Canadian National Railway Company (CNI) Q2 2025 Earnings Report, Transcript and Summary

Good afternoon. 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, everybody, and thank you for joining us for CN's Second Quarter 2025 Financial and Operating Results Conference Call. Joining us on the call today are Tracy Robinson, our President and CEO; Derek Taylor, our Chief Field Operations Officer; Pat Whitehead, our Chief Network Operations Officer; Janet Drysdale, our interim Chief Commercial Officer; and Ghislain Houle, our Chief Financial Officer. As note, we have forward-looking statements and non-GAAP definitions for your reference 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 the outcomes may differ from the 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 is now my pleasure to turn over the call to CN's President and Chief Executive Officer, Tracy Robinson.

Thanks, Stacy, and thanks, everyone, for joining us on today's call. Now as you, no doubt, saw in yesterday's press release. Janet Drysdale, who most of you know, is stepping in as interim Chief Commercial Officer following Remi's departure. Now I want to welcome Janet to the role. She knows our company well, she knows our markets, she's the long-standing leader within our company and our sector. And Janet is here in the room with us today, and she'll take us through the commercial performance and the market trends in just a few minutes. So we're going to start with the quarter today, and then we'll move on to the outlook for the remainder of the year. We delivered 2% adjusted EPS growth this quarter on flat year-over-year carloads and a 1% reduction in RTMs. Now we knew heading into the year that Q2 would be a tough compare from a volume perspective but it held up well against a positive Q2 last year when we had some pull forward demand ahead of a potential labor disruption. Bulk volumes were very strong through the quarter. Now this is a great business and it reflects our advantage network for the ag sector and the strength of our share. In the merchandise and intermodal segment, we started in Q2 to see the impact of tariffs and the weaker industrial economy. Now this shift in traffic mix with less merchandise created a drag in our revenues and margins despite continued same-store pricing ahead of inflation. I will get into the details on the volumes and the revenues with Janet in just a few minutes. And our network is running very well. Our operating metrics, velocity, dwell, customer service, they're all in the right spot. And it's important that as our volumes or mix shift that we respond quickly. And this team has proactively and progressively adjusted the operating plan and resources throughout the quarter, maintaining good tension between costs and network fluidity and performance. And this helped us drive 50 basis points year-over-year improvement in margin and 150 basis points spanning over Q1. Now everyone across this organization is focused on containing costs as volumes adjust. This team is aligned, we're focused and we're disciplined. Now as we look forward to the next 6 months, we need to consider the current environment. A few months ago, the trade deal seemed imminent. And instead, there is an increasing uncertainty around the tariff and trade environment, particularly in Canada and some concerns over weakening macroeconomic environment. And we are seeing impacts in our Forest Products, and metals and our autos business. And there is a question of what happens to the international volumes to the last half as the tariff discussions continue. And we know that these questions will be resolved with time and we'll have greater certainty on the traditional and perhaps the newly emerging trade flows. Now in the immediate term, the uncertainty makes calling the merchandise and intermodal volumes for the second half, more of a challenge. The range of outcomes is broader and it seems more likely that the current softness in certain sectors will persist in the near term. And we're watching all of this closely as it unfolds across our business lines, and we're controlling what we can control in an uncertain environment. And here's what we're doing. We have efforts underway with our customers to further leverage the benefits of the strength in our diversified book. We have a very strong bulk and energy franchises, for example, these businesses will continue to grow and there's work underway in Canada to develop better access to global markets, particularly in the energy space, and these may provide further opportunity. In the areas that are impacted by tariffs, we're working closely with our customers on getting them to other markets. So in metals, for example, following the escalation of U.S. tariffs on Canadian-made steel and aluminum, which rose to 50% in June, we worked with our customers on intra-Canada and intra-U.S. moves, and we were able to mitigate some of the loss of the southbound flow. Now we believe there is more opportunity here. We are doubling down on leveraging our service performance to increase volumes. We've had some wins, for example, in domestic Intermodal based on our ability to deliver for our customers. And we're managing our cost structure in response to shifts in both mix and volumes to protect our margins, and we made good progress on this in Q2, and there's more to come. We are all over that. Now we delivered a solid Q2 in this environment, but there is ongoing uncertainty as we look forward. As a result, we believe it is appropriate to soften our expectations for the remainder of the year, and we're adjusting to low single-digit RTM growth. Now make no mistake about it. This is a great network. It has tri-coastal access. It serves the resource and energy-rich regions of Northern Canada. We uniquely bypasses Chicago congestion and has a well-diversified book of business. And remember, we also originate over 85% of our book and originate and terminate more than 65% of our business, more than any Class I. And this means we control more of the service at origin and destination and a strong partnership with our customers that we can build on. I'm going to turn it over to the team to get more -- to give you more detail on the quarter and how we're thinking about the balance of the year. Derek, I'll turn it to you first.

Yes. Thanks, Tracy, and good afternoon, everyone. I'll be speaking to Slide 6. I'm pleased with our operational performance as the operating team has maintained a very fluid and very healthy network throughout the second quarter. Now I said on our Q1 call that we would take decisive action to tightly manage costs as demand evolves, and that's just what we've done this quarter. We are acting quickly and decisively, and will continue to do so as we balance operational and service requirements in this dynamic environment. In the second quarter, we cut 8% of our mainline manifest train starts versus last year in response to a 7% decrease in merchandise workload. Both workloads were up 9%, and we handled that with only 4% more bulk train starts. At the end of the quarter, we had 560 train and engine employees on furlough across the network, and we are continuing to actively manage resourcing as we keep an eye on volumes. This is all about striking the right balance between service, cost and network health. We know speed has a cost, but we also know that we can keep this railroad fluid with car velocity above 200 miles per day. Our focus is on pulling cost levers while still maintaining solid operating metrics that ensure network fluidity. With that in mind, car velocity was 213 miles per day, driven in large part by a faster network train speed that increased 3% over last year. Our yard state fluid and through dwell improved 1%. Lastly, we continue to deliver for our customers with a local service commitment performance of 95%. So all in all, really solid operating metrics were delivered. Wildfire season started early this year, but fortunately, so far, we have had very little impact on the main line. There have, however, been several branch line outages. Our firefighting trains and tank cars are deployed and staged across the Western region to protect the network and to support local communities where we can. I can proudly say they have been very effective. Now coming into July, we've had a couple of incidents in the South, which has put pressure on velocity in that region. Meanwhile, the West and the East continue to perform well. Overall, month-to-day car velocity is nearly 210 car miles a day, and we expect to build on that for the rest of the quarter. We've been doing what we have to do in this dynamic operating environment. We will continue to act with urgency to keep the tension type between cost and the operating and service metrics. I know I can count on the team to pull on every lever and deliver the outcome that is required. I'll now pass it over to Pat.

Thanks, Derek. Let's start with safety. This quarter, I want to call out our injury ratio, which improved by 16%. This is not by chance. It is a direct result of our teams proactively engaging in the field, identifying at-risk behaviors before they turn into incidents. Our conviction is simple. Everyone goes home safely every day, and that standard is not negotiable. On the resourcing side, we're tightly managing our cost base staying lean and nimble. Our T&E labor productivity improved 11% year-over-year, mostly through targeted furloughs that we acted on early to realign to demand. We're hiring only for the hardest-to-fill locations, and we are timing every training class in close partnership with what the commercial team is seeing in terms of the volume outlook. On the asset side, we're also reacting quickly, preserving optionality and protecting margins as volume shift. We ended the quarter with 8,000 system cars in storage twice as many as at the end of the first quarter and 200 high-horsepower locomotives or roughly 12% of the fleet. These moves, combined with careful train planning shield us from the unnecessary expenses and lifted both our gross ton miles for horsepower and our fuel efficiency by 1%. Sticking with locomotives. We're seeing real traction on our reliability, which means we're doing more with less. Locomotive availability hit 92.5%, with failures down 3% year-over-year, driven by rooting out systemic failures and enhancing our predictive maintenance capabilities. The result, an 8% reduction in locomotive unit costs year-over-year. Now that's control and efficiency delivered. In engineering, our lowest over time in a decade indicates we're executing to plan and not playing catch-up. Tie gangs are 7% more productive with 5% lower unit cost. Work block delays are down across the network. By moving more work in-house, we're gaining greater control and driving efficiency, delivering more with the resources we have. This shift is helping us to stay on schedule improve quality and manage our costs. As we look to the second half of the year, we're maintaining our proactive approach and taking decisive action when and where necessary. Early moves on safety, cost and asset management means we're set up to respond quickly, safeguard the bottom line and capitalize on opportunity as markets rebound. The railroad is running very well, and we're going to keep it that way, no matter how markets evolve. With that, I'll pass it on to Janet.

Thanks, Pat. Good afternoon, everyone. It's great to be here. I really appreciate the opportunity to step in as interim Chief Commercial Officer. So today, I'm going to do my best to give you some color on the quarter as well as what we're seeing at this point in terms of the outlook for the second half. As you just heard the railroad is operating very well, and that translates directly into solid service for our customers. That's foundational in terms of our focus on driving growth no matter what type of external challenges we face. Revenues in the quarter fell 1% on 1% lower RTMs and flat carloads, reflecting weaker market fundamentals amid ongoing U.S. trade and tariff actions and uncertainty. We also had an unfavorable mix impact, more details on that in a minute. Lower applicable OHD prices versus last year were a headwind of about 2%. In addition, the Canadian carbon tax surcharge was repealed on April 1, which impacted revenues by about $70 million in a quarter. This is a pass-through to customers, and so it will be a headwind of roughly the same amount for the next 3 quarters. Foreign exchange was a slight tailwind to revenue of less than 1%. Same-store pricing continues to come in ahead of our rail cost inflation, but revenue per RTM was flat as a result of mix. Year- over-year, we moved less merchandise business with the key mix impact being driven by Forest Products, refined petroleum products, chemicals and metals. So I'm going to provide you a few key highlights on the quarter before moving to the outlook. You have the numbers in front of you, so I'm not going to repeat them. Petroleum and chemicals were impacted by lower volumes in refined products due to extended turnarounds at about 50% of the Western Canadian refineries that we serve which is really unprecedented to have that many refineries down at the same time. Now we did partly backfill some of those moves from the U.S. and Eastern Canada but those are much shorter haul. We have lower shipments for renewables, mainly the result of policy changes in the U.S. and Canada. Those policy changes drove producers to source from inside Canada versus Iowa and Louisiana. So that's also part of the mix issue. Within metals and minerals, iron ore shipments were impacted by weaker demand fundamentals, including a mine closure on our line. We also saw lower sand volumes due to our bridge fire, that was on the branch line that Derek referred to. That paused shipments early in the quarter. And as we exited the quarter, lower gas prices drove less drilling activity. Steel and aluminum shipments came under pressure from tariffs, but as Tracy mentioned, we did have some compensating moves Intra-Canada and Intra-U.S. Challenging market fundamentals are continuing to unfavorably impact Forest Products volumes. Turning to coal. Canadian met coal exports were up due to the Quintette mine restart last fall, while U.S. coal volumes were impacted by back-to-back longwall moves at two of our Illinois Basin thermal coal mines. Now the real bright spot for the quarter was grain and fertilizers with a 12% increase in revenues. We saw stronger grain shipments on both sides of the border with grain volumes up 6% in Canada and U.S. volumes up almost 30%. That was due to the higher U.S. corn exports, new ethanol projects as well as the Iowa Northern acquisition-related volumes. Potash RTMs were up almost 30%, driven by strong exports to the Port of St. John. Now in terms of intermodal, we expected increased blank sailings and that's what we got and primarily impacted units through Vancouver, which were down 4%. Prince Rupert units, however, rose 14% and led by new Gemini volumes. In domestic, wholesale volumes were up, particularly in the TransCon and Eastern Canada lanes. In automotive, both finished vehicles and parts were below last year's levels and we certainly saw some shift in flows with auto manufacturers moving around production. Mexico to Canada was up and as you'd expect, volumes between Canada and the U.S. were down. Turning now to the outlook. The on again, off again tariffs are forcing customers to rethink their supply chain. Based on what we saw in Q2 and what we're hearing from customers, we have reduced our volume outlook for the back half of the year, and consequently updated our full year volume assumption to low single-digit RTM growth versus 2024. I would say our perspective has changed most notably for international intermodal and Forest Products. In intermodal, we still expect to see solid year-over-year growth in the back half of the year as we lap last year's labor-related disruptions, but our view has been tempered by the tariff situation and the recent pull forward of inventory. Within merchandise, we see continued risk exposure in lumber with higher softwood duties for Canadian imports coming in August, the lingering threat of the U.S. Section 232 lumber investigation as well as the slower-than-expected housing recovery. Lumber mill curtailments also have a direct impact on other forest products, including wood pulp. Petroleum and chemicals will have some continued pressure from turnarounds within the refined segment into Q3, but those are expected to be resolved by Q4 and we're expecting a ramp-up in volumes into the fuel distribution facility in Toronto with Phase 2 coming online. And for those of you that were able to join us in Prince Rupert in June, you'll recall we also expect continued growth in export propane through the AltaGas facility. Overall, we're projecting growth in P&C for the balance of the year. For other trade-sensitive commodities, metals, minerals, automotive, we're navigating ongoing market shifts by staying close to our customers and adapting to changing supply chains. In bulk, it's still a little bit too early to call the Canadian grain crop size, and we probably need a bit of help from mother nature. Nonetheless, we expect to see the normal seasonal uptick as we get into September. I do want to note that with just 2 weeks left in the current year crop, we have already set an all-time record for the most bulk grain and processed grain product shipped ever in Western Canada. We're forecasting a smaller domestic potash fill program in Q3, followed by higher export shipments to St. John in Q4 as we lap last year's terminal outage. Coal is going to continue to benefit from the new production in Northeast B.C. So the broader market hasn't developed in our favor, but we're actively driving our CN growth initiatives and are committed to continuing to build our growth pipeline. Let me wrap up. The railroad is running exceptionally well, and we are delivering for our customers. We're controlling what we can, including the intensity with which we drive our growth agenda, especially our CN-specific growth opportunities. Ghislain, over to you.

[Foreign Language] Turning to Slide 13 for the quarter. we reported EPS of $1.87, up 2% versus last year's adjusted EPS of $1.84. Revenues were down 1% year-over-year on 1% lower RTM. The operating team took swift action to adjust the train package to our evolving volume mix which allowed us to deliver an operating ratio of 61.7%, a 50 basis point improvement versus last year's adjusted operating ratio of 62.2%. Moving to Slide 14, let me break down the earnings drivers for the quarter. Volumes were lower due to macro and tariff overhang. We also had unfavorable mix shift and a fuel price headwind of $0.04. On the plus side, we're very pleased with our solid cost takeout and same-store pricing above rail inflation. Finally, we had a $0.02 tailwind of FX year-over-year. However, the average FX was $0.72 in Q2 versus the $0.70 as shown in our plan, so a headwind of $0.02. I will remind everyone that every penny of appreciation of the Canadian dollar to the U.S. dollar represents a headwind of $0.05 of EPS on an annualized basis. On Slide 15, let me provide you with more details on some of the operating expense categories in the quarter, which I'll speak to on an exchange-adjusted basis. Labor was essentially flat versus last year with general wage increases, mostly offset by lower average head count resulting in increased productivity. Purchased services and material was also flat versus last year with higher maintenance and repair costs, offset by lower outsourced services. Fuel expense decreased 25% versus the same period last year due to the elimination of the carbon tax in Canada and a 23% decrease in price per gallon. Other costs were up about $40 million or 25% versus last year, mostly driven by higher incident cost and higher software and support costs as we continue to transition our legacy technology infrastructure to the cloud. We generated over $1.5 billion of free cash flow through the end of June, up 5% versus the same period last year, mostly driven by lower capital expenditures. Leverage at the end of Q2 was 2.5x, and we will continue to execute on our current share buyback program which runs through February 3 of next year. We continue to maintain a 2.5x adjusted debt to adjusted EBITDA target. Moving to Slide 16, let me provide some visibility to 2025. The current macroeconomic environment is becoming increasingly volatile with ever-changing tariff rates and policies. The uncertainty and the direct tariff impact on our customers is putting pressure on volumes. Even as we deliver on our CN-specific growth initiatives, we are revising our volume growth assumption in terms of RTMs to now 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 now assume foreign exchange for the balance of year to be between $0.75 versus approximately $0.70 previously. Our effective tax rate continues to be in the range of 24% to 25%. With the revised volume assumption and corresponding mix impact as well as a higher Canadian dollar assumption for the balance of the year, we are revising our guidance to mid- to high single-digit EPS growth in 2025. We're also looking at reducing our CapEx envelope for the year by about $50 million, and we continue to look for opportunities to further tighten CapEx for this year and next year. At the same time, we are removing our 2024 to 2026 multiyear guidance, given the short runway remaining. Tariff policies have had a meaningful impact on traffic volumes and mix. We are staying close to our customers and continue to manage our costs and resources tightly. In conclusion, let me reiterate a few points. The network continues to operate very well with strong operating and service metrics. We expect to have volume growth in the second half of the year as we lap labor disruptions from last year. We are tightly managing costs in this uncertain environment controlling what we can control. We are pleased with our Q2 results and are well positioned to deliver on our revised guidance. Let me pass it back to Tracy.

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

[Operator Instructions] The first question comes from Cherilyn Radbourne with TD Cowen.

I wonder if you could comment on what progress has been made for covering U.S.-bound international intermodal traffic through Prince Rupert versus last year? And given that mergers seems to be the topic du jour, could you comment on whether you think 2 hypothetical transcontinental mergers would impact Prince Rupert's ability to attract that traffic in the future?

Thanks, Cherilyn. Listen, I'm going to turn the first part of that question over to Janet and then Janet, I'll take the second half.

Yes. So Cherilyn, I would just remind everyone that in terms of overseas intermodal via Canada to the U.S., that actually represents less than 5% of our total revenues. I would also say that when you look at our business from the West Coast, it's really destined to mainly Chicago, Memphis and Detroit on CN. So it's not being interchanged further. So I think those are important mitigating considerations. In the context of how we're doing and getting that U.S. traffic back, I think we've seen good progress at Prince Rupert, a little bit tougher at Vancouver. And of course, we have this stopwatch clicking around the tariff deadline of the Chinese tariffs on August 12. And so there is some interest, I would say, of the overseas companies to make sure that they can get their products landed on U.S. soil before that deadline. So it's been a bit tougher, I would say, on the Vancouver side. And the merger question, I'll hand it over to you, Tracy.

Thanks, Janet. Let me just say this, Cherilyn, we recognize on the merger front that the chatter is out there, and we're obviously paying attention to that. It would make no sense for us to speculate on the potential of mergers or even what other Class I intentions are. But I'll say this, our view remains that there are similar benefits to be gained from commercial arrangements without the pretty disruptive effects of a major merger. And the hurdles due to the merger, they're not insignificant. The regulatory barriers are high and untested. But whether it is Rupert or other parts of our network, I mean, we would expect that any transaction would protect at least or enhance the competitive options that we would have, and we would certainly participate in that to the fullest extent. When it comes to our business and our network in that scenario, it's important to know, as I said in my comments, we've got a really strong origination network. Going more than 85% of our volume originates on our lines. And when it comes to destination, the majority of our freight moves more than 65% of it, in fact, from an origin on CN to a destination on CN. So this makes our business pretty resilient. And as Janet said, in the case of Rupert, the Rupert advantage would persist. That volume goes largely to Chicago to the Midwest and to other points in our line. And so the Rupert Advantage would remain intact. So we're watching all this very closely. But I must say that our focus is on driving execution to our strategy on what we think is a pretty advantaged network.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets.

So my question is on the company-specific volume growth initiatives that you outlined at Investor Day in 2023. Obviously, they were quite significant. Now the reason for your guidance reduction you pointed to tariffs and trade. However, you did make the change with -- in your executive rank. Just wondering, is there any -- has there been any challenges or any changes in your optimism around your company-specific initiatives as you look out the next few years?

Not at all, Walter. I mean I would tell you that those CN-specific initiatives were all based on the advantages of our network, whether it is the intermodal volumes using Rupert, Vancouver, Halifax and a stronger and stronger Montreal. Whether it is the energy, how we're positioned in the northern part of Alberta and British Columbia, Saskatchewan, on the energy front and the growing demand for that energy in global markets, whether it is the sand that is driven into that market in order to support the gas drilling, whether it is some of the canola crush that has increased the yields and the production of canola and that creates multiple moves into the crush facilities and then with the meal going offshore, whether it is some of what we're doing in the southern part of our network, to integrate the Iowa Northern and to make sure that the crush facilities down there are as productive as they intend to be. So all of this remains intact. What's happening right now is the environment given the tariff situation is pretty uncertain and it's pretty volatile. And so we are seeing the direct impact in some lines, some sectors, some of our lines of business. But the fundamentals of the growth given where our network is and what's happening remained intact. This is just going to be a timing issue. We know that the tariff deals will ultimately done or at least we believe that, that will be the case and that we'll see more of the normal kind of flows emerging, as we said, maybe even some new ones, certainly in Canada, there's lots of effort around kind of new trade flows. And we think that, that could be a great opportunity for us as well. So it's all intact, and we're ready.

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

I wanted to ask about the RTM guide, particularly for the second half of the year. So it looks like 3Q is off to start just a little bit slower with volume down kind of mid- to high single digits on the RTM side. So I get the easier comps here, but what do we need to see change in the next few weeks to sort of get that moving in the right direction? And does it make sense to leave a little bit more cushion? And I guess as you think about the RTM outcome, relative to the EPS outcome if you're sort of towards the flatter end, is that what we're assuming sort of the mid-single-digit earnings growth could come in? Just want to get a sense of how to think about that RTM versus EPS relationship.

Janet, why don't you take that one?

Yes. Thanks for the question, Chris. So I would say in the context of petroleum and chemicals in particular, we've got some of those lingering refinery outages. Now those are going to start to come back. So we do expect the volumes to accelerate as we move through the quarter. We've seen good strength in domestic intermodal. On the overseas side, a little bit of weakness but we will see this improve. And certainly, the grain crop is going to come in the September time frame. So yes, we will see the volumes increase.

And I would add to that as well, if you think about -- if you transition that over to the earnings outlook, right, we're not standing still in the midst of changes in volumes and in mix as well. So we have a very kind of, as I called it, a progressive and proactive effort underway to make sure that our costs are adjusted as our volumes and our mix adjusts, and we've had -- we've got great traction on that. A 50 basis points improvement in margins despite some of the headwinds in Q2, and we are intensifying that as we go. So that's an important part of this equation.

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

Maybe Tracy, if you can elaborate a little bit more on those proactive changes with mix? Because I think as, if I understand Janet's comments correctly, some of the Forest Products, refined products, renewables, like those things don't seem like they're going to reverse all that quickly. So how far along are you on this path? What are sort of the leverage you can pull? Is it all labor? Maybe you can elaborate a little bit more on that.

Yes, I'll start on that, and then I'm going to turn it over to Pat to talk about the resourcing. But what happened in Q2 was, as you heard today, we had a great bulk program. Our bulk volumes were very, very strong. And that's a very good business. We love that business. And our network is built well for that business. Our share is continuing to increase, which is very good. That -- what we had -- what we saw in the offset is the reduction in Forest Products given where -- particularly in lumber whereas we saw the housing starts kind of continue to go down, there are some tariff actions that have been long-standing in lumber, but we're seeing that intensify as well. We saw the impact on other merchandise sections like the steel and the aluminum, some of the metals we did, we were able to mitigate some of that. In the case of those 2 sectors, that's likely to continue until we see some sort of an agreement. It's difficult to know where that's going to go. We thought we were on a good track. We had 25% tariffs on steel and aluminum. Instead of going down, those went up to 50%. That's when we saw the impact. I don't know where these tariffs are going to go, but we are anticipating that it's not going to be resolved immediately. And we think about what Janet said on more the energy sector, the petroleum and chemicals, those were more onetime issues. The tariff impact, we're not seeing it on those. That's going to come back to the third quarter, and we expect it to be strong in the fourth. So the mix equation is not going to be the same. It will mitigate as we move into the tail end of the year a little bit but we are going to have the weakness that we expect until there's some arrangements or deals made in the Forest Products and steel and aluminum, the relative weakness. So Pat, can I ask you to spend a few minutes on how we're responding to that.

So I would say first off, we've been very successful with the cost takeout initiatives, and we'll continue to manage resources very tightly. As I look at how we snap back, we are in a great position to meet a quick rebound in volumes. We have 740 T&E employees furloughed. We have mechanical employees furloughed, and I've talked about the storage efforts of locomotive. The fleet is running better than it ever has, and we have locomotives store that we can quickly put back in service. So as I look at it as volume would ramp up, these folks that we recall, they only take a few weeks for refresher training versus someone that we would hire taking 9 months to be fully trained. So we are well positioned to react if volumes turn down as we have. We're also positioned well to make a quickly rebound.

And what you heard Derek say as well around how we've responded in train starts relative to volumes, which has been very impressive in what these guys have done. So I think our job is there's lots going on out there that we can't control. Our job is to manage what we can control and really pleased with the way this team is doing that.

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

I want to follow up on earlier question about the TransCon merger potentially here, and I have a question on CapEx. But is it fair to assume CN is an observer in this kind of framework that was kind of potentially looking at? And ultimately, you will look to defend your competitive access STB process if mergers were to be announced in the future. Is that kind of a fair framework to think about? And really, my question is on -- I mean, volume have been relatively flat for the last 5, 6 years and your growth CapEx envelope have remained relatively elevated and we've seen kind of degradation and cash conversion, obviously, as a result of that. Is this kind of more longer-term thinking on your part? You're investing still at a very high level. Is there an opportunity here for tightening that spend? And ultimately, given just the growth environment, it was a little bit more muted.

So Fadi, let me say this. You heard Ghis say that we're pulling $50 million out of a budget that was $100 million less than it was last year. So we are watching CapEx pretty closely. A couple of levers on that. Pat and his team are doing a lot of work to make sure that the maintenance CapEx that we put into the system -- well all CapEx that we put into this system is done at higher levels of productivity as every month goes on, and we're seeing the traction in that. So that's going to be a benefit for us. We'll continue to invest for growth as we have line of sight and certainty on that growth. And so we are doing some of that in the Western corridor, where we've got line of sight to the energy exports into the frac sand improvements and some of the other specific growth. Most of our growth capital right now is focused on that western part of the network. And so we'll look at this constantly. We will always keep our network up to the level that we need to, to make sure that it runs safely and it operates efficiently. We will build for growth only as we have line of sight and in all cases, to the first part of your question, we will rigorously defend our competitive access, whether it's related to mergers or anything else. And I hope I covered all that you asked for there, Fadi.

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

I guess, Tracy and team, as you're looking out from '25 baking in some more tariff headwinds in the back half of the year, I'm assuming those are probably going to bake into the first half of the year. I'm just wondering from a timing perspective as you go across the CN initiatives that you've got out there, like how confident are you that you can get some volume growth back into the business in '26? Or do we think we're still going to be kind of slugging through this area and uncertain environment again next year?

I was hoping maybe you could tell me when the tariffs were going to be settled and the trade deals will be done. We don't know. What we've learned is that I'm surprised at where we are now. And I can't -- I'm not someone who can predict exactly what's going to happen here. What I can tell you that we are staying very close to our customers, and there are cases where we can help them get into different markets and to mitigate the impact, there are some cases where customers are very proactively looking at diversifying into other markets and we think that we can be helpful on that. But as long as we are in the kind of uncertainty in the tariff environment that we are, I think that you're going to see enough uncertainty in the marketplace that we may see an impact on that. The fundamentals of the growth strategy on this network remained intact and are very strong. And if you think about some of what we've talked about on ag and energy and some of the others, those persist in any regard.

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

Thoughts on the range of the mid to upper single digit in terms of EPS growth? But maybe talk about what gets you to top or bottom end? I know Janet ran over a few of the revenues that can snap back. But is it purely revenue? Is it cost? Are we seeing more margin gains? And within that, your volumes are down slightly in the first half, down as you mentioned, 6% 3Q to date, the guide's low single-digit growth. Maybe just talk about the confidence of that relative to that EPS growth target range.

Yes. Normally, Ken, at this time of the year, we'd be narrowing our guidance, but there are a number of factors at play here, whether it's mix, it's volume, it's currency, it's fuel. So all of those play a role in what would move us through that guidance range. And we thought through the volatility in some of those. But Ghis, do you want to make some comments on that?

Yes. Thanks, Tracy. Yes, some of these factors are very volatile, Ken, as you know. So we started the year thinking that FX, for example, was at $0.70 and it's now at $0.73 and as I said in my remarks, every $0.01 of appreciation of Canadian dollar to U.S. is $0.05 on EPS on an annualized basis. So I mean, we've assumed now the range would be $0.70 to $0.75 FX for the balance of the year, we'll see. But as you know, if the Canadian dollar continues to appreciate, then that's going to be a headwind. And if it depreciates, then it's going to be a tailwind, a little bit of the same on fuel, OHD and WTI, we're assuming right now that OHD and WTI will stay for the balance of year about at the current spot rates because we don't know. And that's very volatile. So -- and then, of course, the mix is something that hit us quite a bit this year, as Janet mentioned.

And those are all the things that we can't control, but what we can control is how we respond to it. And that is our key focus as we go through a period of uncertainty like this.

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

Just on the domestic intermodal side, I think you guys talked about the market share gains there. It seems like volumes are running pretty good. Can you talk about where the gains are coming from and what's driving it? And just a quick clarification question on the carbon tax elimination. Just the Q2 operating ratio, did it benefit from the elimination or was it neutral?

So I can start off with the first question on the domestic intermodal. The answer is a pretty straightforward, Konark, it's a really good service. And so we've been able to -- with the help of the operating team just really demonstrate to customers that we have a fluid network, a fast network when it needs to be for the case of domestic intermodal, and we've gained some share there. On the other piece, Ghislain I'll pass it to you.

Yes. Konark, On the carbon tax elimination, it is a complete flow-through to customers, as Janet pointed out. Now maybe it's tough to put your finger on it because it's a bit masked by the other factors that you saw in the earnings drivers that we demonstrated in Q2, including the mix. So it's a bit masked by those factors.

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

Janet, great to have you back on the call. You said in your prepared remarks that your customers that you're talking to say that they're rethinking their supply chain. Can you talk about what changes they're talking about, both in the short term as well as the medium to long term?

Yes. Certainly, I think the metals and minerals segment is a good example of how they've been able to adapt in the short term. And you may recall, about 1/3 of our business is transborder, 2/3 going south, 1/3 coming north. That's the segment most impacted, I would say, by the trade and tariff situation. And so we have a strong franchise independently in both Canada and the U.S. And so in the case of some of that metals and minerals, we've been able to do alternative supply chains Intra-Canada, Intra-U.S. we've been able to capitalize on some different automotive lanes. These are the short-term things. What the customers are starting to talk to us about now is what can we do on a longer-term basis to reduce their exposure to the U.S. market and to think about how to get more goods offshore. So that's something that we're certainly focused on. I would say, frankly, both with our customers as well as with the Canadian government and other stakeholders along the supply chain.

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

Janet. I'm not sure if this is for you or Tracy, I know a few people have already asked about volume, but just big picture, like volume RTM are down in Q2, down to start Q3. Every other rail is positive. I just don't know that I recall many other times with one rail as an outlier without there being some sort of like operational issue, and that's obviously not the case right now. So I don't know, do you have just an explanation for the relative volume trend versus others? And then maybe just separately, Tracy, last quarter, you were talking about a path to 200 basis points of margin improvement for the year. What's embedded in the guide now, if you can.

Thanks, Scott. I can start off a little bit on the volume side. And it's always very hard to compare, I think, across the rails, and we've got different books of business. And we also have different year-over-year comparables. So sometimes somebody who's up this year is because they had a weaker year last year. I would say the 2 segments on the U.S. side that have been particularly strong is intermodal as well as the thermal coal. And I think that's kind of why you see some of their volumes coming through. I would say what was a little bit unusual for us in the quarter was the amount of impact that we had in that petroleum and chemicals segment. And really most of those are kind of transient issues. So they're going to resolve themselves as we kind of work our way through Q3. Now as you've seen, it's not in the first couple of weeks of Q3, it's going to take a little bit of time. But we do feel those are going to come back.

And as it relates to your question on the operating margin improvement of the year, we are going to expect -- we do expect margin improvement in 2025. This hasn't changed. You've seen some improvement in Q1 and Q2, the easier compares. As you know, our Q3 and Q4, we've outlined the headwinds, particularly the traffic mix. So hitting 200 basis points, maybe a little bit more of a challenge than it was before, but it's not completely off the table. As always, it depends on volume and mix. But what is going to support it is the velocity with which we are kind of responding as we see changes in mix and volume out in the property and the extent to which we can make sure that our resources match kind of what we're trying to move.

Your next question comes from the line of David Zazula with Barclays.

Janet, as you're coming in for the interim, I guess, what are your kind of priorities? What do you see as key opportunities for your time in the [indiscernible] financially or by product focus?

Yes. I think, David, I think the key focus is to really try and get a little more agility built into the commercial side of the business. It's a brave new market out there in terms of the way things are moving. We do see more opportunities on the spot market as supply chains kind of evolve in relation to trade and tariffs. So I think the focus is really around the intensity of execution around those spot markets, our ability to drive that growth pipeline that's more specific to CN and to be able to adapt as these markets evolve potentially including to offshore. So intensity of execution, I guess, is the way I would frame it up.

Your next question comes from the line of Steve Hansen with Raymond James.

Tracy, I think this question is for you. Can you maybe just perhaps speak to the recent change in the Chief Commercial Officer position? I certainly applaud Janet for stepping in here on pretty short notice, but it's hard not to observe, I'd say, the lack of continuity in the C-suite over the last 5 years. Do you think you're getting closer to the team that you need? Do you think that the continuity is an issue? Just trying to get a sense for why the change in the current environment.

Listen, I won't comment on any specific change, Steve. But what I will say is that it's my job to make sure that we've got the right team across commercial and across the organization to execute on our strategy, and I take that very, very seriously. And I very much appreciate Janet stepping into this position. So let me just leave it there. We've got the right team, and we're moving forward.

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

Maybe following up on a previous question in terms of the margin improvement or, OR improvement for the year. Could you talk a little bit about just cadence as we think about the back half of that OR and there's a lot of moving pieces here admittedly. So I would love to get your thoughts on how we should think about cadence in the back half in conjunction with your outlook for it is still seeing improvement for 2025.

I think the cadence is difficult to say, and it's going to match kind of the volume. And the thing is you heard Derek talk about -- and Pat, the fact that we can -- we're positioning ourselves to move as quickly as possible as we see changes in mix and volume on the downside. They've demonstrated a level of acuity around getting that done quickly. It is impossible to match it on the downside dollar for dollar given the time lines of getting locomotives out of the system or getting kind of furloughs in place. But what they also have an eye on in which we need to be equally nimble at is responding on the upside. And so we're staying very close to the folks that have been furloughed. We want them to be able to come back quickly. Pat is making sure that the locomotive fleet is ready to go. So it's really going to depend on how and when the volumes show up and where they show up from a mix perspective. I don't think we could put a cadence on kind of the margin improvement over the second half.

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

I guess going back to the executive change, I know Tracy, you didn't want to offer too much perspective on that. But was there something related to that where you'd say, like there was kind of execution of the strategy that wasn't right or maybe we didn't quite have the strategy right? Or is it just not related to that? And then I guess on the intermodal topic, is that -- it doesn't sound like it's tariff related in terms of softening in second half, is that more kind of just demand and macro related? So as any thoughts on those two, appreciate it.

Listen, I'm not going to make any comments on the team issue. Our concerns and what the headwinds are in this environment right now are related to tariffs and related to the impact of those tariffs on certain sectors and the impact of all of that on kind of questions around the macroeconomic. This is not new, the economy will recover, we've been here before. We will get, I think, ultimately, certainty in the tariff and trade deal front. And as we see that, then our strategy is the right one for our network and our diversified book of business. We strongly believe in it. We need to move urgently to execute it, as Janet has said. And when I look at the construct of this team at every part of the organization, it's with a long-term view with how we're building the capabilities and the muscle to be able to do this not just now but into the future. And from an intermodal volume perspective, I'll let Janet kind of chime in on this, but it is tariff related. Some of what we've got, we've constructed a great portfolio of international intermodal customers. We like it a lot. They're driving volume through Rupert even at a time when most of the shipping lines are racing to get onto U.S. soil as quickly as possible because of time line around tariffs. And so this is a tariff-related issue. Underneath it, what we can see for sure is really the strength of consumer sentiment and consumer demand, and I think that will unfold over time. Janet, did you have anything else?

Yes, I could just add a couple of more comments. I think certainly, since post COVID, that fall intermodal peak has become a pretty elusive concept. I think what we're seeing right now across the marketplace, and this is not specific to CN is that there's been some inventory front-end loading. It's quite possible that July may have been the peak season. It's going to depend on how consumer sentiment, as Tracy mentioned, plays out from here. I would add as well that of the goods that we're moving, it's not just China, it's also Korea, it's also Japan. There are meaningful tariffs on those countries as well, and they're on higher-value goods that may be sensitive as well to a Nintendo play station. For example, you put a 25% on that. It's perhaps meaningful in the context of the consumer. So I think we're holding our share really well, and I think that's a testament to the service that we're providing. But I think it is a tougher marketplace. And you guys have good visibility on that when you look at how transpacific rates are falling, when you look at how capacity is being pulled out of those lanes. So we're going to wait and see but we're going to protect our share, and we're going to see what we can do to leverage our service to drive more.

Your next question comes from the line of Jonathan Chappell with Evercore ISI.

Going back to some of the recent headlines as it relates to some of the new services you've created with the players in that speculation. Is there anything as far as out clauses or how long some of the agreements are that we should be focused on? Specifically, I'm thinking about Falcon Premium and things from [ Mexico to the U.S. ]

You kind of cut out on us there, Jon, at the last little bit. I'm not clear what your question is. Could you repeat it?

Yes. Well, I'll just be more direct about it. As it relates to the merger headlines, you have the Falcon premium service with Union Pacific. So are there any out clauses associated with that? Do we know how long that agreement is for? Anything we should be worried about if there's any change in ownership or collaboration within East Coast Rail?

Look, no, I would just remind everybody that, that service is really Mexico to Canada, North South is the other important part of that piece. So we're going to continue driving that volume.

Your next question comes from the line of Ari Rosa with Citigroup.

I wanted to follow up just on the CapEx point. I was hoping you could break down for us or remind us at least what share of your CapEx is maintenance versus growth. And it's been some time, if we go back and look at kind of the history, it's been sometime since we've seen meaningful growth in RTMs. I'm just wondering how you get confidence that you're seeing the appropriate ROIs from that elevated level of CapEx spend?

Yes, Ari, I can talk about it. And Tracy, if you want to jump in, you're welcome to do it. But really, a good portion of our CapEx envelope is maintenance, like all of the other rails. When we do invest in capacity, a lot of it is in Western Canada, like Pat mentioned, we do invest with a thought of capital efficiency, i.e., we want to make sure that about 100% of our investment goes in the ground. And then with the growth CapEx related to customers, we look at the internal rate of return, and we want to make sure that the internal rate of return is above our threshold internally, and we've got detailed business cases on this to make sure that we have the benefits coming in and we go and track those after these investments are done. I mean I'd say that, that's basically -- and Tracy, I think you made the point is when we look at our maintenance CapEx, the key here is to do it more efficiently. And we're very happy with the changes we've done in engineering lately where we can see some of this productivity and efficiency coming in and allowing us to invest more at a lower cost.

And let me just add a little bit to that. So our CapEx, I don't think we give the breakdown in CapEx between maintenance CapEx and growth, but it also includes IT. The IT capital that we spend. And if you look at -- we watch very closely the returns on the growth CapEx. And as Ghis has said, a lot of it is in very specific to some of the growth, primarily, not completely, but primarily in the Western part of the network. And it's tied to volume through usually commercial contracts that protect the return on that. And so that volume is showing up. We have had the volume declines in other parts of the network that create for us capacity. And the magic will happen, as Derek was speaking earlier, well if we can fill trains and fill corridors where we have capacity more related to the South and the Eastern parts of our network.

The last question comes from the line of Bascome Majors with Susquehanna.

Looking back 4 years, CN was drawn into a merger situation but faced resistance from regulators and shareholders, and that ultimately led to some changes in management and both the Board. If the Class I rails did consolidate into 2 TransCon networks in the U.S., what is the biggest competitive concern that you would have? And does CN's experience from 2021 and '22 keep you on the sidelines from what may transpire over the next 12 to 18 months? Or are there scenarios where you'd actually want to be an active participant from a defensive situation?

Listen, we're not going to speculate on the whole merger question. And we are focused right now on driving execution to our plan on our network, and we think that, that's the right thing for us to be focused on. In any scenario, we would very rigorously defend our competitive access and our growth prospects, and I'm going to leave it at that.

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

Thank you, Christa. Well, thank you all for joining us today. We are indeed in uncertain times. And while we can't predict exactly where tariffs and trade and the economy will go, we are very intensely focused on doing the things that we can do both with our customers and in controlling our cost to make sure that we protect our margins and are well positioned to execute our growth strategy as we go forward. Thank you for your time today, and we look forward to talking soon.

The conference call has now ended. Thank you for your participation, and you may disconnect your lines.