Canadian National Railway Co (CNI) May 2026 Conference Transcript

All right, good morning, everyone. Welcome to day three of the 19th annual Wolf Global Transportation Industrials Conference. I'm Scott Group, Transport and Airlines Analyst here at Wolf. We are going to get going with our first session of the day with Canadian National. We have Janet Drysdale, Chief Commercial Officer, and Jimmy Lockwood from Investor Relations. Thank you guys so much for being back at the conference. Appreciate it as always. I think Janet's got a couple of quick things that she's going to start with, and then we'll jump right into questions.

Sounds good. Thanks, Scott. It's great to be here. As you know, I always appreciate the opportunities to spend time with the investment community. So I'll make just a few kind of brief high-level remarks, and then, like you said, we can dive right into the Q&A. You know, I think let me start off by saying the railroad is running really, really well. I couldn't be more pleased with the service that Pat and team are providing to our customers and that matters because the service number one helps us to grow volumes number two it helps us with pricing so let me talk about pricing for a minute we have been very very consistent with our pricing strategy you know and we have spoken about it on the last three analyst calls I'll speak about it on the next three at the risk of sounding like a broken record but it's pretty straightforward first and foremost we're gonna price to the value of the service that we're providing our customers we're gonna price ahead of our rail cost inflation and we're gonna sell into our capacity so let me say a couple more words about that when we are out you know meeting customers when we're out trying to drive new business onto the railroad what we want to do is make sure that we can service that business really really well because if we do a good job for the customer. The customer is going to win and when they win, we win. And we service it well, we do it at low incremental cost as well, right? So you're not jamming up your network. So that really matters a lot to us. Let me say a word about revenue per revenue ton mile while I'm talking about pricing. You'll remember, Scott, many years ago, railroads used to provide same-store pricing. We stopped doing that because it wasn't comparable the way it was measured between the railroads and so you're kind of left with revenue per car load or cents per RTM as a kind of proxy for pricing I have to tell you it's not a great proxy there's a lot of noise in revenue per RTM and I think we saw that in the first quarter when you think about things like FX the fuel surcharge and on the Canadian side we had the carbon tax as well so it gets hard to measure kind of on a year-over-year basis and really have an understanding of the underlying pricey when we think about the mix of business there can be a huge impact to revenue per revenue time mile based on mix just to drive that point home if you look at the numbers you'll see intermodal and automotive as examples where the revenue per revenue time mile is much higher than the average of the other categories now that's not to suggest that intermodal and automotive the most profitable business units nor should it suggest that you're getting the most pricing in those segments but it's just a way to drive home the point that mix has a significant impact on revenue per revenue ton mile so let's talk for a minute on volumes um we had about three percent rtm growth in q1 as of this morning i would say we're pretty close to three percent on a quarter to date basis in q2 so that is running scott a little bit ahead of our expectations where we've seen some really good strength is grain canada grain us we've seen strength in our refined petroleum products and that relates to the toronto fuel distribution facility that we opened up and are now into phase two moving unit trains with that facility natural gas liquids which i think we should spend a little bit more time talking about today have all kind of surprised a little bit to the upside. Some of the other areas that have been more resilient where we expected maybe more weakness are things like metals and automotives that were impacted by tariffs. These segments have proven more resilient than we expected. Potash is surprising to the upside. automotive I think I said automotive already so we've got you know the more weeks I guess you could say under our belt the more confidence grows when we think about the second half I would say you know it's still a bit murky the macro and so we we remain cautiously optimistic but the good news for you is that we report volumes on a weekly basis so you can track it with us as we go So when we look a little further out, so kind of that was half one, half two, if we now kind of think about where are we getting to at the end of 26 and what does 27 and 28 look like, I think that's where we're just really excited. I think, you know, we have tremendous growth opportunities, multi-project, multi-commodity, and I think the announcement that went out earlier this week on Ace Terminal, this is a partnership with Kiara and Alta Gas, who have been great partners to CN and will be great partners for many, many more years to come. This is a little bit of an underappreciated, I think, opportunity for CN, where our network is really just built for growth. So if we think about the Montanay Shale region, which borders Alberta and BC, this is one of the most significant natural gas deposits in all of North America. Now, we don't move natural gas as a railroad, but what's happening in Canada is we're getting more export capacity for natural gas. When that happens, there's more drilling that takes place to produce more gas. this is a deposit that is very rich in liquids so natural gas liquids you're talking about propane butane ethane condensate all of that moves by rail and so this ace terminal is going to be an important long-term growth opportunity for us and this is of course all linked to growing export capacity at the port of Prince Rupert and the new capacity coming online there with reef to actually get the propane and butane offshore the ethane is also an important component because this is making it cheaper to produce plastics and so plastics eventually will be another key export opportunity in canada as well so let me wrap up by just saying you know we're we're built for growth we have the capacity available we have the franchise that is well positioned to where incremental growth is going to come from and we believe that that growth is going to be able to come on at a low incremental cost.

Okay great so I'm going to start with some questions if audience has questions raise your hand we'll get you involved. I appreciate you starting your opening comments talking about sort of price because I don't know that we typically hear opening comments from rails sort of start that way so I appreciate that. I guess I agree with you, right, that rev per car, cents per RTM are not perfect, right? We look at it because we don't have a choice. I guess then I would sort of pose to you, why not go back to a same store price? And you can't say because it's not comparable anymore because no one else is doing it.

So why not be the leader and start yeah I think this is an area where there is not a big advantage to to kind of be out on your own with the number I think the guidance that we can give you is that we we are pricing ahead of our rail cost inflation okay and right now I would say our inflation is driven by two major components it's labor and its materials and our inflation is probably running in the two and a half to three percent range and so you can assume that we're you know pricing ahead of that and when we say we're pricing ahead of that right there's a discussion some rails have pricing dollars and yes yes let me let me explain what we mean like you know it's not obvious right that pricing is accretive to margins because margins have sort of been steady right so yeah no 100 scott is a good question so when we measure pricing we measure it on a same store basis so it's a very detailed measure you know is it the same origin the same destination the same commodity the same car type you know you kind of have to check off all of those parameters and then did it move volume so is my price this year higher than my price last year and I measure it against the volume which gives me the pricing dollars okay so it's a pretty rigorous measure what we're seeing is that we continue to have this mixed headwind and so we talked about that a little bit in Q1, where mix is essentially offsetting our same store price dollars at the moment. And the mix impact is really driven by kind of headline would be the forest products, right? So we're seeing, you know, 40, 50% kind of tariffs and duties on Canadian lumber into the US. And that has hit us hard. Now that will continue to probably about October of this year because that's kind of following the sequencing of when the incremental duties and tariffs were applied last year. Metals has been a headwind but as I mentioned it's it's actually faring better at this point than what we would have expected so I would put most of the mix issue on the forest products and give you the sense that as we kind of lap the tariffs that were placed last year we should have the opportunity for the pricing to show through without the mix impact.

And just one more, just on this sort of thing, I'll add, you know, if you're pricing 50 basis points above inflation, you're sort of at the whim of mix being a headwind. If you start pricing one, two, three points above inflation, then you could say, hey, mix is a headwind, we don't care, we're still getting, you know, net price above, like, is there an opportunity to sort of accelerate that?

So my customers will tell you there's not an infinite price Sure.

No, I'm not suggesting we go 10 point. I don't know.

Like, is there some opportunity to sort of – No, listen, I'm very, very comfortable with the team's approach to pricing, and we do this on a disciplined basis. We're looking at, you know, individual origin destination lanes, understanding the relative competitiveness. But there is no point for me to renew a contract at 6% if I don't move the volume. Okay, that's theoretical pricing. What I care most about is dollars that I can put in the bank account that support earnings growth. And so there's not unlimited pricing power. I think we're in a market where we've had multiple years of weak volumes. We're seeing that now start to correct itself. So we're seeing the tightening truck rates and capacity. We're seeing all of the rails getting a little bit more volume growth. So I think we're kind of coming out of the worst of it. And then it's service, like how good of a service are you providing? That's where you need to be able to anchor your price.

And is this trucking phenomenon, certainly in the U.S., is that any signs of it spilling over into Canada so we can?

Yeah, there's some early signs. It is stronger, like in the U.S., I would say. And I think you see that from the various companies that you cover.

But we are seeing some of that traction take hold in Canada as well. okay and then maybe just okay I'll get you in one second on questions um if there's a mic well we can get around um so you mentioned RTM's tracking up about three percent again right the guide sort of for the year has been flat right you mentioned some macro uncertainty do you feel like there's upside potential or is this hey you know grains really really good right now do grain comps start to get harder as the year progresses is that yeah I mean grains always the unknown right so i think that's an important point and the single biggest driver of the strength has been grain canada and grain us normally at this time of the year we actually see a little bit of

a slowdown in grain shipments because the farmers around in their field planting the planting has been delayed it's been quite wet in western canada and so those volumes are holding steady and then it's all about trying to predict what the next crop looks like and as farmers get a better handle on that they'll make decisions around how much of the current crop they hold back or release and then that gives us a better sense of you know what does the the you know i would say september to december time period look like in the context of grain the crop isn't even planted yet i think that's the key point yesterday cp suggested that they think from a year-over-year standpoint grain could look pretty good through december do you have that visibility yet or hard to know well it's hard for me to predict the crop that hasn't been planted I would say that you know I think the visibility is pretty good on the crop that's in the bins right now so we feel good about and it's both Canada and US I want to make that point like we've had a all-time record crop in Canada but it was a record corn crop in the US and then the resolution with China on soybeans in the US the resolution between Canada and China on canola all of that has been constructive for for shipments this year okay and then just a couple more on the bottom side so you mentioned we get to October and some of like the lumber forest product comp should start to ease yes we're still in a pretty weak we are in a housing market things not continuing to are things stabilizing at a low level and so we just start we just have to lap this or is there risk that we just continue to see downward I think I think that's a little bit of the unknown I think housing is such an important segment you know not just for lumber but for the broader economy and when housing goes well you have your lumber you have your roofing shingles you have your wall board and then somebody builds a new house and they want all new appliances and they want all new furniture so it actually brings growth and intermodal as well so when the housing market is doing well our railroad volumes are doing well so I would say the way I would answer your question is that the number one issue is the housing starts. The secondary issue is the duties and tariffs. So we will lap that issue, but we don't expect, you know, growth to return until, you know, the U.S. mortgage rates come down a little bit and we see housing starts move up a little bit.

Okay. You said we should talk more about NGL. So talk more about it.

So how big is of a business today where do you see over the next 12 months two years like how much growth I mean this this business is growing at double digits and this is all related to that Montenay Shale region that I was talking about so the more opportunity that Canada creates to export more natural gas the more that this is a long-term opportunity and so there's multiple projects you know that are being kind of fast-tracked to to increase export capacity I think you've seen kind of the Canadian government be very focused on you know liberating Canadian energy and obviously it's a good time to be doing that so as that grows we're gonna grow with it we have more fractionation capacity that's actually coming online in the second half so what I mean by fractionation if you're less familiar with that once you kind of extract the liquids from the production process it goes through a fractionator and the fractionator is what separates the products into propane butane condensate and ethane and so more capacity coming online in the second half and then I think the Kiara AltaGas CN announcement is kind of the proof point that this isn't growth for a year or two this is a decades-long growth story and I think that's an important piece and it doesn't just mean you know more propane condensate and butane opportunities it will help crude oil opportunities it helps plastics opportunities so it does have an outsized impact I think on overall volumes and it's something that our franchise is particularly well suited to in that northern BC area it's a rock sand as well I mean that's that's the kind of key input to make this happen So you think this should be double-digit growth for multiple years? For that segment, yes.

And is this a, where does this rank in terms of like, is this a better margin product or something?

It's within our petroleum and chemicals business unit, which does tend to be at the upper end.

And, you know, you mentioned this is a growth opportunity. I've heard over a long many years of lots of different, you know, growth stories we've talked about. You know, all the rails, you know, there's Meridian Speedway, there's Lazaro, there's this East Coast port, there's this triangle strategy in the East. There's one growth pitch that has really, really hit, and that is Rupert. Yes. But it's the last few years that has stopped.

Yeah, so Rupert, you have to distinguish.

And Rupert is down a lot from where it was. What went wrong with Rupert of late, and when does that start to come back?

So you have to kind of split Rupert in half. Okay, because Rupert used to be just an intermodal story, And it is equally, if not more, a carload growth story today, as well as an intermodal story. So on the intermodal side, we did. We had some challenges, labour issues in Canada, both at the port and the rail side, where, you know, we lost some of that traffic to the U.S. And we're working hard to get it back. I will say that, you know, we have the Gemini service at Prince Rupert. it is going extremely well, exceeding our own expectations, I think, and that creates a proof point for other shipping lines. So I think all of the structural advantages of Prince Rupert remain fully intact, and it's more about kind of giving the proof point around the stability of kind of labor and the supply chain is the important point going forward, and Gemini is helping us demonstrate to how successful the port can be on the intermodal side. The carload side, like I said, we've talked about the NGL exports. We think there's incremental opportunity for metallurgical coal. So it's becoming as much a carload growth story as an intermodal growth story.

What is Rupert growing this year, do you think?

I don't know offhand, but it's outpacing.

Do you think Rupert, you think, is back on a growth?

Rupert is back on a growth trajectory, absolutely. Okay, sorry.

There's a question that we have Mike's coming right behind you.

Yeah Thanks, um, it's more just going back to the pricing side So you say pricing in excessive inflation, but can you just drill into that a little bit? Like what does that mean and like when you talk about inflation is that like realized inflation or some sort of pro forma thing? and then when you think about this year I Know you do a fuel surcharge pass-through but a lot of your other inputs would be sort of petroleum-based and thinking like lubes and things like that that could see really significant inflation so like how are you factoring that in and how do you sort of get comfort that the ultimate price will actually be in excess of inflation so the fuel is is well covered by the fuel surcharge um so it's you know the vast majority of that is the diesel fuel for locomotives and yes there's some other you know products that kind of get used on the railway but that is well covered uh with what is a pass-through fuel surcharge um so when we're talking about

other inflation we're talking about labor being a key key part of that um in canada the labor inflation uh is about three percent uh we have a smaller base in the us that's maybe running closer to four percent and those are really just based on the negotiated collective agreement so they're known um and they're typically known kind of multi-years the balance is materials and so that's how you know how well you're contracting for other materials uh that are used on the railway way and that's running a little bit lower that's you know more in the in the two and a half kind of percent range so when you put the basket together um this is this is the inflation that we're talking about it's the specific inflation for cn um that we're trying to make sure that we're pricing ahead of and for sure that this is this is dynamic right as we kind of go through the economic cycles um when demand is higher when inflation is higher we're going to see price move up we do have regulated grain that we're dealing with so a certain portion of our business is regulated this is export grain in canada and so that has put a little bit of pressure on our pricing for this year that regulated grain increases about 1.7 percent for the 25 26 crop year i wish i could tell you that that was going to improve as we think about next year but the pricing has already been released and it's a 0.66 for cn for the 26 27 crop year now that segment the fuel is embedded in in the in the index um so there's there isn't a separate fuel surcharge so fuel can cause a lot of noise and that regulated grain number and so it's not as responsive so it tends to be a timing issue of when you kind of get the benefit of fuel But that timing issue could be like a year later. So that's just something to keep in mind about how we kind of move through the cycle and how we price differently according to the market conditions that are out there.

So what you're saying, so August of 26, regulated grain rates only go up less than a percent. And it's not like a year lag, right? So you're going to have that piece of your business is going to see a real margin hit relative fuel that's up meaningfully. And then in theory, next August, regulated grain rates, including fuel, go up a lot. And then fuel, hopefully by then, is normal, and regulated grain margin should look really good in the back half of 27.

That's the theory.

Right, in theory.

Now, I would just say that it is a bit of a black box in terms of how the government does these calculations and then how they correct for prior year forecasting errors. But yes, the theory that you've outlaid is sound.

And is that like enough of a margin hit that mismatch on grain rates versus fuel to like impact like my model?

I don't think so, Scott. I think, you know, you've just got to, you know, when we talk about the mixed headwinds, you got to factor in a little bit on the grain side. I think that's how you should think about it. Not showing through maybe as much as we all would hope in the near term, but catching up timing issues. Okay.

So that like, you know, I think it's like a bigger picture question. I think I asked it to you maybe on one of the earnings calls, but I'll sort of ask you again because I think it's important to sort of understand this, right? you know for so many years right the thought was rails could grow earnings by single digits maybe even low double digits without much volume growth there was enough price there was enough cost margin there was enough buyback to sort of get us there even without much volume growth and you know certainly doesn't feel that's not what we're you know last couple years we're sort of flattish on earnings this year you're saying volume flat earnings up slightly more than volume like can we get back to that better sort of earnings growth algorithm

what has to happen to get there yeah so let me start off and then and then Jamie can jump in I think Scott we're gonna kind of you know Wikipedia this to your name Scott group you know earnings algorithm so it is it has become a thing instead of the or question yes yes so um so yes the earnings algorithm we believe is is actually fully intact um now year to year you're going to have some noise but do we think that you know uh the cn railroad has the capacity in a supportive environment economic environment good macro to be able to deliver high single low double digit you know the answer is yes jamie maybe you can give a little bit more color well and i think if you even if you start looking last year

we had 1% volume growth, 7% EPS growth. So I think, you know, in 2025. So that at a base kind of proves that earning algorithm theory. This year we have, you know, FX issues and a higher tax rate, some headwinds from other income. But when you pull those aside, Scott, you look at the base of how the business is performing, how Janet's doing on the commercial side and with volumes, how Pat's doing operationally. I think you see that at the core and the core engine's running well and the earning algorithm is actually intact.

Okay. And so, you know, looking ahead a year, if we lap these headwinds, maybe there's if the volume environment's picking up a little bit, maybe then the pricing environment picks up, like the pieces grain could turn into a grain pricing could turn into a tailwind back half 20. Like those are the pieces that could get us back to that.

There's leverage in our business. And when the volume comes back, when you see the volumes come back, you'll see the earnings follow it.

Okay. And then just one other, I know there was a question on fuel. I did a Canadian grain, you know, fuel. Any thoughts of changing the way the surcharge mechanisms work to more frequent resets?

Yeah, I mean, we have a two-month lag. Most of the rail industry has a two-month lag. On a regulated basis, it's really hard to get shorter than a one-month lag. You have a minimum 20-day notification period that you have to respect when you're changing tariffs. So I don't think it's a high priority, to be honest, Scott. I think, you know, the overall fuel surcharge functions well and as intended as a, you know, kind of a pass-through mechanism. So, no, I think we're comfortable where we are.

Just a sort of a near-term question. You talked about on Q1 call, few-cent headwind from fuel in the quarter and sort of 200 base points on margin. Typically, we see margins improve, I don't know, two, three points, Q1 to Q2. Given that fuel headwind, should we still see some degree of margin improvement, Q1 to Q2?

I think you'll see it Jamie's gonna correct me if I'm wrong here you'll see it you know on a sequential basis so that normal seasonal pattern will hold but you know fuel you know is hitting both your top line and and your bottom line and so it kind of comes at a hundred percent or and so when we look on a year-over-year basis I think there may be just more of a headwind but you think still fair to see like the normal yeah the normal you know sequential improvement comes through and then you have like I think just like called it out it at q1 of a 200 basis point hit from fuel that was you know fuel was at $95 a barrel so we'll see if it stays north of 100 it was back down yesterday so there's a little bit of noise maybe a little bit you know plus minus on that

200 Scott okay and then last last just few minutes maybe just a couple minutes just on the bigger environment with M&A maybe just you know at its core like what are your greatest concerns about the merger and you know what do you say to the argument of, hey, there's already a transcontinental system in Canada. It works. Like, why shouldn't we have that here in the U.S.?

I think for us, the biggest concern has been making sure that there is adequate data to make an assessment of the impacts of the merger. And I think we've demonstrated through our various filings that we don't think we're there yet in terms of the robustness of the data. I think the other piece is really...

Can I jump in for one second? So you would argue that you're not even making a comment about the mergers. You're saying the application is still incomplete in your mind.

Yes, yes.

And we'll find out next Friday.

Exactly, but this is significant, right? This is the most significant merger I think that the industry has contemplated, and with the most significant bar in terms of the necessary remedies to demonstrate enhanced competition and to be clear the measurement for enhanced competition here is as an existing rail customer it's not you know truck to rail conversion that maybe is you know uh you know a kind of community benefit or a social benefit but if i am an existing rail customer you have to be able to demonstrate to me that this merger creates enhanced competition i don't think that bar has been demonstrated to this point uh and it is a high bar so when we think about you know is this going to happen is it not going to happen one we think you know having the right data is really important uh two we are the railroad probably least impacted by the merger just due to the nature of our network we originate about 85 of the traffic that moves on our network and we originate and terminate about 65%. But, you know, if there's a way that we can play a role in the context of remedies, or if there's a way we can influence what we think remedies look like to demonstrate enhanced competition, then we're going to be an active participant in that process.

Okay. And then maybe just as we wrap up, anything active participant, any specific things you would like to see from a concession standpoint? And then just hypothetical, if this gets approved, Is it inevitable that one merger leads to two or three or four mergers?

Yeah, I don't know about inevitable, but I think, you know, we're running all scenarios and likelihood would suggest so. I think, you know, for us, we remain focused on growth. And I think as we've kind of talked about today, we have a network that is really built for growth. We're well positioned to bring volumes on at a low incremental cost and to benefit from our operating leverage. So this is where we're really putting our time and energy. and trying to leverage you know we talked about the ngls we talked about northern bc we didn't have time to talk about you know just kind of the build canada and the amount of infrastructure projects and the acceleration of those infrastructure projects whether it's critical minerals or other just energy products so we are quite excited about how we kind of move into 27 and 28 and that's what we're focused on growing do you want to take a minute and just talk about that opportunity is so I mean I think you know we we've taken a new Canadian government new approach in terms of trade diversification desire to to really liberate Canada's natural resources whether it's energy whether it's critical minerals and so I think rails are going to play a really important role in that in getting Canadian goods to offshore markets and I think we're we're primed to be the railroad to help support that, particularly given our northern reach to where some of these resource bases are located.

Janet, Jamie, thanks so much for being here. That was great.

Thank you.