Earnings conference call (announced in 6-K)

Good morning. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to the Canadian National Railway second quarter, 2026 Financial Results Conference Call. 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. At this time, I would like to turn the call over to Jamie Lockwood, CN's Vice President of Investor Relations and Special Projects. Ladies and gentlemen, Mr. Lockwood.

Bonjour à tous et merci de vous joindre à notre conférence sur le réciteur de 2015-2026 du CEM. Welcome everyone. Thank you for joining us for seeing second quarter, 2026, Financial and Operating Results Conference Call. Joining us today on the call are Tracy Robinson, our President and CEO, Pat Whitehead, our Chief Operations Officer, Janet Drysdale, our Chief Commercial Officer, and Gisele, our Chief Financial Officer. You can turn to page two of the presentation, which includes our forward-looking statements and non-GAAP definitions for your reference. These forward-looking statements reflect our current information and educated assumptions and include estimates, goals, and expectations about the future. These involve risks and uncertainties, and actual results may differ from what we expect. As a reminder, forward-looking statements are not guarantees, and factors such as economic conditions, competition, fuel prices, and regulatory changes could impact actual outcomes. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracey.

Merci, Jenny. Thanks, everyone, for joining our call. I'm pleased to walk you through our second quarter results and some recent developments. This team has delivered another quarter of strong performance. EPS growth of 12% affects the justice on 5% volume growth. We're staying focused on what we control and this is driving results. And we're running the railroad well using service to convert customer growth opportunities, driving cost and capital discipline, and continuing to position CM for growth. With this momentum, we're raising our guidance to now expect earnings for the year of mid to high single digits on the back of low single digit volumes. The engine is running well. We're executing against our strategy, and we can see the results. Our productivity continues to improve while we're supporting a customer growth across our franchise and at the same time running a safe, fluid, efficient, and reliable railroad. Now, we're seeing this in fuel efficiency, where we delivered record performance in the first half of the year. In labor productivity, where we're moving more volumes with less people. And in locomotive productivity, now our team is always challenging itself to use the assets we already have more efficiently. On the commercial side, our teams are focused on winning business and converting opportunities into growth. Now whether it's metals moving within Canada, energy-related traffic, domestic intermodal, or other areas across the portfolio, we're seeing benefits of stronger commercial intensity and a team that is focused on creating value for our customers. It's all about speed and agility. Simply put, when strong service, disciplined operations, and commercial intensity come together, results follow. And that's exactly what we've seen in the first half of the year. Now, before I turn the call over to the team to walk you through the quarter in more detail, I'd like to spend a moment on the two agreements with Union Pacific that we announced this past Wednesday. Now, these were rigorous negotiations, but Union Pacific runs a great railroad and they're good partners, and I'm happy where these discussions have landed for both of us. These agreements are strategic, and they bring long-term benefits. Now, for CN, they structurally enhance and extend our network by giving us direct and very competitive access to important markets in Kansas City and Mexico. They'll also increase the density in parts of our U.S. network where we have capacity. Now, the first is a commercial agreement that extends our reach into Mexico. It grants TM new rights for volumes between Canada and Mexico by Memphis. This gives us a competitively advantaged route and extends our reach of Paul from Chicago to Memphis, densifying our southern network. In exchange for the Mexico Group, we've granted UP rights to additional capacity over the EJ&E for UX traffic. This monetizes available surplus capacity on the J while protecting the capacity that CN needs now and into the future. Any additional capacity required to accommodate UP volumes will be funded by them. Now, these provisions will be effective as soon as a definitive agreement is in place and are not contingent on the merger. The second is a settlement agreement, and it is contingent on the FDB's approval and closing of the merger. It secures for us competitive access into Kansas City and the use of UP's net yards. This positions us to compete on new business in an important rail market and provides the opportunity to lengthen our haul in traffic currently moving in this corridor. We've also secured remedy production, allowing us to provide competitive options for the 2-to-1 and 3-to-2 customers, and agreements that provisions granted to others through the FDV process will also be extended to us. Now, through this strategic agreement, we have largely addressed the risk of the proposed merger to CN, and we have created new opportunities for us to grow. and we've agreed to not oppose the merger. Overall, the opportunities created through the new strategic commercial agreement with UP and the potential merger-related remedy to improve the position of our railway and create new avenues for growth. These agreements reflect how we operate, getting close to the opportunities in front of us and acting with discipline to create long-term value for our customers and shareholders. PN is very favorably positioned for the long term. We can see the impact of our actions in 2026, but what's more exciting to me is the opportunity that is unfolding across 2027 and beyond, supported by unique long-term tailwinds in our economic exposure and a team that is showing can drive results through cycles. So I want to thank our railroaders across the network for their commitment and execution in this quarter. Their efforts continue to make the difference. Now let me pass it to the team. They'll give you more details on the quarter.

We entered the quarter with a clear plan centered on fluidity, reliability, and productivity. The team executed that plan, and the results were out of the network. I am pleased with our performance, and I want to thank the entire CNT. As always, it starts with our people going home safely at the end of the day. Safety is foundational to our performance, our culture, and the way we operate this railroad. While we are encouraged by the progress we've made over the last few years, This year, we have seen a very active wildfire season in both Northern Ontario and British Columbia. The safety of our employees and of the communities we operate through is our first area of focus. We are monitoring the wildfires closely, both for our own operation. We have a comprehensive extreme weather fire risk mitigation plan to reduce risk and increase prevention, monitoring and response to wildfires with our firefighting fleet deployed in strategic locations. Northern Ontario is open at this point, and we currently do not expect a significant impact. Now turning to operations, productivity improvements continue 3% more gross ton miles using existing assets and capacity more efficiently. Productivity improved approximately 6% in the quarter. Productivity improved approximately 9%. If you look only at train and engine employees, productivity improved approximately 13%. These are important proof points because productivity is not just an operating statistic and continues to improve. We delivered the best Q2 and first half fuel efficiency performance in our history, driving direct operating savings. We used to identify opportunities for locomotive utilization and operating practices that reduce consumption while maintaining transit time improvement throughout the network. It is about challenging how we work, eliminating waste, improving terminal productivity, and making the railroad more safe across the initial list of major terminals. We continue to work across intermodal terminals and our network operations centers. So far this year, we have close to $100 million in realized benefits. Importantly, these improvements have been achieved while maintaining strong service performance. This track is a part of how we operate this railroad. The mindset is continuous improvement, and we believe there are additional opportunities ahead. As we move on to the next slide, the network is running well. Car velocity and network train speed were largely flat year over year while handling stronger volumes and maintaining solid customer service. And these metrics, as well as dwell, improve during the quarter after still being impacted by the tail end of winter and April. We are seeing strong first and last mile execution in the type of operating performance that creates opportunities for Janet and her team to win additional business. Let me spend a moment on the western region because it is a good proof point of what this network is capable of doing. The less handled record grain volumes during the quarter, as well as higher year-over-year refined petroleum products, potash, at the same time, passed the investments we have made, disciplined training planning. We're pleased with the progress, and just like safety performance, our team is excited around the new opportunities announced in the MOUs with Union Pacific. I'm working closely with Eric and the Union Pacific team to operationalize the agreements. Together, we are hammering out details on the connections between our two railroads. With that, I'll turn.

Thanks, Pat. Good morning, everyone. As you've just heard, the railroad is running really well, and that's translating into strong service for our customers. Revenues were up 11% year-over-year on 5% RTM growth. The close alignment between operations and sales and our strong service levels are driving success across the network. Underpinning that is how effectively we are working with our customers. Let me give you a few quick examples. Our metals volumes were up 11% in the second quarter, despite the significant tariffs on steel and aluminum, as we worked with our customers to create new supply chains. We improved our commercial speed and agility to capitalize on market changes, converting spot opportunities in a number of segments, including butane and plastics. And we continued to collaborate for longer-term growth. Our partnership with Kiara and AltaGas is a great example of how we're working strategically with our customers to efficiently get their products to global markets. Our broad boots on the ground effort also continues, building on the momentum we established over the last few quarters and across a range of commodities. Facing remains ahead of our rail cost inflation, however, in the quarter it was partly offset by mix. Let me walk you through the key second quarter highlights. We delivered another exceptional quarter in grain, continuing to set records for volumes of Western Canadian grain, and our U.S. grain performance was strong across the board – corn, soybeans, and ethanol. We also delivered a record second quarter for pot-off shipments, with solid service enabling us to capitalize on strong demand, both domestic and export. Growing in chemicals RTMs, we're up 11%. In refined products, we increased long-haul shipments from Western to Eastern Canada. And we continue to grow our volumes into the GTA fuel terminal, growing RTMs in this segment by nearly 30%. We grew NGL RTMs by over 15%, demonstrating the value of our Prince-Rupert export supply chain, as well as the team's ability to convert on a number of SPA's G-chain opportunities. Domestic intermodal outperformed with solid growth inter-Canada. In overseas intermodal, volumes were up sequentially, but lower year-over-year, reflecting tough comps due to last year's pull forward of volumes on tariff uncertainty. In automotive, growth reflected share gains, as well as a shift in traffic flows toward longer-haul movements, driving the stronger RTM versus carload performance. In metals and minerals, I have to say the team has done an outstanding job working with our customers to mitigate the impacts of tariffs, growing domestic and cross-border scrap shipments and shifting steel towards longer-haul domestic Canadian lanes. We had a notable mix shift in FRAXAN, with less long haul shipments into Alberta and an increase in shorter haul shipments within the US. In Forest Products, we increased our shipments of packaging products and helped our customers to diversify their export markets for wood pulp. Lumber shipments also increased this quarter, some of which is an easier year over year comp and there is likely some pull forward there. Coal RGMs were flat for the quarter as increased U.S. thermocoal exports were offset by production challenges affecting Canadian West Coast volumes. Moving now to slide 10 and turning to the second half of the year. We expect strength in grain to be the key driver of RGM growth in the third quarter. Few four-year-over-year comparables for grain will be more challenging, though, as we lap the record crop and CEM's record performance. Our energy franchise continues to be a real bright spot. We expect ongoing strength in refined products, new crude business, and additional fractionation capacity supporting long-term growth in NGL exports via Prince Rupert. Domestic intermodal is expected to remain strong, reflecting sustained momentum from recent gains. Overseas intermodal is expected to be weak in the second half, in part related to the demarketing of certain low-profitability shipments through the Port of Vancouver. In automotive, share gains and strong offshore imports into Canada are offsetting overall flat production. In metals and minerals, we see a steady run rate for steel and aluminum and growth in frack plant shipments to northeast B.C., partly offset by lower iron ore. In forest products, well, no sign yet that housing starts will improve. With respect to coal, demand remains supportive for U.S. exports. Canadian coal shipments will depend on mine-level production and operational conditions. Now, quick word on the commercial agreements that we've reached with UP. The team is very excited about the opportunity to extend our length of haul, and we're even more excited that we've secured, for the long term, a shorter and faster route to Mexico and direct access to Feramex. For sure, more to come on that. Our strategy is delivering. We are growing volumes that we can serve as well and maintaining our pricing discipline. And looking beyond 2026, we remain excited about the multi-year, multi-commodity growth prospects across our franchise, especially in energy and ag and with our new connection to Mexico. And I am confident in and very proud of the commercial team's continued commitment to find new opportunities and to capture the volumes that best fit our network. They are staying close to our customers and moving with urgency and agility. We're also working closely with our short-line partners who are driving economy plus growth, continuing to leverage our business and industrial development teams to attract new facilities on to rail and facilitate expansion and we are staying very close to the opportunities being created by Canada's trade diversification agenda. CN's network is uniquely situated to connect new sources of resource production with domestic and global markets. And with the capacity and network investments already in place, CN is well positioned to deliver on that growth at low incremental cost.

Here's the client, over to you. an adjusted operating ratio of 62.2%, a 50 basis point increase versus last year's operating ratio of 61.7%, impacted by higher year-over-year fuel prices in the quarter, impact on the operating ratio of 210 basis points, or roughly $300 million driven by stronger earnings, attention on working capital, required tax payments, on a current share buyback program. We continue to maintain a 2.7 times adjusted debt to adjusted EBITDA target for 2026. Let me walk you through a few key operating expense categories for the quarter on an exchange-adjusted basis. $1 million increase in year-over-year intensive compensation, which were partially offset by 5% lower average headcount and strong labor productivity. $16 million higher than in the same period last year due to offset by record fuel efficiency. Prices in March, and the decrease in oil prices in June, fuel did not impact EPS in the quarter. However, as noted, it had a 210 basis point unfavorable impact to the operating ratio. Driven by advisory costs, higher trucking and vessel costs, mostly due to stronger volumes year-over-year. Add some visibility into 2026. Of our team, combined with stronger volumes through the RTM growth for 2026 versus our original assumption of flattish volumes for the year. High single-digit adjusted valuted EPS growth for the year. Constructive demand environment in the second half of the year, with year-over-year comparisons becoming more challenging, particularly as we move into the fourth quarter. The uncertainty related to fuel and foreign exchange and broader macroeconomic volatility remains present, including potential changes in trade and policy discussions. We have seen year-to-date and remain grounded in our assumptions for the balance of 80 to 110 US dollars per barrel. However, we have updated our FX assumption from 73 cents to the current spot rate of 71 cents for the balance of the year.

You can tell we've got great momentum and we're excited about the future. And with that, Krista, we're ready to take questions.

Thank you. We will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourself to one question. Your first question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Yeah, thanks very much. Good morning, everyone, and congratulations on a good quarter here. I was wondering if you could go into the MOU, look at the – and give us an indication of the total addressable market that you're looking at in that – on that route. In particular, what markets do you – are you planning on focusing on? And more importantly, how are you planning to assess and how will you be communicating the assessment of how well you're doing in terms of ramping up any new customer wins or volume that you're getting on that new route?

Good morning, Walter. Listen, thanks for the question. There's two agreements, as you know. The first agreement is a commercial one, and that will start as soon as we get the definitive agreement in place. And so we will have immediate access directly to Ferro Max in Mexico through the Memphis Gateway. And so it does a couple things for us. For volumes that are already moving, it extends our haul from Memphis, which is a benefit. But it also allows us to more directly market, you know, another competitor to put a shoulder into it. And we're putting those plans in place right now. The other agreement, of course, gives us access into Kansas City, which is another great marketplace. But we don't get that, of course. That one is contingent upon the merger. So that will be in the future. We thank you for your question.

Your next question comes from the line of Sherilyn Radborn with T.D. Cowan. Please go ahead.

Thanks very much, and good morning. I wanted to use my one to ask Janet if she could give some more color in the year-to-date growth of the energy business. Anything we can share about expected growth next year and the extent to which visibility to 2027 and beyond has improved, given the events over the last six months?

Good morning. Thanks, Sherilyn. I appreciate the question. I think, you know, what we're seeing is a lot of strength in the refined products. So that's mainly gasoline and diesel. And, of course, that's associated with our new GTA fuel terminal. We did start ramping up phase two of that terminal roughly in April of this year, so certainly we are seeing those volumes continue to grow, and we'll have some full-year effects of that benefit as well in 2027. But that's a really solid piece of the market, I think, that we've captured here in Ontario, and it's going to continue to grow, but maybe more slowly than the initial ramp-up phase. On the NGLs, of course, we have expansion continuing at the Port-au-Prince-Rupert, and we have the backup of the product that's being drilled and made available, including through the new fractionation capacity that I mentioned that will be coming online in the second half here. So I think, you know, when we think about the energy franchise, this is a multi-commodity within energy, multi-commodity as well as a multi-year opportunity. And, of course, you know, I continue to make reference to the agreement that we've struck in regards to the ACE terminal. So, that's something that we're going to see probably in the 2028 or so timeframe. So, a great growth story on energy. Thanks for the question.

Your next question comes from the line of Ken Hexter with Bank of America. Please go ahead.

Hey, great. So maybe just continuing on some yield thoughts, right, up 6% in the quarter on revenue per RTM. Maybe just break down fuel and thoughts on core underlying pricing and thoughts into the second half. And I think I heard Pat toss in there's no impact to the wildfire to results. I just want to make sure I heard that. And then given you don't oppose the merger, do you see that as raising the odds of getting it past the finish line?

And that's a lot of questions and one question. Let me see if I can start this. So, Janice, do you want to say a couple words on pricing and then just on the fuel impact if you could reiterate it? And then I think, Pat, you pretty much covered what's all the tires up close on it.

So, Ken, I mean, kind of simple terms, we continue to price ahead of our rail cost inflation. For sure, the fuel was a benefit to us as it was to all of the industry in the quarter, bumping up the, you know, revenue per RTM, revenue per car load. We did have, by segment, some changes in haul that also would have factored into some of those changes. I expect that pattern to continue, certainly, into the third quarter. But the underlying point I want to make is the pricing ahead of our rail cost inflation.

Maybe just, Ken, some visibility on fuel. As I said in my opening remarks, fuel in the second quarter did not have any impact on EPS, but did have a dilutive impact on OR by 210 basis point. So fuel moves, as you know, a lot day in, day out. If fuel prices remain where they are and the correlation between OHD and WTI remains essentially where it is, then we think that fuel in the third quarter could be a tailwind by close to 15 cents and a tailwind of about 100 basis points in the third quarter. And then in the fourth quarter would be a little less, would be a tailwind of around 10 cents and a tailwind on a war above 30 basis points.

And Pat's monitoring wildfires in Columbia. We are operational in both locations.

Our agreement on the merger, the settlement agreement, as we thought about this, as you know, we've been a lot about the need for more competition. And we had some concerns around creating the opportunity that we've always said we wanted to do, which was extend our reach into broader markets. And we've done that with the Kansas City extension, with the two-to-one and three-to-twos. And so this is largely taking care of the mergers broader, and I know that, you know, it will go through what I expect will be a very thoughtful and rigorous process by the FTB. They'll do a great job of that, that playoff starting with what I heard Jim say yesterday was the submission of the next level of materials.

Your next question comes from the line of Fadi Chowman with BMO Capital Markets. Please go ahead.

Yes, good morning. I want to circle back first just to follow up on some of these questions on the MOUs. Can you talk about how many two-to-one, three-to-two customers you're going to be having access to, provided this whole MOU kind of go through? and on the first agreement in terms of getting the overhead rights to Eagle Pass, is this for Canadian-originated carload only? It just feels like some of the press releases were focused on this being kind of covering only Canadian-originated carload. I just want to clarify that. And my main question is maybe to Pat, how are you thinking about the network capacity as we start looking into 2027? I think you guys did a good job this year in improving cash flow conversion. I just want to understand whether we have a CapEx need as we go into 2027. How do you think about, you know, the bottlenecks, the capacity to handle the volume as we go into next year?

Let me start with that, Fetty. Thanks, Ben. And I'll turn it over to – we went through it and were prepared for pushing. From a people perspective, we're pushing pretty hard on what we get for every inch of asset base. I expect he's going to tell you that we've got the capacity to do a whole lot more. But, Pat, over to you, and I'll answer his other questions.

Thanks, Tracy. Yeah, I would say that from a network capacity perspective, I feel really good about where we are. I would say if you look back to the presentation and to my comments, what we demonstrated in the West is with – To the settlement agreement, Fatty, you know, the two-to-ones, I think that we've identified five.

UP has as well. Three-to-twos out there, and we'll see how that evolves. But what this essentially does is it says that where we have operationally, we would be the partner of choice for those. So that's how that piece works. On Eagle Pass, on the kind of, yes, this is for traffic that can move the market between Canada and Mexico, southbound and northbound. It's a considerable marketplace. We've sized it out over time with Fernando and his team at the FXC. This gives us direct access to get at it over Memphis, which we can be very fast. We're really excited about that. Also, on the EG&E deal with the Union Pacific, that applies only to U.S. business. I hope that that is helpful.

Your next question comes from the line of Brandon Oglensky with Barclays. Please go ahead.

Hey, good morning, and thanks for taking the question. Tracy, I guess you did address that you think this resolves the competitive issues you had with the deal specifically, you know, within your network. But more broadly, how do you think if this deal goes through, you know, it's going to impact broader industry competition, you know, especially longer term?

Thanks, Brian. And listen, I think we've all been – we've all had a question. We are very – the question on this on a broader basis on the merger is what it does to competition. We can't speak to the broader deal, but we've spoken to what is the impact from our network perspective. But we'll see. We're going to launch into a process that will – we've already launched into a process that's going to be very thoughtful. And I know, knowing Patrick Fuchs and the board of the STB will be very thorough to ask and answer all of the very important questions into this merger. So that's all ahead of us.

And what happens beyond that, I think – Your next question comes from the line of Chris Weatherby with Wells Fargo. Please go ahead.

I just maybe wanted to ask a little bit on the guidance. We talked a lot about the merger, so kind of curious about the guidance. I think previously sort of flattish RTMs and EPS growth, a little bit above that, the spread between RTM and EPS in the guide is a little wider. So I was hoping you could kind of expand a bit on that, obviously, Just, Lane, I think you talked about fuel potentially being a good guy for you from an earnings perspective, at least in the third quarter. But how do you think about sort of the operating leverage of the business now as we see RTMs kind of go through the rest of the year? Can we assume that that sort of decent spread of operating leverage and performance to the bottom line can continue? Just want to get a rough sense of what's changed from the earlier outlook relative to where we are now.

We've had a really strong first half. I'm really proud of what the team has done on it. You know, the operation has been very strong fluid. You've heard Pat talk about the productivity that we've been able to drive. Janet's done a great job of being able to use that service to convert a whole bunch of opportunities, not only to take advantage of what's there but to increase our share of market and to be nimble with our customers. And you've heard her talk about her boots on the ground program, so we're out there with some intensity. So all of that, which we are in control of, you know, it's gone very well. I would say overall volumes are much stronger than we anticipated at the beginning of the year that they will be this year. I'm not expecting that will change as we go. You're seeing our volumes in the second quarter. We do have a pretty tough comp on Q4. Last year in Q4 we hit a record in grain, and operationally we exceeded all of our own expectations. And so we'll have a tougher comp in Q4 as we look forward. I think the question marks as we look at the remainder of the year are more around those things that are moving around outside of this, more around kind of where fuel will go, the impact of that, maybe a little bit of currency. We have a little bit of tariff action that's moving around. So we'll see where all that goes. But we think that, you know, we want to be disciplined as we think about guidance. And, you know, we're comfortable with where we put the peg at this point.

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

Great. Thanks, Moni, everyone. Tracy, just wanted to follow up on your previous response. I think you said in the past that you haven't had the confidence, even with a lot of promise on the volume side. It seems like that confidence is building. Can you share your conversations with your customers, particularly around, again, you've had some kind of catalyst on USMCA paths. It looks like we know what the next generation of tariffs look like. Do you feel like there was any pull forward into the first half of the year? Do you feel like there's any pent-up demand past these catalysts? Or kind of – what are your customers telling you about their inventory re-talking plans?

I'll start with that, but then I'm going to turn it over to Janet to talk more specifically. Like, we've watched this tariff, you know, the global, the trade, the tariff, all the impacts from some of the geopolitical events, you know, and the impact that has either on the volume that we move or the corridors that we move it in. And I'm really proud of the work that Janet's team has done to be out there with customers and respond. You heard her say that our metals business, for example, despite the difficulties in the metals marketplace, our metals business has, you know, we've been able to mitigate most of that impact. Forest Products is still failing. As we look at tariffs from where we are now, Now certainly, we're all reading in the newspaper around what's happening on that front. We remain hopeful that we will come to a productive agreement embedded in our guidance as we look forward is a tariff level that's...

Ravi, we might have had a little bit of pull forward. I think I referenced that on lumber. That probably has more to do with just kind of fuel surcharges and building up some inventories. We saw in the U.S. some more significant pull forward in the context of Intermodal that wanted to come into the United States ahead of this tariff regime changeover, I'll call That was certainly less impactful from a CN perspective. So broadly speaking, no, I don't think we've had a whole lot of pull forward. And I think, to Tracy's point, our customers have become very adept at managing the situation, and we've, you know, been there to support them along the way as they've changed some of their supply chains. Thanks for the question.

Your next question comes from the line of Connor Gupta with Scotiabank. Please go ahead.

Thanks. Tracy, I understand UP will be responsible for any investments needed at the J to support their volume growth if needed, But as you firm up the MOU with them, how are you tackling the risk mitigation around potential congestion issues that may arise in and around Chicago if UPNs are driving a lot of volumes through the J?

Listen, we spent a lot of time and had to spend some time with Eric on how this whole thing will work. And we remain in control of the J. We've got surplus capacity right now on various parts, you know, just different on different parts of the J. So we'll control how that volume comes on, and our agreement says that if we see any strain, so they will not get in the way of our traffic, if there is any constraint or any strain on volume and the capacity needs to be expanded, that we will trigger that, and, you know, they will fund the expansion. Of course, when they do the expansion, they will fund the expansion, and we're locked on that approach.

Your next question comes from the line of David Vernon with Bernstein. please go ahead. Your line is open. Your next question comes from the line of Scott Group with Wolf Research. Please go ahead.

Hey, thanks. Good morning. So just two quick things. One, as the SDB process plays out going forward, just practically speaking, does this just mean that you don't participate, like no more filings if there's hearings you don't participate? Is that like how we should think about your role going forward here? And then just laying on the fuel side, like, clearly going to help this year now? Like, anything you can do to, like, protect yourself on the way down for fuel? I know a few years ago it was an issue. Is this just naturally how it's going to work, or is there anything that can be done to, you know, protect yourself? Thank you.

Scott, I'll start on the first one. So, we've agreed not to oppose. So, yes, we won't have a large voice in the merger considerations as we go forward. However, if there are questions, we'll obviously be involved in anything related to the agreement that we have, you know, explaining or defending or whatever the action may be. But, yeah, largely our considerations, our worries have been taken care of, so you won't hear as big a voice. And Jib?

Yeah, on the fuel side, as you know, fuel surcharge is ahead. It's working well, But because there's a lag, because there's a two-month lag, then on the short-term basis, it does create noise. And as you know, and you've been around this business for quite a while, I've been around that business for quite a while as well, there's a loss of movement and volatility around fuel prices, especially with what's happening in the Middle East. So it does create more noise. But, you know, I mean, it's just what it is, and you know the formula, and we just live with it. We try to provide visibility on it every quarter and what's coming up. We'll see what it does. Now it looks like it's positive for the second half of the year, but that could turn very quickly. How much we can do on the downside, but as I said, it's a hedge, and it's working quite well to hedge ourselves against ups and downs of fuel prices.

Next question is going to come from the line of David Vernon with Bernstein. Please go ahead.

Hey, thanks for coming back to me. So coming back to the MOUs for a second, you know, I want to talk a little bit about magnitude. You know, as you think about the agreement on the E and then the access down to Eagle Pass, you know, the amount of capacity that you have on haulage from the border is going to matter, and obviously how many trains are going to be running through there. Is there any way you can kind of quantify commercially, Janet, like, is this going to start to impact numbers next year? Is it going to be noticeable? And then if you think about implementing the second part of the agreement, with the contingent tractage rights to Kansas City. Is there additional investments you're going to need to make to operationalize that? I think, you know, when you guys were going after KCS as a business a long time ago, there was some discussion around investment in extending your line's capacity there. I'm just wondering if there's additional capital or operating resources you're going to need to put into operationalizing that Kansas City rate.

So let's – hey, David, I'm glad you're back. Let me start on that. So as we think about it, as we've long looked at our network, like we really like the position of our network with where we sit across the natural resource base in North America, our access to ports, our ability to get down into the Gulf Coast. What we've always aspired is how do we extend our network, and these agreements do it in a meaningful way in getting it into Mexico and ultimately contingent on the merger into Kansas City. It's a gym in the Union Pacific about how this would work. We start, in the case of Mexico, at a haulage arrangement. So you're going to see haulage. Talk about the Kansas City side, and then, Janet, I'll turn it over to you and Pat, any comments you want to add to it. On the Kansas City side, should the merger be approved? We come on to the line of Tuscola, but in LF Pat's comment, you know, we do need to build a bit of a connection there. That would be funded by us. On the landing side, we're going to have an agreement with Union Pacific to utilize their net yard in Kansas City. So we've got a landing spot for all of the commodities that we would move through that quarter. Do you want to talk about the connection to this goal? And then Janet, we'll go to you.

And I would say, you know, remain lying between – David, thanks for the question.

From a revenue perspective, let me just give you a sense of sequencing that we have today from Canada into Mexico. the immediate benefit to us is going to be the extended length of haul as we move the interchange south into Memphis. So that's a definitive agreement in place, and we'll see some of that flowing in this year. And then the team is very, very focused on the addressable market and what we can do to provide a great service to the customers that want to move their goods between Mexico and Canada. So more to come on that.

Thanks for the question. your next question comes from the line of brian ossenbeck with jp morgan please go ahead hey good morning thanks for taking the question uh one first quick follow-up just to make sure i heard correctly but uh if there's any other decisions or concessions that are done through the merger review process the agreements here seems like they don't exclude you from participating in those uh so just this first clarification and then for jen maybe you can go into more details on some of the demarketing. It sounds like you're doing in Vancouver. That may be the relative scope and size. I'm assuming that's international and modal, but I'd like to hear a little bit more about that.

Brian, I'll start. So, our agreement with the Union Pacific is that we will not oppose. If there are interventions that we need to make in response to questions from the SDB or to support the agreement that we have with the Union Pacific, then we will participate in that. I hope that answers that portion of your question, Janet.

Yeah, so, Brian, you know, our approach to pricing has been very, very consistent. Baseline is we want to price ahead of real cost inflation. We also want to price to the value of our service. And as you know well, you know, our corridor between Vancouver and all the way into Chicago, Montreal, Toronto, has a lot of traffic and it's an important piece of our network. So, yes, the piece of business we demarketed is in the overseas intermodal, and I think an upset on that one. Thanks for the question.

Your next question comes from the line of Benoit Poirier with Desjardins. Please go ahead.

Yeah, bon matin tout le monde. Félicitations. Congratulations for the results. Could you talk maybe about the opportunities to convert trucks on the rails, given the high spot rates we see these days and kind of what you see in terms of discussion with some customers and what could evolve in terms of intermodal opportunity?

So we are seeing, Benoit, some trucker wheel conversion. When we look at our own domestic intermodal franchise, though, for CN, it is more skewed to Canada. And our average length of haul is in the 1,700 to 1,800-mile range. So we have a pretty high market share already, I would say, of the long-haul trucking business in Canada. So I think the short answer is, yes, there's some opportunities. You know, probably not as much as what we're seeing in the U.S. Truck capacity there is tightening more significantly than what we're seeing in Canada. But we're encouraged by what's happening so far. And, of course, any tightening of capacity is also supported from a rate perspective. Thanks for your question.

Your next question comes from the line of Tom Wadowitz with UBS. Please go ahead.

Yeah, good morning. I know you've gotten a lot on the U.K. agreements, but I want to ask you kind of two elements on that. And congratulations on the agreement. It seemed like a really nice strategic move. So, let's see, on the Kansas City element, I guess, is there a way, because I think UP has implied 2-to-1, 3-to-2 is something a little less than 40 shippers. Can you give us a little more color? Are there some large shippers there, or is it kind of relatively small carload shippers, just a little more perspective so we can, you know, kind of maybe think about sizing it? And then on the candidates in Mexico, is there any other information to contemplate, you know, the type of commodities you think would be opportunity? Is a lot of it auto and intermodal? You know, is a lot of it bulk? Or just how you think about, you know, that market and where you would see the growth on that candidate to Mexico?

Hey, Tom, thanks for the question. On the two-to-ones, I think we're all aligned. There's probably about five of those. Some of those are very meaningful. I want to find it. We don't think based on our... Canada, Mexico, we've been working, and it's not just southbound, it's northbound as well. We've been working for some time on a three-call. It gives us a much better, a much more direct kind of marketing campaign, and we think a better route through Memphis. Canada, give you a little...

Go further, I think for sure Tracy's point has well said. It's northbound, it's southbound, it's all commodities. When we think about the contour of the different business segments, for sure, automotive is a heavy hitter. We're already been tackling the intramodum. We continue to believe that there's really good opportunities for truck-to-rail conversion. Not easy, but, you know, we just heard, you just heard me say that truck capacity is tightening in the U.S., and this is one area where it is quite supportive for us and for that product. Ag, energy, petroleum, and chemicals of all sorts. So it is a broad-based opportunity that we see.

We have time for one more question, and that question comes from the line of Jonathan Chappelle with Evercore ISI. Please go ahead.

Thank you. Good morning. Pat, you gave us an update on the fast track work that you've been doing, and you've done with a review of most of the major terminals. You also highlighted $100 million of cost savings that you've identified this year. Trying to understand, is that $100 million, have we seen any of that thus far in the first half, or if this is what you've identified thus far, and you start to see that savings really start to shake out in the second half of the year? And then also you mentioned still looking at some intermodal terminals and facilities. Is there a chance that that $100 million becomes something greater as we think about run rate into 27?

Thank you all. Listen, we appreciate your time today. Let me just say this as we close. The team has always been excited about our prospects. We love our franchise. You know, we've got great access to North American markets, great access to global markets. We've got, you know, investment in natural resources, and whether it be ag, it be energy, it be mining that's continuing on, our customers are investing. It's not often in a railroad career, though, that you get to meaningfully expand the extended network. And so we're really even more excited now about the prospects, what we can do with this network, how we can bring more to our customers into the industries that we serve. Thank you for your interest in it, and we'll talk to you soon.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.