Canadian National Railway Company

Good morning. My name is Krista, and I will be your operator today. All participants are now in a listen-only mode. After the speaker's 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 Stacey Elderson, CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Elderson.

Thank you, Krista. 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 Jislent Wu, our Chief Financial Officer. As a note, we have forward-looking statements and non-GAAP definitions for your review on page two 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 the possibility that outcomes may differ from expectations. That being said, forward-looking statements aren't guaranteed, 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, Stacey. 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. 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 three years, revenue in 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. We're 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 rail car 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. And 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. Second, the team is doubling down on productivity efforts. 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. 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. Disincremental 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 two 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. 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 mixed 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 three 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 will 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. We delivered volume growth on 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 macro and tariff overhangs. 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. Suzanne 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 will continue to do so. Our commitment to delivering value for customers and shareholders is steadfast through all economic cycles. Now our actions, an 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 two years with his focus on network excellence, capital efficiency, and disciplined execution. Congrats to you Pat, and over to you.