Canadian National Railway Company ($CNR)

Good morning, everyone. Thank you for joining us, and welcome to Bernstein's Strategic Decisions Conference. We're grateful for your support, and thank you for coming out to join us. Thank you also to Canadian National Railway, Tracy Robinson, CEO; Jamie Lockwood; Francois Belanger and Yannick Landry.

Doing very well, David.

Close. It is still early. So [indiscernible] also join us here in the audience, we'll be taking meetings. So before we get started, just a couple of things. You do have access to Pigeonhole. So if you want to put questions up for the Q&A, I'll try to work them in as best I can. We do want to make this as a productive session as possible. So please don't be shy about proffering up ideas to keep the conversation going. Tracy is going to start us off with a couple of prepared remarks, and then we'll get into the Q&A. So I will hand it off the mic to you.

Thank you, David, and thank you for hosting this morning. It's always great to be in New York and good to see you and great to catch up on all the railroad topics of the day. I wanted to start today by just summarizing from 3 perspectives, why we believe so strongly in the long-term value proposition for CN. And I'll cover just briefly why we're so excited about the long-term growth opportunities that we have ahead of us, what we're doing to make sure that we are fit and ready to respond to those. And then finally, what you get when you can create a pro -- you can combine a proactive commercial presence with an intensity of operational excellence and how that drives shareholder value. So we have this great network. You're very familiar with it, David. We span across Canada and down through the U.S. into the Gulf Coast, great port access with optionality on all coasts. And we have a portfolio of business that spans from the consumer segment to the industrial segment to the resource segment. And there's growth opportunities in all of those. I'm sure we'll have a chance to talk about those over the course of the next hour. But there's one unique one that we've seen emerging over the last few years and is starting to grow with some intensity that I wanted to make a special point of, and that is the Natural Resources segment in the resource sector. We have the benefit on this network being positioned on top of a very rich natural resource base, various points of our network, but particularly in the North. And these are the commodities that North America needs, that the world needs. This is what we're talking about, all the energy products we're talking about, potash, grain, metallurgical coal, frac sand. And over the longer term, you think about the resources of critical minerals. There is a tremendous amount of investment going into the natural resource sector, particularly up in the North. If you think about all of the energy products, even just natural gas alone, that industry is predicting 25% to 40% growth over the next kind of decade. And if you look out further, they believe they'll double it. That drives frac sand demand up in the Montney. That drives the production of NGLs that want to get into across North America and into export markets. Potash development predicted to increase production by 35% in the next 5 years, some say up to 75% or 70% over the next decade if you think about what's happening in the ag sector in grain, the incredible worldwide demand and the advances in yield. So that growth overall and the investment in the development of these resources is significant. We happen to sit proximate to that. And we have the ability with our network to get it deeply into North American markets. But this is increasingly becoming an egress into global market question. And that's where -- that's our sweet spot. We can get these commodities into Vancouver, but we can also exclusively get them into Prince Rupert. And Prince Rupert, which for the -- over history has been more of an international intermodal play, is becoming now a very balanced international intermodal and natural resource or an export play. So when I joined CN just 4 years ago, 40% of the business there was carload. We're now up to 55% and the development at Rupert is matching the development of the natural resource base, and we're going to continue to see that grow. So we're really excited about those opportunities. We have been doing a tremendous amount of work over the last 4 years to make sure that we're ready with the capacity and the capabilities to respond to this opportunity. We had underinvested in some key areas, the network, but also the locomotive fleet and some of our railcar fleets. We've leaned into that. We've addressed it. We're coming to the end of that big capital cycle or the capital investment cycle. We have capacity and we have capability. The railroad is running extremely well. You're familiar with the productivity numbers that we're putting up, the operating model customer service. This is all -- we are creating a high level of customer service that's creating commercial opportunities, but also at the same time, driving productivity that's creating operating leverage for us. So we're pretty excited about the commercial opportunities that are coming from that, which brings me to the third point, which is the magic that happens in how we execute this. So we're pretty focused on making sure that we do this right, which means that we pair the operations team and the commercial team in building and creating our success out of this. And so we have them out working together on long-term structural growth opportunities. We announced the ACE terminal a couple of weeks ago. And this is -- we're partnering with 2 energy customers, Keyera and AltaGas on a unit train facility that will move energy products from Northern Alberta to Prince Rupert for export. It will start at 3 to 4 trains a week. It's going to have the capacity to go 3 trains a day. It starts at NGLs. It will have the ability to do other types of energy commodities as well. This is structural fundamental growth that will persist over time. We're also out there in Janet's boots on the ground to look for every opportunity, right? So they are partnering with the operations team to identify where we have available capacity and they're selling that capacity. And so that we've converted in Q1 of this year, $100 million of those opportunities. They tend not to be long term. They tend to be a little bit smaller, but they're incredibly important. So we're being very disciplined and focused on how we deliver and how we create our own success with this. So the combination of those things is creating really strong financial leverage and long-term financial value. And so we like the earnings algorithm that we're building. We're excited about the long-term value proposition, the long-term growth opportunities. With the operating leverage that we've built, with the capacity that we have now in place and available to sell, we have the ability to drive this through earnings and cash flow to the bottom line. So I'm really happy with how Q1 has gone and how the year is starting, but I'm even more excited about when I look out over the longer term around the opportunities that are ahead of us and how we're positioned to capitalize on them. We are, as we say, now built for growth. And we think it's great for customers and it's great for shareholders.

All right. Well, thank you for that introduction. I definitely want to dig into the Western Canadian Resources opportunity in a second. But I also want to kind of step back a little bit. First quarter, as you mentioned, was great, productivity running very, very well. I did sense, though, from the management team a little bit of -- maybe we don't really know what's coming up in terms of the volume outlook. How have things changed since the earlier part of the year? What are you seeing in the underlying sort of day-to-day from a demand perspective that would be useful for an investor looking at Canadian National as maybe a barometer on the broader economy?

Well, this year, what we're very focused on is controlling what we control. It's a very dynamic environment out there with all that's going on in the geopolitical area and even in North America on trade and tariffs, and we've all navigated that. I think we're becoming much more resilient to it. But what we've decided to do is focus on what we can control and what's going to be helpful for our customers at the end of the day. And so we have the operation -- the operating model is the right one for us. It's operating extremely well. Customer service is strong, but so is productivity. It makes us nimble, and we have capacity available to sell. And that strong foundation of service is allowing us to capitalize on growth opportunities. So we're moving a record grain crop right now. And we haven't had to throw extra assets at it. We've increased -- we've improved cycle times by 15%. We're just spinning the assets faster. We've delivered a record for this company grain movement in Canada every month except for January, where we were -- I think, we were the second highest in our history. And that's because we're operating well. So that's an opportunity we could capitalize on. We're delivering a record corn crop in the United States. The energy sector is running very hard. We are on the fifth consecutive quarter of domestic intermodal growth based on that service capability and that share. And that service is also allowing us to continue to price above rail cost inflation. So it's the foundation of what we do is the consistency and the efficiency of that operation. So we've used that in Q1 and continued through April and May to deliver volume growth that's admittedly a little higher than we expected it would be. As we look forward into the remainder of the year, I think it's uncertain. This is the year of the renewal of the USMCA. And we've gotten used to the tariffs that are out there now. We've all adjusted. We're with our customers, being very nimble in adjusting to that. We're not sure what's going to happen from here. We're watching it very closely. But I can tell you, I'm really proud of the adaptability that we've developed. We've got capacity in every part of the network. We've got 12% of our locomotive fleet available to us -- tied up, but available to us, and we can be very nimble in responding to what's happening out there.

Okay. So if you think about the business cross-border with the U.S. Obviously, that's been maybe a little bit softer. The rest of the business is operating well. How do you think about the size of the operating leverage that you can get if we get a more normalization of trade between Canada and the U.S. and that volume becoming a little bit more stable? Like how would you frame that opportunity set either from a margin or a volume perspective?

Well, maybe let me give you an update on how the volumes are going so far. I mean, certainly, we felt an impact last year at this time as we had a lot of announcements on tariffs. And Janet just talked about the impact on steel and aluminum, where most of the Canadian steel and aluminum goes into the U.S. market and the tariffs got to 50%, stopped most of that volume. I would tell you now aluminum, even at a 50% tariff, is starting to move into the U.S. again. The demand is so strong. So that kind of has moderated from an impact perspective already. If you think about steel, that's a tougher market for them, but we've worked closely with our customers. And we're getting the Eastern Canadian steel into Western Canadian markets. We're moving more steel in the U.S. intra -- within the U.S. We've mitigated a lot of that impact on us. The steel industry, I think, is still suffering. The real impact that's continuing to persist is in forest products and lumber in particular. And I think that's an issue related to tariffs, but also related to just the overall continuing weakness in housing starts. So we will see that respond as housing starts pick up if and when they do. But I don't think we will have the same capacity that we once had. So that will be a lingering item. The whole tariff issues around the ag sector, whether it was with China or U.S.-China or Canadian-China, Canadian-India, that has resolved itself, and we're moving, as I said, a record grain crop. So as we look at it, we have adjusted to the current tariff scenario reasonably well. We had a $350 million revenue impact from tariffs last year. We have replaced most of that. It's a different kind of a mix, but we've replaced most of that. But the operating leverage that we have in place now because we understand where our capacity is, trains are running longer, but they're not yet, from a merchandise perspective, full. We're selling into that capacity. We have available capacity, train capacity in every corridor. We can move quickly on it. As I said, we've got locomotives available to us. So we're able to move very, very quickly. And with that kind of operating leverage, as you bring on incremental volumes, you don't need to invest in it. It falls directly to the bottom line. So we like what we're looking at as we look forward, the opportunity for both in the immediate term, the kind of volume growth that we're seeing, but especially in the longer term as we see the opportunity for long-term structural growth, the ability for that to drive right to the bottom line into earnings and free cash flow is significant.

And as you think about that progression from here, obviously, it sounds like you're saying that some of the trade stuff is stabilizing. You've got Western Canada kicking up. Is '27 then an inflection year from an earnings perspective? Or does it take a little longer? Or is it still somewhat dependent on USMCA?

Well, I would tell you that what we know now is that the environment is going to continue to be dynamic. I spent a lot of time in Washington, a lot of time in Ottawa, and they both say the same thing. We, as a business community, have all been saying, we need to know what the rules are. We need to be predictable and well understood. They're telling us get over that. It's going to be different. It's going to be far more uncertain on an ongoing basis. So we need to be ready for whatever happens. And what I like about where we're positioned on top of all of the natural resource sector, we know the world needs this. In any tariff scenario, in any geopolitical scenario, these are developments that are going to -- it's going to be -- make economic sense to pursue. And I think there's a lot of opportunity in that.

And then maybe just kind of putting the U.S. issues aside for a second, Canadian trade diversification has been a theme. How durable do you think some of those changes are going to be? Is this opportunistic shifts that you're making that you think are going to be in place until something changes between the North-South relations? Or is this something that you think is going to really kind of build for a longer term?

There is a lot of effort up in Canada on trade diversification. But it's not an or, it's an and. So the Canadian, U.S., Mexico trade relation is critically important, I think, to all of us. But certainly, 75% of Canada's trade is with the U.S. There's no replacing that, and everyone understands that. I think everyone in the U.S. understands the importance of that relationship as well. This is about, given what's going on in the world, the benefit of also exploring trade opportunities and relationships with others around the world, and there's a lot of momentum around that. So we're spending a lot of time, especially given our presence on the natural resource sector and our presence at the ports in Vancouver and Rupert and Halifax and Montreal and Saint John, around where we have capacity and how quickly we can bring it to bear. We have been the beneficiary of some of Canada's trade corridor funding that's helping us do some incremental work at Rupert and some incremental work that I think you may have seen outside of Vancouver to make sure that those supply chains have capacity and they've got some resiliency. So all of that work is taking place. So there's opportunity there. It doesn't in any way replace the U.S. trade relationship. It's in addition to. And we're all working very hard to make sure that we do that in ways that are structural. So if you think about in the energy sector, there is significant investment in assets, infrastructure being put in the ground. That is sustainable. That will be durable no matter what happens. Those are long-term arrangements and long-term agreements. Think about NGLs and all of the work that's happening in that energy space. Even if you think of refined products, some of what's happening on the condensate side. If you think about grain, that is going to move regardless of what happens in North America and potash, 40% of the world's production comes from Saskatchewan. That will move regardless of what happens economically in North America. It's one of the benefits is that we're becoming less tied to the North American economy and more tied to this fundamental natural resource base. So there will be some and many of those that are structural and they'll persist. There'll be others that are opportunistic and could revert back. They'll go to where the best netbacks are. So there's some that could revert if we get to a productive agreement on USMCA that could revert back to more traditional flows or new flows. But what I like about the capabilities that we've developed is we're flexible and nimble, and all of that is okay. We've got capacity, and we're prepared to use it. And we're built -- as I say, we're built and ready for growth.

Okay. So as we kind of think about that growth opportunity in Western Canada, you mentioned a significant amount of CapEx going in over the years to harden that infrastructure, expand that mainline capacity up to Rupert now to Vancouver. Can you help investors think about like how much capacity there is to grow? Like is this a 2-, 3-year opportunity or a 5-, 7-year opportunity as you think about the utilization of that excess capacity before maybe you would need to start adding even additional infrastructure in the West?

Absolutely. So when we talk about capacity, it is track and network capacity, but it's also locomotives and it's also railcar fleet. So an important part of what we've done is modernize the locomotive fleet. And so it is now exactly where we need it to be, and it's operating at reliability levels that exceed what we've ever done before at CN. That's an important part of us being able to deliver both capacity and deliver from an operating reliability perspective. From a network perspective, we knew and we could see 4 years ago this opportunity for growth in the Western, and we've talked about it for a long time. We hadn't invested heavily enough in it. And so we have now. We have, in effect, increased the capacity in the Western part of our network by about 25%. The pinch point is that piece between Edmonton and Jasper that all the trains run, anything going from the West Coast to any part of the other network, they all run on that piece. We've increased that by 25% in effect. We are continuing to develop capacity just outside of Rupert at the Zanardi Bridge and then just outside of Vancouver, and we're continuing to tweak. But in effect, we've added 25% of capacity. And when we think about what our requirements are for that capacity, you have to look at all of the segments. So Forest Products is down a little bit, NGLs are up. Grain is running a record year, but you look forward as to what you think the sum total of that's going to be. And we see -- we think we've got a few years of capacity before we need to lean into it. When we do next, we've got all of those projects ready. We know exactly where the next pinch point will be, and we're organized from a project perspective to lean into it. But that's probably -- it's a few years away before we need to get lean into a capital cycle again.

Okay. And you mentioned earlier the ACE terminal expansion. And obviously, you took us up to Rupert a while back, and we saw a lot of the facility expansion that's up there. Can you help us maybe frame the size of the opportunity for resource extraction moving west over to Asia Pacific? Like how do you think about that as an addressable market?

From an energy perspective?

Yes, just in terms of -- because obviously, it's growing, right? The Montney Shale is a huge resource that can be exploited. But as you think about the revenue opportunity for you in the next sort of 3 to 5 years, how do you think about dimensioning that?

So we're bullish, really bullish on energy for 3 reasons. One is that the urgency of demand. North America needs this, the world needs this, and that's not going away. One is that it's not a single project or a single commodity. It's crude oil, it's NGLs, it's condensate, it's refined fuels, and it moves in every direction. It is an export kind of opportunity, but we've got refined fuels in the Toronto fuel facility that we're now on Phase 2 of. And the third thing is that we are uniquely positioned to do this as we grow. So we're very bullish on energy for all of those reasons. And as we see it, we see the -- what I like about this is, also that it's growing at scale. If you think about the ACE terminal, we've been starting to move NGLs, export through Rupert for a number of years now. Now this is going to scale to something that's much more significant. There's a number of those projects behind it. So we have frac sand that's moving in to support the energy. We were moving frac sand into the Montney region. We now have 4 unit train facilities for frac sand. So it's scaled up in Northern British Columbia. We are, as I said, on Phase 2 of the refined fuel facility in Toronto. So this has got considerable scalability, and that also drives when you have that kind of investment that your customers and supply partners are making, that's a durable structural kind of growth opportunity. So we see significant growth in energy export, yes, but also across North America as we look at the opportunities going forward. So there -- and the good news is that we have prebuilt the capacity for it.

And as you think about the crude part of that story, obviously, liquid crude off of Western Canada, particularly in the North is not possible now. Is there a continued effort, I think, in Ottawa to maybe open that up as a way to kind of free...

You're venturing into the hottest topic in Canadian politics right now, David. Yes, there is an intention without a doubt. There's an understanding of both the opportunity and the urgency of getting crude oil into international markets as well as increasing the flow into the U.S. And the Canadian government and the Alberta government, in particular, are quite taken with this. They've signed an MOU around building a pipeline or the conditions around which a pipeline will be built. They've met recently to refine those conditions around what it will be built. We have a little more work to do. The producers have to agree to invest to produce that crude oil. And I think we're going to see incremental gains, but there is the potential out there for a step function increase. There may be an opportunity for rail in that. It takes some time to build pipelines. We're certainly engaged in dialogues with a number of our customers around what that opportunity would look like. But I think there's greater potential for that than there has been in some time. What they need to do is to deal with things like the tanker ban in Northern British Columbia. That is the subject of much debate and the conditions under which that could be modified.

I admire your restraint because I would think that if you were going to go ahead and move crude off the Western Coast, that would be a significant revenue opportunity for you.

That would be meaningful because crude doesn't move in small volumes. And so anyone who's looking to invest in that kind of a supply chain is looking to do a pretty big project.

Okay. And then as far as kind of the grain opportunity, that's the other side of the agriculture and energy sort of focus for you guys. Record grain crops continue to happen pretty much every year.

It's been a good few years.

Yes, it's been a good couple of years here. So how do you think about longer-term growth in that? Is there room for that to continue to expand? I don't know how you're talking about it with the farmers and the grain.

I grew up on a farm in Saskatchewan. My brother still is on the farm in Saskatchewan. And so we have a debate about rail service all the time, but also around where it's all going. And I would say that with technology on the farms, just like every other business, the yields continue to grow in the farm community. Now in any given year, we're moving a -- on the farm, we call it a bumper crop and railroads, we call a record crop right now, and it surprised us on the upside given the moisture conditions last year. We'll see what the next one looks like. But if you look at the longer-term trend, that industry believes, in the next decade, there's 10% to 25% growth in ag production. And some of that will be in the more regulated grain, the grain that go offshore. Some will be in the canolas that either go offshore or go into the crush kind of opportunities that are out there. But 10% to 25% over the next decade is what they are predicting based on what's happening on yields in some of the -- where the acreages are and what's being planted.

Okay. So we talked a lot about agriculture, talked a lot about energy. Rupert did start out as an intermodal opportunity.

It did indeed.

Right. And how do you think about the longer-term prospect for Intermodal for Rupert?

The Gemini service, I think, is the best proof point of what Rupert can do and the confidence that the industry has on what Rupert can do. So Gemini chose Rupert as the fastest way. What they're out selling is they want reliable and fast service, right? And so they chose Rupert as the fastest way from Asia to Chicago, which is what we've been selling for quite some time. And you have a port there that the moment you're off the vessel, you're on a train, the dwell is negligible, and we can get you into Chicago faster than any other path on the West Coast. And so the Gemini service has signed up for that. We continue with Gemini to move more volumes than have been committed. So it's attracting that kind of volume and momentum. And we think that there's the potential to do more of that. Rupert also serves the Canadian international market, but its sweet spot really is the speed in which it can get into the U.S.

But as you think about the overall sort of, I guess, the generalist view that trade tensions between Asia and the U.S. might mean a headwind to that growth. Is that something that concerns you? It doesn't concern you?

I think the economics will prevail. We've been talking about that for a while. And I think the economics of getting from Asia into Chicago favor Rupert and the speed, if you look at kind of the cycle times favor Rupert, if you look at the development that's taking place at Rupert around the facilities that you saw, either to transload or destuff or cross-dock, what we're doing is using the opportunity of empty containers going back to Asia to use that capacity for carload volumes, for manifest volumes, whether it's agricultural volumes, whether it's forest products, whether it's plastic pellets. So as we load those empty containers going back, that creates an even more compelling economic opportunity and creates that stickiness at Rupert. Are there political considerations here? Absolutely. And we'll navigate those as we go. So far, we haven't seen any of that impact.

Okay. So the productivity side a little bit. I want to kind of switch to that before we talk about some of the strategic issues in the industry. Pat has done a great job driving productivity. CN has always been viewed as obviously one of the -- I don't know if the birthplace, but the maturation of Precision Scheduled Railroading. How is it that we're finding new opportunities for productivity after having run the model so well?

Productivity is never -- it's a never-ending kind of effort, right? And because the business changed, flows change and the opportunities change. And so we call it good hygiene. So in the first part of when I arrived when we reverted back to the scheduled operating model, we focused on over the road. This was about getting the scheduled operation up and running. Trains depart on time, they arrive on time. You got to make sure that the schedule is right so that they make the meet at the right place. And a big part of our initial lift in service and productivity was over the road. Now it's time for the terminals. And most of the workload is in the terminals. And so Pat's going through there with his team and completely whiteboarding it and saying, based on our current volume flows and how the business has evolved, how do we most efficiently and most effectively move this volume through the terminal. So that is resulting in changes in services and less locomotives, less facilities, less manpower as we go through. And we've started with the biggest facility, so we're getting the biggest benefits upfront, but we're going to continue to do that. And we'll probably do it again in a few years because the business will have evolved again. And part of this is building that capability into your management team and the operating cycle, so you don't have to do an effort and initiative, you continually adjust as the volumes change. As we look forward, we've seen this in the past, and we'll see this again, the opportunities for technology to be brought to bear on how you think about what goes on in a hump yard or even a flat switching yard around how you process cars, either in an intermodal terminal or in a yard, it's going to create the need and the opportunity to do this again and again. And there's going to be continued opportunities from a productivity perspective without a doubt. Right now, in Q1, I think we were -- overall labor productivity, if you account all of us, we were up 7%. But in the T&E, they were up double digit, right? And so this is -- we're starting to see this traction. And locomotive productivity was up 7% or 8%. Since Q1, Pat has put 20 more locomotives away, even though the volumes are higher than we expected, he has put 20 more locomotives aside because we're just getting that velocity out of it. And that's how you create operating leverage is when you can use your assets to move more and more volume without having to invest in the next side of the piece of track or the next asset. That's the place we're at.

Okay. I think it's worth probably also kind of mentioning or discussing a little bit technology and the role that, that is kind of playing and whether you see opportunities for AI or large language models to kind of help facilitate that process of institutionalizing that.

It's massive. One of the things that we have given the investments that we've made in the past in this industry around wayside detection. So the amount of data that we collect as we monitor trains that go by and the health of the assets and the data that we collect with our ATIP cars as they run over around the health of the infrastructure. We have an incredible amount of data. And the opportunity to work with AI on that to become more predictive than we are now, either in routing or in the health of the assets, is significant. Now we need a regulatory environment that helps support that. It's a different conversation. But I think that we'll get there over time because the opportunity to improve safety, improved reliability is meaningful as well as productivity. We're also looking at the potential for AI in everything else that we do. We have an effort underway in the white-collar population that would say, how can we use it to do things differently. And we're finding some really significant surprises in there where we've missed revenue or an opportunity to bill a car. We don't need translation services anymore. Those kinds of opportunities where we have to be nimble and always looking at how we apply them. I think we're at the very front end of all of that. But without a doubt, this is going to change the way we all work. Your business, too, I expect.

I would -- definitely, definitely. Okay. So maybe if you think about the operating plan development and obviously using technology to maybe get into crew scheduling and get into that side of it. Is that untapped territory for you guys? Or have you guys already kind of kind of started to work on that part of it?

I think we started to work on it without a doubt. And it's an evolution, not a revolution at this point in time. And so we are in the midst of updating a number of our key basic foundational operating systems, which is necessary. So you need to get the data into a certain position where you can then use it to do some of the predictive things. But I think over the next 10 years, you're going to see some significant changes to the way that we operate and other railroads operate as we lean into what technology can do to help us. And it's an exciting time.

I think there was some hope in the industry with the appointment of an FRA administrator that was kind of from industry that we might be able to see some changes in the regulatory landscape that would allow you to actually unlock that productivity because I think you're still burdened by 100-year-old regulations on how often you got to drive out and look at the track when we're using AI and ATIP cars running over it. So has there been any shift in that regulatory environment that would allow you to actually yield the benefit from some of these investments?

I think the shift is that there's a greater understanding of both the need and the opportunity for a more constructive regulatory framework on all of that. Certainly, David understands, as you say, both the challenges and the opportunities. And we all -- there's an opportunity for us to invest, but in order to invest, we've got to be able to secure the benefits from that. I think it's moved slower than we had hoped it would in this administration for all kinds of reasons. But without a doubt, there's an intention to try and move that way. It's a frustrating part for us in the industry because we can see the potential to not be able to step into it. In Canada, we're starting to attract a lot of attention as well. Canada does not want to be less positive or productive from a regulatory perspective to do work. It takes time to change, but we actually have now in Canada some exceptions and waivers that go beyond what we've done in the U.S. So I think that there's some momentum behind it, but it is frustratingly slow. It's tremendous opportunity there.

Okay. And then obviously, there's now support for this Railway Safety Act that's moving through D.C. How do you think about that from a...

It's a solution looking for a problem, quite honestly. What is contemplated in that act suggests that a solution to a problem that doesn't exist. If you look at the safety record of the railroad industry over the last decades, the investments, but also the improvement has been significant. If you look at the problem that they're suggesting that came out of the East Palestine incident, where there happened to be 3 people in that locomotive on that train, there was no problem with the size of the crew base. There was no problem. The issue was not the length of the train. So a lot of the solutions that are in that have no bearing on anything that created that incident or any of the other incidents. So I think it's a solution that is not addressing any problem that exists in this industry. And there's some danger on that and that you become more prescriptive and more difficult from a railroad operating environment. Our job is to power the economy and to do it effectively and efficiently. And when you layer on kind of regulatory requirements like this, it gets in the way of us being able to move the economy's freight, and that is a significant risk as we look forward. So I think we're having some of the right conversations, but it is -- in the political environment, it's a problematic space.

Okay. One of the other issues that stand out to me from a regulatory standpoint that I kind of scratch my head about sometimes is you have the U.S. economy -- the U.S. administration kind of pushing for things like the Rail Safety Act, at the same time, going all gas, no breaks to work on autonomy on the highways. How do you think about autonomous trucking in relation to the railroad business? And how would you sort of frame that as an opportunity or risk set for a generalist investor who might be looking at a railroad investment?

I would say that -- so we are both part of a logistics supply chain, right? And so we, in Canada, as CN has in from a Canadian perspective, we have the largest trucking fleet in Canada. So we're watching this very, very closely. We take that -- we do that last mile with our CNTL and the trucks. We have TransX. And so this is a space that I think has a lot of opportunity. The technology in the case of both trucks and railroads is there or nearly there. It is the regulatory, the social framework that we've got to get around it that convinces us all that this is safe and we should progress with it. And that's a conversation that if we really are serious about building the economy in North America, whether it's in the United States or Canada, we have got to get our heads around how we do this efficiently. If we ever reach our aspirations around what these economies can do, we do not have the labor force to respond to that. If you look at the generational change, to respond to that in a way that's going to allow the economy to grow, we need to embrace technology to let technology handle what it can handle and free up our resources, our human resources to do things that technology can't. And that's going to be a critical part of the path forward, whether it's in the trucking industry or whether it's in the rail industry. It's a critical path forward for the economy, and that's the conversation we need to start to have.

All right. I appreciate that. So let's talk a little bit about some of the strategic issues that are happening in North America with railroads, with consolidation and the potential merger between UP and Norfolk. You've been pretty publicly skeptical of the proposed transaction from day 1. Can you talk about the basis for that thinking, how your thinking has evolved? And what do you think is going to happen prospectively?

I think our thinking has been pretty consistent. This is a significant transaction, significant change. If this merger were to proceed, that we have a single company that was controlling 40% plus. It will be more than 40% of the rail freight in North America. And that concentration of market power is meaningful, and it needs to be something that we're very thoughtful about. We're never going to -- you never back out of something like that. And so we believe that this needs to be looked at very carefully. The way the regulatory framework is, requires this to be in the public interest to achieve outcomes and goals that couldn't be achieved without the merger, that increases competition for the benefit of the economy and that considers downstream effects. And the merger application and even the revised application that was recently submitted, we don't think comes close to contemplating that. It doesn't provide all of the right data and information to allow all of us to assess what the impact really is going to be of this transaction, particularly as it relates to competition. And so we're not -- it's not personal for us. This is a structural issue that needs to be considered very thoughtfully. We don't think that the application is up to muster. The STB is going to opine on it, and we're going to hear, I think, this week around whether it's complete, which is the first step, whether it's got the right information. And then we'll start to have the conversation around what needs to happen -- in the event that this merger were to take place, what needs to happen to ensure the protection for the benefit of industries and customers and the economy to ensure that it has the right level of competitive options.

Okay. So if you think about the maybe the generalist approach to looking at this issue of single-line service versus interline service. I think it seems to make sense that a single-line service would be more efficient than an interline service. Like why wouldn't that be a good thing for shippers to have in terms of like GN being able to ship from the Mexican border to Detroit without having...

So the question is, can you get that benefit any other way? And that's the regulatory framework is can you get the benefit in any other way. And I think that we've demonstrated in this industry, it's not easy. But since the CPKC merger, there's been a lot of effort to demonstrate the network can work, including with UP, the Falcon service that we have, with Ferromex, the UP and CN. And we've consistently delivered truck-like service from Monterrey in Mexico to Toronto in Canada for 5 days. And so we know that it can work. And so the question is, do you need a merger to make that happen? And that's the regulatory question that has to be asked and answered. Can there be some benefits? Yes. But they have to be weighed against the very real potential for competitive harm and the impact of that on the industries that we serve and on the economy of the United States. And that's the question that I think we're considering under the application.

Okay. As you think about this whole concept of enhancing competition, what would an application -- forget about this application, what would an application need to have in it that would make you think you were enhancing competition?

Well, okay. So the concept of enhancing competition came out around in, you know this better than I do, 1999. It used to be -- railroad mergers are not a new idea. We've done a lot of mergers over time. And it used to be under the regulatory framework, what you had to do is just demonstrate you weren't harming competition. But now we're 6 of us. And so the regulators in 1999, 2000 decided that the standard needed to go up. And you needed not just to demonstrate that you were not harming, but that you enhance competition, given how important this is for the economy. And so it's undefined. It's never been tested. There hasn't been a big merger since that happened around what does enhanced competition really look like. But if you think about a merger and having to have more competition, you've got to fit in more rail competition and achieving this public interest piece. You've got to think about how you introduce other rail competition to areas that are impacted. And as we think about this, we believe that our network could be very useful in introducing competition and driving kind of our network further down into the U.S. markets, for example, and introducing another competitive option in some of the markets that we don't currently serve. So there are options around trackage rights or haulage or interline arrangements or divestitures or even kind of some of the gateway commitments that could be make that actually do something versus the ones that they have in the current application. So there are ways to think about how do you deal with the competitive issue, but it's a pretty high bar to hit. We've got a lot of work to do.

But it sounds like you and your team have put some thought into what you might be able to do to help enhance competition through this transaction. I'm sure we'll hear about it if this thing does propose to the merits. But if you take a face value that there is some value in single-line service, is that something that you would be a proponent of pursuing? Or is that something that you would kind of pursue defensively in terms of like trying to bring some of those solutions to bear.

Yes. I think I'd tell you, at the point of the state of this application right now, we think it's a negative thing to the industry and to the economy, right, without a doubt. Are there conditions under which it could enhance competition? Yes, but it's a very high bar and a lot of things would have to happen. And you wonder whether the benefits -- any benefits to the parties that are merging would still exist once you get through all of those conditions. CN is in a pretty good spot on this. We are kind of more of a north-south when it comes to the U.S. We originate 85% of our volume, and we originate and terminate 2/3 of our volume. So we've got a pretty good moat around us from a defensive perspective. We would be impacted without a doubt. But I think our assessment and that assessment that's in the application was that we would be impacted far less than any other railroad. We're concerned about that, and we'll do what we need to do to take care of that. But we do think that there's opportunity if this goes forward for us to be position our -- use our network to position our customers in an even more favorable position. Whether there is enough of that to get this full merger to the level that it increases competition is the bigger question.

Okay. And as you think about the potential for the regulator to actually approve the merger, you've talked before about entertaining all options to creating value for your shareholders. Without getting into specifics, like what is that?

It's exactly what we've been talking about. So we'll be a very engaged part of this process, right, and where we think that there is harm. And I do not believe that this merger will be approved without any concessions. I think that, that is highly unlikely to impossible, just given the impact to the industries that the railroads serve and the economy of the United States. So we will be very actively engaged as we think about what are the provisions that need to be put in place, what are the concessions that will maintain and enhance competition. And so that's from a defensive perspective. From an offensive perspective, there's opportunities as we think about where our network runs down through the center of the continent and the opportunity to extend that service into some of the other markets that we're sitting on top of this natural resource base. We already handle all the way to destination 2/3 of our volumes, but think about the potential for that natural resource base to push even further on our line into the North American markets, and we're doing our work.

All right. So coming back to CN and thinking about this year being -- your guidance, I think, has been for flattish EPS as you're dealing with...

Flattish volumes and EPS..

EPS a little bit more, yes. When you think about setting up the outlook for the next couple of years, like I said before, are we -- is this a transitional year ahead of an inflection? Or is this a transitional year ahead of a -- we'll wait and see that comes out of the USMCA?

I think the USMCA outcome is always going to have an impact, but so is the geopolitics. And so we've become very nimble and we've positioned ourselves well. So we are at the end of what is, I think, a transitional period. So we've done the investment. We've got the capacity in place. We've got the capabilities in place. We have capacity to sell, and we're out in the market in a very disciplined way, creating our own success on that. We've created operating leverage, which means that as that happens, that falls to the bottom line in earnings and in free cash flow. We're positioned on top of a very kind of a rich resource base in Western Canada and other places as well. If you think about the U.S. and the ag space in the U.S. that we're positioned very well over the longer term to see that develop for the world as well as for North America. So we're kind of at the end of what will be an inflection point. I'm excited about what the opportunity looks like going forward for our customers and for our shareholders and for our company.

Okay. And then just kind of real quickly on the balance sheet as far as cash flow coming out of the business. Leverage is kind of running a little bit above plan. Is the plan to grow into that and continue to do opportunistic buybacks? Or are we going to be deleveraging before buybacks? How do you think about that?

So we've been pretty nicely -- our stock is a pretty good buy, right? It has been a good buy for the last couple of years. So we leaned into that. We announced a temporary increase in leverage. We've leaned into that and done a little bit more buyback. We're at the end of the investment cycle. So our CapEx is lower. Our free cash flow is running higher. We're 44% up in free cash flow in the first quarter of this year. That's going to continue. We've committed to return that to shareholders. Our framework is always if there's a growth opportunity, high return opportunity in the business that goes to the business. If not, it's consistent, predictable dividend increases and it is, then we return the excess cash back to shareholders. We're going to have more free cash flow going forward. We've leaned into that in the first quarter. We have said at this point in time that the increase in leverage is temporary and will revert back next year, but we'll continue to kind of focus on making sure that, that free cash flow gets back to our shareholders.

All right. Well, we're coming down to the close here. So I usually like to give you an opportunity to make the bull case for the stock. You've got a group of investors in the room that are looking at Canadian National's opportunity. Why is this the right place and the right time to put money into CN?

Okay. We have an incredible network. It can't be replicated across Canada in the northern part of Canada, down through the U.S. We sit on top of a diverse portfolio of commodities. We have a particular and unique opportunity in the natural resource base across the network, but particularly in the North and even more particularly in Western Canada. We have spent 4 years in building out our capacity and capability and getting ready for this. We are built for growth. We've got operating leverage, ways to bring that volume into the system with low incremental investment. And so that falls directly to the bottom line. We're positioned with strong operating leverage and the ability to drive both earnings and free cash flow. And we will have the opportunity to return that -- do the right things for our customers, but return the free cash flow to our shareholders. If you think about the bull case, it's not just about the North American economy kind of recovering and volumes returning. I think about the bull case more as the continent Canada, but also the U.S. to realize the full value of the natural resource and the commodities that we have and the appetite that we have to get those into the global marketplace. And this company is uniquely positioned to play a role in that. And we're ready for it. We're built now for growth. We've got the operating leverage to do it, and we can respond very quickly. And I think that's going to be very good for our shareholders and our customers.

Excellent.

Thank you, David.

Well, with that, I think we're going to bring it to a close. Thank you all for joining us. Enjoy the rest of the conference. Thank you to CN and the team for coming out and supporting the conference.

Thank you, David. Good to see you.

Yes, good to see you, too.