Canadian National Railway Backs Full-Year Outlook as Grain and Productivity Drive Growth

Key Points

• CN remains comfortable with its full-year outlook, supported by strong Canadian grain shipments, higher volumes, network fluidity and productivity gains, despite weakness in lumber and international intermodal freight.
• The railroad generated nearly CAD 100 million in first-half savings through its Fast Track initiative, while improving crew productivity, locomotive utilization and fuel efficiency. However, rising diesel prices are reducing expected fuel-related earnings benefits and could pressure operating ratios.
• CN plans approximately CAD 2.8 billion in capital spending and sees long-term growth opportunities through expanded Union Pacific access toward Mexico, excess network capacity and potential future free-cash-flow benefits from a Canadian tax deduction.

Canadian National Railway NYSE: CNI Executive Vice President and Chief Financial Officer Ghislain Houle said the railroad remains comfortable with its full-year guidance as strong Canadian grain shipments, network fluidity and productivity gains support results despite softness in lumber and international intermodal markets.

Speaking at an investor conference in Montreal, Houle said revenue ton miles were up 4.5% quarter to date and 4% year to date, driven largely by a bumper Canadian grain crop. Excluding grain, volumes were up 1% both quarter to date and year to date.

“We’re very pleased with where our volumes are,” Houle said. He noted that grain shipments have continued into the third quarter, an unusual pattern compared with an average crop year, when grain volumes typically decline by the end of the second quarter.

Network Performance and Productivity

Houle said CN’s network has remained fluid while handling higher volumes, with car velocity running above 200 car miles per day. He pointed to first-half gains in several productivity metrics, including a 13% increase in crew productivity, a 7% increase in locomotive utilization and a 3% year-over-year improvement in fuel efficiency.

The company’s Fast Track initiative, which reviews processes across yards, terminals, auto compounds, fleet operations and other facilities, delivered nearly CAD 100 million in savings during the first half, Houle said. While he said the company is continuing to identify efficiency opportunities, he cautioned investors not to expect another CAD 100 million to CAD 300 million in savings from the program.

“The lion’s share has been achieved,” Houle said. “But we’re not done.”

CN is also examining its vehicle fleet and real estate footprint as part of the initiative. Houle said the company has roughly 5,000 vehicles and is reviewing whether all are necessary, along with evaluating smaller engineering facilities and associated real estate costs.

Fuel, Capital Spending and Cash Flow

Houle updated the company’s fuel-surcharge outlook after diesel prices rose from levels discussed during CN’s second-quarter call. He said an expected third-quarter earnings-per-share tailwind of CAD 0.15 is now closer to CAD 0.10, while the fourth-quarter benefit is estimated at CAD 0.05 to CAD 0.10.

If fuel prices remain at then-current levels through year-end, Houle said the operating ratio would face an estimated 50-basis-point negative impact in the third quarter and a 150- to 200-basis-point negative impact in the fourth quarter. He noted that fuel prices remain volatile.

The CFO said CN is on track to invest CAD 2.8 billion in capital expenditures, down from 2025. He said the lower capital level is not expected to be a one-year event because the railroad has sufficient capacity in railcars and locomotives. CN expects its capital spending as a percentage of revenue to remain more in line with U.S. railroad peers for at least the next couple of years.

Houle also said a Canadian government productivity deduction could increase CN’s free cash flow by about CAD 150 million next year and by more than CAD 200 million in 2028. The measure would affect cash taxes rather than earnings per share, he said.

CN’s capital-allocation priorities are not expected to change significantly as a result, although Houle said the company could consider being “more aggressive a little bit” with share repurchases. The company plans to return its adjusted debt-to-adjusted EBITDA leverage ratio to 2.5 times next year after temporarily lifting leverage from its prior 2.5-to-2.7-times range.

Trade Shifts, Mexico Access and Growth Opportunities

Houle said changing trade conditions have affected freight categories differently. Metals, energy and automotive traffic have performed well, while lumber remains weak amid a 45% tariff and muted U.S. housing starts of about 1.3 million. He said metals traffic has shifted within Canada, including shipments from Ontario to Vancouver, while aluminum continues to move to the United States despite tariffs.

CN also sees opportunity in its memorandum of understanding with Union Pacific, which Houle said expands the railroad’s reach toward Mexico. He said trade between Canada and Mexico totals about CAD 45 billion, with approximately 80% involving eastern Canada.

According to Houle, CN’s route from eastern Canada is about 400 miles shorter than that of its Canadian competitor and benefits from CN’s ability to move through Chicago on its own tracks. Under the arrangement, CN expects to interchange traffic with Union Pacific in Memphis rather than Chicago.

Houle said the agreement is not dependent on a merger, though access to Kansas City would depend on the merger referenced during the discussion. He described the Mexico opportunity as a long-term growth avenue across automotive, agriculture and other freight categories, complementing the Falcon service’s focus on converting long-haul truck freight to rail intermodal service.

CN has excess capacity on its Joliet-area “J” line, Houle said, and views Union Pacific traffic as an opportunity to monetize that capacity. If additional infrastructure is eventually required, he said Union Pacific would fund the needed capacity “in one way, shape or form.”

Technology and Regulation

Houle said CN is using artificial intelligence and automation in areas including accounting, but characterized the effort as still developing. He said technology represents the next stage of both safety and productivity improvements for railroads.

However, he said regulatory requirements continue to limit the benefits from automated inspection systems. Houle cited CN’s use of portals equipped with high-resolution cameras and algorithms that can inspect trains, while manual certified car inspections are still required.

“That train should go right through a portal,” Houle said, describing an inspection process that can otherwise keep a 12,000-foot train stopped for about an hour and a half. He said Canadian and U.S. regulatory environments have been similarly slow to permit replacement of manual processes with technology.

Looking ahead, Houle said CN’s network, access to three coasts, position in Canada’s natural-resource markets and connection through Chicago to New Orleans support its long-term outlook. “I think the future of CN is looking great,” he said.

About Canadian National Railway (NYSE:CNI)

Canadian National Railway Company NYSE: CNI is a transportation and logistics company that operates a major freight railway network across Canada and the United States. Its rail system connects the Atlantic, Pacific and Gulf coasts with major industrial centers, ports and distribution markets, supporting trade across North America.

CN transports a diverse range of products, including grain and fertilizers, coal and minerals, forest products, petroleum and chemicals, metals, automotive goods, and consumer and manufactured products.

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