Canadian National Railway Company (NYSE:CNI) Q1 2026 Earnings Call Transcript

Canadian National Railway Company (NYSE:CNI) Q1 2026 Earnings Call Transcript April 29, 2026

Canadian National Railway Company reports earnings inline with expectations. Reported EPS is $1.31 EPS, expectations were $1.31.

Operator: [Audio Gap] I’ll be your operator today. [Operator Instructions] At this time, I would now like to turn the call over to Jamie Lockwood, CN’s Vice President of Investor Relations and Special Projects. Ladies and gentlemen, Mr. Lockwood.

Jamie Lockwood: Thank you, Christa. [Foreign Language] Welcome, everyone. Thank you for joining us for CN’s First Quarter Financial and Operating Results Conference Call. Joining us today on the call are Tracy Robinson, our President and CEO; Pat Whitehead, our Chief Operations Officer; Janet Drysdale, our Chief Commercial Officer; and Ghislain Houle, our Chief Financial Officer. You can turn to Page 2 of the presentation, which includes our forward-looking statements and non-GAAP definitions for your reference. These forward-looking statements reflect our current information and educated assumptions and include estimates, goals and expectations about the future. These involve risks and uncertainties, and actual results may differ from what we expect.

As a reminder, forward-looking statements are not guarantees and factors such as economic conditions, competition, fuel prices and regulatory changes could impact actual outcomes. It is now my pleasure to turn the call over to CN’s President and Chief Executive Officer, Tracy Robinson.

Tracy Robinson: Thank you, Jamie. [Foreign Language] Thanks, everyone, for joining our call. I’m pleased to walk you through our first quarter results. This was a solid quarter where we delivered on plan. This is reflective of our continued focus on execution and performance across the entirety of our operations. We’re doing exactly what we said we would do at the outset of the year, and the results can be seen across the business. We’re increasing our commercial intensity, and we saw volume growth in the first quarter. We’re executing with urgency, and we’re not done. As we look at the quarter, our performance is best understood through key commitments we laid out around execution, financial discipline and guidance. Now let me walk you through each of those.

First, on execution, we committed to pulling every lever we have in the areas we control to deliver regardless of the macro backdrop. We have leaned into workforce productivity, asset utilization and operating efficiency, and the railway is running well. All of our key operating metrics improved year-over-year, and this has contributed to a structurally improved cost base. At the same time, we continue to intensify our commercial execution in this environment where every carload counts. The team is delivering by staying nimble, empowered and responsive, capitalizing on our strong service. Now second, we committed to strengthening free cash flow and returning excess capital to shareholders while maintaining a strong balance sheet. In the quarter, free cash flow increased by about $275 million.

We repurchased 6 million shares and increased leverage to 2.7x. This reflects our confidence in the underlying earnings power of this business. Expect this focus to continue. And third, we committed to providing directional guidance tied closely to volume trends rather than precise targets. Now we’re encouraged by the start of the year, and our view remains that earnings will grow above volumes on an annual basis. It’s too early to change our outlook for the year. But if volumes come in stronger, we’re confident we will deliver earnings leverage in the business. Now as we exit the first quarter, the business is positioned for better financial progression, not just as comparability becomes less demanding through the balance of the year, but in anticipation of the operational leverage that will come through as and when the volume environment improves.

So let’s turn to the quarter. We are pleased with how we started the year. I am proud of how the team is performing. It speaks to the strength of the network and to the quality of the operating model we’ve built. We’re handling volumes more efficiently with fewer people and locomotives. And that matters because it positions us to convert growth more effectively and improve financial performance as the year unfolds. And from a commercial perspective, volume growth was led by grain, potash, natural gas liquids and intermodal. In fact, we set a new first quarter record for grain movements, and we continue to see our service reliability and commercial intensity creating opportunities for us in the marketplace. Janet will walk you through the key revenue puts and takes in a few minutes.

Our productivity is a key focus for us, and we’re hard at work pulling every lever. Our fast-track initiative, which Pat will speak to in a moment, is progressing as expected as this cross-functional review further drives network efficiency. Q1 was set to be the toughest year-over-year comparison of 2026, and the quarter came in largely as we expected. Now the benefits to EPS from our commercial and operational execution were impacted by a few factors that are not reflective of the underlying performance. Ghislain will provide details on those. In addition, fuel and FX had a combined $0.07 drag on the earnings in the quarter. The engine is running well, and you will increasingly see the benefits drop to the bottom line as the year progresses.

The one area in which we’re not satisfied in Q1 is safety. We have consistently improved our safety performance over the last number of years. However, in Q1, we fell short of our expectations. We remain fully committed to continue improving our safety outcome, and we’re already seeing improvements in both accident and injury rates in April. Pat will speak to our safety performance in more detail. Now looking forward to the rest of the year, our priorities remain unchanged: disciplined execution, increased commercial intensity and continued focus on cash flow. Longer term, the opportunity in front of CN remains compelling. Our advantaged network, our extensive port access and the natural resource base uniquely positioned on our network provide us with an incredible opportunity to grow beyond what the broader economy alone can deliver.

We remain bullish, especially on agriculture and energy with the potential for increased egress opportunities for Canadian energy to be positive for our NGL business and our frac sand franchise. We’re seeing green shoots and potential in these sectors. Recent announcement around natural gas projects in Western Canada reinforce that view. The investments we’ve made position us very well to support our customers in both existing and new markets. And as we go forward, we’ll remain disciplined, but our focus on execution is working. Q1 has delivered to plan through better service, productivity and asset utilization. We’re sharper and faster and the organization is well positioned to deliver going forward for our customers, employees and shareholders.

Over to you, Pat.

Patrick Whitehead: Thank you, Tracy. Once again, this team delivered another disciplined quarter in Q1, building on the consistency we’ve been driving across the network. That consistency matters because it allows us to handle volume efficiently, make better use of our resources and support better financial performance as the year unfolds. It’s another proof point that the model is working and that this network has durable advantages. I feel very good about where we stand operationally and about the progress the team is making, and I want to thank the entire CN team. Turning to the next slide, let’s look at some of the key operating measures. Compared to Q1 2025, we improved network fluidity through solid execution, driving car velocity up 6%, dwell down by 4% and train speed up 6%.

We maintained good customer service with local service commitment up 1%. We ran longer and heavier trains by 2% and overall, we moved 3% more GTMs. While winter conditions were less severe overall, our performance reflects continuous improvements in the elements under our control, supported by sound decisions and deliberate investments we have made over the last few years. Capacity investments have structurally improved the resilience of our network, allowing for faster recovery from cold stretches. At the same time, our unique air car fleet enhances asset utilization by optimizing the size of our trains and redeploying locomotives in the right trains. The key point is the better operating performance and more consistent service are creating opportunities for Janet and her team to go win business.

Janet will touch on some in a minute. The operations and commercial teams are tightly aligned. We jointly evaluate incremental opportunities and determine where it makes sense to pursue them. Looking ahead, we use forecasted volumes to anticipate our needs, including how many people, locomotives and railcars we require. This allows us to plan proactively and ensure everything operates efficiently across the network. What this process leads to, and you can see it on the next slide, is improved asset utilization. Looking at it year-over-year, our T&E productivity is up 12% and more importantly, T&E labor costs per GTM is down 7%. Our locomotive productivity is up 8% with locomotive availability remaining at 91%. Locomotive fuel productivity improved 3% with our best ever Q1 on record.

These results and the ones of the last few quarters reinforce our ability to grow volumes without a proportional increase in cost, and they are not accidental. They reflect a predictable approach to operations and disciplined management of our people and assets. And we’re still early in the journey with a clear line of sight to further efficiency and value creation. Our cross-functional reviews, fast track are helping us further improve both our operations and resourcing. This is a progression of our scheduled operating model, highly focused on matching demand with our existing assets, running lean and staying nimble. The resource management metrics we just discussed are early proof points of that work. We are approximately 1/3 of the way complete of the major terminals on our network and remain on track to complete the work through the summer.

Finally, one area where we were not where we wanted to be in Q1 was safety. Safety performance in Q1 fell short of the high standards we set for ourselves and that demands our full attention. Accidents were up year-over-year. And while this comes in comparison to last year’s exceptionally low levels, no incident or accident is acceptable. We take this very seriously and are actively addressing it. One important finding so far is that there is no single underlying cause driving this increase. Some incidents relate to wheels, some to track conditions and in one instance, a land slide impacted a train. We have taken targeted and concrete actions to ensure that the learnings from each of these incidents are fully understood and translated into safer outcomes in the quarters ahead.

Taken together, this quarter reinforces my confidence that a scheduled operating model, disciplined execution and accountable leadership will continue to deliver strong, reliable and durable performance. With that, Janet, you’re up.

Janet Drysdale: Thanks, Pat, and good morning. Overall, Q1 finished on solid footing. Volumes were slightly ahead of our expectations, supported by strong execution across the network. Revenues were down 1% year-over-year. They were up 2% when adjusted for foreign exchange, and they were up 3% when adjusted for foreign exchange, fuel surcharge and the Canadian carbon tax. Revenue ton miles increased 3% and carloads increased 2%. Mix was a headwind that offset same-store price. Now on pricing, our strategy remains consistent: price for the value of our service, sell into our capacity and price ahead of our rail cost inflation. This reflects continued pricing discipline as we grow volume. Now as I’ve said before, in this environment, every carload counts, and the team is bringing it home.

I am extremely pleased and proud of the team’s agility and the tight alignment between operations and sales, which enabled us to seize new opportunities. We have converted about $100 million in revenues in Q1 from our boots on the ground pipeline. Our wins have been across commodity segments, including, for example, plastics, asphalt, fertilizers, aggregates, scrap steel and steel billets. Our service in Q1 also supported incremental volumes of international intermodal and potash as well as record shipments of Western Canadian grain. I’ll briefly walk through how the performance showed up across the portfolio. We delivered an excellent quarter on grain. Canadian grain benefited from robust demand and strong service, including grain car cycle times that were 15% better than the prior year.

We also benefited from the reduction of Chinese tariffs on canola. In the U.S., growth was driven by a strong soybean program following the agreement between the U.S. and China. Potash was above our expectations on resilient operational execution and aided by favorable year-over-year comparisons related to last year’s terminal outage in Eastern Canada. In petroleum products, volumes increased across the portfolio. We delivered a 16% increase in NGL RTMs, driven by weather-related demand for propane, strong exports to Prince Rupert and our ability to capitalize on spot butane shipments. Refined products benefited from increased gas and diesel into the Greater Toronto area, including our first unit train into the Phase 2 expansion of the Toronto fuel terminal.

Intermodal delivered a solid quarter, driven by the Gemini service at Prince Rupert and service-related gains in domestic. Results were more challenged in metals and minerals as reduced gas drilling in Western Canada impacted frac sand demand. Steel and aluminum continued to be affected by tariffs, but we were able to partly offset the impact with new long-haul shipments of steel intra-Canada and new moves of scrap steel. Q1 was the final quarter impacted by last year’s closure of an iron ore facility. Forest products continues to face a difficult environment, driven by weak demand for lumber and the ongoing impact of tariffs and duties. Finally, coal volumes declined due to unfavorable market conditions for thermal exports. Turning to Slide 10 and looking ahead to the balance of the year, we remain appropriately cautious.

Visibility is still limited this early in the year, and the geopolitical environment remains volatile. By segment, grain remains very constructive. We do expect that our record Q1 performance included some pull forward. We continue to be bullish on energy-related commodities and global energy disruptions are expected to drive sustained long-term demand for Canadian products. CN is extremely well positioned to serve this market. We have several projects and expansions that are scheduled to come online later this year, and we’re very excited about our future prospects. Rising thermal coal prices driven by the Middle East conflict could support improved export demand for thermal coal. Year-over-year comps get tougher for international intermodal volumes in the second quarter, but should improve in the second half.

Consumer demand bears close watching, but CN’s service reliability remains a key differentiator. In automotive, near-term demand remains pressured, but we are encouraged by recent share gains that position us well for the back half of the year. For metals and minerals, we expect demand to continue to be bumpy. We have strong conviction in our frac sand franchise, and we will benefit from the new unit train receiving terminals that have come online in Northeast BC. More recently, we are also seeing higher demand for U.S. frac sand shipments. We are expecting increased intra-Canada and intra-U.S. steel moves along with higher shipments of scrap metal. Cross-border shipments of steel remain challenged. In forest products, it’s difficult to foresee improvement in the near term given muted housing activity in addition to the dampening effects of tariffs and duties.

So let me wrap up. Our strategy is consistent, stay close to our customers, grow volumes that fit our network and maintain our pricing discipline. CN is very well positioned to deliver strong incremental margins when the demand environment improves. Ghislain, over to you.

Ghislain Houle: [Foreign Language] Starting on Slide 12, we began the year on solid footing. We delivered financial performance that was in line with plan through our continued focus on asset and labor productivity. First quarter reported diluted EPS was $1.87, up 1% from last year, while adjusted diluted EPS was $1.80, down 3% from last year or $1.83, 1% lower on an exchange-adjusted basis. These results reflect 2 notable adjustments: a $66 million pretax gain tied to the sale of our new market subdivision and a $17 million in adviser fees related to industry consolidation. There are also some year-over-year factors that are not reflective of the underlying performance. That includes a higher effective tax rate this quarter as well as last year’s remeasurement of CN’s investment in Iowa Northern.

These factors negatively impacted year-over-year adjusted EPS by $0.06. And as Tracy mentioned, fuel and FX were an additional $0.07 of drag in the quarter. As Tracy said, the story of the quarter is free cash flow. We generated around $900 million in Q1, approximately $275 million or 44% higher than last year. This was mainly driven by lower capital expenditures, the proceeds from the disposal of our new market subdivision and higher net cash from operating activities. As we outlined in January, we have taken advantage of our strong free cash flow generation to increase returns back to shareholders. Across our current share repurchase program, which runs from February 1, 2026, to January 31, 2027, and the previous NCIB, we repurchased a total of 6 million shares for $870 million in the first 3 months of the year.

Our leverage ratio increased to around 2.7x at the end of the first quarter. Given the current macroeconomic environment, we expect the leverage ratio to stay at this level through 2026 before coming back to 2.5x in 2027. 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 1% higher, driven by general wage increases, which were largely offset by 4% lower headcount and strong labor productivity. Fuel expense was more than $10 million lower than in the same period last year with the positive impact of the removal of the carbon tax in Canada, partly offset by higher fuel prices and record fuel efficiency essentially offsetting the impact of higher volumes.

We are monitoring fuel prices very closely. With the sharp increase in oil prices in March, fuel negatively impacted EPS by $0.04 in the quarter and had an 80 basis point unfavorable impact to the operating ratio. Purchased services and material was up 9%, driven by higher snow removal costs as a result of harsh winter storms across much of the network, advisory costs and higher material trucking and transload costs. Other expenses were up approximately $50 million with over $30 million of that driven by higher-than-expected incident costs. Moving to Slide 15. Let me provide some visibility to 2026. We are tightly managing costs in this uncertain geopolitical and macroeconomic environment, controlling what we can control. If anything, the uncertainty has heightened since our last January call.

We have updated our view of WTI from USD 60 to USD 70 per barrel to $80 to $110, with a wider range driven by higher fuel volatility. We have also updated our FX assumption from $0.715 to the current spot rate of $0.73 for the balance of the year. Our effective tax rate continues to be in the range of 25% to 26%. With that context, we are maintaining our directional guidance of flattish volumes with earnings slightly exceeding volume growth for 2026. So in conclusion, let me reiterate a few points. We continue to deliver strong operating and financial performance. We have a renewed commercial intensity. Our customers continue to benefit from our excellent service and strong operating performance. We are very pleased with our Q1 results, a solid start to the year and the footing to deliver on our guidance.