective tax rate remains within the 24% to 25% range. Given the updated volume expectations and the effects of the Canadian dollar, we are revising our earnings per share growth forecast for 2025 to mid- to high single digits. We are also planning to reduce our capital expenditure envelope for the year by about $50 million and will actively seek further opportunities to tighten expenditures in the current and next year. Moreover, we are removing our long-term guidance for 2024 to 2026 due to the limited time remaining. Tariff policies have significantly influenced traffic volumes and mix. We will keep close contact with our customers and manage our resources and costs carefully. In conclusion, the network is performing well with strong operational and service metrics. We anticipate volume growth in the latter half of the year as we move past last year's labor disruptions. We are closely monitoring costs in this uncertain climate and focusing on what we can control. We are satisfied with our second-quarter results and are well-prepared to meet our revised guidance.

Thanks, Ghislain. And Christa, we'll go to questions now.

The first question comes from Cherilyn Radbourne with TD Cowen.

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? Given that mergers seem to be the topic du jour, could you comment on whether you think two hypothetical transcontinental mergers would impact Prince Rupert's ability to attract that traffic in the future?

Thanks, Cherilyn. Listen, I'm going to turn the first part of that question over to Janet, and then Janet, I'll take the second half.

Yes. So Cherilyn, 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. 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. 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, a little bit tougher at Vancouver. Of course, we have this stopwatch clicking around the tariff deadline of the Chinese tariffs on August 12. There is some interest, I would say, from the overseas companies to make sure that they can get their products landed on U.S. soil before that deadline. So it's been a bit tougher, I would say, on the Vancouver side. And the merger question, I'll hand it over to you, Tracy.

Thanks, Janet. Let me just say this, Cherilyn, we recognize on the merger front that the chatter is out there, and we're obviously paying attention to that. It would make no sense for us to speculate on the potential of mergers or even what other Class I intentions are. But I'll say this, our view remains that there are similar benefits to be gained from commercial arrangements without the pretty disruptive effects of a major merger. The hurdles due to the merger are not insignificant. The regulatory barriers are high and untested. But whether it is Rupert or other parts of our network, 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 robust origination network. More than 85% of our volume originates on our lines. When it comes to destination, more than 65% of our freight moves from an origin on CN to a destination on CN. This makes our business resilient. And as Janet said, in the case of Rupert, the Rupert advantage would persist. That volume goes largely to Chicago, the Midwest, and other points in our line. The Rupert Advantage would remain intact. So we're watching all this very closely. Our focus is on driving execution to our strategy on what we think is a pretty advantaged network.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets.

So my question is on the company-specific volume growth initiatives that you outlined at Investor Day in 2023. Obviously, they were quite significant. The reason for your guidance reduction you pointed to tariffs and trade. However, did you make the change with your executive rank? Just wondering if there have been any challenges or changes in your optimism around your company-specific initiatives as you look out the next few years?

Not at all, Walter. I would tell you that those CN-specific initiatives were all based on the advantages of our network, whether it is the intermodal volumes using Rupert, Vancouver, Halifax, and a stronger and stronger Montreal. Whether it is the energy, how we're positioned in northern Alberta, British Columbia, and Saskatchewan, on the energy front and the growing demand for that energy in global markets, whether it is the sand driven into that market to support gas drilling, whether it is some of the canola crush that has increased the yields and production of canola, creating multiple moves into the crush facilities, and then with the meal going offshore, whether it is what we're doing in the southern part of our network, to integrate the Iowa Northern and to ensure that crush facilities down there are as productive as they intend to be. All of this remains intact. What's happening right now is the environment, given the tariff situation, is pretty uncertain and mildly volatile. We are seeing the direct impact in some lines, some sectors, some of our lines of business. But the fundamentals of growth given where our network is and what's happening remain intact. This is just going to be a timing issue. We know that the tariff deals will ultimately get done or at least we believe that will be the case and that we'll see more of the normal kind of flows emerging, as we said, and perhaps even new ones. There are lots of efforts around new trade flows in Canada, and we think that could be a great opportunity for us as well. It's all intact, and we're ready.

Your next question comes from the line of Chris Wetherbee with Wells Fargo.

I wanted to ask about the RTM guide, particularly for the second half of the year. It looks like 3Q is off to start just a little bit slower with volume down kind of mid- to high single digits on the RTM side. 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? Does it make sense to leave a little bit more cushion? As you think about the RTM outcome, relative to the EPS outcome, is that towards the flatter end? So I’d like to get a sense of how to think about that RTM versus EPS relationship.

Janet, why don't you take that one?

Yes. Thanks for the question, Chris. In the context of petroleum and chemicals in particular, we've got some lingering refinery outages, and 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. Certainly, the grain crop is going to come in the September timeframe, so yes, we will see the volumes increase.

I would add to that as well, if you think about, if you transition that over to the earnings outlook, right? We're not standing still amidst changes in volumes and in mix as well. We have a very proactive effort underway to ensure our costs are adjusted as our volumes and our mix adjust, and we've had great traction on that. A 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.

Your next question comes from the line of Brian Ossenbeck with JPMorgan.

Maybe Tracy, if you can elaborate a little bit more on those proactive changes with mix? Because if I understand Janet's comments correctly, some of the Forest Products, refined products, renewables, those things don't seem like they're going to reverse all that quickly. How far along are you on this path? What are sort of the levers you can pull? Is it all labor? Maybe you can elaborate a little bit more on that.

Yes, I'll start on that, and then I'm going to turn it over to Pat to talk about the resourcing. What happened in Q2 was, as you heard today, we had a great bulk program. Our bulk volumes were very, very strong. That's a very good business. We love that business. Our network is built well for that business. Our share is continuing to increase, which is very good. What we saw is a reduction in Forest Products given where, particularly in lumber, we saw housing starts continue to go down. Some tariff actions have been long-standing in lumber, but we're seeing that intensify as well. We saw the impact on other merchandise sections like steel and aluminum; indeed, we were able to mitigate some of that. In those two sectors, that's likely to continue until we see some sort of 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. Instead of going down, those went up to 50%. I don't know where these tariffs are going to go, but we anticipate that it's not going to be resolved immediately. Think also about what Janet said on the more the energy sector, the petroleum, and chemicals, those were more one-time issues. The tariff impact; we're not seeing it on those. That’s going to come back in the third quarter, and we expect it to be strong in the fourth. The mix equation is not going to be the same. It will mitigate as we move into the tail end of the year a little bit, but we're going to have the weakness that we expect until there's some arrangements or deals made in the Forest Products, steel, and aluminum, the relative weakness.

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 locomotives. The fleet is running better than it ever has, and we have locomotives stored that we can quickly put back in service. Looking at volume ramp-up, these folks that we recall, they only take a few weeks for refresher training versus someone that we would hire taking nine months to be fully trained. So we are well positioned to react if volumes turn down as we have. We're also positioned well to make a quick rebound.

What you heard Derek say as well about how we've responded in train starts relative to volumes, which has been very impressive in what these guys have done. Our job is to manage what we can control, and I'm really pleased with the way this team is doing that.

Your next question comes from the line of Fadi Chamoun with BMO Capital Markets.

I want to follow up on the earlier question about the TransCon merger potentially here, and I have a question on CapEx. Is it fair to assume CN is an observer in this kind of framework that was potentially looking at? Ultimately, will you look to defend your competitive access STB process if mergers were to be announced in the future? Is that a fair framework to think about? My question is on volume, which have been relatively flat for the last five, six years, and your growth CapEx envelope has remained relatively elevated. We've seen kind of degradation and cash conversion, obviously, as a result of that. Is this more long-term thinking on your part? You're investing still at a very high level. Is there an opportunity here for tightening that spend? Given the growth environment was a little muted.

Fadi, let me say this. You heard Ghislain say that we're pulling $50 million out of a budget that was $100 million less than it was last year. We are watching CapEx pretty closely. A couple of levers on that. Pat and his team are doing a ton of work to ensure that the maintenance CapEx we put into the 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, doing some of that in the Western corridor where we've got line of sight to the energy exports into 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. We're going to look at this constantly. We will always keep our network up to the level that we need to, to ensure that it runs safely and operates efficiently. We will build for growth only as we have line of sight, and in all cases, for the first part of your question, we will rigorously defend our competitive access, whether it's related to mergers or anything else. I hope I covered all that you asked for there, Fadi.

Your next question comes from the line of David Vernon with Bernstein.

I guess, Tracy and team, 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. I'm just wondering from a timing perspective as you go across the CN initiatives that you've got out there, how confident are you that you can get some volume growth back into the business in '26? Or do we think we're still going to be kind of slugging through this area and uncertain environment again next year?

I was hoping maybe you could tell me when the tariffs were going to be settled and the trade deals will be done. We don't know. What we've learned is that I'm surprised at where we are now. And I can't, I'm not someone who can predict exactly what's going to happen. What I can tell you is we are staying very close to our customers, and there are cases where we can help them get into different markets to mitigate the impact. There are some customers looking at diversifying into other markets and we think we can be helpful on that. But as long as we are in the uncertainty in the tariff environment, we are likely to see uncertainty in the marketplace, which may impact our performance. The fundamentals of growth strategy on this network remain intact and are very strong, and if you consider some discussions on ag, energy, and others.

Your next question comes from the line of Ken Hoexter with Bank of America.

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 Janet ran over a few of the revenues that can snap back. Is it purely revenue? Is it cost? Are we seeing more margin gains? Within that, your volumes are down slightly in the first half, down as you mentioned, 6% 3Q to date, the guide's low single-digit growth. Just talk about the confidence of that relative to that EPS growth target range.

Normally, Ken, at this time of the year, we'd be narrowing our guidance, but there are a number of factors at play here, whether it's mix, volume, currency, and fuel. So all of those play a role in moving us through that guidance range, and we thought through the volatility in some of those. Ghislain, do you want to make some comments on that?

Yes, thanks, Tracy. Some of these factors are very volatile, Ken. We started the year thinking that FX, for example, was at $0.70, and it's now at $0.73. As I said in my remarks, every $0.01 of appreciation of the Canadian dollar to the U.S. is $0.05 on EPS on an annualized basis. We've assumed now the range would be $0.70 to $0.75 FX for the balance of the year, we'll see. If the Canadian dollar appreciates, 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 the year about at the current spot rates because we don't know. That's very volatile. The mix is something that hit us quite a bit this year as Janet mentioned.

Those are all the things that we can't control, but what we can control is how we respond to it, and that's our key focus as we go through uncertainty like this.

Your next question comes from the line of Konark Gupta with Scotiabank.

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? Just a quick clarification question on the carbon tax elimination. Did the Q2 operating ratio benefit from the elimination or was it neutral?

The answer is a pretty straightforward, Konark, it's a really good service. With the help of the operating team, we've been able to demonstrate to customers that we have a fluid network and a fast network when it needs to be for the case of domestic intermodal, and we've gained some share there. On the carbon tax elimination, it is a complete flow-through to customers, as I pointed out. It’s tough to pinpoint it because it's a bit masked by the other factors that we saw in the earnings drivers in Q2, including the mix.

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

Janet, great to have you back on the call. You said in your prepared remarks that your customers are rethinking their supply chain. Can you talk about what changes they are discussing, both in the short term as well as the medium to long term?

Certainly, I think the metals and minerals segment is a good example of how they've been able to adapt in the short term. You may recall about one-third of our business is transborder, two-thirds going south, one-third coming north. That's the segment most impacted, I would say, by the trade and tariff situation. We have a strong franchise independently in both Canada and the U.S. In metals and minerals, we've been able to do alternative supply chains Intra-Canada, Intra-U.S. We've capitalized on some different automotive lanes. These are short-term fixes. What 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 U.S. market and to think about how to get more goods offshore. That's something we’re certainly focused on with our customers as well as with the Canadian government and other stakeholders along the supply chain.

Your next question comes from the line of Scott Group with Wolfe Research.

Janet. I'm not sure if this is for you or Tracy, but I know a few people have already asked about volume. Big picture, volume RTMs are down in Q2, down to start Q3. Every other rail is positive. I don't know that I recall many other times with one rail as an outlier without there being some sort of operational issue, and that's obviously not the case right now. Do you have just an explanation for the relative volume trend versus others? Separately, Tracy, last quarter, you were talking about a path to 200 basis points of margin improvement for the year. What's embedded in the guide now?

I can start off a little bit on the volume side. It's always tough to compare across the rails, as we have different books of business. We also have different year-over-year comparables. Sometimes someone who's up this year is because they had a weaker year last year. Two segments on the U.S. side have been particularly strong: intermodal as well as thermal coal. That's kind of why you see some of their volumes coming through. A little unusual for us this quarter was the amount of impact we had in that petroleum and chemicals segment. Most of those are kind of transient issues, so they're going to resolve themselves as we work through Q3. It's not in the first couple of weeks of Q3; it’s going to take a bit of time, but we feel they are going to come back.

As it relates to your question on the operating margin improvement for the year, 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, our Q3 and Q4, we've outlined the headwinds, particularly the traffic mix. Hitting 200 basis points may be a little bit more challenging than it was before, but it's not completely off the table. As always, it depends on volume and mix. What is going to support it is the velocity with which we are responding as we see changes in mix and volume out in the property, and the extent to which we can make sure that our resources match kind of what we're trying to move.

Your next question comes from the line of David Zazula with Barclays.

Janet, as you're coming in for the interim, what are your priorities? What do you see as key opportunities for your time?

Yes, I think the key focus is to really try and get a little more agility in the commercial side of the business. It's a brave new market out there in terms of how things are moving. We do see more opportunities on the spot market as supply chains kind of evolve in relation to trade and tariffs. 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 adapt as these markets evolve, potentially including offshore.

Your next question comes from the line of Steve Hansen with Raymond James.

Tracy, I think this question is for you. Can you speak to the recent change in the Chief Commercial Officer position? I certainly applaud Janet for stepping in here on short notice, but it's hard not to observe the lack of continuity in the C-suite over the last five years. Do you think you're getting closer to the team that you need? Do you think that continuity is an issue? Just trying to get a sense of why the change in the current environment.

Listen, I won't comment on any specific change, Steve. What I will say is that it's my job to make sure that we've got the right team across commercial and across the organization to execute our strategy, and I take that very seriously. I very much appreciate Janet stepping into this position. So let me just leave it there. We have the right team, and we're moving forward.

Your next question comes from the line of Stephanie Moore with Jefferies.

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? There are a lot of moving pieces here admittedly, so I would love to get your thoughts on how we should think about cadence in the back half in conjunction with your outlook for still seeing improvement for 2025.

I think the cadence is difficult to say, and it's going to match kind of the volume. You heard Derek talk about, and Pat the fact that we can respond quickly as we see changes in mix and volume. They've demonstrated a level of acuity around getting that done quickly. It's impossible to match on the downside dollar for dollar given the timelines of getting locomotives out of the system or furloughs in place. They also have an eye on responding on the upside. We're staying closely connected with the folks who have been furloughed. We want them to come back quickly. Pat is making sure the locomotive fleet is ready to go. It really depends on how and when the volumes 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.

Your next question comes from the line of Tom Wadewitz with UBS.

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 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? On the intermodal topic, does it sound like it's tariff-related in terms of softening in the second half? Is that more just demand and macro-related?

We're not going to speculate on the whole merger question. We're focused on driving execution to our plan and we think that that’s the right thing for us to be focused on. In any scenario, we would rigorously defend our competitive access and our growth prospects, and I’m going to leave it at that.

Your next question comes from the line of Jonathan Chappell with Evercore ISI.

Going back to some of the recent headlines as they relate to some of the new services you've created with the players in that speculation. Is there anything as far as out clauses or how long some of the agreements are that we should be focused on? Specifically, I'm thinking about Falcon Premium and things from Mexico to the U.S.

You kind of cut out on us there, Jon, at the last little bit. I'm not clear what your question is. Could you repeat it?

Yes, well, I'll just be more direct about it. As it relates to the merger headlines, you have the Falcon premium service with Union Pacific. Are there any out clauses associated with that? Do we know how long that agreement is for? Anything we should be worried about if there's any change in ownership or collaboration within East Coast Rail?

Look, no, I would just remind everybody that that service is really Mexico to Canada, North South is the other important part of that piece. So we're going to continue driving that volume.

Your next question comes from the line of Ariel Rosa with Citigroup.

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. 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 growth in RTMs. I'm just wondering how you get confidence that you're seeing the appropriate ROIs from that elevated level of CapEx spend.

Yes, Ari, I can talk about it. A good portion of our CapEx envelope is maintenance, like all of the other rails. When we invest in capacity, a lot of it is in Western Canada, as Pat mentioned. We invest with a thought of capital efficiency, i.e., we want to ensure that about 100% of our investment goes in the ground. With growth CapEx related to customers, we look at the internal rate of return, and we want to ensure that the internal rate of return is above our threshold internally, and we have detailed business cases on this to ensure that we have the benefits coming in and we can track those after these investments are done. I’d say, that’s basically what we've got going on. Tracy, I think you made the point when we look at our maintenance CapEx. The key is to do it more efficiently. We’re very happy with the changes we've done in engineering lately where we can see this productivity and efficiency coming in.

Let me just add a little bit to that. Our CapEx, I don't think we give the breakdown in CapEx between maintenance CapEx and growth, but it also includes IT capital that we spend. We watch very closely the returns on the growth CapEx. A lot of it is very specific to some of the growth, primarily, not completely, but primarily in the Western part of the network. It's tied to volume through usually commercial contracts that protect the return on that. That volume is showing up. We have had the volume declines in other parts of the network that create for us capacity. The magic will happen, as Derek was speaking earlier, if we can fill trains and fill corridors where we have the capacity more related to the South and the Eastern parts of our network.

The last question comes from the line of Bascome Majors with Susquehanna.

Looking back four years, CN was drawn into a merger situation but faced resistance from regulators and shareholders. That ultimately led to some changes in management and both the Board. If the Class I rails did consolidate into two TransCon networks in the U.S., what is the biggest competitive concern that you would have? CN's experience from 2021 and '22, does that keep you on the sidelines from what may transpire over the next 12 to 18 months? Or are there scenarios where you'd want to be an active participant from a defensive situation?

We’re not going to speculate on the whole merger question. We are focused on driving execution to our plan, and we think that’s the right thing for us to be focused on. In any scenario, we would rigorously defend our competitive access and our growth prospects. I'm going to leave it at that.

That concludes the question-and-answer session. I would like to turn the call back over to Tracy Robinson.

Thank you, Christa. Thank you all for joining us today. We are indeed in uncertain times. While we can't predict exactly where tariffs, trade, and the economy will go, we are very intensely focused on doing the things we can do both with our customers and in controlling our costs to ensure we protect our margins and are well positioned to execute our growth strategy as we move forward. Thank you for your time today, and we look forward to talking soon.

The conference call has now ended. Thank you for your participation, and you may disconnect your lines.