Earnings Call Transcript - CNI Q4 2025

Operator, Operator

Good morning. My name is Krista, and I will be your operator today. At this time, I would like to turn the call over to Stacy Alderson, Senior CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson.

Stacy Alderson, Senior Assistant Vice President of Investor Relations

Thank you, Krista. Welcome, everyone. Thank you for joining us for CN's Fourth Quarter and Full Year 2025 Financial and Operating Results Conference Call. Joining us on the call today are Tracy Robinson, our President and CEO; Pat Whitehead, our Chief Operations Officer; Janet Drysdale, our Chief Commercial Officer; and Ghislain Houle, our Chief Financial Officer. You can turn to Page 2 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, Tracy Robinson.

Tracy Robinson, President and CEO

Thanks, Stacy, and thank you all for joining us today. I'm pleased this morning to share our Q4 and full-year results. 2025 was a year in which this team delivered strong performance against the backdrop of significant volatility in a challenging macro. The actions we took over the past year were proactive and exactly what the environment demanded. We've been disciplined. We've completed an important investment cycle. We've maintained a relentless focus on productivity improvement and increasingly on commercial intensity. And these actions drove our 2025 results. They helped us navigate a tough year and have set us up well for when volumes start to grow across the industry again. Now on our last call, we made three commitments to ensure we deliver the type of returns we know CN is capable of. First was on performance. As Q4 demonstrates, we continue to intensify our commercial execution while maintaining strong disciplined network performance. Our focus is simple: concentrate on areas we can control and deliver through execution regardless of the macro backdrop. Our results today reflect this focus with improvement across all key operating measures. Second, on financial discipline. We reset our capital program to reflect today's environment with concrete actions to reduce costs and improve productivity. These actions are strengthening free cash flow, and we remain committed to returning excess capital to shareholders while maintaining a strong balance sheet. And third, on guidance. Given the elevated level of macro and policy uncertainty and limited visibility, we think it's appropriate to provide directional guidance tied closely to volume trends rather than precise targets that can change quickly or become outdated. So let's turn to the fourth quarter. We closed the year with solid momentum, reflecting strong execution, reliable service, and continued discipline on costs and assets. In the fourth quarter, we delivered 14% EPS growth and 7% for the full year, in line with our mid- to high single-digit guidance. I'm also pleased with our efficiency. In Q4, our operating ratio came in at 60.1%, our best quarterly operating ratio of the year and a 250 basis point improvement over last year. For the full year, we posted a 61.7% operating ratio, improving 120 basis points versus 2024. On cash flow, we generated $3.3 billion, up 8%, driven by cash from operations. And we remain disciplined on capital spending continuing to tighten throughout the year. Cash flow remains a top priority, and the actions we've taken continue to support a strong trajectory. Now volumes held up well through year-end, led by Grain and Intermodal. We set a number of records on Grain. And on Intermodal, we benefited from an easier comparison as we lap the ILWU strike in 2024. We saw notable strength in segments where our service and commercial execution have helped us drive share gains. Janet will walk you through the key revenue puts and takes in just a few minutes. Across the network, we continue to make meaningful progress on operating performance and efficiency. In the fourth quarter, we saw improvement across all of our key operating measures. Car velocity improved, terminal dwell reduced, train and locomotive productivity increased, labor productivity strengthened materially, and we achieved a fourth quarter record in fuel efficiency. Now these gains reinforce my confidence in our ability to perform consistently even in a challenging demand environment. Pat will take you through the initiatives he and his team are driving to build on this momentum. To sum it up, despite tariff pressures that intensified in the second half of the year and ongoing trade uncertainty, we executed, we stayed disciplined, and we delivered. Now looking to 2026, our focus will continue to be on disciplined execution. We'll prioritize the levers we control, stay close to our customers, and stay grounded amid a volatile macro environment.

Pat Whitehead, Chief Operations Officer

Thanks, Tracy. I'll be speaking to Slide 6 first. The team delivered a strong fourth quarter, and I'm pleased that the three areas we are laser-focused on are paying off. These are: one, ensure our people are at their safest and most productive; two, delivering our promise to our customers; and three, to maximize margin by controlling unit costs and asset utilization. It starts where it always does for us, safety on the ground. In Q4 and for the full year, we achieved the best injury frequency ratio in our history. That reflects consistent execution and is core to our performance this quarter and going forward. I want to first recognize our frontline teams who approach their craft as true professional railroaders. While this record is meaningful, our focus remains on every one of our CN family members going home safely every day. We want this for the families and the communities that count on us. That foundation allowed us to take on more work and deliver for our customers. Our workload increased 5% year-over-year, supported partly by our Grain customers. We carried record-setting Grain tonnage for Western Canada for four consecutive months while maintaining reliable service to our merchandise customers, with local service commitment performance well above 90%. From a network standpoint, Q4 tested resilience, particularly in December when winter operating conditions required shorter train lengths for the entire month. Despite this, car velocity improved 2% and dwell declined 1% year-over-year in the quarter. That tells us we're not trading service or velocity to manage disruptions. We're improving both. The takeaway from the quarter is straightforward. We handled more volume with discipline even under a full month of winter constraints. Turning to the next slide, this is where the operating model shows up in the bottom line. On labor, T&E productivity improved 14% versus Q4 last year. We entered the quarter with approximately 800 furloughs and exited with about 650, selectively adding resources to support the Grain program and winter readiness. On a full-year basis, we improved our T&E labor cost per GTM by 6% with GTMs up by 1%. That's more output with a smaller cost base. That same rigor shows up in how we manage our assets. On locomotives, productivity improved 5% year-over-year in the quarter with roughly 10% of the fleet stored on average. Looking under the hood, locomotive availability reached an all-time high, nudging up 1% over 2024 to 92.5%, creating a knock-on effect that cleans up our balance sheet. The result was a $20 million reduction in our mechanical inventory or 14% year-over-year. We also achieved a record level of fuel efficiency in Q4, improving nearly 1% year-over-year, with full-year results just shy of our best performance on record. On infrastructure, we completed all eight capacity projects we committed to at the start of 2025 on time. Our engineering team maintained its tight control over installation costs, totaling nearly $40 million of productivity gains from 2024 while materially reducing reliance on contractors. Where conditions allowed, including an earlier onset of winter in some regions, we advanced productive capital work deeper into the season rather than defer it, improving asset readiness while reducing contractor spend significantly. As we look to 2026, we're well positioned. The network, locomotive fleet, and car fleet are in good shape, and we're not satisfied stopping there. To move from good to great, our focus is on precision. That means reducing yard dwell, eliminating non-value-added costs, and ensuring cars spend less time waiting and more time earning. Yards are the anchors to the whole network. Three-quarters of our traffic hit our major terminals, and more than half of our staff work in these locations. In engineering, we're continuing to strengthen in-house capabilities, control unit costs, and remove engineering-related delays. Reducing yard dwell only matters if cars move over the road without disruption. Together, these levers expand margins, strengthen cash flow, and allow the railroad to perform through any cycle. We see an opportunity to lower our operating expense in 2026 through our cross-functional terminal reviews and continued operating discipline with additional margin upside as volume growth.

Janet Drysdale, Chief Commercial Officer

Thanks, Pat, and good morning, everyone. Happy Friday. I am really pleased with the way the fourth quarter came together. We delivered 4% more RTMs and 3% more carloads, performance that reflects how hard the commercial team has been pushing on every opportunity, delivering 2% revenue growth in what remains a challenging market. What stands out for me this quarter is not just the growth itself, but how we achieved it. The team has been out in the market every day, winning share, capturing singles and doubles, and staying relentlessly focused on what it takes for our customers to win. And while we did benefit from a relatively easier year-over-year comp, that tailwind was partly offset by continued softness in key markets like forest products and metals, which remain pressured by weak fundamentals and tariffs. So yes, we expected to outperform last year, but we also had real gaps to backfill. I'm really proud of the results the team has delivered. Turning to Slide 9, I'll provide a few highlights on the quarter before moving to the 2026 outlook. Within Intermodal, both international and domestic revenues were up 13% and 6%, respectively. International was notably strong at Vancouver and Rupert, aided by a favorable comparison against last year's port labor disruption. Prince Rupert also benefited from gains related to the new Gemini service. On the domestic side, we continue to realize service-related gains. Turning to Grain, we had very strong demand in the quarter, and our operating team did a great job in getting the Grain from the elevators to the terminals. Not only did we set an all-time annual record in 2025 for Western Canadian Grain shipments, but we had monthly records in October, November, and December. Within Petroleum & Chemicals, we saw growth in all segments, led by a 9% increase in natural gas liquids volumes, driven by strong domestic demand and continued export strength through Prince Rupert. Forest products remained under pressure due to weak demand and increased tariffs and duties. Within Metals and Minerals, we saw lower iron ore shipments driven by weak fundamentals, the mine closure in late Q1 of last year, and some unplanned outages. With persistently high natural gas inventories in Canada, we also had a slowdown in drilling, which impacted frac sand. We continue to generate same-store prices ahead of our rail cost inflation. However, our overall results reflected negative mix and a roughly $70 million headwind related to the repeal of the Canadian carbon tax. We had a fuel tailwind and an FX headwind that combined were a net impact of less than 1%. Tariffs, trade uncertainty, and volatility impacted our full-year 2025 revenues by over $350 million. Turning to the 2026 outlook on Slide 10, in terms of the macro environment, it doesn't look like it's going to be any better than last year. Recall that 2025 growth was helped by a favorable year-over-year comp. So we know we've got real work ahead of us, but we are leaning in hard. Starting with Petroleum & Chemicals, we expect to see positive momentum continue across multiple segments. We will benefit from a number of CN-specific projects, including Phase 2 of the Greater Toronto Area fuel terminal, new fractionators, and crude oil expansion projects. Additionally, we expect a year-over-year comp benefit given last year's extended refinery turnarounds, which we don't expect to reoccur. We anticipate Canadian U.S. Grain to remain strong, particularly with the record Canadian crop, as well as the recently announced improving trade conditions for Canadian canola. In terms of potash, we expect some pressure in the domestic market as farmers balance input costs against lower Grain prices. With respect to export markets, we handled some spot moves in Q2 and Q3 last year, which we generally don't expect to be recurring. So we have a bit of a tougher comp there. Turning to Intermodal, in domestic, we're continuing to leverage our strong service to drive growth. For international, it's pretty slow right now, and we expect that to continue into the second quarter. We continue to be very pleased with the growth in volumes related to the Gemini service through Prince Rupert. Within Metals & Minerals, we have some pluses and minuses. Weak fundamentals for iron ore are expected to continue, and we're still dealing with the tariffs on steel and aluminum. On steel, we are continuing to hustle hard on mitigating the transborder headwinds with opportunities in for Canada. Frac sand demand is unusually weak so far in Q1, but we have new terminals coming online, and capacity for NGL exports is increasing, so we do expect improvement as the year progresses. The auto segment is expected to be flat. Forest products will continue to be challenged as U.S. housing starts are forecast to be flat and Canadian producers manage with the full-year impact of the higher tariffs and duties that were applied in August and October of 2025. We expect persistent weak demand for U.S. exports of thermal coal. For Canadian coal, positive metallurgical coal prices are driving increased production. All in, we expect 2026 volumes to be more or less flat versus last year. Q1 will be the toughest quarter on a year-over-year comparable, and you're seeing that in our January volumes. We continue to price ahead of our rail cost inflation. Unfortunately, we do expect those mix headwinds to persist, driven by the ongoing weakness in forest products and metals. So let me wrap up. We are open-eyed about the difficult environment in which we're operating, but we have a commercial team that is highly energized and moving with urgency and agility. We have available capacity, and most importantly, we're providing the service that our customers need to win.

Ghislain Houle, Chief Financial Officer

Starting on Slide 12, we closed the year on a strong note. Thanks to the dedication of our commercial and operations team, we delivered solid performance across the board. Our financial results were further boosted by our continued focus on managing costs and driving productivity, and we remain active on share buybacks as part of our commitment to creating shareholder value, especially since we see our shares as undervalued relative to intrinsic value and an efficient way to return capital to shareholders. During the quarter, reported diluted EPS grew 12% year-over-year, while adjusted EPS was up 14%. These results reflect two notable adjustments: a $34 million pretax charge tied to the workforce reduction program we discussed on our Q3 call and $15 million in adviser fees related to industry consolidation. We're very proud of the progress on efficiency this quarter. Operating ratio improved by 140 basis points to 61.2%. On an adjusted basis, it was even stronger at 60.1%, a 250 basis point improvement. This reflects the hard work and discipline across the organization in managing expenses and driving productivity. Revenues were up 2% year-over-year, adding to the solid finish for the year. On Slide 13, let me walk you through a few key operating expense categories for the quarter on an exchange-adjusted basis. Labor costs were up 4% versus last year due to the workforce reduction charge and wage inflation, partly offset by 4% lower average headcount and higher capital credits from an extended construction season. Fuel expenses were down 9% compared to last year, driven by two factors: the removal of the Canadian federal carbon tax and a 1% improvement in fuel efficiency. Overall, the impact of fuel prices on Q4 earnings and operating ratio was negligible, essentially flat for earnings and 20 basis points unfavorable to operating ratio. Depreciation was down 7%, mainly due to two items: the benefit of a favorable depreciation study, which we do on a regular basis, and the impact from certain assets recognized through purchase price allocations that became fully depreciated during the year. Other expenses rose 27%, mainly due to higher legal provisions, including a nonrecurring $34 million accrual related to an unfavorable court ruling in the fourth quarter of 2025, which we are in the process of appealing. The increase in legal provision is essentially offset by a $36 million gain on the sale of a portion of a branch line reported below the line in other income. The effective tax rate for the quarter was around 25%. Turning to Slide 14. Given the strong close to the year with earnings supported by strong cost management across the business, we delivered full-year adjusted diluted EPS of $7.63, up 7% from 2024 and at the high end of our guidance range. Our adjusted operating ratio came in at 61.7%, an improvement of 120 basis points compared to last year, a clear reflection of disciplined execution across the business. Finally, we remain focused on free cash flow generation, ending the year at over $3.3 billion, up 8% from last year. We also finished the year $50 million below our Q3 capital projection, thanks to stronger capital discipline and real efficiency gains in engineering. We continue to lean into our share buyback program in Q4, repurchasing nearly 15 million shares in 2025 for around $2 billion, reinforcing our commitment to creating long-term shareholder value. I'm also pleased to report our Board of Directors has approved a 3% increase in CN's dividend, marking the 30th consecutive year of dividend growth, an important milestone and a reflection of our confidence in the durability of our cash generation profile. Additionally, the Board has authorized a new share buyback program, allowing the repurchase of up to 24 million common shares from February 4, 2026 to February 3, 2027. Looking ahead, we expect our debt leverage to increase temporarily to roughly 2.7x and then come back to 2.5x in 2027 as we take advantage of what we view as an attractive share price. The modest increase is intentional and fully aligned with our disciplined balance sheet strategy. Now let me turn to our 2026 financial outlook on Slide 15. As Tracy mentioned, given the uncertainty in the environment, we think a more directional approach is the right way to frame the year. For planning purposes, we're assuming revenue ton miles will be flattish with 2025 and, importantly, that tariffs stay at their current levels throughout the year. On that basis, we expect EPS to grow at a rate slightly ahead of volumes. Pricing should continue to outpace rail cost inflation, and we're carrying good momentum on the productivity side, recognizing that much of the heavy lifting on efficiency was done in 2025. That said, we do have some notable headwinds this year, which will weigh on margins: a continued unfavorable mix with less forest products and metal traffic, lower capital credits related to fixed overhead costs as a result of a smaller capital program, a higher effective tax rate in the range of 25% to 26%, and the fact that we're lapping last year's other income gains. In our modeling and guidance, we've neutralized foreign exchange, assuming the 2025 average rate of $0.715. Our FX sensitivity is unchanged at roughly $0.05 of EPS for every penny move. At current spot levels, that would represent about a $0.10 EPS headwind. With CapEx set at $2.8 billion for 2026, a $500 million reduction versus last year, we expect to see continued improvement in our cash conversion rate. In conclusion, let me reiterate a few points. We're very pleased with our Q4 and full-year 2025 results, having delivered on our EPS guidance and built strong momentum heading into 2026. While the demand environment remains uncertain, our guidance approach is grounded in discipline and realism. At the same time, the fundamentals of our business remain solid. Our focus on pricing discipline, productivity, and cost control, combined with the inherent operating leverage in our model positions us well to generate attractive returns when volumes return. As conditions evolve, the framework gives investors greater transparency into the sensitivity of earnings while underscoring our confidence in the durability of our cash generation and long-term value creation.

Tracy Robinson, President and CEO

Thanks, Ghislain. Krista, we'll go to questions.

Operator, Operator

The first question comes from Cherilyn Radbourne with TD Cowen.

Cherilyn Radbourne, Analyst

Janet, I wanted to turn to you to just ask you if you could give some additional color on where your team is beating the bushes and whether there's any update on the incremental revenue target that was given in Q3. I think you generated $35 million in Q3 and we're approaching $100 million in Q4.

Janet Drysdale, Chief Commercial Officer

Yes, for sure. Thanks, Cherilyn, for the question. So we did kind of close with $100 million. Of course, that pipeline continues to develop, and we probably have another $100 million so far kind of in our scorecard that we're keeping track of in January. What I will say is that this is what's helping us to close the gaps in some of the weaker markets. We have seen forest products continue to deteriorate even since last quarter with some additional mill closures or curtailments, and we see the continued weakness in the metals and minerals side. So we are out there beating the bushes everywhere, I would say, across the board and even in the markets that are a little bit more pressured by the tariffs. For example, we are finding some stickiness and some new moves to ship metals from Central Canada to Western Canada. We actually have some optimism more recently around aluminum and the potential to move some of that back into the U.S. now that inventories are depleted, that's helping us there. I would say the service is an important one I want to call out that's been helping us win on the domestic Intermodal side. And we're leveraging the strength of our franchise in Western Canada around the NGLs and the frac sand, a little weak right now, but we do see that coming back. So hopefully, that answers your question.

Scott Group, Analyst

Ghislain, could you clarify whether the depreciation is a one-time event or if it's the new ongoing rate? Tracy, I have a broader question. When I look at the long-term perspective, one of the benefits of railroads has been their capacity to generate earnings independent of volume. Railroads could increase earnings even with declining volumes, thanks to pricing, productivity, and share buybacks. However, it seems that while pricing, productivity, and buybacks may be slowing down, volumes aren't growing, which means earnings aren't really growing either. Is this historical pattern no longer applicable? Are we facing some specific challenges right now? I want to gain a clearer understanding of the overall situation.

Ghislain Houle, Chief Financial Officer

Yes. Thanks, Scott, for the question. Let me answer the depreciation question first, and then we'll turn it over to Tracy. So when you look at the total variance of depreciation, it's composed of two things. One, the favorable result of a depreciation study. And as you know, we do these on a regular basis, and we try to push the use of our assets and the life of our assets as far as we can. So that is about 1/4 of the variance. And then 3/4 of it is, in fact, we overdepreciated the purchase price allocation of some of the acquisitions that we've done in the past, and we discovered this in Q4, and we corrected it. That's about 3/4 of the variance. Maybe to you, Tracy, on the second piece.

Tracy Robinson, President and CEO

That's an interesting question. I wouldn't say it's a decoupling. There are some unique factors at play right now, especially regarding the unusual effects of the tariff situation between Canada and the United States, which has significantly influenced a few of our sectors. Janet has discussed the implications for forest products and metals. This may correct itself over time, but currently, we are facing notable mix headwinds that aren't typically seen. Additionally, as we observe the shifting economies, we're experiencing substantial changes in foreign exchange and the assumptions underlying it, which affects us more than many of our competitors. In response, we are taking advantage of this quieter macro environment and the ongoing tariff negotiations to become more efficient. We are streamlining our operations and concentrating on reducing structural costs. This will create the operating leverage we're discussing, which will be significant in terms of operating and earnings leverage. Looking ahead, we have a robust natural resource base that we're continuing to develop across agriculture, mining, energy, and industrial sectors, all of which are commodities that the global market demands. We enjoy a strong position in accessing North American markets and have an unrivaled route to ports that connect us to global markets. This positions us well for both exports and imports of consumer goods into North America. We've already begun to see these opportunities, and we anticipate further acceleration. With the capacity we've built and the investments made in our network, we're becoming quite efficient. Once the tariff situation normalizes, which we hope will happen this year, we expect to see that leverage begin to take shape. We're quite enthusiastic about the possibilities ahead.

Fadi Chamoun, Analyst

Janet, is mix in '26 kind of flat versus last year, worse, or slightly better? Just want some clarification on that. And the question I have is, so when you look at the outlook over the next, whatever, year or two or even three, where do you see CN having differentiated opportunities to grow volume, to grow the business? What segment or what market do you feel that you have an opportunity to be differentiated versus the economy and compared to the market?

Janet Drysdale, Chief Commercial Officer

Thanks, Fadi, for the question. So let me start with mix. I want to take a minute to remind everyone, there's kind of two aspects to mix. There's the enterprise level where you see volumes move around, let's say, between forest products, intermodal, metals, and minerals, but there's also mix within each segment. For example, if we look at forest products and we think about lumber, even within that segment, we may be skewing more to shorter haul moves than longer haul moves just as some of the geography changes occur related to the tariff impact. In terms of thinking about the '26 versus '25 and '25 versus '24, right now, it's looking to be about the same level of impact. I think that's how I would quantify it. But again, we're kind of forecasting on a forecast and at a more detailed level. So you're going to see some of that come through as you follow the weekly volumes and where they show up. In terms of where I think we have a great opportunity to differentiate ourselves going forward, it's really the northern nature of our franchise, the exposure that we have to Canada's natural resource base and the overall Canadian focus on diversifying trade and getting our products to new markets. I would call out, in particular, the BC North, which is just a tremendous region for us, including the Montney Shale, which has one of the largest unconventional reserves. So that's great for us from two perspectives. It's the natural gas liquids exports, and it's the frac sand as an input. I would call out on a longer-term trend, our exposure to Canadian Grain and the yields that we're seeing improve there in the canola crushers, and I would particularly do that now in the context of some of the trade resolutions that we've seen with China. As we think about 2027, I like our exposure as well to potash. I would say the natural resources as these progress, things like critical minerals, I think that Canada has a lot of finding new markets. So there's a lot to be optimistic, Fadi, I would say, as we start to think about how we get into '27 and beyond.

Christian Wetherbee, Analyst

Maybe a question on the guidance as we sort of understand it. It seems like volumes may be a little bit more back half weighted. It seems like FX is maybe a little bit more of a headwind in the first half. So it's kind of the way to think about it, maybe down earnings in the first half, potentially higher earnings in the second half kind of gets you that little bit of a premium. I guess maybe the buyback could be something that we need to consider in there too, but just maybe a little bit of help with the shape of 2026.

Tracy Robinson, President and CEO

Chris, I think you've got the contour of the year pretty good. It will be a softer front end given the compare last year and what we're seeing with Janet went over on some of the volumes. We did have some one-time benefits from our cost reduction efforts last year in the first quarter. So you're going to see that lighter, and it will continue to improve over the course of the year. Ghis, anything to add?

Ghislain Houle, Chief Financial Officer

Yes. On buyback, Chris, absolutely. As you know, we're temporarily going to increase our leverage from 2.5x to 2.7x. We want to take advantage of the cheap share price. We're going to try to front-load that as much as we can, and then we plan on going back to 2.5x leverage in 2027.

Walter Spracklin, Analyst

Back to you, Janet, on volume. When I look at your 2026 outlook slide, I see that petroleum and chemicals are up. You have U.S. Grain up, Canadian Grain up, and domestic intermodal up. Those are significant segments. The categories that are down are just forestry and fertilizers, which are not as large. So when I look at that slide, it seems like 2026 volumes are leaning more towards an increase rather than staying flat. I'm curious if there's something I'm missing, and maybe you could highlight some of your strongest increases and decreases. Also, regarding Prince Rupert, would you say that's still operating at the 10% run rate you were aiming for last time we spoke?

Janet Drysdale, Chief Commercial Officer

Okay. There is some art involved in the slide, obviously, Walter, but I appreciate your question. We see the greatest strength in ag and energy. So these are the two that I would call out. And on the energy side, it's really the petroleum and chemicals, and going kind of one level deeper, it's the NGLs, the refined petroleum products. And hopefully, towards the end of the year, we see some incremental crude come on as well. Now some of that growth depends, of course, on our customers and some of them are ramping up. And so you always want to be a little bit careful about how aggressively you forecast somebody else's ramp-up. So I would say that about the business. In terms of where things are expected to be weaker, I'm going to still call out the forest products as well as the metals and intermodal. I think this one is a bit tough to call right now, and it really depends on the health of the consumer. I am pleased with the resiliency of the consumer, particularly on the U.S. side that we've seen so far. But the tariff situation has made that segment a little hard to predict, and we've kind of gone through these boom and bust cycles. So about some question marks around that. I'm really pleased with Prince Rupert and really pleased with the growth that we're seeing there in terms of the Gemini volumes, in terms of the overall performance. And I'm really excited as well now that I have the mic; I'll take a few more minutes just to talk about a few other things that we see on the horizon, especially for those that had the chance to visit Prince Rupert last year. The can export facility is continuing to ramp up. So you'll remember that, that's really an innovative large-scale export transloading facility where we have the opportunity to do different types of commodities, be it Grain, be it plastics. And that expansion is really expected to take hold late this year, maybe a little bit into 2027. We didn't get time to spend while we were up at Rupert around IntermodeX, but I want to call that one out as well. So that's really import transloading, and that gives shippers the ability to consolidate and mix ocean containers into 53-foot domestic units. So both of these are examples of how we're continuing to invest in the end-to-end supply chain and our intermodal ecosystem at Prince Rupert. So again, I see a lot of optimism on the horizon around that if we can get past some of the near-term macro issues.

Brian Ossenbeck, Analyst

Tracy, in terms of looking at the last couple of years, you highlighted a bunch of the headwinds that the business has experienced, but we've still gone from double-digit earnings growth to mid-single, now flattish, clearly excluding the headwind on FX, which will be volatile. Just wanted to understand maybe a little bit more in terms of what you think has changed or maybe not changed from the underlying earnings power in the business. And also wondering, is this a time where you need to spend a little bit more on CapEx through the cycle? I know it's coming down this year, but I think most of that's on equipment and other things like that. So maybe just some comments on the earnings power and the underlying investment you think you need to be there.

Tracy Robinson, President and CEO

Thank you for your question. Over the past year and the preceding years, we've focused on investing in our network. We encountered several critical challenges. As we consider our future portfolio and commodity base, we now have the Edson Sub at 63% double track. We've significantly increased capacity in the Vancouver corridor and are actively working on improvements at Prince Rupert. We completed a high-return project related to the EJ&E. Our network is now prepared for anticipated developments, as outlined by Janet over time. Additionally, we've made substantial progress with our locomotive fleet, moving from having the oldest fleet in the industry to being more competitive. We will continue to enhance this aspect gradually, and our railcar fleets are also mostly in the right position. In addition, we've been closely examining our structural costs. Over the last 18 months, we have made significant efforts to reduce structural costs, identifying one-time savings and in-year reductions. We continuously seek such opportunities. As a result, our underlying margin has improved this year compared to last and is set to improve further next year. We are currently managing the challenges of a considerable mix impact and tariff effects, which I hope will stabilize as we navigate the USMCA review in the coming year. I believe we are in a strong position. Our Western network offers great potential for exports in global markets and imports from Asia. The agricultural sector remains incredibly robust and is on an upward trajectory. The mining sector, as mentioned by Janet, is also poised for continued growth. Overall, I am optimistic about our position as we benefit from a rich resource base that will keep developing. Thank you again for your question.

Konark Gupta, Analyst

Just a quick clarification before I ask my question. On the EPS, I don't think you guys touched upon the pension, if there's any nuance there? And just are you expecting the buybacks to be net accretive to EPS or not? And my question on free cash; actually, you talked about conversion being higher. If you look at the '25, I think the conversion on net income was about 70%. And if you just add on the $500 million CapEx reduction, that gets you to 80%. Is there anything else we should be thinking about on free cash conversion in '26?

Ghislain Houle, Chief Financial Officer

Thank you, Konark. In 2025, the pension was a tailwind of approximately $60 million compared to 2024. If discount and interest rates remain stable, we anticipate the pension will provide a $40 million tailwind in 2026 relative to 2025. Regarding share buybacks, after considering financing costs and current interest rates, they will have a minimal positive impact on earnings. As for free cash flow conversion, we expect it to improve due to reduced capital expenses. In 2025, free cash flow conversion was 70%, and we aim to exceed that. However, we need to account for a significant cash tax payment in 2026 compared to 2025. This contributes to an increase in our effective tax rate, as we anticipate more profits will be taxed in Canada at a slightly higher rate compared to the U.S. When you combine all these factors, it aligns with the numbers you’re referencing.

Ken Hoexter, Analyst

Great job on the OR for the quarter, looking for more next year. I guess, Tracy, let me get you back on your soapbox on the merger, right? You mentioned you're spending millions into the process. You target significant concessions you said. Can you talk about what that means? Like is that protecting sustained access? Is it a dollar amount? I just want to understand when you say significant, what does that mean? And then same thing for USMCA. Just big picture, if you're going to go into negotiations, what is the risk here? Or what are the benefits that you see come out of this? Or is the base case that it's just renewed and things stay the same?

Tracy Robinson, President and CEO

Thanks, Ken. That's a couple of big questions. So first on the merger, listen, we are a very strong proponent of competition. And as we look at this application, we have great concerns and a lot of questions around how it does what it's supposed to do, including when it comes to the standard of increasing rail competition, which is a pretty big bar. In our view, it falls considerably short. It portrays the merger as a complete end-to-end in spite of obvious areas of overlap. They didn't use all the data. They didn't give us the projected market share of the new entity and therefore, how big it would be and the potential harm that would come from market power. So these are only examples that they suggest the gap in the assessment of harm. As importantly, I think it failed to propose conditions that would adequately preserve competition, and it said nothing on how it was going to enhance competition, save an open gateway model that I think has been proven not to work and a gateway commitment that applies to, by our assessment, just a very small fraction of the impacted traffic and not at all the Canadian railways. And it expires with the merged entity. And of course, its impacts are permanent. So should this proceed, I think there needs to be a lot more data and information. There's a lot more we all need to know. And that will lead us to more information on the impact to the shippers across the network. And what I believe is a much more substantive portfolio of concessions to mitigate those impacts if we are held to the STB new rules. So as we look at it from a CN perspective, and we've run a number of scenarios, as you would expect. Based on the information that we have and what we think their intent is, which we need a lot more on that, there will be an impact on competitive access for our customers and for our business. Now our assessment would suggest that the impact on CN will be less than that of the other roads, but it won't be zero. And so if this merger is to proceed, we intend to rigorously pursue concessions that will protect and improve competition. That means protecting the interests of our customers and our network and the competitive integrity of our network as we think about it. We believe that there's opportunities if this is done properly for our network, for our operations to play a bigger role, an extended role in providing options to our customers in the regions that are going to have that negatively be impacted by the merger. So we think our network can be very helpful there. They've got a lot of work to do. I'm interested in seeing what they come forward with and how they will step into this question of how they will not only offset the competitive impact, but also increase competition. It's going to be really interesting. We're ready. Our response will be informed by their next reveal, which I understand we will expect before too very long, but we're not getting ahead of them. In the meantime, the rest of the organization is focused on running the day-to-day business, which is equally important.

David Vernon, Analyst

So Janet, maybe I wonder if you can help us kind of how big of an impact this tariff stuff has had on overall RTM. It sounds like the Western Canadian stuff has been growing. It's just been offset by the tariff losses. I'm just trying to figure out like if you were to look at '24 to the end of your year plan at '26, like how much of your business has kind of come off purely because of tariffs? I think it would be helpful to just understand kind of what the relative weight of the changes in the trade regime has had on your business.

Janet Drysdale, Chief Commercial Officer

Thanks, David, for the question. So I don't have the volume numbers at my fingertips, but what I did say in the remarks is that for 2025, the tariff impact was in excess of $350 million. The IR team can kind of help you with that after the quarter just to kind of translate that back to volumes. Obviously, it's been most impactful, as we've said, in forest products and metals and minerals. Feeling very popular today with the questions. I think the next question should go to Pat for anyone who's listening out there.

Patrick Whitehead, Chief Operations Officer

And hopefully, it's going to be a tough one.

Ravi Shanker, Analyst

Maybe this is for Janet or Ghislain. I know you've changed your guiding philosophy, like you said last quarter. But when you look at the delta between your guide and your peers, particularly your direct peer, based on what you can see so far, kind of is that all down to your new approach to guiding? Or is there something idiosyncratically different with your end market approach or your comps relative to others this year?

Tracy Robinson, President and CEO

I'm going to start off with that, Ravi. We have put a lot of thought into our guidance, especially given the volatile environment we've observed over the past few years. Many of our peers, including us, have had to change, withdraw, or just miss their guidance, which is not an effective way to communicate with you or to manage our business. We believe this model is appropriate for the current level of uncertainty. If our situation improves next year, we can consider providing something more precise. Looking ahead, we feel this approach is justified given the unique volatility we're facing with tariffs, the impact discussed by Janet, and the fluctuating currency situation this year. In comparison to our Canadian peers, I would say our networks and business have evolved in a way that gives us more exposure to Canada than I anticipate they have. They will certainly experience challenges, just as we have, especially regarding tariffs, which they've mentioned on their call as well. Ghis, do you have anything to add?

Ghislain Houle, Chief Financial Officer

Yes. I can provide some insight on the one-time factors I mentioned earlier. With a smaller capital budget, it affects capital credits, which I estimate to be around $100 million. This includes mainly labor and fringe benefits, along with a small portion in P&SM. For other income, we're looking at nearly $100 million in 2025. While we typically have some other income, we don't expect it to be as high in 2026 as it is in 2025. Our effective tax rate is increasing, finishing 2025 at 24.7%, and we're estimating a range of 25% to 26%. To quantify, I believe it's close to $100 million. These are significant challenges we need to address by enhancing productivity and efficiency, which we have made excellent strides in during 2025. We have put in a considerable effort, and in 2026, we will explore all options to mitigate the challenges we face.

Stephanie Moore, Analyst

I wanted to maybe go back to the consolidation in the space. You did mention about $15 million in advisory fees associated with the industry consolidation. Can you provide a bit more color on maybe what drove the decision to bring in external advisers and what areas are helping you to evaluate, including the evaluation of potential further consolidation options?

Tracy Robinson, President and CEO

Listen, yes, thank you for that question. This is a big deal. It's an industry-changing deal, and I think it is incumbent upon all of us who are going to participate that we understand the detail, and there is a great level of detail that we're going to be looking at on how this is going to impact the industry. I think where I would expect most or all of us to bring in experts, let’s make sure that we do that, and we do that in a way that isn't disrupting how we run the day-to-day business, right? Almost all of this organization needs to be focused on delivering for our customers every day. On Pat, there he goes delivering the next level of cost reduction, Janet on growth. And so we have important and trusted advisers that we bring to bear on this.

Benoit Poirier, Analyst

I understand 2026 will be impacted by mix, tax, other income, and FX. Ghislain, you provided great granularity for 2026. But looking beyond 2026, let's say, 2027 under a normal environment with a stabilized mix FX environment, what kind of volume growth would you need in order to generate double-digit EPS growth? And I'm sure you already ran lots of scenarios, but I would be curious to see what kind of volume growth you need in order to generate double-digit EPS growth under a more stabilized environment.

Tracy Robinson, President and CEO

Benoit, listen, here's maybe the way to think about it. We are continuing to build a more efficient and lean engine, which is very good. That gives us great operating leverage. And as we go forward, the real catalyst for realizing that leverage is volume growth, as you know. It always depends on which volume growth and where in the network it is. But in general, I would suggest that if you think about mid-single-digit volume growth with the cost structure that we've built and are continuing to build, you can see us generate double-digit EPS.

Steven Hansen, Analyst

I just want to come back to the contour aspect of your guidance, if I might. Is it possible that the belly of the year might not be stronger than the back half specifically? I'm just cognizant of the fact that I think petchem, coal, met min all got beat up last year through 2Q, 3Q on some one-time issues, either at the customer or at the mine site level. And then we've got a record Grain carry over here that should benefit those same quarters, all while we're looking at a comp in Q4 that's the record Grain movers, I think you articulated in your comments. I'm just trying to understand that contour side a little bit better and whether or not we have a better opportunity in the middle part of the year.

Tracy Robinson, President and CEO

Yes. I think that's probably a great way to think about it. There are two pieces of it, of course. One is how the volume showed up last year, and I think you've got that right. We did also have the refinery shutdowns and what was it Q2, Q3, Janet. The other side of it, of course, is the cost and our efforts on cost and when some of those appeared over the course of the year, and that is a little lumpier, although a bunch of that was early on in the year. So I would say that the way you've constructed that is pretty good. So we'll go with that.

Kevin Chiang, Analyst

Maybe I will throw this one to Pat there. Janet laid out some of these unique opportunities. We talked about these Canadian nation building projects. It seems like a lot of it hits your western network. And when I think back to the Investor Day a few years ago, it felt like a focus was creating a more balanced network, but this growth pipeline might actually exacerbate that imbalance. Just wondering how you think about the long-term capacity investments you might need to make on that part of your network? Or do you feel you have excess capacity now to absorb this growth?

Patrick Whitehead, Chief Operations Officer

Kevin, great question. I appreciate it. Regarding the investments we've made in the West for 2025, particularly with the Edson Sub now being 63% double track, up from about 40%, we've effectively created around six trains of capacity in that corridor. We have plenty of room to grow. We also have stored locomotives, and currently, we have nearly 800 furloughed employees. This gives us options to respond as volume increases. In terms of balancing, we do extensive work across the corridors, so I’m confident in our growth potential. The capacity is available, our locomotive fleet is more reliable than ever, and we feel very optimistic about expanding in that corridor.

Janet Drysdale, Chief Commercial Officer

And I would just add, we're going to take the growth where it comes, and we're going to figure out how to handle it. I think you have to appreciate as well that some of the weakness in forest products will actually help create some capacity in the Western region for other commodities as well. So Pat and I stay very closely connected on thinking about where the volumes are going to come online and how we're going to handle them.

Jonathan Chappell, Analyst

Ghislain, further to Scott's question, you gave a good explanation to what happened to D&A in the fourth quarter. But as we think about that going forward, if we took the fourth quarter run rate, annualize that, put 4% inflation on it, you'd be looking at a D&A number that's down $40 million year-over-year. So I want to make sure we're thinking about that from the right starting point. And then also just overall inflation, you mentioned that $100 million potentially in the comp and ben line with some purchase services. What's the comp per employee look like under that scenario?

Ghislain Houle, Chief Financial Officer

Depreciation on a year-over-year basis has typically been around a $100 million headwind in the past. While it will still be a headwind between 2026 and 2025, the impact will be reduced to about half of that moving forward due to the full-year effect of the depreciation study influencing 2026. This will provide some relief. Regarding inflation, the overall rail inflation appears to be slightly less than 3%. As for compensation per employee in Q4, it was approximately 7%, and for 2026, it's expected to fall within the mid-single-digit range. I hope that clarifies your question.

Tracy Robinson, President and CEO

Thanks, Christian. Now just before we conclude today, I've got one more piece of important news. Today was the last call for our Head of Investor Relations, Stacy Alderson. Stacy has elected to retire on May 1. So as you all know her, she's had an exceptional 30-year career here at CN, defined by leadership, integrity, lasting impact, and she's touched many parts of our business over those years, strategic planning, acquisitions, network development, financial planning. She's done it all, Stacy. And of course, our relationships with all of you. We see your fingerprints on this organization everywhere. Stacy, we're going to miss you, but we're very happy for you and happy for your family on the next chapter. Thank you. So we're not leaving the job open. I'm pleased to announce the appointment of Jamie Lockwood as Vice President, Investor Relations and Special Projects. Now Jamie is back in Montreal. He brings about 18 years of deep railroad experience. He's got a strong perspective. He's spanned finance, internal audit, supply chain, and most recently, a big kind of job in engineering where with Pat, he's been leading the transformation of our engineering strategy and execution. Jamie, we're happy to have you back here in Montreal, and I know all of you will enjoy working with them. So Stacy and Jamie will work closely together over the next month or so just to ensure a smooth transition. I know you'll join me in congratulating both of them. And then just finally, I want to take the opportunity to thank the entire CN team for all of your contributions, your focus, your resilience all over the last year and in the year coming. Railroading isn't an easy business, but you all do it very well, and it's an honor to work alongside all of you. Thank you for joining us today, and we'll talk to you soon.

Operator, Operator

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