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

Okay. So next, we have Canadian National Railway's recently-appointed EVP and Chief Information and Technology Officer, Dominique Malenfant; and EVP and COO, Rob Reilly, as well as VP Investor Relations, Paul Butcher. So gents, welcome, and thanks for joining us this year. Also congrats on CN's 25th anniversary of privatization. It has been a remarkable journey for everyone at CN, I'm sure, and certainly for your shareholders. So before we get into our fireside chat, may I ask Rob to open up with some remarks, please?

Sure. Thank you, Konark, and thank you for having us here today. And I hope you and the rest of the listeners out there are staying healthy and safe through this pandemic as we work through it. As you mentioned, today is a very special day in CN's history. It's the 25 -- 25th anniversary of our initial public offering. 25 years ago today, in 1995, CN went public. And it's been quite a ride, as you said, over those 25 years. To commemorate that, our President and CEO, J.J. Ruest, actually rang the opening bell to Toronto Stock Exchange this morning, and he'll complete that with ringing the closing bell at the New York Stock Exchange today. All that virtually in the world we live in today, but just to ring the bell on what a historic day this is for us. When you look back on -- from the initial stock price of $2.25 to now rising above $140, the return on that investment has been over 6,000%. So it has been a tremendous ride and a tremendous investment for our investors over the past 25 years. Our market capital at that time has grown from $2.2 billion in 1995 to now over $100 billion market cap. We're now the fourth largest company in Canada. And we're very, very proud of where we've been, but our future is extremely bright, and we're looking forward to continuing that return on investment for our shareholders. We're also celebrating today the most recent announcement of our inclusion in the Dow Jones Sustainability Index, both in North America and on the World Sustainability Index. It's the 12th straight year we've been on the North American Dow Jones Sustainability Index and the ninth straight year on the World Sustainability Index. We're the only railroad that's on the World Sustainability Index. We're very proud of that. And the actions we take to achieve those results aren't by accident. They are a concerted effort by all 24,000 employees here at CN, and we're very proud of what we've been able to accomplish. Delivering responsibly is at the heart of how we are building a sustainable future here at CN. So we're very, very proud of that. So with that, Konark, I'm going to pivot briefly and just talk about where we're at in terms of the pulse of the railroad and some of the things we're seeing. And the journey we've been on the past 7, 8, 9 months has certainly been historic, and that's probably an understatement in terms of what we've seen with the effects of the pandemic. And if you go back to the second quarter, we certainly saw volumes drop significantly as the pandemic came to the shores of North America. We saw volumes drop at our trough 20-plus percent year-over-year in late May, early June. And as we look forward to the rest of the year, I would say, the outlook was a bit murky. But we saw that fortunately recovering. And we start to see that recover in July, accelerate in August. And we've actually -- we're starting to see volumes actually exceed where they were at last year. When you think about that third quarter, we entered the third quarter with depressed volumes. Volumes for the month of July were down 17%. And then we saw that recovery start to accelerate in August to 9% down year-over-year. September, we're actually up year-over-year in terms of the volumes we're handling. And then as you go into the fourth quarter, we've actually seen those volumes continue to be strong year-over-year. We're up 5% to 6% now year-over-year for the fourth quarter so far. So through that process, the team has been very proactive in terms of reacting to what we are seeing out there. Really in the second quarter, we rightsized our resources as we saw the volumes drop. And then we brought resources back as we entered the third quarter and saw that. But through that pandemic, we started to see ways we could do things better, and we've actually come out on the other end more efficient. Even though we're moving more volume, we're actually doing it more efficiently, and I'll touch on that a little bit later. When I think about the way we've reacted not just through this pandemic, but you got to remember, back in February, we had 32 illegal blockades that impacted us and certainly the work stoppage a year ago in November. The resiliency of the CN team and the resiliency of our network is certainly to hold up -- something to hold up by. We continue [ to do ] what we're capable of doing and the nimbleness of our operation out there. And I probably should have started with this, Konark. But through this pandemic, we, as a railroad, and we can't work remotely for everybody. Certainly, our HR, our finance, our IT teams can work remotely, and we've done that since March. But to move freight, we need people to show up and move freight, and 20,000 strong men and women of CN have shown up day in and day out to deliver for the North American economy in Canada and the U.S., moving critical supplies, keeping those shelves stocked. And although early on in the pandemic, the government of Canada, the government of U.S. labeled rail workers as essential. We really didn't need that because we already knew we were essential day in and day out. But I couldn't be more proud of the team and what we've done to deliver for our customers, what we've done to deliver for the economies of both the U.S. and Canada, and we continue to deliver day in and day out. As you think about it when we came through this, we went through it thoughtfully as the volumes dropped, and we went through it thoughtfully as the volumes came back, and we found ways that we could operate our railroad much more efficiently. We actually [ guttered ] some locomotive shops as we went into this, that we have not reopened nor do we plan to reopen. We closed some intermediate switching yards. And we were able to complete the consolidation of our Canadian dispatch centers from 3 this time last year into 1 located into Edmonton. All of this makes us more efficient as we come out of it, and we've been able to have that stuff stick coming out of it. In turn, we also, from an engineering standpoint, went in very thoughtfully. And actually, since we're going to have fewer trains on our network in the second quarter and the beginning of the third quarter, we doubled down in terms of our maintenance of our tracks out there, and actually increased the productivity of the rail installation and tie installation costs, utilizing that extra time on the track. So really an excellent job. And then all the while through this, we continue to set records in terms of fuel efficiency. As you know, Konark, we're the North American railroad leader in fuel efficiency. We have been, and we continue to widen that gap. It's something we're very proud of, but we also think it's our responsibility to deliver on this. A little over 0.8 of a gallon of fuel is what it takes to move 1,000 gross ton miles on our railroad. None of the railroad can say that. And we go about this with very disciplined execution day in and day out, how we manage our fuel. And our efforts this year have actually saved us about $40 million now and avoided over 160,000 tons of CO2 emissions. It's actions like that, that make us the only railroad on the World Dow Jones Sustainability Index. I will just touch on briefly in terms of the volumes as we look forward. We have also not just sat on our hands here. We've continued to invest in the future. We've added 3 sidings now between Prince Rupert and Prince George. Prince Rupert is a key part of our strategy going forward, and we continue to build through the growth that we see over the next decade. Whether it's intermodal or gas or grain, we'll be prepared for it to handle that, and we are the only railroad that goes to Prince Rupert, and we certainly see that as an advantage. With that, we're certainly going forward with technology. We're fortunate to have Dominique Malenfant join the team, really is a solid performer, well known in the industry. I'll let him introduce you, but we're very fortunate to get him on the team, not only with the accomplishments he's had throughout his career, but where we're going in our road map going forward. So with that, I'll turn it over to Dominique and let him say a few words.

Thank you, Rob. Good morning, everybody. It's my pleasure to be with you this morning. Rob mentioned, I'm Dominique Malenfant. I'm the Executive Vice President and Chief Information and Technology Officer for CN since September 1. So first off, let me tell you, are pleased to have to be back home in Montreal. I've been away the last several years in U.S., I've been away the last 12 years. At 20 years, I've been away for 12 years of those. So I'm very happy to be back on here. And I'm also very pleased to join an iconic company like CN, a leader in the transportation industry. And the simple reason for why I'm so excited is, first of all, I'm passionate about rail. I'm passionate about transforming the rail industry with technology. So it's why I'm so happy to join CN. So in my resume, in a nutshell, it's 3 things that you will -- you can take those from. It's a global experience, it's impacting -- impactful technology, develop product development and also its first off type of projects. So I've been in the last 30 years, in the rail industry, 23 of them with Bombardier Transportation in the passenger rail. And the last 7 with GE Transportation that became Wabtec in the freight business. So with Bombardier, I was fortunate to have a chance to work on another big project, big first off. And to give a few examples, I had a chance to work on the Acela Express delivery to Amtrak back in 2000. The first and only high-speed train in North America. I also had a chance to move and live in China for 2.5 years to do their first high-speed train of Bombardier in China, the CRH1. It was the first at the beginning of the journey of the Chinese high-speed network. I also had a chance to work on a lot of big, let's say, transit projects globally, including New York City Transit Authority, the R142 as well as automated rail transit system in Malaysia with Kuala Lumpur and many others as well. My last work with Bombardier was the Vice President, Product Development and Engineering. Well, the [ high-tech ] division of Bombardier located in Zurich, Switzerland, where I led global rail engineers, developing products around combustion technologies, control technologies and digital product line. I quit Bombardier in June 2014 and joined GE Transportation as their Chief Technology Officer. I led their 2,400 engineers developing all the products of GE, including the flagship product. And then our first off, their first diesel-electric locomotive meeting Tier 4 requirement, and without an operating system. This, it was back in 2015. That was at the time, [ I believe, by industry ], not possible to do it without operating system, but we did it. So we were the first one. And that product is still working very well on the market. So it was a great project. I also have the chance to work on many digital product development for GE that helps customers like CN to improve their efficient operation. So looking at it now, it's back in February 2019. GE Transportation was acquired by Wabtec, as you all know. And then I became the Chief Technology Officer of Wabtec, leading 5,000 [ engineers ] globally. At the time of the merger, there was a big project going on. And you all know it very well, it's the PTC development. So we were in the middle of the deployment of the Positive Train Control in U.S. This was an unfunded mandate on the FRA at the time that was very costly for the railroad. I was -- had the chance to do the forefront of seeing it deployed. And I can tell you from outside view, from what I view. When I look at the way see and mitigate to deploying that technology and being the first one, the first one having it in operation and one of the first one demonstrating the full capability, I was quite impressed, honestly. So now I have a chance to be with CN, having put that background and experience. I think the PTC, and although it has been a massive investment in the industry now, I think it's a great opportunity to build on for the future, and I'm happy to part -- to be part of that journey. So now to conclude my introduction, a few words about my first impression of CN after 2 months. I have discovered a very passionate team here, extremely talented. So for me, it's a great pleasure and honor to train that team. I think we have a great future in front of us. And I'm truly impressed by what I experienced so far. Now, again, as I mentioned, as the PTC investment is done now, it's time for us to reap the benefit and then move forward with it. So we're excited about it. So my priority is to start with as a Chief Information and Technology Officer at CN. The first one will be around automation. Either business process automation or rail automation, great opportunity there to improve our efficiency and be a key enabler for that, let's say, operational efficiency improvement. And the second area is to bring acceleration and do innovation. And again, we have a lot of talented people here who have opportunity to disrupt the industry and be the first one of many other initiative. And I would be definitely focusing on that in the first few months and few years at CN. But that's about it, Konark. I give it back to you, ready for questions.

Perfect. Thanks so much for that introduction, really thorough introduction clearly, and I can tell you are pretty excited to be back in Montreal and with CN here. So maybe I can -- if I can follow up with Rob, perhaps to begin with. In this pandemic, obviously, we have seen quite a lot of changes. Can you talk to us about the structural changes that have taken place in this industry and at CN? And then how do you see the operating leverage benefiting from those changes? And can you talk to us about what are your aspirations for margin and those things heading into the next few years?

Yes, so thanks for the question, Konark. And I touched on a little bit of this. As we went into it and started to get line of sight in terms of the impact of the pandemic on volumes, we looked at our resources and rightsized our resources going into the pandemic where we saw the volumes start to drop off pretty dramatically. We did not do that willy-nilly. We did it thoughtfully and purposely. And I would say, as the volumes came back, we reacted to the same way thoughtfully and purposely, and that's how we got the resources back. And we did not bring back on a one-to-one basis. All in, that's allowed us to move more freight with less resources and what we're going through [ with some merchants ]. I talked about in my opening comments on the things we did with locomotive shops. We're able to close down multiple locomotive shops, multiple intermediate switching yards. All of that, that allows us to do things actually better, and move freight efficiently by doing it, not just in the interest of saving cost. We also continued with our consolidation of our dispatching centers. So we think that is paramount to run the operation, run the network with 1 bellybutton. That bellybutton is now located in Edmonton, Alberta at our network operations center. It allows us to run it more efficient going into the future. So these are key things that we continue to work on and make our railroad more efficient. But when I think about -- without giving guidance on margin, which we don't do, and when I think about what has come back, the mix and certainly, we have seen year-over-year is different. Even though our volumes are up, it is a different mix that we're seeing. And it really started in July. Mid-July, we started to see this wave of imports on the West Coast where it's really all the way from Long Beach to Prince Rupert. All of the ports experienced this wave of imports. And as I sit here today, it's still very, very strong coming in the ports, and we see that continuing through the next several months as well. So it began with intermodal. We certainly saw it in the East Coast ports as well. They were up as well. Part of that was in relation to the Port of Montreal strike that occurred in August, but we certainly saw that. We also saw things like lumber, which I would tell you at the beginning of this year, nobody was talking about lumber being a growth prospect, but we saw that take off and accelerate in late second quarter and third quarter as a flight to suburbia was happening as restaurants were strangling to build outdoor seating, as people instead of traveling were now becoming do-it-yourself remodelers. So we saw the price of lumber go up and the demand for lumber going well. We're also seeing big volumes in terms of grain. So big harvest, probably a record harvest in Canada. Big world demand out there, and we're set up from a capacity standpoint to handle it. What we have seen conversely in terms of the mix dropoff has been on our energy segment. So less crude by rail, less jet fuel, less refined products moving, and that's down pretty significantly year-over-year. So even though we're moving more freight, it certainly is a different mix. That certainly plays into the margin piece of it. And that's why it's so important what we're doing from an efficiency standpoint. Those things I mentioned we've got about over 2,000 less employees than we did same time last year, moving more freight with it. So we continue to look for opportunities to make our railroad more efficient. We look for opportunities to improve our customer experience with CN, and we're always looking for ways to make our railroads safer for the communities, our employees and the stakeholders of CN.

Right. No, hopefully, that mix noise gets behind you next year and then you can leverage some of those cost benefits that you get to talk about. Maybe talking about the other side of the cost equation, fuel efficiency, you touched upon that. Obviously, you are the leader here, you remain the leader. Can you help us understand if there's further room for improvement in fuel efficiency? And what are sort of the various technologies are coming to the market? And obviously, Dominique, you probably have been on the Wabtec side as well, right? So you probably appreciated more how Wabtec is involved in the next evolution. So can you talk to us about fuel efficiency upside from here?

Yes. Sure. I can start and let you, Rob, to complement here. I think CN has been recognized as the leader in the industry for one of the key products that CN is having that the others does not have. It's very smart and accurate, HPTA that is currently optimizing the fuel consumption of a locomotive. And that's, let's say, first area of [indiscernible] investment, very successful so far. And it gets CN another lead on the industry for that. And now the next step of the evolution of that HPTA is automated in the future for leveraging locomotive control, to automate the process so we can extract even more value out of that approach. And so far, the results are spectacular. So we did well and showed it to our analysts.

Yes, absolutely. So our results, again, are not something that we just accidentally happen. It is a rigorous day-to-day process that we go through in terms of executing. First of all, it starts with how we use our locomotives. We don't waste locomotives. We don't overpower trains. That is the basis for our fuel consumption and how we power up our trains. But then it goes to the discipline of our locomotive engineers, in our frontline supervisors and our rail traffic controllers in terms of how they manipulate the throttle, the information we develop in-house and communicate that to them. It would be the same thing as a car gunning their engine up to a red light only to stop and waste fuel. We allow that conductor to plan or that engineer to plan his trip, use the throttle more efficiently and therefore, save fuel as we go through it. The next evolution is just what Dominique talked about. It really is taking some of those manual things we do day in and day out and automating it. So the engineer doesn't have to react accordingly. It becomes more autonomous as we go through it. If you look out further, then it becomes the next generation of propulsion, whatever that might be, whether it's battery powered, electrification, LNG, hydrogen, all of these things are out there being talked about. Nothing is imminent, but we stay very close to those technologies, and we'll be on the front end of that when it becomes appropriate.