Canadian National Railway Company (CNI) Q3 2025 Earnings Report, Transcript and Summary

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

Thank you, Christa. Welcome, everyone. Thank you for joining us for CN's third quarter financial and operating results conference call. Joining us on the call today are Tracy Robinson, our President and CEO; Pat Whitehead, our Chief Operations Officer; Janet Drysdale, our Chief Commercial Officer; and Ghislain Houle, our Chief Financial Officer. As a note, we have forward-looking statements and non-GAAP definitions for your review on Page 2 of our presentation. These forward-looking statements include estimates, goals and predictions about the future based on our current information and educated assumptions. These come with risks and uncertainties. And with that, there is always a possibility that outcomes may differ from expectations. That being said, forward-looking statements aren't guarantees and factors like economic conditions, competition, fuel prices and regulatory changes could affect actual results. It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracy Robinson.

Thanks, Stacy, and hello, everyone. Now before we turn to results, I want to take some time here at the outset to talk openly with you about what we see and to give you some facts and context on how we're responding. And when I joined CN, we launched a new operating plan. We moved to a scheduled operating model that would drive velocity, efficiency and strong customer service. And this was to be the foundation for driving value, both by capitalizing on volumes inherent in an expanding economy and those created by some unique opportunities that leveraged our network. We've executed well in many parts of our plan. I'm proud of the work that we've done and the results that we're delivering. And what we didn't do well was predict the volume environment we've encountered since then. And yes, we can rightly point to the challenges of a markedly worse macro and the impact of unanticipated shocks from tariffs and labor, which have impacted CN more than other rails. But the reality is the lower volumes have prevented us from delivering on the full earnings growth we forecasted. Now we can do better on guidance, and we will. We're not alone in facing a challenging growth environment, but it's important to remember that even with the unique shocks we faced, we've delivered. Over the last 3 years, revenue and EPS growth CAGR is at or near the high end of our North American peers, and we have consistently delivered top or near top margins. The macro headwinds have been an industry issue, but our operating ratio has been more resilient than most over this period. That said, I know we can do more. Over the past 12 weeks, we've been intensely focused on adjusting our approach to address the ongoing macro challenges while continuing to position CN to deliver for customers and shareholders regardless of the economic backdrop. Now we've initiated several actions that I want to point you to today. First, we're announcing that we're setting our capital spend in 2026 to $2.8 billion, down nearly $600 million from this year's level. Now this will put our spend at mid-teens from a percentage of revenue standpoint, and we expect it to remain at or about this level going forward. The vast majority of the change in spend is driven by the completion of capacity expansion projects and our locomotive and railcar fleet upgrades. And this is no regret capital needed to address capacity bottlenecks in the West and to get our fleet to the right place. The work we've done here is important, and these investments will pay dividends. That said, both the network and the fleets are now properly sized for this volume environment. Now we're also driving efficiencies in our capital execution, and we're getting real traction. There's more to realize here, and we're going to continue to push hard. And second, the team is doubling down on productivity efforts. Now adjusting cost structure is critical, especially in a soft macro environment, and we're pursuing all opportunities across our full workforce and asset base, including taking $75 million out of management labor costs as part of our plan to continue to drive improvement in our operating efficiency. And we know there's more to get here, and we're after it. Third, we're increasing intensity around enhancing shareholder value. Now free cash flow will continue to accelerate in 2026, as capital spend is reset and costs remain in check. This incremental cash will be returned to shareholders. We accelerated our share buyback in Q3. It's the right thing to do given the attractiveness of our share price. And we're committed to returning excess capital to shareholders while balancing a continued focus on maintaining a strong balance sheet to preserve dry powder in what is a very uncertain macro environment and in an industry with an eye to M&A. And finally, on guidance, you can expect us to provide full year 2026 guidance when we report Q4 results. Now I know how we've handled guidance over the past 2 years. It's been a pain point for many. We've heard this, and we're listening to shareholders about what items truly matter to them, and we'll have more on this in January. So with that said, I want to give a few thoughts on the year ahead. As we look to 2026, we see another year of limited volume growth with a weak outlook for North American industrial production and housing starts and some mix headwinds given the continued impact of tariffs on forest products in particular. Now we're not accepting the macro reality as our fate. We're just going to have to work harder to achieve our goals. We've announced Janet as our Chief Commercial Officer. Congratulations, Janet. She's been working with the commercial team for 3 months now, and I'm impressed with the change in level of urgency and focus. Now Janet has launched an intense boots on the ground sales program that is chasing every opportunity, no matter the size. This effort has brought in $35 million in Q3 and is closing in on $100 million in Q4, and it's helping offset weakness in other areas. We know where our capacity is, and we'll be aggressive in selling into it. She'll give you an update on the markets in a few minutes. We are open-eyed about the environment in which we are operating and about our performance. We have a strong foundation, and we're already in flight on the efforts needed to deliver an improved set of returns. We're finding ways to deliver no matter the backdrop. Now with that, let's turn to Q3 results, which were strong and reflect the early impact of the changes we've made throughout the year. During the quarter, we achieved 6% growth in EPS and an operating ratio improvement of 170 basis points to 61.4%. Our network continues to perform well. We're seeing the best levels of many of our operating metrics in the last decade. Our operating performance has been strong and consistent, and it continues to deliver for our customers. Pat will take you through the details shortly. And we delivered volume growth in the quarter of about 1% in RTMs and 5% in carloads. Overall, volumes were a little softer than expected, especially in merchandise segments due to the macro and tariff overhang. And we ran lean in the quarter as well. We've managed crews and assets tightly through this year, and we did the same in Q3. Coupled with some targeted management adjustments, this positions us well for the future as the organization continues to flex on managing variable costs. Ghislain will dive deeper into the savings we are delivering and the impact of the reductions in capital. We're seeing the benefit of this in free cash flow, which is up 14% year-to-date, a sequential acceleration that will continue into 2026. And last point, I want to address something I know is on many of your minds, M&A activity. The industry does not need a merger to provide better service to the North American economy. What we need is more cooperation and less regulation. Now no level of mitigation can offset the reduction of options and the increased cost of service to customers. Now that said, we intend to be an active and engaged participant in the merger review with a view of protecting our franchise and more broadly, competition. And if the regulator decides to approve the merger, we will, as we always do, entertain all options to create value for our shareholders. So to sum it up, we've taken significant steps to move CN into a position that is tighter and front-footed to deliver for our shareholders. We've taken decisive action and we'll continue to do so. Our commitment to delivering value for customers and shareholders is steadfast through all economic cycles. Now our actions and increased focus on commercial intensity, operational agility, streamlining costs and realigning capital to reflect current realities begun to deliver. So with that, I'll turn it to Pat. And as I do, let me say something on the change in approach to COO. The dual COO structure was important for us. It was a forcing mechanism to balance our day-to-day delivery with some critical work we needed to get done on the forward plan and capital efficiency. We're seeing the benefits. It's time to bring this back together. I'm excited for Pat to elevate the impact that he's been having over the past 2 years with his focus on network excellence, capital efficiency and disciplined execution. Congrats to you, Pat, and over to you.

Thanks, Tracy. I'm excited to step into this role after 2 years as our Chief Network Operating Officer. During that time, our collective efforts have been focused on operating a disciplined scheduled railroad. The momentum we've built together is powerful. Now as we look to Q4 and 2026, I'm eager to channel that energy towards our new priorities, beginning in our yards and intermodal terminals to continue driving strong, sustainable performance with an emphasis on safety as always. A great example of this is our cross-functional terminal reviews where we go to key locations on a regular cadence and optimize staffing and resources to fit volume. We believe we can further improve our cost structure, making necessary tweaks to our operating plan to optimize total car handlings without sacrificing exceptional service to our customers at the first and last mile. We're aiming for constant improvement and will never be satisfied with the status quo. We're confident this effort will continue to yield positive results. Now let's turn to Slide 7. On safety, our year-to-date reportable injury and accident ratios are up 4% and 14%, respectively. We responded swiftly with targeted campaigns focusing on the most frequent occurrences and saw improvement through September and into October. Heading into winter, our leaders are out in the field, visible, engaged and helping teams prepare. Now on to operational performance. The team delivered another strong quarter in Q3, and we're carrying that momentum through Q4. Car velocity for the quarter was 211 miles per day, a great indicator of network fluidity. Our yards were in good shape and through dwell improved 1%. Local service commitment performance remained robust at 95%, underscoring the consistency and service reliability for our merchandise customers. It's clear the network is delivering and it's doing so with a sharper focus on costs. Turning to Slide 8. On the resourcing side, training engine labor productivity improved 20% year-over-year, the result of disciplined crew management and acceleration in furloughs through the quarter where volume has softened. We continue to hire in our hardest to staff locations and are pacing onboarding in step with what the commercial team is seeing for demand. Our equipment story follows the same playbook. We've added back locomotives and cars to support grain, but stayed measured, keeping over 6,000 system cars and roughly 160 high-horsepower locomotives or about 10% of our fleet parked and ready. On the motive power side, the productivity gains are clear. Locomotive dwell and failures are both down 12% year-over-year, pushing locomotive availability to 93%, a full point improvement. We're also seeing gains in fuel efficiency, which improved 2% in the quarter. These are the results of steady fleet modernization and predictive maintenance. We have gone from the oldest fleet 8 years ago to middle of the pack. Again, we're running lean, not light. By investing in our people and equipment, we've cut contractor spend by approximately $120 million year-to-date and reduced overtime to its lowest level in a decade, while also improving our train operations with both fewer planned and unplanned delays across the network. The same cost discipline extends to our infrastructure. Despite inflation pressures, we've reduced our installed cost per tie by over $15. Annualized, this amounts to around $20 million in savings. On Slide 9 and staying with infrastructure, the capital projects I touched on in Q1 are advancing as planned. Our yard, siding and double track projects, namely on the Edson sub, are scheduled to come online in the fourth quarter. Reflecting on our progress since 2022, we've lifted West Coast throughput substantially. Capacity is up 25% between Edmonton and Jasper and about 20% to Vancouver and Prince Rupert. Our EJ&E investments have increased fluidity around Chicago and reduced the crew start to Western Canada, a direct cost and efficiency gain. The investments we've made are delivering. Locomotive availability is strong. The network has headroom and our teams are operating with precision. When budgeting, we collectively discuss the right level of investment by reexamining every project in place and every dollar being spent. Our $2.8 billion budget for 2026 reflects a continued commitment to efficient maintenance CapEx and a list of growth projects that continue to exceed our return requirements. These consider a downside pressure to volumes. With a strong foundation in place, we've delayed select projects to reflect a softer economy. We're focusing on maximizing the value of what we've built, protecting cash, preserving flexibility and positioning the company to accelerate when the market turns. When demand is there, we'll be ready to move quickly. With that, I'll pass it on to Janet.

Thank you, Pat. Good afternoon, everyone. I want to start by thanking our customers for their support and collaboration. Turning now to Slide 11. Revenues in the quarter grew 1% on 1% higher RTM and 5% higher carloads, reflecting growth in Intermodal. Volumes were softer coming into the second quarter than expected, mainly due to transitory issues in refined petroleum products and in frac sand. The Canadian grain harvest was also slower to come off the fields this year, especially in CN's draw territory. Having said that, weather conditions were just right in the final weeks of growing, and we are now expecting a record crop. Intermodal was up on a year-over-year basis given last year's labor disruption, but not as strong as we expected given ongoing tariff challenges. Throughout all of it, our service continues to perform exceptionally well, and rails are hustling boots on the ground and getting every carload we can, including some recent market share wins in chemicals and plastics. Same-store pricing continues to come in ahead of our rail cost inflation. I'll provide a few key highlights on the quarter before moving to the outlook. Petroleum and chemical volumes rose across most major segments. Plastics and chemical RTMs were up 8% on market share gains. NGLs were up 4%, driven by increased export volumes via Prince Rupert and crude was up 6%. Within Metals & Minerals, iron ore shipments were impacted by a mine idling in late Q1. Lower frac sand volumes were due to reduced drilling in BC, and we saw less cross-border shipments of aluminum steel, although we were able to partially mitigate the impact with more intra-Canada and intra-U.S. moves. We also had higher volumes of scrap metal and pipe. Forest products, especially lumber, saw a year-over-year decline, mainly due to weak demand and the impact of duties, which more than doubled on August 1. In terms of Intermodal, domestic units were up 18% and international units were up 14%. Volumes across all Canadian ports were up, benefiting from easier comps given last year's rail labor issues. Notably, Prince Rupert volumes were up a full 30%, driven by the new Gemini service. In domestic, our strong service continues to help us win market share. Turning now to the outlook for the remainder of the year on Slide 12 and starting with Intermodal. For domestic, transporter shipments remain soft, but we are focused on market share gains in Canada by leveraging our strong service. For international, we expect to see year-over-year growth given last year's port strikes and given the strong Gemini volumes through Prince Rupert, which should be roughly consistent with Q3. Canadian grain is expected to run hard to year-end. In Petroleum & Chemicals, the last of the refinery outages are now behind us, and we are seeing positive momentum going into Q4 across multiple segments. In Metals & Minerals, we will continue to help our steel and aluminum customers find alternative markets. Frac sand demand is expected to be tempered for the balance of this year, but we continue to have very high conviction in the growth potential of the Montney Shale region for frac sand and natural gas liquids. The auto outlook for Q4 is stable. In Forest products, we expect a step down in the Q3 run rate for lumber with the additional 10% tariff that came into effect on October 14. So to close out, while the macro environment remains challenged, there is still plenty to be excited about. Our service is strong. The team is selling into our capacity, and we're chasing wins by being strategic and pragmatic. Ghislain, over to you.

[Foreign Language] Turning to Slide 14 for the quarter. We reported an EPS of $1.83, up 6% versus last year's EPS of $1.72. Revenues were up 1% year-over-year on 1% higher RTMs. The operating team continued to perform very well, delivering best-in-class service for our customers and a year-on-year operating ratio improvement of 170 basis points, coming in at 61.4% versus last year's operating ratio of 63.1%. Moving to Slide 15, let me break down the earnings drivers for the quarter. Volumes in the quarter were a little softer than expected, especially in merchandise segment due to macro and tariff overhang, but we were still able to grow volume. We also had a fuel price headwind of $0.03 of EPS or 30 basis points unfavorable to the OR. On the plus side, we're very pleased with our solid cost takeout, rightsizing our resources to align with volumes. Q3 was an important inflection point where we began to see the early impact of the increased cost discipline brought to bear throughout the organization as well as the steps taken to reduce our capital spend to reflect the continued weakness in volumes. Throughout the organization, our teams have rallied behind the call for increased productivity. We have identified meaningful cost savings across all levels and across all departments and are bringing a rigorous approach to managing our spend. On Slide 16, let me provide you with more details of some of the operating expense categories in the quarter, which I'll speak to on an exchange-adjusted basis. Labor was 2% higher versus last year, mostly due to higher year-over-year incentive compensation and wage inflation, partially offset by 5% lower headcount. As Tracy outlined, our workforce reduction initiative will be completed in Q4, some of which is CapEx and is a deliberate step to position the organization for long-term agility and sustained value creation. Purchased services and material was down 1% on tight cost management with lower repair and maintenance costs led by the engineering team. Fuel expense decreased 20% versus the same period last year due to the elimination of the Canadian federal carbon tax, a 2% decrease in price per gallon and a 2% favorable fuel efficiency. Other costs were up 7% versus last year, mostly driven by higher incident costs. Productivity is a mindset, a habit, not one-off, and we are bringing this mindset to bear across all levels of the organization. In addition to increased cost savings in the quarter, we are also still expecting to reduce our capital spend by $150 million year-over-year. The result of these efforts is that we generated over $2.3 billion of free cash flow through the end of September, up 14% versus the same period last year, and you should expect a continued sequential acceleration through 2026. Leverage at the end of Q3 was 2.54x, consistent with the 2.5x adjusted debt to adjusted EBITDA target. We cranked up our share repurchases in Q3, taking close to 8 million shares out of circulation for just over $1 billion. We will continue to execute opportunistically on our current share buyback program, which runs through February 3 of next year. Moving to Slide 17. Let me provide some visibility on the balance of 2025. We expect the uncertain macroeconomic environment we've experienced so far this year to persist through at least the next several quarters. Our year-to-date volumes in terms of RTMs are essentially flat versus last year, and our full year volume growth assumption continues to be in the low single-digit range. We continue to assume WTI to be in the range of USD 60 to USD 70 per barrel and assume foreign exchange for the balance of the year to be between $0.70 and $0.75. Our effective tax rate continues to be in the range of 24% to 25%. We are, therefore, reaffirming our guidance of mid- to high single-digit EPS growth in 2025. We also continue to expect our 2025 CapEx envelope to end this year at around $3.35 billion. Turning the page for next year; while the environment remains dynamic, we're not expecting a big change in the macroeconomic environment. As Tracy discussed earlier, we are looking at an overall capital envelope of $2.8 billion in 2026. This will put our capital intensity in line with our U.S. peers and will contribute to solid free cash flow conversion. In conclusion, let me reiterate a few points. We are pleased with our Q3 results and are well positioned to deliver on our full year guidance. The network continues to operate very well with strong operating and service metrics. We continue to expect to have volume growth in the fourth quarter as we lap port labor disruptions from last year. We've accelerated cost initiatives to ensure the long-term competitiveness of this franchise. We are planning a 2026 capital envelope of $2.8 billion, reflecting our strong capacity position and continued weak volume growth in the near term. Let me pass it back to Tracy.

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

[Operator Instructions] The first question comes from the line of Walter Spracklin with RBC Capital Markets.

Congrats on the good results here and the proactive measures you're taking. Zeroing in on one of those, the CapEx cut that you're announcing here this morning. Obviously, whenever we see the immediate concern is that it may jeopardize some of your capacity or your ability to flex up in a rebound. I know you spoke to some of that, but love to get a little bit more color on what kind of projects are going to be cut. I know at Investor Day, you zeroed on some very attractive CN specific growth opportunities. And so when we see a recovery, I just want to make sure we're not jeopardizing your ability to capitalize on those when that recovery comes. Appreciate that.

Walter, thanks for the question. Listen, when I joined CN 3.5 years ago, we had some issues that we needed to deal with. We had a lot of congestion in the western part of our network where, as you know, we have the most significant growth opportunities. We had the oldest locomotive fleet in the industry. So these needed to be addressed, and we have. The work that Pat's been doing over the last 3 years on the Edson sub, on the Vancouver corridor, on Northeast BC, we've got -- we've had more than 20% kind of workload growth in the Vancouver corridor since the last peak. He's built enough capacity to accommodate that and more. He's focused on the Edson sub. Right now, we have, what, Pat, between more than 60% of the Edson sub double tracked right now. And so this has accommodated not only the volume that we have, it's accommodated -- it's created 7 more trains a day of volume capability. So we've got lots of room to grow there. It's improved our speed across that important kind of bottleneck on our network, and it has significantly increased our resilience and our reliability up there. Our locomotive fleet is now, as I said, middle of the pack in the industry. And really importantly, we are much more efficient now in the way that we deploy and execute on our capital program. We're getting -- you heard Pat talk a little bit about some of the proof points on that. We are more effective in the way that we do that. So for this environment right now, we are exactly where we need to be. We're well positioned for this volume, and we've got room to grow in the western part of our network. So it's important now that we pull this capital back in and it's set at the proper place for next year.

Your next question comes from the line of Fadi Chamoun with BMO Capital Markets.

Look, I think, like you indicated, Tracy, you've been railroading quite well in recent years. You're in the middle to the top of the pack there. And the bigger issues have been really volume and a lot of challenges, obviously, outside of your control. So really, my question is to Janet, like do you see an opportunity here to reenergize how CN goes to market in terms of the commercial strategy? And if you can talk maybe about any unique opportunities that you see that you want to tackle as you go into 2026? And any high-level maybe thoughts about how we should think about the volume in '26? Is there an opportunity to grow volume next year if the economy doesn't really help you or economy is flat from where we are today? And by the way, congrats on the new role, Janet.

Before Janet gets into that, Fadi, let me just say this. As we indicated, overall, given this macro kind of economic environment and what we see on tariffs, we don't see overall a big lift. It's going to be more of the same for next year. But embedded in that, we've got a very diversified book of business. So there's areas of considerable strength that Janet is driving in the energy sector. We've got a very strong ag sector. We've got strength in a lot of the industrial products. It's offset by some pretty kind of tariff and economic headwinds in forest products, in particular, in the mix that we've -- the mix impact of that. But Janet, I will say it again, I'm impressed with her boots on the ground approach. She's making things happen out there. Janet?

Yes. Thanks, Tracy, and thanks, Fadi. What I would say is that our go-to-market strategy doesn't change. We're going to continue to provide the service that helps our customers to win in their markets. We're going to price to the value of the service that we provide. Now where I do see opportunity for change is really our level of intensity and urgency. We are driving decision-making down, and we're out there the whole team with boots on the ground, knocking on doors, competing hard for every opportunity and listening to and collaborating with our customers. So you all know the macro challenges. We're going to have to work harder, and we're going to have to work faster and smarter, and that's exactly what we're doing. And I will say it's working. We've had recent share gains in domestic intermodal. We've captured recent spot moves of soybean meal, plastics and coal. And we're also innovating in the products that we're moving. We actually just moved our first unit train of scrap iron. It was a test move. I'm very pleased to report that our operating team hit it out of the park. In support of the Toronto Blue Jays, I am going to try and use as many baseball analogies in my answers today. So I just want to reiterate that the operating team hit it out of the park. They beat our own aggressive service plan, and we're going to keep working with our customers to innovate and win. So stay tuned. There's more to come. We are all in the same environment, but we're going to work harder, smarter, faster, and we're going to get more of what's out there for our growth.

Your next question comes from the line of Ken Hoexter with Bank of America.

Good luck tonight in the game. So Tracy, a lot of talk about negative impact to the Canadian rails from M&A since you opened up the subject. There's a desire to move more U.S. origin. Can you talk about the risk you see there? And is there any move instead of waiting for transcon? Any thoughts of being involved or proactive before options disappear? And I guess just to hit on that, the lowest CapEx to revenue since 2002, is that limiting your growth going forward in some fashion?

Thanks for the question. There's a lot in there. Let me start by taking the last piece first because we've spoken about it in the first question. We've looked -- we look very carefully at our network. And the work that Pat has done on the Western corridor, in particular, we've done a little bit around the EJ&E that's going to allow us to take a crew start out and give us a great return on that. But the big focus from a capacity perspective has been in the western part of the network. We have the capacity to grow there, both over the Edson sub into Rupert and into Vancouver. He's got 2 projects left that will finish at the end of 2027, one siding outside Vancouver and the Zanardi Bridge in Rupert, and we will watch this as we go. So I'm not concerned at all about limitations in our capability to grow. We are ahead of that from the network perspective. As I think about our network, we've got some real advantages. We're sitting up here the very strong origination network on top of an incredible natural resource base. And yes, if you think about some of what's going on in the tariff world these days, we're feeling the impact of that in certain areas like forest products, a little bit in steel and energy. But we are also -- as we see trade between Canada and the U.S. decline year-over-year, we've seen trade between Canada and the U.K. and Europe and Asia increase. And as we sit here with the network that has the most extensive port to access in Canada. And on top of these natural resources, we think about our network and driving deep into the U.S. markets. If we think about our access globally to the markets overseas in Asia and other, I like our growth prospects as we -- now we now have the capacity, whether it's access to Rupert, Vancouver or the other ports, we've got the capacity to deliver it. If we think about M&A, this is -- as you know, and we've said and you've heard us say it before, we don't think this is necessary in the industry, and we think that there's more risk than there is benefit to the industry. It doesn't mean it's not going to happen. If it happens, we will be very aggressive in making sure that we not only protect our network, but that we position it so that we can drive some of what we're sitting on up here deeper into the markets in the United States and South as those opportunities present themselves. So we're pretty optimistic as we look out over the longer term that we're positioned with flexibility to respond to whatever happens from an M&A perspective, whatever happens from a global trade flow perspective. We're in the right spot.

Your next question comes from the line of Brian Ossenbeck with JPMorgan.

Just to follow up on M&A real quick, Tracy. There's a website now that both you and your peers have helping shippers voice their concerns if they would like to. So is that created because there have been some concerns that have been voiced. Maybe you can give a little bit more background on that. And then maybe for Ghislain and Janet, in terms of forecasting better, you're going to give more details in a couple of months, but we've heard that a few times now. I mean, it's obviously difficult this year is an example of that. But what are some of the building blocks to help be able to do that better? Is it communications? Is it technology? Maybe you can give some thoughts on how to deal with this constant volatility.

I'll start, Brian. Listen, everybody in this industry wants to grow and grow sustainably. And that, as we all know, means gaining market share against the trucking industry. And if we're going to do that as an industry and as a company, I think that the idea -- what we need to figure out is how we offer more competitive options, not less. And so if we want more competitive options, the better path to that is better collaboration, more service innovation. And we think the right way to do that is through these pro-competitive alliances that you see the industry putting together. We think that's the right path forward and we see it as a far lower risk path forward than the alternative of a big merger. Janet, do you want to talk about forecasting?

Yes, for sure. Thanks, Brian, for the question. So what I would say is forecasting in this kind of environment is very difficult, particularly point forecasting. So when we think about going forward, I think we're going to try and be more in a range. And we'll try and share more of that with you as well, Brian. What are the things that could bring us upside? What are the things that could bring us downside so that you can follow what's going on in the macro or with certain customers and understand whether those are good or bad for us. I think part of what we need to do, though, as well is get better at our agility in responding to changes in actual volumes. The other area where I'm very preoccupied is just the ease of doing business and making sure that we're out there as aggressive as possible, getting what we can. So I think it's a whole mix of things. The team is fully engaged in this, but I don't want the commercial team looking backwards, trying to explain why things didn't happen or did happen. I need them looking forward and being out there and selling. To your point, there were some really difficult things for us to call out there, whether that was the repeated port disruptions, whether it was the rail disruption, whether it was the size and scale of what's gone on in the tariffs. And frankly, just the unpredictability of the tariffs. It's on, it's off again, it's back on. So we're going to focus on being agile, being responsive and remaining really close with our customers and also giving you a better sense of the range of potential outcomes.

Your next question comes from the line of Chris Wetherbee with Wells Fargo.

I guess, Tracy, maybe if we could zoom out a little bit and think about what you think sort of the growth algorithm is for CN going forward. So CapEx coming down to mid-teens, similar to your U.S. peers, you generally sort of had a higher growth profile than the U.S. peers. I guess in an environment that maybe is a little rocky, I guess, 2 questions. Are you assuming that we just kind of stay in a slower growth volume environment for CN for the foreseeable future? And if that's the case, maybe what is the sort of EPS growth algorithm for the world that you see today? Just want to get a little bit of sense of how you're thinking about because clearly, you're making some, I think, more structural changes to how you're operating the business financially.

We have, as I said earlier, a very diversified book of business. So -- and probably a bigger merchandise portfolio than some of our peers. But if you think about the natural resource base that we're sitting on, whether it be metallurgical coal, our very significant ag portfolio, if you think about energy portfolio and potash and fertilizer, these are commodities that are less impacted by the macroeconomic and the comings and goings of the strength of the North American economy and consumer. These are largely commodities that find their way to markets, whether they be globally or North American. So we have a very strong position in those and a lot of growth in those. LNG Canada has announced recently that they're turning on Train 2. And the Phase 2 of LNG Canada is a priority for acceleration for the government of Canada. And so that drives our frac sand expansion that we've grown considerably. That drives our NGL expansion, which is increasingly exported through the Port of Prince Rupert. And if you think about the refined products and the growth that we've seen in that, so there's going to be tremendous areas of growth that is enabled by the network that we have, the positioning that we have in the north through the ag sector and our access to ports like Prince Rupert and Vancouver and even if you look into the East. And so that's going to be -- Janet's leaning into that. That is structural, that's partnership, that's strategic growth for us as we go forward. If you look at the components of our system that are more related to the macroeconomic environment, particularly in North America, whether it be forest products, it's impacted by housing starts, but also significantly by tariffs. We've seen that sector come down by about 60% since its peak a number of years ago. There's a structural adjustment in that, and we need to -- we've been doing a good job of backfilling that volume in the past. It's getting -- we'll see where that business goes as housing starts ultimately pick up in the United States and across North America. If you look at the auto franchise, it will be interesting to think about where that may go, but we've got a great U.S. franchise as well. So some of the merchandise commodities are more directly related to the macroeconomic, and we're going to have to watch that. So what we've been doing is being proactive around making sure that we've done the right things in advance for a slower macro environment. We've got the right network. We've talked about that. We've got the capacity that we need. We're increasingly efficient from a capital perspective. We've taken some early actions throughout the year. But in honesty, we've been working on productivity for 3 years, getting tighter and tighter on it. It's why our operating ratio has been so resilient despite what's been thrown at us, we've been the first or second operating ratio in the industry for the past 3 years, and we did it again this quarter. It's because we've been proactive on productivity. So that isn't finished. That's part of what we do and a muscle that's getting stronger and stronger, and we're going to continue on that. So that's going to allow us even when the volume growth overall isn't significant, it allows us to grow cash -- free cash flow. It allows us to kind of continue to position ourselves to increase returns. And we are highly leveraged as the macroeconomic comes back. So we're highly leveraged to volume increases. So as I look forward, I can tell you, we can't call when the economy will turn, and I can't call these trade deals, whether it's Canada, U.S. or whether it's U.S., China, whether it's Canada, China. Those are difficult things to call. What our job is to be ready for the environment that we find ourselves in, and I'm comfortable that we've done all that we need to do that, and we're leaning into it further as we go forward. So I like our position. I like where our network is. I like the long-term kind of strategic plays that we have, and you'll see us continue to push forward.

Your next question comes from the line of Cherilyn Radbourne with TD Cowen.

As it relates to the decision to streamline to a single COO structure, can you talk about what impact, if any, that has on sort of the make the plan, run the plan philosophy? And particularly for Pat, just how much time you spend boots on the ground now as part of your day-to-day?

Thanks, Cherilyn. So this -- as I said earlier, the COO structure, the dual structure has worked for us, and I'm really happy with the impact that it's had. It was a forcing mechanism. It gave Pat the opportunity and it forced him to kind of focus full time on the network, on capital efficiency, on making sure that we had the plan. We had Derek, who's a very capable operator focused on the day-to-day. We've got the momentum from that. We've -- but Pat spent most of his career in transportation, I think. He's been a Chief Mechanical Officer. Now we spent 2 years deep in engineering, and it's time to pull this back into one COO, and I'm pretty confident that he's going to lift his place to the next level. The strategy doesn't change at all. We are make the plan, run the plan, sell the plan business. And what changes is the level of productivity that he's going to drive in this, right, Pat?

Absolutely. Let me start by saying, first of all, I'm extremely excited and honored to lead the operations team here at CN. I have the utmost confidence in this team of professional railroaders to safely deliver exceptional service that our customers demand. Look, for the past 2 years, Derek and I have worked hand-in-hand. We are in a good place from an operations standpoint. And I want to be clear and reiterate Tracy's comments. There is an urgency around this entire organization as it relates to safety, service, productivity, developing our people and cost. I've been in this industry for 33 years. Tracy outlined, I've spent most of that in transportation, boots on the ground. I started in the train and engine craft, as did my father. I spent a lot of time in mechanical and I've been overseeing engineering for 2 years. I know what I've seen over that time, and that's what works, a clear plan, disciplined execution of that plan and our leaders staying very close to their operation. The work we've done has paid off, and I'll just outline a few things. Our shops are more productive with fewer people per repair, and our locomotive availability is at an all-time high for this railroad. The material inventory levels in our shops is down 20% since 2023. In engineering, our operating cost per track mile has completely absorbed inflation and FX, and we have our lowest overtime levels in over a decade. Most importantly, our lost time days from injuries are down 23% from last year, a record low. Our goal, my goal is for everyone on this team to go home the same way they came to work every single day. As Tracy said, the strategy does not change. We're building on what's already working. The railroad is running very well and efficiency is improving across the entire organization. Our goal, my goal now is to take it from better to best-in-class consistency. As it relates to operations, the next thing that we're going to spend time on is tightening the dwell in our yards, removing non-value-added costs and really focusing on cars spending less time waiting and more time earning a return for us. So strategy is unchanged. We're just taking it to the next level. Thank you for the question.

Your next question comes from the line of David Vernon with Bernstein.

Pat, Janet, congratulations on your appointments. Tracy, I'd like to ask a big picture industry question, if I could. If you look at the structure of the railroad industry in Canada, you've got sort of the CNCP controlling about 95% of RTMs, something close to 90% of freight revenues. The broad question I have for you is, why is that industry structure good for Canada, but not good for the U.S.? I think that in a network business like a railroad or an airline, where you have greater connectivity, more local traffic, you produce more opportunities to grow, you produce more reliable service, you produce better service levels. And I think most investors would agree that comparing the U.S. rails against Canadian rails on a 15-year view, that's largely been true. I'd just like to understand kind of why you think that further consolidation is a bad idea in the U.S.?

Well, if you want to compare the Canadian kind of industry to the U.S. industry, we are structured a little bit differently. But what you get with that kind of transcon network is you get a very different regulatory environment. And if we're going to be successful if we're going forward as an industry, particularly if the focus is to be nimble enough to take trucks off the road, which is the next big growth area, then we need less regulation, more competition. We need to be able to be more nimble, more innovative in how we go to market. And so that's going to be critical. So going down the path of creating big transcon is going to inevitably attract a different regulatory structure. I don't think that, that's going to enable that sustainable growth that we all want. So we got to be eyes wide open about what we're walking into here.

Your next question comes from the line of Scott Group with Wolfe Research.

So Tracy, been a lot of management change. Are we comfortable? We're sort of through it all. And then I heard a lot -- you talk a lot about sort of the macro challenges and volume and mix. I didn't hear a lot about price. Maybe just talk about how this macro environment is impacting pricing. And ultimately, like when you add it all together, like are we confident we can get some margin improvement looking out to next year?

Scott, thanks for the question. Yes, I like this team. I like this team for right now. We are -- we've got a plan. We're focused, we're aligned, we're ready to go, and we're feeling pretty urgent about delivering this plan. As far as the price goes, let me say an overarching comment, and then I'm going to let Janet answer and give you the details of it. We've been -- we've had very strong price performance over the last 3 years as part of what's driven our results. And as we look forward, expect that to continue. We will -- Janet's mandate is continue to price relative to service, but above rail cost inflation. Janet, do you want to speak a little bit about that?

Sure, Tracy. Thank you. Thanks, Scott, for the question. Let me say, first of all, that we know our customers well. We know what our available capacity is, and we know what service levels we're providing. So our overall pricing strategy remains very consistent. First and foremost, we're going to price to the value of our service we're providing. We're going to sell into our capacity, and we're going to ensure -- going to continue to ensure that we're pricing ahead of our rail cost inflation, which is around 3%. I would add that we have really good line of sight on our pricing for the balance of the year and into 2026. Now I would call out that our pricing for regulated grain for the '25, '26 crop is about 1.7%. That's versus nearly 6% last year. So that's just something to keep in mind in your modeling. But the short answer is, yes, we are still growing price ahead of our expense inflation.

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

Just on the cost side of things, Tracy, I wanted to understand, you have a $75 million program here. How much of that you expect to be recognized in 2025? I mean, I think your guidance is unchanged. And I mean, it sounds like you're expecting a pretty good Q4 here. So I mean, some of that might be from lapping of comps perhaps in November from the strikes and all that, but also some of these costs, right? And then for Ghislain, the leverage ratio philosophy, does it change with the CapEx reduction for next year?

So we have been working at productivity improvements for 3 years, and we've been working on it Konark all year this year. The smaller part of it is this management adjustment or adjustment to our management workforce. We're in the middle of that right now. So yes, you will see some benefit of that in Q4, but I think it's going to be smaller. It's really intended for full year impact in 2026. And Ghis, do you want to take?

Yes. And I would say as well, Konark, thanks for the question. So out of the $75 million that Tracy talked about, I said, there was a little bit hitting CapEx, but I would say the majority -- nearly 90% of it will hit OpEx. And on the leverage, as you know, we finished at 2.55. We've targeted 2.5. This is something that we debate on a regular basis within management and with our Board, whether we have the right leverage. We like a strong balance sheet. I think the question is how strong does it need to be. So at this point, we're continuing to manage to 2.5, considering the fact that the macroeconomic environment is weak and that there's consolidation out there. So we want to keep some powder dry, but it's something that we debate on a quasi-regular basis.

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

Tracy, Prince Rupert is a pretty unique asset. Obviously, huge growth over the years and opportunity as well. How do you see the outcomes there, whether there is a permanent change in the U.S. or not? Do you think there's more opportunity to grow? Do you think there's less? And how does that influence your capital position as well?

So Rupert is a very unique asset, and we've been seeing it grow over the years. What has really been interesting about Rupert is to watch it go from a pure intermodal play to more and more of a carload play. And as we think forward about what's going on in the energy sector and in other sectors, ultimately plastics, grain, we see that continuing to increase. And as we look forward and contemplate how global trade flows may adjust from an export perspective and all of what kind of the Canadian government is contemplating, we can see Rupert playing a bigger and bigger role in that as we go forward. We watch our capacity very, very closely. And I'm satisfied right now that we have the capacity in that line. The pinch point was the Edson sub, and Pat's taking care of that. As I said, we've got 7 more trains capacity by the end of this year than we did in this year. So we're well positioned for the capacity as we go forward. We're finishing off the Zanardi Bridge in Prince Rupert, which is going to give us more capacity in the local area. So we are positioned to respond to the growth, both in the immediate and the longer term at Rupert right now.

Maybe I could just add a little bit, Tracy, on that. In terms of the intermodal as well, I would reiterate we have a very competitive service offering through Prince Rupert. And you have to remember with intermodal, it's not just the rail, it's the end-to-end supply chain. And so we've seen great growth with Gemini because of our service consistency and some of the other products that we're doing at Prince Rupert, Tracy mentioned the grain and the plastics. This actually helps us load more containers to go export. And so it's really an ecosystem of competitiveness that we have at Prince Rupert that we think is going to continue to make us successful there. Thanks for the question.

Your next question comes from the line of Brandon Oglenski with Barclays.

So I'm not sure if this is for Ghislain or Pat, but -- and maybe this is an unfair characterization, but it sounds like maybe CN is a bit more mature in the network now. Does that change the way you guys look at operationally planning things for next year and thinking about headcount and managing costs? I know it's kind of an open-ended question, but I appreciate it.

I'll take that. I would say that as we think about the network, we have made the right investments over the last several years. You think about what we've invested in the Edson sub to unlock capacity west of Edmonton. You couple that with the NTCF and CN money that's been spent for landing capacity at West Coast ports. I feel very good about the condition of the network. We invested in 2 projects on the EJ&E around Chicago. Our competitive advantage around Chicago, it's taken -- it is now with the last project taken a crew start out of that corridor between Chicago and Western Canada. I would also say that as I think about productivity and the way it has improved, we have learned very quickly the impact of the duty and rest period rules and made adjustments. We have been quick to adjust workforce where volumes softened while continuing to hire in the hardest to staff locations. I feel very good about where we are from a resource standpoint. I feel very good about the network and our ability to grow into it, fill it up. And Ghislain, any comments from you?

Yes, I would say as well, it's productivity everywhere, Brandon. It's not only productivity from the operating side, but it's productivity at the headquarters side as well. So we're looking at everything. We're looking at automation in some of the back-office systems that we have. So it's everywhere. We're turning every rocks, and this team is focused, and we know we have a weak volume environment. So we need to address costs everywhere, and that's what we're doing.

Your next question comes from the line of Stephanie Moore with Jefferies.

I was hoping you could talk a little bit about some of the cost actions that you guys have undertaken and your thoughts in terms of those going into the fourth quarter and then also into 2026, the sustainability of those.

Thanks, Stephanie. I think that this isn't just a -- we've intensified over the last 12 weeks given the macroeconomic environment. But we've been working on continuing to improve productivity across the organization over the last 3 years. It's what made us so resilient as we've kind of encountered different economic and different kind of operating environments. In the last 12 weeks, Pat and team have been doubling down on how we're thinking about responding to the volumes that we see coming at us and how we do that with increasing productivity, whether it's train starts, whether it's the way that we're managing the crews, whether it's the continued capital productivity, whether it's the -- what you heard him talk about in the mechanical shops. In head office, on the management side, this was an action that we've taken. It's healthy every now and again to just -- good hygiene to take a look at how you're organized and where you can consolidate opportunities. And so as we've done that, we've done a program here -- and actually, we're in the middle of the program here. And -- but it's just said, we're going to continue to look at where we have the opportunity to get tighter and tighter. This is part of railroading. It's good business to kind of just continue to tighten the way you work and to react to what you see coming at you. A big part as we look at the work that we've done over the past, and we're -- you're going to continue to see the impact of is just adjustment in our contractor workforce as well. Pat has taken a look at that primarily in engineering, but I think broader than engineering and bringing that work back in, we've reduced, I think, Pat, $120 million in contractor fees -- contractor costs year-to-date by investing $20 million in an employee base. So it's those types of things that you're seeing out there. There's no one big item. This is singles across the organization and every month, and you're going to see that continue.

Your next question comes from the line of Tom Wadewitz with UBS.

I think historically, if you go back, kind of CN was the original OR leader and great carload franchise. I think the kind of biggest miss versus the growth targets of a couple of years ago has really been on the intermodal side. And so I wonder if there's more of the opportunity is Western Bulk, maybe carload, do you get back to kind of an algorithm that produces a stronger OR? Is that a reasonable way to think about it, just looking at carload or bulk as just being naturally stronger OR business. So kind of, I guess, a broader thought, but you think we can see OR improvement and maybe go from low 60s to high 50s, something like that, if your mix of growth is a bit different with more carload and bulk?

Yes. We love our merchandise portfolio without a doubt, and it is a great business. And we -- right now, we're suffering a little bit under the tariff impacts to forest products on the merchandise side. But we've got tremendous opportunities growth in merchandise. If you think about the energy sector and others, Janet will talk about that in just a minute as we look. But I've always thought intermodal is going to be interesting to watch. But I've always thought that the right operating ratio for this place starts with a 5. And -- but it is we are highly leveraged to volume growth right now. We've done what we've needed to do from a cost perspective. That's going to continue. We'll continue to lean into it. And as we look at rounding into 2026 with the macro environment we're in, we're going to run tight. We're going to be lean, but we will have the ability to flex up as the volumes turn up, whether those are intermodal international volumes or whether they are merchandise volumes. Janet, did you want to add something?

Look, I would just say, Tom, I want all our business to grow. Intermodal, merchandise bulk, everything. And so we're going to be pushing on all levers for growth. There's nothing I would like more than to load up the network and have Pat make some more investments or figure out how to run faster, smarter and better going forward. So mix is something you deal with. But from a proactive perspective, we're going to go out there and we're going to try and get every piece of business we can. In fact, the mantra for the sales team is every carload counts. And I use carload loosely there. That means intermodal units as well. So we're after everything. Thanks for the question.

Your next question comes from the line of Kevin Chiang with CIBC.

Congrats to Janet and Pat on their roles. Maybe this is for Ghislain. If we think of a mid-teen CapEx intensity, just how does that play out over the longer term in terms of how you think about ROIC, which looks like it's stuck kind of in that 13%, 14% range kind of for the last 5 years as well as your depreciation intensity, which has been creeping up given your capital spend? Like does that -- I'm assuming that naturally comes down? And maybe if you could just wrap that up in terms of what that means for incremental operating leverage as volumes do come back. Does that look a little bit better just given some of these moving parts with lower CapEx?

Yes. Thanks, Kevin, for the question. As you know, ROIC is very, very dependent on earnings because your denominator is the entire asset base. And the ROIC has reduced in the last few years because earnings have been challenged a little bit. So as earnings come back, which they will, I mean, eventually, the economy will get stronger and we will be able to flex up, I think that you will see the ROIC improving. In terms of depreciation, you're right. We've had depreciation headwind year in, year out. I think that sizing up now our CapEx the way we are. And as Tracy said, we see this going forward, I think that, that will help on a year-over-year basis in terms of depreciation. Thanks for the question.

Our last question is going to come from the line of Benoit Poirier with Desjardins.

Congrats on the results and for Janet and Pat for the new roles. Tracy, you've been taking some action, putting in place a leaner and more nimble organization with a sense of urgency, as Janet discussed. Looking at the regions, you made some changes with Nicole in charge of Southern region, Brad in charge of Western region. So are you still looking to break down the network in 3 regions? And could you talk about what you expect from these new leaders?

Bonjour, Benoit. Yes, we are. We're constantly looking at our organization. And as you know, I take talent development very, very seriously as does this entire team. Nicole has had the opportunity and the benefit of being able to sit on top of the Western corridor for a couple of years. And we're going to -- we've asked her to go down and take a fresh eye look at what's going on in the Southern region, and she's going to have some other opportunities there. Brad is perfectly positioned to step up into the Western region. He knows it extremely well. He's been developed outside of transportation and mechanical and other areas, and we know that he's going to do well at that. But it's about giving our key leaders that next development opportunity, and it's about getting fresh eyes all the time on different parts of our organization. Pat's been very thoughtful around how he wants to structure this. Yes, there will still be 3 regions. There's unique operation, unique opportunities in each of those regions. And every time we bring a different leader in, they have an opportunity to kind of do that fresh eyes look at it. It's going to be part of how we operate going forward is strong focus on developing the team. I like our operations bench strength a lot, and you're just seeing it continue to strengthen. So as we bring -- go ahead, Christa.

This concludes the question-and-answer session. I would now like to turn the call back over to Tracy Robinson.

Thanks, Christa. Now just before we conclude here, I want to take the opportunity to thank the entire CN team for all your contributions, your focus and your resilience as a team, we have a plan. We're driving forward. We are in the markets, Janet, next to our customers, driving for every carload of freight. We're being proactive about positioning our costs and our capital for the environment that we're in, and we're increasing cash flow and returns. Now we know that we have an advantaged network that sits at top an incredible resource base that's well positioned in the future no matter how trade flows evolve, and we're committed to driving value through all cycles. Thanks for your time today, and we'll talk to you soon.

The conference call has now ended. Thank you for your participation. You may now disconnect.