Canadian National Railway Company (CNR:CA) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed outlook. Financial performance indicates challenges with increased expenses, while product development and market strategy show promise with capacity projects and energy opportunities. However, concerns about fuel prices and macro uncertainties persist. The Q&A section reveals cautious optimism but lacks clarity on certain strategic impacts. The absence of a clear market cap limits the assessment of stock volatility. Overall, the balanced positives and negatives suggest a neutral stock price movement prediction.
Key Financial Performance
Free Cash Flow Increased by about $275 million year-over-year, reflecting a 44% increase. This was mainly driven by lower capital expenditures, proceeds from the disposal of the new market subdivision, and higher net cash from operating activities.
Revenue Down 1% year-over-year. However, when adjusted for foreign exchange, it was up 2%, and when adjusted for foreign exchange, fuel surcharge, and the Canadian carbon tax, it was up 3%. The decline was attributed to mix headwinds offsetting same-store price increases.
Revenue Ton Miles (RTMs) Increased by 3% year-over-year, driven by volume growth in grain, potash, natural gas liquids, and intermodal.
Carloads Increased by 2% year-over-year, supported by strong execution across the network and volume growth in specific commodities.
Grain Movements Set a new first-quarter record, benefiting from robust demand, strong service, and a 15% improvement in grain car cycle times compared to the prior year. Additionally, the reduction of Chinese tariffs on canola contributed to the growth.
Potash Volumes Above expectations, aided by favorable year-over-year comparisons related to last year's terminal outage in Eastern Canada and resilient operational execution.
Natural Gas Liquids (NGL) RTMs Increased by 16% year-over-year, driven by weather-related demand for propane, strong exports to Prince Rupert, and the ability to capitalize on spot butane shipments.
Intermodal Volumes Delivered a solid quarter, driven by the Gemini service at Prince Rupert and service-related gains in domestic intermodal.
Metals and Minerals Results were challenged due to reduced gas drilling in Western Canada impacting frac sand demand and ongoing tariffs affecting steel and aluminum. However, new long-haul shipments of steel intra-Canada and new moves of scrap steel partly offset the impact.
Forest Products Continued to face a difficult environment due to weak demand for lumber and the ongoing impact of tariffs and duties.
Coal Volumes Declined due to unfavorable market conditions for thermal exports.
Operating Metrics (Car Velocity, Dwell, Train Speed) Car velocity increased by 6%, dwell decreased by 4%, and train speed increased by 6% year-over-year, reflecting improved network fluidity and solid execution.
T&E Productivity Increased by 12% year-over-year, with T&E labor costs per GTM down 7%.
Locomotive Productivity Increased by 8% year-over-year, with locomotive availability remaining at 91%.
Locomotive Fuel Productivity Improved by 3% year-over-year, achieving the best-ever Q1 on record.
Adjusted Diluted EPS $1.80, down 3% year-over-year, or $1.83, 1% lower on an exchange-adjusted basis. The decline was due to a higher effective tax rate, last year's remeasurement of CN's investment in Iowa Northern, and a combined $0.07 drag from fuel and FX.
Reported Diluted EPS $1.87, up 1% year-over-year, reflecting a $66 million pretax gain tied to the sale of the new market subdivision and $17 million in adviser fees related to industry consolidation.
Fuel Expense More than $10 million lower year-over-year, with the positive impact of the removal of the carbon tax in Canada partly offset by higher fuel prices and record fuel efficiency.
Purchased Services and Material Expense Up 9% year-over-year, driven by higher snow removal costs, advisory costs, and higher material trucking and transload costs.
Other Expenses Up approximately $50 million year-over-year, with over $30 million driven by higher-than-expected incident costs.
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Operating Highlights
Grain Movements: Set a new first-quarter record for grain movements, supported by robust demand and strong service.
Natural Gas Liquids (NGL): Delivered a 16% increase in NGL RTMs, driven by weather-related demand for propane, strong exports to Prince Rupert, and spot butane shipments.
Intermodal: Incremental volumes supported by the Gemini service at Prince Rupert and service-related gains in domestic intermodal.
Energy Commodities: Bullish outlook on energy-related commodities with global energy disruptions driving sustained long-term demand for Canadian products.
Agriculture: Positive outlook on agriculture with increased opportunities for Canadian energy and frac sand franchise.
Steel and Scrap Metal: Increased intra-Canada and intra-U.S. steel moves along with higher shipments of scrap metal.
Workforce Productivity: Leaned into workforce productivity, asset utilization, and operating efficiency, resulting in improved key operating metrics year-over-year.
Asset Utilization: Improved T&E productivity by 12%, locomotive productivity by 8%, and fuel productivity by 3%.
Safety: Safety performance fell short in Q1, with accidents up year-over-year, but targeted actions are being taken to address this.
Free Cash Flow: Increased free cash flow by $275 million, repurchased 6 million shares, and maintained a strong balance sheet.
Operational Leverage: Positioned for better financial progression with operational leverage expected as volume environment improves.
Market Positioning: Focused on disciplined execution, increased commercial intensity, and cash flow to capitalize on market opportunities.
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Risk or Challenges
Safety Performance: The company fell short of its safety expectations in Q1, with an increase in accidents year-over-year. Contributing factors included issues with wheels, track conditions, and a landslide. This poses operational and reputational risks.
Fuel and FX Impact: Fuel and foreign exchange fluctuations negatively impacted earnings by $0.07 per share in Q1. Rising oil prices and fuel volatility could continue to pressure costs.
Geopolitical and Macroeconomic Uncertainty: The company highlighted limited visibility and heightened uncertainty in the geopolitical and macroeconomic environment, which could impact demand and operational planning.
Metals and Minerals Demand: Reduced gas drilling in Western Canada has impacted frac sand demand, and steel and aluminum shipments remain affected by tariffs. This creates challenges in maintaining revenue in these segments.
Forest Products Demand: Weak demand for lumber and the ongoing impact of tariffs and duties are creating a difficult environment for the forest products segment, limiting growth opportunities.
Thermal Coal Market Conditions: Unfavorable market conditions for thermal coal exports have led to a decline in coal volumes, impacting revenue from this segment.
Incident Costs: Higher-than-expected incident costs, including snow removal and material trucking, have increased operating expenses, affecting profitability.
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Guidance & Outlook
Earnings Growth: Earnings are expected to grow above volumes on an annual basis. If volumes come in stronger, the company is confident in delivering earnings leverage.
Financial Progression: The business is positioned for better financial progression as the year unfolds, with operational leverage expected to improve as the volume environment strengthens.
Sector-Specific Growth: The company remains bullish on agriculture and energy sectors, with potential growth in natural gas liquids (NGL) and frac sand franchises. Recent natural gas projects in Western Canada are expected to positively impact these sectors.
Grain and Energy Commodities: Grain and energy-related commodities are expected to drive sustained long-term demand. The company has several projects and expansions scheduled to come online later this year.
Thermal Coal: Rising thermal coal prices driven by geopolitical conflicts could support improved export demand for thermal coal.
Intermodal Volumes: Year-over-year comparisons for international intermodal volumes are expected to be tougher in Q2 but should improve in the second half of the year.
Automotive Sector: Near-term demand remains pressured, but recent share gains position the company well for the back half of the year.
Metals and Minerals: Demand is expected to remain bumpy, but increased intra-Canada and intra-U.S. steel moves, along with higher shipments of scrap metal, are anticipated.
Forest Products: No near-term improvement is expected due to muted housing activity and the impact of tariffs and duties.
Operational Efficiency: The company is focused on disciplined execution, increased commercial intensity, and cash flow management. Operational improvements are expected to drive better financial performance.
Leverage Ratio: The leverage ratio is expected to stay at 2.7x through 2026 before returning to 2.5x in 2027.
Fuel Prices and FX: The company has updated its WTI assumption to $80-$110 per barrel and FX assumption to $0.73 for the balance of the year.
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Shareholder Return Plan
Free Cash Flow Increase: Free cash flow increased by about $275 million in the quarter.
Share Repurchase: Repurchased 6 million shares for $870 million in the first 3 months of the year.
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Key Q&A
Q:What are the current capacity projects and their expected impact upon completion in 2027?
A:The current capacity projects include the Zanardi Bridge and Glen Valley Abrahamson projects. These projects are not currently causing pinch points but are expected to facilitate volume growth and improve productivity and velocity in Vancouver and Rupert. Upon completion in 2027, they will allow for better service and fluidity, particularly in Rupert, which is critical for ongoing volume expansion.
Q:What are the short-term and long-term opportunities from higher energy prices?
A:Short-term opportunities include increased NGL exports to Prince Rupert, more crude movement, strength in refined products, and a shift to more potash applications due to nitrogen-based fertilizer price increases. Long-term opportunities include continued NGL export growth at Prince Rupert and leveraging Canada's position to meet changing global demand for sulfur and other products.
Q:What is the outlook for operating ratio (OR) improvement in Q2 and the rest of the year?
A:The operating ratio is expected to improve in Q2 due to better network fluidity, asset and labor productivity, and commercial execution. However, fuel prices could negatively impact the OR by over 200 basis points in Q2. If fuel prices stabilize, they could become a tailwind in the second half of the year, potentially improving the OR.
Q:What is the current volume growth trajectory and its impact on operating ratio?
A:RTMs are up 3% year-to-date, and the company is cautiously optimistic about volume growth. The operating ratio is expected to follow volume growth, supported by productivity improvements and tight cost management. However, uncertainty in the macro environment and tougher year-over-year comps in certain segments like grain and intermodal could impact the trajectory.
Q:What changes have been made to the commercial strategy?
A:The commercial strategy now emphasizes speed of decision-making, empowering account managers to make decisions directly with customers. A new sales incentive plan focuses on proactive customer engagement, and the team is strategically selling into available network capacity to maximize contribution dollars.
Q:What is the impact of tariffs on revenue and trade flows?
A:The impact of tariffs is lessening as the company finds new trade flows and mitigates effects through customer collaboration. The worst of the tariff impact will be lapped after Q2. The company is also monitoring trade negotiations and potential tariff relief tied to production commitments.
Q:What is the company's position on the UP-NS merger application?
A:The company supports competition and believes the merger must demonstrate public interest and enhanced rail competition. The first application fell short in data quality and analysis. The company expects remedies to be required and sees opportunities to use its network to introduce further competition.
Q:What are the key factors influencing volume and yield for the rest of the year?
A:Key factors include potential pull-forward of grain volumes, tougher year-over-year comps in intermodal and potash, and uncertainty in trade and energy markets. The company is focusing on contribution dollars through both pricing and volume growth, leveraging strong service performance to capture incremental business.
Q:What is the status and expected impact of the Fast Track initiative?
A:The Fast Track initiative has already captured $40 million in run-rate savings and is about one-third complete. It focuses on improving terminal productivity, reducing dwell times, and enhancing operating discipline. The initiative is expected to unlock further savings and improve service reliability as it progresses.
Q:What is the company's outlook on USMCA and global trade dynamics?
A:The company sees significant opportunities in global trade, particularly in energy and natural resources, despite risks associated with USMCA renegotiations. It is closely monitoring trade discussions and working with customers to adapt to potential changes. The company is also investing in capacity at key ports to support trade diversification.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer on the potential outcomes of the UP-NS merger application and the specific impacts of USMCA renegotiations. They emphasized the importance of competition and trade but did not provide detailed scenarios or quantifiable impacts.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
FX drag
Relations Special
Special Projects
USD
area safety
asset utilization
balance
carbon
comparison
energy
environment carload
factor
flow capital
footing
fuel price
gas
incident
intensity
investment
leverage ratio
market subdivision
metal
model
people locomotive
plan focus
pricing discipline
productivity asset
removal
resource point
review
scrap steel
shipment steel
slide
tariff duty
tax
term demand
terminal
track
view
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The earnings call presents a mixed outlook. Financial performance indicates challenges with increased expenses, while product development and market strategy show promise with capacity projects and energy opportunities. However, concerns about fuel prices and macro uncertainties persist. The Q&A section reveals cautious optimism but lacks clarity on certain strategic impacts. The absence of a clear market cap limits the assessment of stock volatility. Overall, the balanced positives and negatives suggest a neutral stock price movement prediction.
CNI Report
Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
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They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
