Canadian National Railway Company (CNR) Earnings Call Transcript & Summary

Thank you, operator, and good afternoon, everyone, and thank you for joining us on the call today. We are delighted to host the senior leadership team of CN Rail today. Joining us on this call are JJ Ruest, CEO of CN; Ghislain Houle, CFO; and Paul Butcher, VP, Investor Relations. I'm going to pass it on to management first for some introductory remarks, and then I'll come back with Q&A. So with that, we'll pass it on to you, JJ.

Thank you, Fadi, and thank you for all of you to take a little time to join us this afternoon. I'm sitting here in our headquarter with Paul Butcher and Ghislain is sitting in his home. We ask -- this is actually part of our coronavirus -- our plan is we split management. Not to be all at the same place at the same time. So what I'll do is I'll give you a bit of a sense of how we -- what is our plan to deal with the pandemic. I'll give you a sense of how the operation is working right now, some of the -- what we have done and are doing on the costs. I'll give you a bit of -- a 2-minute update on to -- on the CN experience in China. We have a freight forwarding and business development there. And we've lived through there for the last 3 months. And I'll also talk a bit about our book of business. And Ghislain will also cover, after me, our cash position and things relevant to the space of treasury. So let me start first with how we protect our employee, which is very critical to making sure we can meet all the demand that there is right now and in the future weeks and future months. So we have 25,000 employees. Probably 20,000 of them are actually in physical operation. Less than 5,000 or 4,500 are sort of office-type people. So definitely, we apply social distancing. What does that mean is that we conduct a lot of job briefing over the radio, on the phone with our team as opposed to do it face-to-face like we used to do. We stagger start time to avoid people coming in -- too many people coming in at the same time. We also divide our engineering production gang. Spring is coming. We'll start to do construction work and maintenance. So we divide them in smaller group. And we also ask people to stop using public transit and ask them to come to work by car. For those who are office-type people, most of them by now or a large number work from home. They've been set up from home for probably a good set 10 days. And things are working well. Our -- all of the different groups are very effective at this point, working from home, thanks to our IT team. When it comes to working in the field in a so called -- roughly 20,000 people have to report to work physically every day and work with their colleague. There's obviously a huge focus from early days on the cleaning. We have reinforced cleaning activities in all works area. We do regular cleaning of main location, including elevators, bathroom, lunch and restroom, shops where people share the same tool and work in -- used to work in close proximity. When we share vehicle, like a pickup truck and/or buses where we move engineering gang around, we've done a number of things to minimize the number of people at the same time and do a lot of cleaning. And when it comes to some of the basic tool in our industry like a crane in a container terminal or a locomotive, we are disinfecting locomotive at each servicing event. So there's a very specific written and practices policy that we work with our safety committee and our union to be sure that people feel that they are safe and are safe and keep on coming to work because we need them to keep moving the economy. An area of CN, which is rail industry, which is quite important because it's hard to replicate, is what we call our rail traffic control, which is basically the same thing as in an airport, is where we control the traffic of train, and these require special equipment. At CN, we have 3 of these physical locations, Montreal, Edmonton and Chicago. We've actually split the group in Edmonton in 2 physical locations. And we've also split the people in Chicago in 2 physical location. So now we run with 5. And we'll run it that way during the length of the virus issues here. And also, in all cases, we've asked these people to stop taking public transit. In the case of Montreal, since -- in the headquarter, we gave them a dedicated elevators. In all 5 locations, they have medical personnel, medical technician who are positioned at the beginning of every shift. And of course, these are round the clock. So there's 3 shift a day, it's 7 days a week. And then when they come in, they've been asked question, they sign a document, temperature is taken. And then during the shift, the technical technician moves around and asks some further questions or make sure that everything is sort of fine. So we feel very confident in our rail traffic center. If ever we had some people who were going to develop the symptoms and/or that we were going to lose one of the traffic controls, that we would have enough backup to be able to run the operation very effectively. When we -- now let's talk about the operation. The railroad is running very fluidly. We've -- when you look at our matrix in terms of train speed, if you look at our metrics in terms of car velocity, we're -- the railroad is actually running well. What does that mean is, currently right now, we have -- we're slightly above last year in the month of March from a revenue ton mile. Carload is down, and I'll come back to that later. There's been a change in our mix, but the workload is up in revenue ton mile and the index of car velocity, train velocity are on the right side. So what that mean is actually, we are able to operate this year with slightly more volume, with slightly less people. So when we get to cost, and the first areas of cost is -- it was obvious a few weeks back that some segments were going to be weak. So we started to take action in our cost during the month of March. At this point, our strategy, as it was always the case, we rightsize our head count to the volume, and we do that very proactively. We do that basically every week. So we look at it every day based on the volume of the night before. And then we look at their trend -- sequential trend, which is right ahead of us, and we take action basically about every week, or so far it's been every week. So roughly, right now, we have about 1,400 people, union people, between Canada and the U.S., between East, South and West, which are in layoff. Obviously, these now have the safety net of what the Canadian government and the U.S. government have triggered, so they're able to get an income from other source than CN. I would call them also as reserve, that is that we also have a number of people who right now are not reporting to work because they're in quarantine, either it's because they came back from vacation from other countries or somebody in their family came back from vacation or they have signs and they're not too sure of whether or not they have it. So while these people are in quarantine, the fact that we don't know how many of those will come back, I'm sure many of those will come back, but I don't have any guarantees that they will all come back, the people we have on layoff become our reserve to be sure that we protect our operation for the months to come. We've also closed our training campus in Winnipeg and Chicago. So we basically stopped all hiring and all training. All hiring because we don't need at this point, and all training because it's a bad idea to have people get together in group. And by the way, on that point, we work hard with the Canadian government and the U.S. government through the AAR to have them agree to extend the certification of all of our trains and conductors, such that we don't have to recertify people in the months to come and force people to travel or get together in classes. We are consolidating our traffic control to Edmonton from Montreal. We keep doing that in small bit. Obviously, we won't go faster than we have to. What I'm saying is our long-term cost control that you've heard from us in the past month, that will also stay in play. If the carload business continue to slow down, which it might, eventually, we might shut down temporarily some of our smaller carload yard in places where the carload business might slow down or requires to do so. And the same thing in some of the repair shop. On the asset side, we've -- we started quite a while ago to get ready to park asset. And the asset I'm talking are basically of 2 types: the locomotive and the railcars. So we've already put in place, about 10 days, 2 weeks ago, an exhaustive plan, identifying each of our locomotive as business slowdown or might slow down with the first, second, third, 20th, 30th locomotives that we would park, and it's based on how reliable these locomotives are and how efficient they are in terms of fuel and also the place we would park them. And same thing on the rolling stock, obviously -- which rolling stock we will park by car number and especially park the rolling stock that would not cost us money. So you're talking to TTX box or boxcar or the TTX centerbeam or the TTX multilevel, TTX intermodal car as well as, obviously, a foreign car. So we already have a game plan. As the business slows down or specific commodity slows down, our network centers already have the list of the cars as they come back to the interchange, which one is worth it to park and also the physical location where it can be parked because we want to do this strategically that when business come back for a specific commodity or specific geography, that we have asset deployed in ways that we can actually respond better that way. And to give you a sense of rolling stock right now, last year, in the month of March, roughly around March 21 -- 24, we had about 110,000 cars online. And this year, as of March 24, we have about 100,000 cars online. So there's a difference of 9% down this year. Going back to the productivity index, I mean, I'm talking basically kind of where we're at now, now being yesterday on the 24th. Revenue ton mile for the month of March, I think, was up about 5%. The carload was down. The train load, which is the weight per train, is up 5%. The car velocity is up 12%. The true networks fee is about up 10%. So the network is running well. So it's fluid. And our safety stat also have improved year-over-year. One thing that we've done, and we've done this now for a couple of weeks, is to stay very close in touch with our Chinese office. In China, we have -- we do freight forwarding from 4 cities. The one where we have the most people is Shanghai. And obviously, since late December, they've been going through this whole experience that we're now going through here in Canada and the United States. So how have they managed their business? How have they managed the working from home? How are they managing the slow return from the office? And what was the experience that they've had in terms of the manufacturing sector in China? How that was effective early days? Why were some of the delay? How is it coming back? What are some of the hurdle? And also what's happening in the port? So right now, the report that we have from Gabriel, our general manager, who's been there all along -- he sent his family back in Canada, early on, but he stayed with his team during this whole thing, and he's still there. On the manufacturing side, manufacturing is coming back in China. Roughly about 90% of the large-scale enterprise have resumed work. They have about 70% to 80% of their workers back at work. And in the case of the small-sized business, their workers, they don't have as many, they're probably in the range of 60. So most companies are attempting to reopen or are reopening. What they're facing, obviously, is some labor shortage, which in China might be a little more acute because you have migrant worker, which is not the case in Canada. But I'm giving this all in the context of what might be playing out here in the next few months. Truck drivers at first were very tight. Now truck drivers is getting better, and the ports are getting more active. So we expect at CN that -- I can't really tell what the demand will be for a product made in China in Canada, United States. But one thing is for sure, China will be positioned to increase the shipment to the Canadian West Coast as demand pick up. And in fact, we expect there will be some kind of a sequential improvement of container coming in Vancouver and Rupert, sometime in -- especially in the month of May and partly because they can produce it. And then after that, we'll see how much is the demand at that point. Just briefly, some word on our book of business. As you recall, CN has a very diversified book of business. We -- which is very relevant right now. We deal in many commodities. We deal with many, many customers, and we deal in many geographic area, geographic exposure. The bulk business of CN represent about 25%. And that, in the month of March, that 25% is actually up from what the trend was in the month of February. The intermodal business of CN right now in the month of March was about 28%, and that's a bit down, and it's partly because of the blockade that we have in Canada, but even more relevant is there was a huge slowdown of stuff coming in from China. And also, you know there's one contract that moved from one railroad to another. And then on the carload side, we have about 25% in P&C, petroleum and chemical, which is slightly down, and that's going to be a reflection of crude slowing down. And on the industrial product, which is mostly forest product and metals and minerals, we have about 20% of our revenue that comes from the forest product and metals and minerals. And that's about the same percent that we had back in February. So if we go over the high-level March breakdown. So March so far is basically more or less in line with March of last year, maybe a bit better. A bit better slightly in RTM and dollar. We'll see how the next remaining days brings. There was definitely a change in the mix. What does that mean is we've moved a little more bulk this year, so more grain, more coal, more potash, more sulfur, and we've moved less container. So we moved more unit, which are heavy bulk cars; and less unit, which are light, which is containers. And the container business weakness was, obviously, all related to overseas. We also have a change in our mix from currency. The Canadian dollar is weaker, which is a positive shock absorbers in our result. And also, we currently have a positive lag on fuel because diesel price is down. It came down in March for obvious reason, which also provide the fuel surcharge lag of 2 months, which is also a positive shock absorber. So currently, what's solid is Canadian grain. And Canadian grain was solid in March, should be solid and also in April, May. In other words, the season should be extending. Our fertilizer business is also solid. Our Canadian coal business is solid, especially through Rupert and to an extent through Vancouver. Sulfur has been solid as well as consumer product intermodal is also solid, and especially showing up in anything of a consumer type, which is our door-to-door product, and also our TransX business as well as our H&R temperature control acquisition, both are running very strong right now because they are very much in the space of food and consumable. What will be weak in April? When I say weak, from a sequential business for the month of March, there will be crude, obviously. Price of crude Canada is not very attractive for producers. Frac sand, because frac sand is a way to create diluent to dilute the heavy crude, if every crude production is reduced and you don't need as much diluent, you don't need as much frac sand. And also, as you know by now, the automotive market is slowing down. So in Canada, United States, I was talking to one of my colleague in United States yesterday, there hasn't been too many people going to the dealer in the last 2 weeks and a number of dealer have actually shut down. So we're still moving finished vehicle. But what we're doing is we're emptying the yard of the OEM, the people who make them. They're going in shutdown. Our automotive compound across North America are getting pretty full. The dealer being closed and not pulling from our compound, so there will be a lull in automotive, definitely in the second quarter. And one would think that the total automotive sales in North America, Canada and U.S. combined, could be down 10%, 15% this year versus last year. Remember from 2009, those same phenomena, when automotive sales dropped, eventually they spiked back up. And that pent-up demand might show with us in sometime in 2021 when people regain confidence, and they have their income back, there might be a onetime pickup in automotive sales. One thing also to remember, I talked about earlier, there was a shift of an overseas intermodal contract early this year between the 2 Canadian railroad. And there's another one coming up June 1 or late May, where the ONE will do business with CN from the Port of Vancouver. And at this point, we would assume that the Canadian dollars will remain weak in the second quarter, and diesel will also remain cheap in the second quarter. So I think, Fadi, that's pretty much most of the point for myself, and I wanted to ask Ghislain to talk about our balance sheet because it's a question often asked, so we thought we would introduce that in our opening comment. Ghislain?

Yes. Thank you, JJ. Listen, before I turn it over to you, Fadi, for questions, let me give a quick overview of our financial situation. And the first I'm going to say is to reassure investors that CN is probably one of the top companies, not only in the rail industry, but also in the world that's better suited to go through this crisis at this point. And let me give you a couple of proof points. As you know, Fadi, we've had a very consistent use of cash and capital allocation strategy for the last 15 years. The first use of cash has always been towards the business. The second use of cash was always to maintain a strong balance sheet. In case there's a strategic opportunity, we want to be able to jump on it quickly. Or in case there's a recession or tough times like we're living, as we speak, we want to be able to go through it and with the flying colors. Then the third use of cash, as you know, is shareholder distributions, starting with dividends, not the amount, but the consistency of the growth in dividends, and we've grown our dividends since privatization as you know. And then the last use of cash is the share buyback, which is a flexible tool, and it's a tool to get to our targeted leverage level, which, as you know, our internal leverage level target is in the range of 1.7 to 1.9x adjusted debt to adjusted EBITDA. And as you know, we finished 2019 at 2x adjusted debt to adjusted EBITDA. And we have communicated to the rating agencies 2.25x. So we have the strongest investment-grade credit rating in the industry, A from Standard & Poor's or A2 by Moody's. And therefore, we're very well positioned. When you look at the tools we have in terms of getting through this from a liquidity management standpoint, we don't have one tool, we have multiple tools and multiple levers that we can actually draw on. First of all, we have about $800 million of cash on hand as we speak. Second, we have a committed credit -- revolving credit facility of $2 billion. We do have collateralized letters of credit that we can uncollateralize at any given month, and we have over $500 million worth of those that we can access. Second, as you know, talking to -- about CapEx, last year, we had -- and we had for 2 years elevated capital in the range of about 25% of our revenues. This year, we brought it down to $3 billion. And it's in line with historical levels. And obviously, with what we're seeing now, we will revise and reduce our capital. I'm not going to give a number today. I'm working with Rob Reilly and the team and others in the company and JJ to look at what we should either defer, hold off based on the volumes that's coming at us. But I want to reassure everybody that the reductions or the delays that we'll do in some of our CapEx, we're very cognizant of not compromising the recovery and not compromising 2021, 2022 and the mid- to long term. So -- but we will review CapEx, and stay tuned on that one. And then the final flexibility that we have is, as you know, on the share buyback. Share buyback used to be in $2 billion a few years ago. We've toned it down to $1.7 billion last year. We have a program this year, as you know, of $1.5 billion. We have not dialed back our share buyback so far. So we're buying shares, and it's actually not a bad deal. And we have what we call a liberalized approach where it's a certain amount of money every day that we use. So naturally, when the stock price go down, then naturally, we buy more shares. So we haven't dialed it down yet. We are monitoring the situation closely, but that's certainly another flexible tool that we have in front of us to protect the liquidity and to protect shareholders as we go through this crisis, which is unprecedented. So these are the quick points, Fadi, I wanted to run through, reassure everybody. And I think we'll open up, JJ and I, for your question.

That's right.

Okay. That's great. I mean you went through it in systematic and details. And I think you answered a lot of the questions that would have been on my list as well. So -- but maybe just kind of dig into a couple of area. JJ, you mentioned about kind of as you go into the second quarter, a number of market like the grain, fertilizer, coal, sulfur, domestic intermodal, I guess, and the reefer business. And I mean, that's obviously -- if I put all of these pieces together, that's a bigger part of your business. Are you saying these could potentially grow on a year-over-year basis based on what you see right now?

Some of them, yes. So sequentially, they -- already in March, they were solid. So Canadian grain, fertilizer was good, Canadian coal, and the retail intermodal business and especially stuff that relates to temperature control, like TransX and H&R. So in the month of April, this should hold for the same reason. This should be -- also be above last year, all things being equal. Fertilizer, as you know, at some point, will taper off in the second quarter because it needs to be there in a sort of specific, certain amount -- at the time the farmer needs to spread. Grain may not be as strong, might slow down in June as well, we'll see. But we're in good position with grain, in good position with fertilizer. The Canadian coal mine that we serve are going to be up year-over-year. They actually -- in fact, we still have some places where we have backlog right now. There's still a backlog of vessel of grains we loaded in Vancouver. That's -- I'd say that's for both Canadian railroad, and there's still a backlog of coal at CN. That's, I would call, clean coal, which is ready to go, that needs to go to the port. So in the case of grain and coal, there's a pent-up demand not fully fulfilled yet. And definitely, that will be useful in the month of April and May. And some of that might go into the month of June, and a good deal of that should be at or above last year. So obviously, some of the segments are going to be below last year. So one would think that for all the railroads in North America, including CN, the second quarter revenue ton mile growth will probably be negative. And some of the major area in the case of us, where we will see a sequential reduction in -- a year-over-year reduction would be obviously crude by rail. People will probably pay the take-or-pay as opposed to ship because the take-or-pay amount will be a lesser painful financial than selling it at the price that they're selling today. And then the frac sand is related to drilling. And if you drill -- a good part of the payback on the drilling is related to the diluent, less crude, less diluent required. And automotive sector will have this pause because right now, there's so much vehicle all over North America, which are ready for the spring rush, for the spring sales, and there won't be a big spring sale. That's going be delayed. So our customers, all manufacturers in North America are sort of taking turn in their shutdown. This time they're saying 2 weeks, 2 weeks might become 3, 3 might become 4, it all depends. And we saw the same thing in South Korea, where they were down for 2, 3 weeks, came back up. And I think we will see that also -- I think we saw that also in Germany, where the German product you buy, which in the case of CN comes via Halifax, I mean, all sales are going to be down this year, where some sales are going to be pushing to 2021. So I don't know if that helped, but that's kind of just a broad view of how we see the market at this point.

Okay. That's great. On the crude, I have in my note that you did something around like 25,000 carloads maybe in the second quarter of last year. I'm guessing this has a lot of downside. Like, is there a way for you to kind of give us an idea what's the downside to that number this year?

Well, we have a forecast, basically. In fact, at this point, what we're working with is we're working with booking, right? We're working with scenario of min/max in most of what I work, whether it's the financial side or the people side or the revenue side. But definitely, it will be below last year. And I don't know by how much, but it'd be significantly below last year. It may be as much as -- there may be as -- it could be as much as half of what last year was for all Canadian crude in total between the 2 railroads. So the volume might be half of last year, that certainly is in the ballpark of what might happen.

Okay. And -- but you have also some liquidated damages, I guess, or...

That's right. And our model right now is also based on the fact -- based on discussion account by account, one by one, that both railroad will probably end up having a similar number of carload. Obviously, we don't have the same comparable versus last year. We had different volume last year. And also our sequential progression from Q1, Q2 is different. But in terms of how much carload is available for us to move, we think it will be split more or less 50-50 during the second quarter. And obviously, in total, probably a bit less of last year.

Okay. You mentioned about 1,400 on layoff or furlough right now. Is this sort of kind of representative -- because it's roughly what, 5% of the head count maybe, is this kind of representative of what kind of you see right now in front of you in terms of volume impact?

The number I gave you is kind of a spot number, kind of where we're at right now. So where we are right now, we have -- I know, I know, but it is in total. I think in total, it's more like maybe 7 -- 7% to 8%. I think right now, we're roughly 24,500 employees. And last year at the same time, we had roughly 26,500 employees. Remember, in our head count last year, we added the TransX. So we had the step-up in head count because we did make an acquisition. But going back to your point, we have right now less people in operation, mechanical and engineering than last year at the same time. But we're moving a few percent more revenue ton mile, which basically brings you back to the point I was making about the railroad is running very well. The KPIs are good, and the train loan, train weight, et cetera, et cetera. So the railroad is running very well, which bodes well for being able to improve our cost. It also bodes well for having ability to continue to meet the demand because in this kind of environment, each company, including in the rail industry, we need to be concerned about attendance to work. We need to be able to have the right skill, the right people and the right geography to be able to move what we need as people may not be coming to work because of quarantine or whatnot or having them being -- actually being sick. So we have a number of people who are -- they're on the payroll, but they're not active. And we also have 1,400 people who weren't on the payroll because they're furloughed.

Okay. So maybe kind of a question on the incremental -- I mean there's a lot of uncertainty around kind of how deep and how long this downturn could potentially go on, and a lot of question about decremental and how are you able to manage decremental. If you can walk us through -- I mean in 2008 and 2009, your decremental, I think, if you just calculate it off of the P&L is about below 40%, but you did way better than that in 2015, '16 when we saw some revenue pressure as well. Can you walk us through right now, like what are the variable costs? What are the key point in the equation that could help you mitigate volume decline, potentially, in the next quarter or 2 or whatever kind of...

Okay. So I will start and then Ghislain can add. So sequentially, the month of April will not be as strong as the month of March. And I think that's the fact for all the railroads. And sequentially, therefore, as we go on, we're going to be parking more equipment. We're going to be parking more locomotive. We're going to be parking more railcars and we might actually shut down some small carload yard in geographic pocket where carload might be slowing down for a period of time. And also, we will also be looking at maybe adjusting workload and layoff and maybe some -- for the place where we actually repaired in shops. So as I said, we made a list of all of our rolling stock, and we ranked them in terms of cost versus what they can produce. So in the case of locomotive, we rank a locomotive from the most reliable and the most fuel-efficient to the least reliable and the least fuel-efficient. And as business slows down, we know which locomotive we want to park. And that's a decision that our network group takes a couple of times a week as to, okay, now it's time to reduce our locomotive count. A number that I think I didn't mention earlier is, right now, we have, I think, 250 train start less per week that we were running because of the train are running longer. And some of our local service, we don't have the same frequency than we've had in the past. So maybe an area that was 5 days a week is now 4 days a week. And we also have taken down some train sets, which obviously require many locomotive, say, from Western Canada to an interchange in Chicago or whatnot. And as we do that, same thing for the rolling stock, the numbers I talked about eventually will be higher if the business keep on slowing down because we will continue to take out either train start or reduce some frequency of some mainline service and/or local service. And on the management side, these -- we got a couple of initiatives, which at this point, I don't want to get into those detail. But we could also go deeper as required based on what we said. At the same time, though, Fadi, this is a marathon, and CN is very focused on the future and on the growth. So whether it's capital or layoff, we don't want to hurt our ability to rebound when the business come back because the deeper the pain might be in the weeks and come to month, the stronger the potential for rebound will be. The deeper we go, the more is a chance that this will at some point become a V as opposed to a U. So when we do temporary furlough, people will come back. When we park equipment, we can bring those back in the business. So we're very mindful of the -- making impact on costs, which are -- we can reverse as opposed to cost that we would regret in 2021 that might cost us some EPS because of not being able to participate in the rebound. And at this point, I don't know what the rebound will be, whether it'd be fast. But the things are so volatile that if people can eventually leave their home and go back to work, a couple of months, this thing could be -- could drastically look different. Who knows? I don't know if you want to add to that, Ghislain?

Yes. Maybe I can add a little bit. Maybe -- Fadi, I think this team has demonstrated that we are very, very good to adjust in times of toughness. I think we've demonstrated that we are becoming -- or we are -- you could even debate that we are expert at crisis management. I mean just a couple of proof points. When you look at what happened to us in February with blockades and with landslides and washouts on our mainline going to Vancouver, if you look at our volumes February to date, our volumes were down just slightly 2%. And then to JJ's point, our volumes in March -- and March typically is a big month, it's a big seasonality month. The biggest 2 month in the railroad is March and October. We're actually up slightly 3% to 4%. So I think we're demonstrating that we're very good to adapt. And I think that stay tuned because you're right, we did it quite well in 2008, 2009, while our revenues were down 15%, and our expenses were down 12%. We did very good in '16. To your point, again, when our volumes were down 5%, our EPS was up 3%. So obviously, those years, we had shock absorbers that helps us. We still have some of those. FX is one of them. As you know, every time the Canadian dollar depreciates versus the U.S. dollar, it gives us -- so it produces about 1 -- it produced about $0.05 of EPS on an annualized basis. The fuel is another one that JJ mentioned a little bit where, again, the way that we've structured our contracts -- and hats off to our supply management team here and procurement team. And as you know, we've been on a transformation on supply management and procurement for the last few years. We've structured our contract where we essentially buy our fuel at spot prices. So when the fuel comes down, we get the benefit -- fuel prices come down, we get the benefit right away on our expenses. The shock absorber in the previous years that we used to have that we don't have anymore is the stock-based compensation. If you remember in those years, and I've been around for quite a while, that there was a lot of noise on a quarter-to-quarter basis because all of our incentive compensation, i.e., performance stock units and stock options, they were all cash-settled and they were creating ups and down in the quarter, and every dollar of the movement of the stock was actually a $5 million impact on incentive compensation in the P&L. A few years ago, we removed that noise. And now all or most of all of our incentive compensation is equity-settled. So this -- like in a time like today, where stock prices have been significantly down, obviously that would be another shock absorber but that we don't have this year and anymore because of our equity settle. The last point I would make is, again, I would remind you as well that we have some cost headwind that we have to deal with. Depreciation is one of them. Tax rate going up from 25% to 26% is another one. Pension, on the analyst call, we said it was a headwind. And pension is settled because, again, it was based on the discount rate of December 31, 2019, and is a headwind of about $60 million to $70 million. So those are the headwinds that are there. But in terms of our capacity to adjust our variable cost, and JJ touched upon them quite a bit, they're very good, and we will adjust on an ongoing basis as we see the events unfolding in front of us.

Should we wrap up or what?

Yes. That's great. I won't forgive myself if I don't ask this last question. It's a very quick one. One of the exciting things about the CN story is the strong backlog of growth opportunities that you have kind of over the next 24, 36 months, and I think you've highlighted this in the past in many of your presentation. Outside of the crude by rail, which I think is -- there's a big question mark around it now, does what's going on right now changes anything in that backlog of business that you've kind of been highlighting for the last few quarters?

So let's call it backlog of project and backlog of business. I talked about it in the more short-term business. But backlog of projects, we still had -- we have a backlog of project. Earlier this week, I think it was -- was it last night or the night before? We were on a call with a company in Asia, in China. So we continue to have a strong focus on long-term, midterm business development of ports to create gateways on the container side that will attract containers into the North American continent via CN through more efficient gateway, more efficient partners and capital investment. Also very focused in the next 18 months to continue to invest in our grain franchise in Canada. We have a number of location in the country where we are connecting with customers or connecting with new grain elevators. And obviously, as you know, we're investing in Rupert and Vancouver in some of the -- sort of the last 5, 10 miles of the capacity so we can serve well the bulk terminal in Rupert and Vancouver. We also have a strong focus more than ever, I think, on the consumer. So I'll give you an example briefly. Railroad can do that. CN has always had a retail product, where we can do door-to-door, which typically is warehouse to -- distribution center to distribution center. So we're not just a wholesaler, we deal directly with the retailer. But as of late, because of the coronavirus, we also are doing store delivery. So you have H&R or TransX. Instead of bringing the product to the distribution center of a big-box retailer, we actually go directly to these big-box store, and we do that 50 to 75x a day. So it just gives you that -- we keep working on getting even closer and closer to the consumer economy. That's the reason why we did this work with CSX. That's why we bought the short line to Syracuse, which we've yet to close. We're still waiting for the STB's approval. And that's why we did that deal with them in terms of drawing port business from New York, New Jersey and Philadelphia into the Montreal and -- Greater Montreal and Greater Toronto consumer market, because that's -- regardless of how you see the future, the future definitely involves more of the consumer. You want to get closer to the retail market and intermodal. You want to be able to be even closer to the big-box retailer and the big retailers so you could be the player of choice and not have somebody in between you that actually takes some of your margin and some of your market power. The grain will always be a good business because grain has to do with the vast space we have in Canada and United States. And as long as people eat around the world, the area of land that we have is very valuable. And anything that has to do with port, CN is very focused on. And then you have the other stories that are much more cyclical in nature, that have to do with the price of the commodities. So price of thermal coal export, price of met coal export. And you know what we've done with Teck, and that will take place by May 2021. And in crude by rail, who knows, right? So the reason why things are so cheap on the crude by rail is not so much related to the coronavirus. It's just this egocentric battle between Russia, United States and Saudi Arabia, that purposely, the producer are trying to shut down one another. So how that will end, I don't know. But at current pricing, nobody makes any money. And it's very hard to make any money in North America, whether you are based in Texas or based in Alberta. But this price make no sense. And they only exist because of this willingness of everybody losing money. So Russia losing their hard currency export of crude. Saudi Arabia can probably last longer because their production cost is very low. And any frac producer of crude in the United States is probably not doing very well either right now. So at some point, some of these price will come back up. Will they come back up in 12 months to the point where crude by rail will be strong? I don't know, but I won't be surprised that a year from now, crude keeps selling at the current very low price. That's just in a nutshell. So maybe just to wrap it up, if I could, Fadi, the operation is in very good shape. Our KPI and the operation are in very good shape. I was very focused on making sure that our attendance to work is very good because that's how we protect the railroad. We need our operating people to keep coming to work and feel that their environment is safe, so they keep coming and move the train. That's very critical. Our balance sheet, I think, is known as one of the strongest in the industry. We have the best credit rating in the industry. Fuel and exchange for Canadian railroad are positive shock absorbers, at least for the short term. In March, we have started to adjust our costs. We are doing temporary layoffs, and we might do some. It will all be volume-related. We've parked rolling stock and we'll keep parking more volume-related. We are going to be adjusting the CapEx down, more information on that later. And we continue to work on long-term growth, as I was mentioning. There will be a 2021 and 2022. And this thing is not going to last forever. And eventually -- it's hard to see when you're in the middle of it, I mean, how bad could it be and how long can it be. But I think when you stand back from the forest -- from the tree and you start to look at the forest, eventually things will come together again. And I think that's one thing we learned, for example, in the automotive market in 2009. Eventually, automotive sales, 18 months later, start to pick up because of -- when the consumer came back, he came back with his regular demand plus a bit of a pent-up demand. So we might see that in housing start, we might see that in white goods, we might see that in automotive. And so we need to make sure that we don't damage the future at the same time. That's about it.

Awesome. Fantastic update. Thanks a lot, JJ and Ghislain. And thanks a lot, callers, for being on this call. And with that, operator, we can end this call. Thank you.

Thank you. Thank you, Fadi.

Thank you. Thank you, Fadi.

Thank you, everyone.