Canadian National Railway Q2 2026 Earnings Call

Good morning. My name is Krista, I will be your conference operator today. I would like to welcome everyone to the Canadian National Railway second quarter 2026 financial results conference call. After the speakers' remarks, there will be a question and answer session, during which we ask that you kindly limit yourself to one question. At this time, I would like to turn the call over to Jamie Lockwood, CN's Vice President of Investor Relations and Special Projects. Ladies and gentlemen, Mr. Lockwood.

Thank you, Krista. Welcome, everyone. Thank you for joining us for CN's second quarter 2026 financial and operating results conference call. Joining us today on the call are Tracy Robinson, our President and CEO, Pat Whitehead, our Chief Operations Officer, Janet Drysdale, our Chief Commercial Officer, Gilles Lelièvre, our Chief Financial Officer. You can turn to page two of the presentation, which includes our forward-looking statements and non-GAAP definitions for your reference. These forward-looking statements reflect our current information educated assumptions include estimates, goals, expectations about the future. These involve risks uncertainties, actual results may differ from what we expect. As a reminder, forward-looking statements are not guarantees, factors such as economic conditions, competition, fuel prices, 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.

Thanks, everyone, for joining our call. I'm pleased to walk you through our second quarter results and some recent developments. Now, this team has delivered another quarter of strong performance: EPS growth of 12%, FX adjusted, on 5% volume growth. We're staying focused on what we control, this is driving results. We're running the railroad well, using service to convert customer growth opportunities, driving cost and capital discipline, continuing to position CN for growth. With this momentum, we're raising our guidance to now expect earnings for the year of mid to high single digits on the back of low single-digit volumes. The engine's running well. We're executing against our strategy, we can see the results. Our productivity continues to improve while we're supporting customer growth across our franchise, at the same time, running a safe, fluid, efficient, reliable railroad.

Now, we're seeing this in fuel efficiency, where we delivered record performance in the first half of the year. In labor productivity, we're moving more volumes with less people. In locomotive productivity, our team is always challenging itself to use the assets we already have more efficiently. On the commercial side, our teams are focused on winning business converting opportunities into growth. Now, whether it's metals moving within Canada, energy-related traffic, domestic intermodal, other areas across the portfolio, we are seeing benefits of stronger commercial intensity a team that is focused on creating value for our customers. It's all about speed and agility. Simply put, when strong service, disciplined operations, commercial intensity come together, results follow, that's exactly what we've seen in the first half of the year.

Before I turn the call over to the team to walk you through the quarter in more detail, I'd like to spend a moment on the two agreements with Union Pacific that we announced this past Wednesday. These were rigorous negotiations, but Union Pacific runs a great railroad, and they're good partners, and I'm happy where these discussions have landed for both of us. These agreements are strategic, and they bring long-term benefit. For CN, they structurally enhance and extend our network by giving us direct and very competitive access to important markets in Kansas City and Mexico. They'll also increase the density in parts of our U.S. network where we have capacity. The first is a commercial agreement that extends our reach into Mexico. It grants CN new rights for volumes between Canada and Mexico via Memphis.

This gives us a competitively advantaged route and extends our length of haul from Chicago to Memphis, densifying our southern network. In exchange for the Mexico route, we've granted UP rights to additional capacity over the EJ&E for U.S. traffic. This monetizes available surplus capacity on the J while protecting the capacity that CN needs now and into the future. Any additional capacity required to accommodate UP volume will be funded by them. These provisions will be effective as soon as the definitive agreement is in place and are not contingent on the merger. The second is a settlement agreement, it is contingent on the STB's approval and closing of the merger. It secures for us competitive access into Kansas City and the use of UP's NEF yards.

This positions us to compete on new business in an important rail market and provides the opportunity to lengthen our haul and traffic currently moving in this corridor. We've also secured remedy protections, allowing us to provide competitive options for the two-to-one and three-to-two customers, and agreements that provisions granted to others through the STB process will also be extended to us. Through this strategic agreement, we have largely addressed the risk of the proposed merger to CN, we have created new opportunities for us to grow, and we've agreed to not oppose the merger. Overall, the opportunities created through the new strategic commercial agreement with UP the potential merger related remedy improve the position of our railway and create new avenues for growth.

These agreements reflect how we operate, staying close to the opportunities in front of us and acting with discipline to create long-term value for our customers and shareholders. CN is very favorably positioned for the long term. We can see the impact of our actions in 2026, but what's more exciting to me is the opportunity that is unfolding across 2027 and beyond, supported by unique long-term tailwinds in our economic exposure and a team that is showing it can drive results through cycles. I want to thank our railroaders across the network for their commitment and execution this quarter. Their efforts continue to make the difference. Let me pass it to the team who'll give you more details on the quarter. Pat, over to you. Thank you, Tracy.

We entered the quarter with a clear plan centered on fluidity, reliability, and productivity. The team executed that plan, the results are showing up throughout the network. I am pleased with our performance. I want to thank the entire CN team. As always, it starts with safety. Everything we accomplish starts with our people going home safely at the end of the day. Safety is foundational to our performance, our culture, and the way we operate this railroad. While we are encouraged by the progress we've made over the last few years, we are never satisfied, as we always look for continuous improvement. This year, we have seen a very active wildfire season in both Northern Ontario and British Columbia. The safety of our employees and of the communities we operate through is our first area of focus.

We are monitoring the wildfires closely, both for our own operations and for our customers' operations. We continue to work closely with local authorities. We have a comprehensive extreme weather fire risk mitigation plan to reduce risk and increase prevention, monitoring, and response to wildfires with our firefighting fleet deployed in strategic locations. Our main line through Northern Ontario is open at this point. We currently do not expect a significant impact to our business. Now turning to operations. Productivity improvements continue to be strong. We moved 3% more gross ton miles using existing assets and capacity more efficiently. We improved crew utilization. We ran longer trains and reduced non-value added activities. Locomotive productivity improved approximately 6% in the quarter. Employee productivity improved approximately 9%. If you look only at train and engine employees, productivity improved approximately 13%, and our train length increased approximately 1%.

These are important proof points because productivity is not just an operating statistic. Those improvements translate directly into stronger financial results. The gains we are delivering are structural and enduring, supporting value creation well beyond the quarter. Another example is fuel efficiency, where CN is already leading the industry and continues to improve. We delivered the best Q2 and first-half fuel efficiency performance in our history, driving direct operating savings. The team continues to identify opportunities through train handling, locomotive utilization, and operating practices that reduce consumption while maintaining transit time performance. Now let me provide an update on Fast Track, our cross-functional effort focused on continuous improvement throughout the network. It is about challenging how we work, eliminating waste, improving terminal productivity, and making the railroad more efficient. We have essentially completed the review across the initial list of major terminals.

We continue to work across intermodal terminals and our network operation centers while performing a look back process of the completed terminals. So far this year, we have close to CAD 100 million in realized benefits. Importantly, these improvements have been achieved while maintaining strong service performance. Fast Track is a part of how we operate this railroad. The mindset is continuous improvement, and we believe there are additional opportunities ahead as the work continues. Turning to the next slide, the network is running well. Car velocity and network train speed were largely flat year-over-year while handling stronger volumes and maintaining solid customer service. These metrics, as well as dwell, improved during the quarter after still being impacted by the tail end of winter in April.

We are seeing strong first and last mile execution and the type of operating performance that creates opportunities for Janet and her team to win additional business. Let me spend a moment on the Western region because it is a good proof point of what this network is capable of doing. The West handled record grain volume during the quarter as well as higher year-over-year refined petroleum products, potash, NGLs, and other commodities. At the same time, car velocity, train speed, and dwell improved roughly 3%. That combination matters. It demonstrates that the capacity investments we have made, disciplined train planning, and strong execution are allowing us to absorb growth while improving overall fluidity, moving more freight with solid service and improving asset utilization. The team has done a solid job this quarter, and I'm proud of the progress we've made. The railroad is performing well.

The productivity initiatives are gaining traction. The benefits from Fast Track are becoming increasingly visible. We're pleased with the progress, and just like safety performance, we're never satisfied. Lastly, our team is excited around the new opportunities announced in the MOUs with Union Pacific. I'm working closely with Eric and the Union Pacific team to operationalize the agreement. Together, we are hammering out details on the connections between our two railroads. With that, I'll turn it over to Janet.

Thanks, Pat. Good morning, everyone. As you've just heard, the railroad is running really well, and that's translating into strong service for our customers. Revenues were up 11% year-over-year on 5% RTM growth. The close alignment between operations and sales and our strong service levels are driving success across the network. Underpinning that is how effectively we are working with our customers. Let me give you a few quick examples. Our metals volumes were up 11% in the second quarter, despite the significant tariffs on steel and aluminum, as we worked with our customers to create new supply chains. We improved our commercial speed and agility to capitalize on market changes, converting spot opportunities in a number of segments, including butane and plastics. We continue to collaborate for longer-term growth.

Our partnership with Keyera and AltaGas is a great example of how we're working strategically with our customers to efficiently get their products to global markets. Our broad Boots on the Ground effort also continues, building on the momentum we established over the last few quarters and across a range of commodities. Same-store pricing remains ahead of our rail cost inflation. However, in the quarter, it was partly offset by mix. Let me walk you through the key second quarter highlights. We delivered another exceptional quarter in grain, continuing to set records for volumes of Western Canadian grain, and our U.S. grain performance was strong across the board, corn, soybeans, and ethanol. We also delivered a record second quarter for potash shipments, with solid service enabling us to capitalize on strong demand, both domestic and export. Petroleum and chemicals RTMs were up 11%.

In refined products, we increased long-haul shipments from Western to Eastern Canada, and we continued to grow our volumes into the GTA fuel terminal, growing RTMs in this segment by nearly 30%. We grew NGL RTMs by over 15%, demonstrating the value of our Prince Rupert export supply chain, as well as the team's ability to convert on a number of spot butane opportunities. Domestic intermodal outperformed with solid growth intra-Canada. In overseas intermodal, volumes were up sequentially, but lower year-over-year, reflecting tough comps due to last year's pull forward of volumes on tariff uncertainty. In automotive, growth reflected share gains as well as a shift in traffic flows toward longer-haul movements, driving a stronger RTM versus carload performance.

In metals and minerals, I have to say the team has done an outstanding job working with our customers to mitigate the impacts of tariffs, growing domestic and cross-border scrap shipments and shifting steel towards longer-haul domestic Canadian lanes. We had a notable mix shift in frac sand, with less long-haul shipments into Alberta and an increase in shorter-haul shipments within the U.S. In forest products, we increased our shipments of packaging products and helped our customers to diversify their export markets for wood pulp. Lumber shipments also increased this quarter, some of which is an easier year-over-year comp, and there is likely some pull forward there. Coal RTMs were flat for the quarter as increased U.S. thermal coal exports were offset by production challenges affecting Canadian West Coast volumes. Moving now to slide 10 and turning to the second half of the year.

We expect strength in grain to be the key driver of RTM growth in the third quarter. Q4 year-over-year comparables for grain will be more challenging, though, as we lap the record crop and CN's record performance. Our energy franchise continues to be a real bright spot. We expect ongoing strength in refined products, new crude business, and additional fractionation capacity, supporting long-term growth in NGL exports via Prince Rupert. Domestic intermodal is expected to remain strong, reflecting sustained momentum from recent gains. Overseas intermodal is expected to be weak in the second half, in part related to the demarketing of certain low-profitability shipments through the Port of Vancouver. In automotive, share gains and strong offshore imports into Canada are offsetting overall flat production.

In metals and minerals, we see a steady run rate for steel and aluminum and growth in frac sand shipments to Northeast BC, partly offset by lower iron ore. In forest products, well, no sign yet that housing starts will improve. With respect to coal, demand remains supportive for U.S. exports. Canadian coal shipments will depend on mine level production and operational conditions. Now, quick word on the commercial agreements that we've reached with UP. The team is very excited about the opportunity to extend our length of haul, and we're even more excited that we've secured, for the long term, a shorter and faster route to Mexico and direct access to Ferromex. For sure, more to come on that. Putting all of that together, our strategy is delivering. We are growing volumes that we can service well and maintaining our pricing discipline.

Looking beyond 2026, we remain excited about the multi-year, multi-commodity growth prospects across our franchise, especially in energy and ag and with our new connection to Mexico. I am confident in and very proud of the commercial team's continued commitment to find new opportunities and to capture the volumes that best fit our network. They are staying close to our customers and moving with urgency and agility. We are also working closely with our short line partners who are driving economy plus growth, continuing to leverage our business and industrial development teams to attract new facilities onto rail and facilitate expansion. We are staying very close to the opportunities being created by Canada's trade diversification agenda. CN's network is uniquely situated to connect new sources of resource production with domestic and global markets.

With the capacity and network investments already in place, CN is well-positioned to deliver on that growth at low incremental cost. Gilles, over to you. [Foreign language] [Foreign language] I will begin with the review of our second quarter performance before turning to our updated outlook for the balance of the year.

Starting on slide 12, our results came in ahead of our initial expectations and reflect the strong operational and commercial execution highlighted by Pat and Janet. Second quarter reported diluted EPS was CAD 2.06, up 10% from last year, while adjusted diluted EPS was CAD 2.08, up 11% from last year or CAD 2.09, 12% higher on an exchange adjusted basis. These results reflect an adjustment of CAD 17 million in advisor fees related to industry consolidation. As Tracy mentioned, the engine is running well. Our network is fluid. Our service is reliable, and we are converting volume growth to the bottom line.

The solid performance from Pat and the operating team allowed us to deliver an adjusted operating ratio of 62.2%, a 50 basis point increase versus last year's operating ratio of 61.7%, impacted by higher year-over-year fuel prices in the quarter, which had a diluted impact on the operating ratio of 210 basis points. Year to date, free cash flow is up approximately 20% or roughly CAD 300 million, driven by stronger earnings, disciplined capital spending, and continued attention on working capital, partially offset by higher required tax payments. Leverage at the end of Q2 was 2.6 times and will continue to be opportunistic on our current share buyback program. We continue to maintain a 2.7 times adjusted debt to adjusted EBITDA target for 2026. Turning to slide 13, let me walk you through a few key operating expense categories for the quarter on an exchange adjusted basis.

Labor was 3% higher, driven by general wage increases, an approximately CAD 40 million increase in year-over-year incentive compensation, which were partially offset by 5% lower average headcount and strong labor productivity. Fuel expense was about CAD 250 million higher than in the same period last year due to higher fuel prices, with the impact of higher volumes offset by record fuel efficiency. With the sharp increase in oil prices in March and the decrease in oil prices in June, fuel did not impact EPS in the quarter. However, as noted, it had a 210 basis point unfavorable impact to the operating ratio. Purchased services and material was up 11%, driven by advisory costs, higher trucking and vessel costs, mostly due to stronger volumes. Other expenses were largely flat year-over-year. Moving to slide 14, let me provide some visibility into 2026.

The strong execution of our team, combined with stronger volumes for the first half, gives us increased confidence in the year. As a result, we are raising our full year outlook. As Tracy mentioned, we now assume low single digit RTM growth for 2026 versus our original assumption of flattish volumes for the year. We now expect mid to high single digit adjusted diluted EPS growth for the year. Our updated outlook assumes a constructive demand environment in the second half of the year, with year-over-year comparisons becoming more challenging, particularly as we move into the fourth quarter. We continue to see uncertainty related to fuel and foreign exchange and broader macroeconomic volatility remains present, including potential changes in trade and policy discussions. We are encouraged by the momentum we have seen year-to-date and remain grounded in our assumptions for the balance of the year.

Accordingly, we continue to assume that WTI will be in the range of $80-$110 U.S. per barrel. However, we have updated our FX assumption from CAD 0.73 to the current spot rate of CAD 0.71 for the balance of the year. Our effective tax rate continues to be in the range of 25%-26%. To wrap up, we are pleased with our performance in the quarter and first half. The team has executed well. Volumes have trended ahead of our expectations. Free cash flow remains strong, and the network is demonstrating the earnings leverage we've been working to build. Let me pass it back to Tracy.

Thanks, Gilles. Thank you all. As you can tell, we've got great momentum, and we're excited about the future. With that, Krista, we're ready to take questions.

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

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

Good morning, Walter. Listen, thanks for the question. There's two agreements as you know. The first agreement is the commercial one, and that will start as soon as we get the definitive agreement in place. We will have immediate access directly to Ferromex in Mexico through the Memphis gateway. It does a couple things for us. For volumes that are already moving, it extends our haul from what is essentially Chicago down to Memphis, which is a benefit. It also allows us to more directly market with FXE in Mexico for southbound volumes and northbound volumes. We will be going after all markets including those that are moving on rail right now, as well as what we all know is a pretty expansive truck market between Mexico and Canada. I think it's in the area of CAD 3 billion.

We're getting organized on what that push is going to look like. What this does is gives that market another competitive option. We know those that have gone after the truck-to-rail conversion, most haven't met the targets that they put in place. This is tough, but we've got a great corridor here, an advantage corridor, and we're going to put a shoulder into it. We're putting those plans in place right now. The other agreement, of course, gives us access into Kansas City, which is another great marketplace, but we don't get that, of course, that one is contingent upon the merger being successful and being put in place. That will be in the future. We don't have access to that market right now. Thanks for your question. Your next question comes from the line of Cherilyn Radbourne with TD Cowen.

Please go ahead. Thanks very much.

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

Good morning. Thanks, Cherilyn. Appreciate the question. I think what we're seeing is a lot of strength in the refined products, so that's mainly gasoline and diesel, and of course, that's associated with our new GTA fuel terminal. We did start ramping up phase 2 of that terminal roughly in April of this year. Certainly, we are seeing those volumes continue to grow, and we'll have some full-year effect of that benefit as well in 2027. That's a really solid piece of the market, I think, that we've captured here in Ontario, and it's going to continue to grow, but maybe more slowly than the initial ramp-up phase.

On the NGLs, of course, we have expansion continuing at the Port of Prince Rupert, and we have the backup of the product that's being drilled and made available, including through the new fractionation capacity that I mentioned that will be coming online in the second half year. I think, when we think about the energy franchise, this is a multi-commodity within energy, multi-commodity as well as a multi-year opportunity. Of course, I continue to make reference to the agreement that we've struck in regards to the ACE terminal. That's something that we're going to see probably in the 2028 or so timeframe. A great growth story on energy. Thanks for the question. Your next question comes from the line of Ken Hoexter with Bank of America.

Please go ahead. Hey, great.

Good morning. Maybe just continue on some yield thoughts, right up 6% in the quarter on revenue per RTM. Maybe just break down fuel and thoughts on core underlying pricing and thoughts into the second half. I think I heard Pat toss in there's no impact to the wildfire to results. I just want to make sure I heard that. Given you don't oppose the merger, do you see that as raising the odds of getting it past the finish line? Thanks. Ken, that's a lot of questions in one question.

Let me see if I can start this. Janet, you want to say a couple words on pricing Gizz on the fuel impact, if you could reiterate it, I think, Pat, you've pretty much covered wildfires. I'll close on it. Ken, I mean, kind of simple terms, we continue to price ahead of our rail cost inflation.

For sure, the fuel was a benefit to us as it was to all of the industry in the quarter, bumping up the revenue per RTM, revenue per carload. We did have, by segment, some changes in haul that also would have factored into some of those changes. I expect that pattern to continue certainly into the third quarter. The underlying point I want to make is the pricing ahead of our rail cost inflation.

Okay. Maybe just, Ken, some visibility on fuel. As I said in my opening remarks, fuel in the second quarter did not have any impact on EPS, but did have a dilutive impact on OR by 210 basis points. Fuel moves, as you know, a lot day in, day out. If fuel prices remain where they are and the correlation between OHG and WTI remains essentially where it is, we think that fuel in the third quarter could be a tailwind by close to CAD 0.15 and a tailwind of about 100 basis points in the third quarter. In the fourth quarter would be a little less, would be a tailwind of around CAD 0.10 and a tailwind on OR of about 30 basis points.

Pat, wildfires? We are monitoring wildfires in Northern Ontario and in British Columbia.

We are operational in both locations. Minimal impact to the railroad as far as it relates to infrastructure. We did see some bunching clearly of traffic as we shut down in Northern Ontario and continue to work our way through that. Minimal impact. As far as our agreement on the merger, the settlement agreement, as we thought about this, as you know, we've been pro-competition, and we've been talking a lot about the need for more competition.

We had some concerns around how the merger would impact our network, our business, our customers. As we've come to this agreement, we are satisfied that we've mitigated much of that concern. We've also created the opportunity that we've always said we wanted to do, which was extend our reach into broader markets. We've done that with the Kansas City expansion with the two to one and three to twos. This has largely taken care of what are our concerns.

The merger is broader, I know that it will go through what I expect will be a very thoughtful and rigorous process by the STB. They'll do a great job of that. We'll watch that play out, starting with what I heard Jim say yesterday was the submission of the next level of materials next week.

Your next question comes from the line of Fadi Chamoun with BMO Capital Markets. Please go ahead. Yes, good morning.

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

How do you think about the bottlenecks, the capacity to handle the volume as we go into next year?

Let me start with that, Fadi. Thanks. I'll turn it over to Pat first on the capacity piece. Let me tell you what I've been impressed about what he's been able to do. We went through an investment cycle, as you know, where we got our locomotive fleet and our fleets in the right place, and we lifted our capacity in the essence up by 25%. We were prepared for all the volume, whether it was the grain or the energy products that have been strong in the second quarter. What has impressed me so much is that we moved that grain largely without incremental fleet. We improved our cycle times on grain by 15%. These guys are not being idle.

They're pushing from an asset perspective and from a people perspective, we're pushing pretty hard on what we get for every inch of asset base. I expect he's going to tell you that we've got the capacity to do a whole lot more. Pat, over to you, and I'll answer his other questions.

Okay. Thanks, Tracy. Yeah, I would say that from a network capacity perspective, I feel really good about where we are. I would say if you look back to the presentation and to my comments, what we demonstrated in the West is with volume surging, the capacity that we spent over the last three investment cycles, as Tracy pointed out, we demonstrated that we can take on that volume, and in fact, we got faster, we got more fluid with that capacity. We said it before. We have additional capacity available both in the East and in the South, and we continue to work towards growing into those. We think that this expansion of this agreement with Union Pacific will help us fill up some of that capacity in the South while protecting our capacity, and any additional capacity for UP would be funded by UP.

I will say to the question of investments, we will continue to spend on basic capital to keep the railroad safe and fluid and call out the two projects we continue to point to as far as larger capital projects, which is in Northern and Southern B.C., both the Zanardi Bridge outside of Rupert and outside of the Vancouver terminal, the Glen Valley and Abrahamson double track project. Those are the big call outs on growth capacity.

As to the settlement agreement, Fadi, the two to ones, I think that we've identified five. UP has as well. There will be some more three to twos out there, and we'll see how that evolves. What this essentially does is it says that where we have operationally, we can get close to it, and commercially, we're a feasible solution to that is that we would be the partner of choice for those. So that's how that piece works. On Eagle Pass, on the kind of Memphis to Eagle Pass route, yes, this is for traffic that can move the market between Canada and Mexico, southbound and northbound. It's a considerable marketplace. We've sized it out over time with Fernando and his team at the FXE. This gives us direct access to get at it over Memphis, which we can be very fast. We're really excited about that.

Also, on the EJ&E deal with the Union Pacific, that applies only to U.S. business origins and destinations as well. I hope that that is helpful.

Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead. Hey, good morning, and thanks for taking the question.

Tracy, I guess you did address that you think this resolves the competitive issues you had with the deal specifically within your network. More broadly, how do you think if this deal goes through, it's going to impact broader industry competition, especially longer term? Thank you. Thanks, Brandon. Listen, I think we've all had a question about that.

At CN, as we've talked about this, we've said we're not opposed to mergers. We are very favorable on competition. The big question on this on a broader basis on the merger is what it does to competition. We can't speak to the broader deal, but we've spoken to what is the impact from our network perspective. We've already launched into a process that's going to be very thoughtful, and I know, knowing Patrick Fuchs and the board of the STB, will be very thorough to ask and answer all of the very important questions as to this merger. That's all ahead of us.

What happens beyond that, I think we'll wait to see first before we comment on what happens on this part of it.

Your next question comes from the line of Chris Wetherbee with Wells Fargo. Please go ahead. Yeah, hi.

Thanks. Good morning. I guess maybe wanted to ask a little bit on the guidance. We've talked a lot about the merger, kind of curious about the guidance. I think previously sort of flattish RTMs and EPS growth a little bit above that. The spread between RTM and EPS in the guide is a little wider. I was hoping you could kind of expand a bit on that. Obviously, just landing, I think you talked about fuel potentially being a good guide for you from an earnings perspective, at least in the third quarter. How do you think about sort of the operating leverage of the business now as we see RTMs kind of go through the rest of the year? Can we assume that sort of decent spread of operating leverage and performance to the bottom line can continue?

Just want to get a rough sense of sort of what's changed from the earlier outlook relative to where we are now.

We've had a really strong first half. I'm really proud of what the team has done on it. The operation has been very strong. Fluid, you've heard Pat talk about the productivity that we've been able to drive. Janet's done a great job of being able to use that service to convert a whole bunch of opportunities, not only to take advantage of what's there, but to increase our share of market, and to be nimble with our customers. You've heard her talk about her Boots on the Ground program. We're out there with some intensity. All of that, which we are in control of, it's gone very well. I would say overall volumes are much stronger than we anticipated at the beginning of the year that they will be this year. I'm not expecting that will change as we go.

You're seeing our volumes in the second quarter. We do have a pretty tough comp on Q4. Last year in Q4, we hit a record in grain, and operationally, we exceeded all of our own expectations. We'll have a tougher comp in Q4 as we look forward. I think the question marks, as we look at the remainder of the year, are more around those things that are moving around outside of this, more around kind of where fuel will go, the impact of that, maybe a little bit of currency. We have a little bit of tariff action that's moving around. We'll see where all that goes, but we think that we want to be disciplined as we think about guidance, and we're comfortable with where we've put the peg at this point.

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

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

I'll start with that, then I'm going to turn it over to Janet to talk more specifically. We've watched this tariff, the global, the trade, the tariff, all the impacts from some of the geopolitical events, and the impact that has either on the volume that we move or the corridors that we move it in. I'm really proud of the work that Janet's team has done to be out there with customers and respond. You heard her say that our metals business, for example, despite the difficulties in the metals marketplace, our metals business, we've been able to mitigate most of that impact. Forest Products is still feeling it. They could use housing starts to lift. As we look at tariffs from where we are now, certainly, we're all reading in the newspaper around what's happening on that front.

We remain hopeful that we will come to a productive, constructive, positive agreement for all three countries. What we've embedded in our guidance as we look forward is a tariff level that looks a lot like what it is right now. Janet? Yeah, I would say, Ravi, we might have had a little bit of pull forward.

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

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

Please go ahead. Thanks. Tracy, I understand you people will be responsible for any investments needed at the J to support their volume growth if needed.

As you firm up the MOU with them, how are you tackling the risk mitigation around potential congestion issues that may arise in and around Chicago if UP ends up driving a lot of volumes through the J?

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

Your next question comes from the line of David Vernon with Bernstein. Please go ahead. David, your line is open. Your next question comes from the line of Scott Group with Wolfe Research. Please go ahead. Hey, thanks.

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

We've agreed not to oppose. Yes, we won't have a large voice in the merger considerations as we go forward. However, if there are questions, we'll obviously be involved in anything related to the agreement that we have, either explaining or defending or whatever the action may be. Yeah, largely, our worries have been taken care of. You won't hear as big a voice. The shift? Yeah, Scott, on the fuel side, as you know, fuel surcharge is a hedge.

It's working well, but because there's a lag, because there's a two-month lag, on the short-term basis, it does create noise. As you know, and you've been around this business for quite a while, I've been around that business for quite a while as well, there's lots of movements and volatility around fuel prices, especially with what's happening in the Middle East. It does create more noise, but it's just what it is, and you know the formula, and we just live with it. We try to provide visibility on it every quarter and what's coming up. We'll see what it does. Now it looks like it's positive for the second half of the year, but that could turn very quickly. We'll see. There's nothing much we can do on the downside.

As I said, it's a hedge, and it's working quite well to hedge ourselves against ups and downs of fuel prices.

Your next question is going to come from the line of David Vernon with Bernstein. Please go ahead. Hey, thanks for coming back to me.

Coming back to the MOUs for a second, I wanted to talk a little bit about magnitude. As you think about the agreement on the E and then the access down to Eagle Pass, the amount of capacity that you have on haulage from the border is going to matter, and obviously how many trains are going to be running through there. Is there any way you can quantify commercially, Janet, is this going to start to impact numbers next year? Is it going to be noticeable? As you think about implementing the second part of the agreement, the contingent trackage rights to Kansas City, is there additional investments that you're going to need to make to operationalize that?

I think when you guys were going after KCS as a business a long time ago, there was some discussion around investment in extending your line's capacity there. I'm just wondering if there's additional capital or operating resources you're going to need to put into operationalizing that Kansas City link. Thanks. Hey, David, I'm glad you're back.

Let me start on that. As we think about it, as we've long looked at our network, we really like the positioning of our network with where we sit across the natural resource base in North America, our access to ports, our ability to get down into the Gulf Coast. What we've always aspired is how do we extend our network? These agreements do it in a meaningful way in getting it into Mexico and ultimately contingent on the merger into Kansas City. As we've talked with Jim and Union Pacific about how this would work, we start, and in the case of Mexico, at a haulage arrangement. As volumes grow, we can trigger trackage rights. There's not a lot of concerns along that route right now on when we'd hit any capacity.

If we do hit capacity constraints, then similar to the reverse on the J, we would be funding whatever expansion would be required then. We don't anticipate that that's likely in the near term, and we have largely the capacity we need to make that work right now. You're going to see haulage start very quickly. I'll talk about the Kansas City side, Janet, I'll turn it over to you if Pat, any comments you want to add to it. On the Kansas City side, should the merger be approved, we come onto the line at Tuscola, but I'll let Pat comment. We do need to build a bit of a connection there that would be funded by us On the landing side, we have an agreement with Union Pacific to utilize their NEF yard in Kansas City.

We've got a landing spot for all of the commodities that we would move through that corridor. Do you want to talk about the connection to Tuscola, Janet will go to you?

I do. Thank you. I would say, think about these differently. Different than the KCS application, some of the wording there, that was capacity that would need to be built to access Springfield, Illinois, where we have existing trackage rights with Union Pacific. That is not our core main line. Tuscola is off of our core main line between Chicago and Memphis. It is our fastest route to get south, this will be a new connecting track, just a connecting track to connect to Union Pacific, where there is a diamond in Tuscola. We'll access St. Louis and eventually Kansas City via that connection. Very different than what we put in the application, and you saw needed to be invested to get to Springfield. This will be one connection track. The NEF yard discussions that will be ongoing.

Good morning, David. Thanks for the question. From a revenue perspective, let me just give you a sense of sequencing. The current movements that we have today from Canada into Mexico, the immediate benefit to us is going to be the extended length of haul as we move the interchange south into Memphis. That happens as soon as we get the definitive agreement in place, and we'll see some of that flowing in this year. The team is very focused on the addressable market and what we can do to provide a great service to the customers that want to move their goods between Mexico and Canada. More to come on that. Thanks for the question. Your next question comes from the line of Brian Ossenbeck with J.P.

Morgan. Please go ahead. Hey, good morning.

Thanks for taking the question. One first quick follow-up, just to make sure I heard correctly, but if there's any other decisions or concessions that are done through the merger review process, the agreements here seems like they don't exclude you from participating in those. Just as the first clarification. For Janet, maybe you can go into more details on some of the demarketing sounds like you're doing in Vancouver. Maybe the relative scope and size. I'm assuming that's international intermodal, but would like to hear a little more about that. Thanks. Hey, Brian. I'll start.

Our agreement with Union Pacific is that we will not oppose. If there are interventions that we need to make in response to questions from the STB or to support the agreement that we have with the Union Pacific, then we will participate in that. I hope that answers that portion of your question. Janet? Yeah. Brian, our approach to pricing has been very consistent.

Baseline is we want to price ahead of rail cost inflation. We also want to price to the value of our service. As you know well, our corridor between Vancouver and all the way into Chicago, Montreal, Toronto has a lot of traffic, and it's an important piece of our network. Yes, the piece of business we demarketed is in the overseas intermodal, and I think enough said on that one. Thanks for the question. Your next question comes from the line of Benoit Poirier with Desjardins.

Please go ahead. Yeah. Congratulations for the results.

Could you talk maybe about the opportunities to convert trucks on the rails given the high spot rates we see these days? What you see in terms of discussion with some customers, and what could evolve in terms of intermodal opportunities? Thanks. We are seeing, Benoit, some truck-to-rail conversion.

When we look at our own domestic intermodal franchise, though, for CN, it is more skewed to Canada, and our average length of haul is in the 1,700-1,800-mile range. We have a pretty high market share already, I would say, of the long-haul trucking business in Canada. I think the short answer is yes, there's some opportunities. Probably not as much as what we're seeing in the U.S. Truck capacity there is tightening more significantly than what we're seeing in Canada, but we're encouraged by what's happening so far. Of course, any tightening of capacity is also supported from a rate perspective. Thanks for your question. Your next question comes from the line of Tom Wadewitz with UBS.

Please go ahead. Yeah, good morning.

I know you've gotten a lot on the UP agreements, want to ask you kind of two elements on that. Congratulations on the agreements. They seem like really nice strategic moves. Let's see. On the Kansas City element, I guess, is there a way you can I think UP has implied two to one, three to two is something a little less than 40 shippers. Can you give us a little more color? Are there some large shippers there, or is it kind of relatively small carload shippers? Just a little more perspective so we can maybe think about sizing it. Then on the Canada to Mexico, is there any other information just to contemplate the type of commodities you think would be opportunity? Is a lot of it auto and intermodal? Is a lot of it bulk?

Just how you think about that market and where you would see the growth on that Canada to Mexico. Thank you. Hey, Tom. Thanks for the question.

On the two to ones, I think we're all aligned that there's probably about five of those. Some of those are very meaningful accounts Some are smaller.

Harder to say on the three to twos. That will be a broader group, and I am sure some of that will be contested. We will see how that plays out as we go forward. We have quantified it. We do not think it is the biggest piece of this merger based on our broad estimates by any stretch. The bigger, the most impactful parts of this, of course, are the extension of our network into Kansas City with the settlement agreement. We are really excited about that. On the Canada-Mexico, let me start on this. This is all commodities, and we have been working, and it is not just southbound, it is northbound as well. We have been working for some time on a three-railroad haul on this. The two-railroad haul gives us a much more direct kind of marketing campaign, and we think a better route through Memphis, faster. It is all commodities. We have been working on all commodities.

I am going to let Janet give you a little. Janet, do you want to add a little further?

I can take it a little further. I maybe think for sure Tracy's point is well said. It is northbound, it is southbound, it is all commodities. When we think about the contour of the different business segments, for sure automotive is a heavy hitter. We have already been tackling the intermodal, and we continue to believe that there are really good opportunities for truck-to-rail conversion. Not easy, but you just heard me say that truck capacity is tightening in the U.S., and this is one area where it is quite supportive for us and for that product. Ag, energy, petroleum, and chemicals of all sorts. It is a broad-based opportunity that we see between Mexico and Canada. Thanks for the question. We have time for one more question, and that question comes from the line of Jonathan Chappell with Evercore ISI.

Please go ahead. Thank you.

Good morning. Pat, you gave us an update on the Fast Track work that you have been doing, and you are done with the review of most of the major terminals. You also highlighted CAD 100 million of cost savings that you have identified this year. Trying to understand if that CAD 100 million, have we seen any of that thus far in the first half, or if this is what you have identified thus far and you start to see that savings really start to shake out in the second half of the year? Then also you mentioned still looking at some intermodal terminals and facilities. Is there a chance that that CAD 100 million becomes something greater as we think about run rate into 2027?

Thank you for the question. I will say this, the CAD 100 million, that is the savings we have realized. Let me say it this way, Fast Track is part of how we run this railroad now. I would say the work we are moving as we have looked at the major terminals, we have moved on to intermodal terminals, non-rail operations. We have had a thorough review of our rubber tire fleet. We will continue to double click into purchase services and facilities, we called that out as well. I will say this is a muscle we will continue to exercise. We feel good about the additional opportunities, and we are going to chase every dollar.

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

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