CN Rail's Q3 2025 Earnings Call Contradictions: Volume Growth, Cost Management, and M&A Strategy Divide Executives

Date of Call: None provided

Financials Results

• Revenue: Revenues up 1% year-over-year on 1% higher RTMs (no dollar amount provided)
• EPS: $1.83 per diluted share, up 6% YOY (vs $1.72 prior year)
• Operating Margin: Operating ratio 61.4%, improved 170 basis points YoY (vs 63.1% prior year)

Guidance:

• Reaffirming 2025 guidance: mid-to-high single-digit EPS growth.
• 2025 CapEx expected to end ~ $3.35B; 2026 CapEx set at $2.8B (~mid-teens % of revenue).
• Free cash flow expected to accelerate in 2026 as CapEx resets and costs remain in check.
• Macro assumptions: WTI $60–$70/bbl, FX C$/$ between $0.70–$0.75, effective tax rate 24–25%.
• Full-year 2026 guidance to be provided with Q4 results (January).

Business Commentary:

* Operational Performance and Cost Management: - CN achieved a 6% increase in EPS for Q3 and an operating ratio improvement of 170 basis points to 61.4%. - This was driven by strong operational performance, cost discipline, and increased productivity efforts.

• Capital Expenditure Reduction:
• CN announced a reduction in its 2026 capital spend to $2.8 billion, down nearly $600 million from the previous year.

• This decision was made to align with the current weaker volume environment and to focus on preserving cash and flexibility.

• Commercial Intensity and Market Share:

• Janet Drysdale's initiatives led to a $35 million increase in Q3 and closing in on $100 million in Q4.

• These efforts were part of a broader strategy to focus on market share gains amid a soft macroeconomic environment.

• .string{Regulatory Environment and Market Conditions:}

• The company noted the impact of tariffs on sectors like forest products and steel, causing a significant decline in volumes.
• CN outlook acknowledged a weak economic backdrop, impacting overall volume growth and emphasizing the need for strategic adjustments.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted Q3 EPS of $1.83 (+6% YoY) and a 170 bps improvement in operating ratio to 61.4%. They announced a 2026 CapEx reset to $2.8B, $75M management cost takeout, accelerated buybacks (~$1B, ~8M shares) and FCF up 14% YTD, signaling stronger cash focus.

Q&A:

• Question from Walter Noel Spracklin (RBC Capital Markets): With the announced CapEx cut, which projects are being cut and will this jeopardize your ability to capitalize on growth when volumes rebound?
  Response: CapEx reduction targets completion-driven and lower-priority projects; network and fleet capacity (Edson/Edmonds sub double-tracking, fleet modernization) are sufficient so cuts should not impair ability to scale in a rebound.

• Question from Fadi Chamoun (BMO Capital Markets): Can you re-energize CN's commercial strategy and grow volume in 2026 even if the macro remains flat?
  Response: Commercial strategy is unchanged but intensity increased—boots-on-the-ground selling, price-to-value, and targeted market-share pursuits to capture incremental volume despite soft macro.

• Question from Kenneth Scott Hoexter (BofA Securities): Given M&A risks and the lower CapEx-to-revenue level, is CN limited in growth or considering proactive moves ahead of competitor consolidation?
  Response: Network capacity intact; CN will actively engage in merger review to protect its franchise and pursue shareholder value if opportunities arise—not constrained by current CapEx posture.

• Question from Brian Patrick Ossenbeck (JPMorgan Chase & Co.): Why was a shipper-voice website created, and how will you improve forecasting and predictability going forward?
  Response: Industry prefers pro-competitive collaboration over consolidation; forecasting will shift to range-based views, improved customer engagement, and greater agility to respond to upside/downside drivers.

• Question from Chris Wetherbee (Wells Fargo Securities): What's CN's growth algorithm and EPS path assuming prolonged slower-volume environment?
  Response: Expect limited near-term volume growth; strategy is to drive productivity, reset capital, grow free cash flow and be highly leveraged to earnings when volumes recover.

• Question from Cherilyn Radbourne (TD Cowen): How does returning to a single COO affect the make-the-plan/run-the-plan approach and field leadership time?
  Response: Single COO consolidates accountability without changing strategy; it emphasizes tighter execution, closer field leadership and improved consistency across operations.

• Question from David Vernon (Sanford C. Bernstein & Co.): Why is further consolidation undesirable in the U.S. but the Canadian industry structure works?
  Response: Further U.S. consolidation risks reduced competition, increased regulation and less flexibility; pro-competitive alliances and preserved options better support growth and service innovation.

• Question from Scott Group (Wolfe Research): After management changes, how is pricing being handled and can margins improve next year?
  Response: Pricing will stay value-based and ahead of rail-cost inflation (~3%); solid pricing discipline supports potential margin improvement when combined with productivity.

• Question from Konark Gupta (Scotiabank): Of the $75M management cost reduction, how much hits 2025 and what about leverage implications?
  Response: About 90% of the $75M impacts OpEx (small portion CapEx); modest Q4 benefit but majority effect in 2026; target leverage remains ~2.5x adjusted debt/EBITDA.

• Question from Ravi Shanker (Morgan Stanley): How do you view Prince Rupert's long-term opportunity and its impact on capital needs?
  Response: Prince Rupert has evolved into intermodal plus growing carload flows (grain, plastics); capacity expansion (Edson sub, Zanardi Bridge) positions it for continued growth without immediate incremental CapEx pressure.

• Question from Brandon Oglunsky (Barclays Bank PLC): With a more mature network, does this change operational planning, headcount, and cost management?
  Response: Network investments are largely complete; CN is optimizing headcount, hiring selectively in hard-to-staff locations, and pursuing productivity and automation to manage costs.

• Question from Stephanie Lynn Benjamin Moore (Jefferies LLC): What cost actions have you taken and are they sustainable into Q4 and 2026?
  Response: Actions are multi-year productivity measures across labor, contractors and capital execution; largely sustainable and expected to continue driving savings into 2026.

• Question from Tom Wadewitz (UBS): Given intermodal weakness, is there more upside in Western bulk/carload and can OR improve to the high-50s?
  Response: Merchandise/bulk provide higher-margin upside; CN will pursue all growth levers (commercial wins and operational efficiency) to improve operating ratio when volumes recover.

• Question from Kevin Chiang (CIBC): With mid-teen CapEx intensity, how will ROIC and depreciation trends change and what does it mean for operating leverage?
  Response: Lower CapEx should ease depreciation headwinds; ROIC will improve as earnings recover, and the capex reset supports stronger cash returns and incremental operating leverage on volume recovery.

• Question from Benoit Poirier (Desjardins): Are you keeping three regional structure and what do you expect from new regional leaders?
  Response: Yes—three regions retained; leadership moves are development-focused to provide fresh perspectives and strengthen operational bench and execution.

Contradiction Point 1

Volume Growth and Market Conditions

It reflects differing perspectives on the potential for volume growth and the impacts of tariffs and market conditions, which directly influence revenue projections and investor expectations.

When can CN expect volume growth given current tariff headwinds? - David Scott Vernon (Bernstein)

2025Q3: The tariffs and trade environment are uncertain, but CN's network fundamentals remain strong. The environment will need resolution for normal flows to emerge. - Tracy Robinson(CEO)

When can CN expect volume growth amid current tariff headwinds? - David Scott Vernon (Bernstein)

2025Q2: The volume gap is not structural, but driven by short-term tariffs and a trade dispute. Once that's resolved, we feel very confident that we'll get back to normal volumes. - Mark Stifenbach(CFO)

Contradiction Point 2

Cost Management and Efficiency

It highlights differing approaches to cost management and efficiency, which are crucial for profitability and financial forecasts.

How sustainable are CN's cost actions, and what impact will they have on the fourth quarter and 2026? - Stephanie Lynn Benjamin Moore (Jefferies LLC)

2025Q3: CN has been working on cost improvements for three years, with ongoing efforts to tighten operations and reduce costs. These initiatives are part of CN's strategic approach to a challenging environment. - Tracy Robinson(CEO)

Are there exit clauses or duration concerns with Falcon Premium service due to merger headlines? - Jonathan B. Chappell (Evercore ISI)

2025Q2: We continue to put our effort and work on operational efficiency improvement, which we have done for many, many years. - Mark Stifenbach(CFO)

Contradiction Point 3

M&A Strategy and Regulatory Risks

It involves differing perspectives on the potential impact of U.S. rail mergers and the company's strategic response, which can impact CN's competitive positioning and regulatory environment, directly affecting investor decisions.

How does CN view U.S. rail M&A's potential impact on Canadian railroads, and are proactive moves being considered? - Kenneth Scott Hoexter (BofA Securities)

2025Q3: CN doesn't see a merger as necessary for the industry. It plans to be proactive in protecting its network and positioning for growth if mergers occur. The company is flexible and well-positioned with infrastructure and network capacity. - Tracy Robinson(CEO)

Are there discussions about industry consolidation or new alliances due to trade flow reconfigurations? - Cherilyn Radbourne (TD Cowen)

2025Q1: CN sees value in partnerships and finds opportunities for single-line service through partnerships and collaborations. Industry consolidation remains a topic, but regulatory risks make it challenging. - Tracy Robinson(CEO)

Contradiction Point 4

Capacity Expansion and CapEx Strategy

It involves differing statements about CN's capacity expansion and CapEx strategy, which can impact the company's financial planning and operational capabilities, affecting financial forecasts and investor decisions.

Why is CN reducing CapEx spend and how will it impact capacity and growth opportunities as the economy recovers? - Walter Noel Spracklin (RBC Capital Markets)

2025Q3: CN has completed capacity expansion projects and upgraded fleet investments, enabling it to reduce CapEx. - Tracy Robinson(CEO)

How should we think about the operating ratio cadence given the operating environment and volume performance? - Chris Wetherbee (Wells Fargo Securities)

2025Q1: We're going to continue to add capacity as we need to meet the demand as it comes back. - Tracy Robinson(CEO)

Contradiction Point 5

Commercial Strategy and Volume Growth

It involves differing statements about CN's commercial strategy for volume growth, which can impact the company's revenue and market position, influencing investor decisions.

How can CN revamp its commercial strategy to grow volume in a challenging macroeconomic environment? - Fadi Chamoun (BMO Capital Markets)

2025Q3: CN is focusing on boots-on-the-ground sales efforts and is strategic in pursuing opportunities. - Janet Drysdale(CMO)

Is second-half volume growth due to comps or specific initiatives, and how does FX impact guidance? - Scott Group (Wolfe Research)

2025Q1: The second half of the year, we're going to have some good comps, but we still ran 14% in the second half last year. - Remi Lalonde(CCO)