Third Quarter 2026 Financial and Operating Results - CANADIAN NATIONAL RAILWAY CO

Financial Performance:

• Reported diluted EPS was $2.14 (up 9% YoY), including a $118M non-cash asset impairment; adjusted diluted EPS was $2.16 (up 18% YoY).
• Adjusted operating ratio improved 40 basis points to 61%, excluding 60 basis points of fuel price headwind.
• Total revenue increased 15% in Q3, with Revenue Ton Miles (RTM) up 4%.
• Year-to-date free cash flow reached $2.9B, a 25% increase, with a conversion rate of 80%.
• Capital intensity normalized to industry levels; net debt-to-EBITDA ratio expected to decline to ~2.5x by year-end.
• Share repurchases totaled ~$675M (4M shares) in Q3.

Guidance and Future Outlook:

• Reaffirmed full-year adjusted EPS growth guidance of mid-to-high single digits, currently tracking toward the upper end of the range.
• Expected low single-digit RTM growth for the full year 2026.
• 2026 capital investment guidance remains at approximately $2.8B (net of reimbursements).
• Long-term outlook targets high single-digit to low double-digit EPS growth over time, leveraging operating leverage from existing capacity.
• 2027 outlook anticipates strong growth in energy (NGLs, crude, refined products), automotive (share gains, return of closed plants), and Mexico trade via UP partnership.

Business Segments and Product Lines:

• Grain & Fertilizer: RTMs up 12% driven by record crop production and export demand.
• Petroleum & Chemicals: RTMs up 5%, driven by refined products, crude to Gulf Coast, and NGL exports; Q4 expects growth from new fractionation capacity (Strathcona, Pembina, Wolf).
• Automotive: Strong performance with share gains and longer-haul imports; additional North American plants retooling to come online.
• Metals & Minerals: Growth driven by long-haul steel and scrap iron/aluminum; Frac sand demand strong in Northeast BC.
• Coal: RTMs declined due to mine production challenges and ongoing labor disruptions at Prince Rupert's Trigon terminal affecting coal and some NGL volumes.
• Intermodal: Domestic volumes recovered from wildfire disruptions; overseas impacted by Asian demarketing and supply chain weather issues; CMA-CGM's Indamex service expansion to Halifax expected late November.
• New Initiatives: "Boots on the ground" efforts generated ~$300M in new revenues YTD; new transload facilities opened in New Brunswick and expanded in Nova Scotia; CanExport facility at Prince Rupert now operational.

Market and Competitive Landscape:

• Mexico Expansion: Finalizing agreement with Union Pacific to extend reach into Mexico, targeting the $45B annual Canada-Mexico trade flow and converting truck-to-rail traffic.
• Canadian Policy: Positive impact from Bill C-39 permitting reforms ("one permit, one approval, one year") and Carney administration's focus on resource investment.
• Competitive Positioning: Maintaining pricing discipline ahead of rail cost inflation; service reliability enabling share gains against competitors (e.g., CP) on certain lanes.
• Trade Dynamics: Navigating U.S.-Canada tariff volatility; 85% of bilateral trade remains tariff-free, though specific sectors (steel, auto, forest products) face adjustments.
• Labor Disruptions: Coal terminal labor issues at Prince Rupert are causing transient volume impacts; Federal government engaged on labor stability.

Risks and Challenges:

• Fuel Prices: Higher year-over-year fuel costs impacted the operating ratio (60 bps negative), though Q4 may offer an EPS tailwind if spot rates hold.
• Labor Relations: Upcoming TCRC collective bargaining agreement (expires Dec 2026) and ongoing terminal labor disputes at Prince Rupert.
• Market Volatility: Potential normalization of market share gains in 2027 if competitors regain capacity or if grain comps are difficult.
• Technology Projects: One-time $118M charge for asset impairments related to discontinued PDS dispatch system and SAP HANA reorientation; governance processes being reviewed.
• Regulatory: Bill C-39 extension of inter-switching provisions; company opposes principle but expects minimal volume impact based on pilot results.

Management Commentary and Tone:

• Leadership Transition: CFO Gisela Heuvel retiring (staying until Feb 1, 2026); Jamie Lockwood succeeding as CFO; Tracy Robinson (CEO) expresses high confidence in the team and discipline.
• Tone: Highly positive and confident regarding operational execution, capacity utilization, and the "FastTrack" productivity initiative ($120M realized YTD).
• Operational Excellence: Cited best Q3 accident/injury record in a decade, record fuel efficiency, and improved asset productivity (locomotive +5%, employee +7%).
• Strategy: Focusing on controlled growth, structural productivity, and leveraging existing network capacity without proportional capital increases.

Analyst Questions and Answers:

• FastTrack Clarification: Pat Whitehead confirmed $120M is realized net benefits, representing a continuous improvement discipline rather than a one-time event.
• EVR/Coal Impact: Janet Drysdale quantified the impact of EVR traffic changes (Neptune terminal handoff) as ~3 cents of EPS reduction in 2027, with a commitment to backfill via new business.
• Non-Grain Growth: Janet highlighted accelerating growth in energy (NGLs, crude) and automotive for 2027, offsetting slower grain comps.
• Capacity Limits: Pat Whitehead noted the Western Corridor capacity expansion (25% lift) is successfully handling record volumes with stored locomotives; further investment not immediately required.
• IT Systems: Gisela Heuvel explained the impairment was due to vendor failures in dispatch and SAP systems; governance and vendor selection processes are being overhauled.
• Mexico Opportunity: Discussed as a three-part opportunity: extending length of haul, competing for existing traffic, and converting truck-to-rail, leveraging UP partnership.
• EPS Outlook: Confirmation that high single-digit to low double-digit EPS growth is the target over the cycle, driven by productivity and new revenue streams.

Other Key Points:

• Union Pacific Partnership: Agreement to connect to Mexico positions CN to capture cross-border trade, mitigating merger risks while expanding reach.
• Productivity Metrics: Seven consecutive quarters of year-over-year employee productivity improvement; cost per GTM down 3% YTD.
• Capital Efficiency: Ability to accommodate additional volume with available capacity and stored assets, lowering unit costs and enhancing operating leverage.
• Long-term Projects: Mentioned of ACE terminal (mid-2028) and Dow Path to Zero (late-2029) as future energy growth drivers.
• Shareholder Returns: Continued share repurchase program execution consistent with capital allocation framework.