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

Okay. Thanks so much for coming down here. Nothing going on in the world right now. So...

No, not very much at all.

Exactly. I am glad you found the time.

Thanks for hosting, happy to be here.

So before we kick off, please note that for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. With that, Tracy, again, thanks for being here. I don't know if you want to kick off with any opening remarks.

Yes, why don't I just make a couple of comments and then I know you have some questions for us today, Ravi. It's some -- as you say, that's exciting time, all kinds of things going on. But I would say things are going well for us this year. I'm pretty proud of how the team has leaned into the changes that we're making and the operating plan that we're running. We kind of started. We knew we needed to put it a scheduled plan in place. We started in April coming out of winter this year. We've made some pretty good progress. The priorities were pretty clear. We were going to run a scheduled plan and try and get our assets moving a little more quickly. We were going to focus on our commercial portfolio and make sure it fits the plan and there was a plan that we could deliver to our customers and then we wanted to grow our bottom line, drop all of that to kind of the bottom line. So starting in April, we put the plan in place. We've been leaning on it ever since. We're showing some good momentum at the end of Q2 in our commercial portfolio. We touched up a little bit. We had a 20% growth in revenues on the 2% volume growth. The velocity was a little bit higher. We were able to drop it to the bottom line. We grew our earnings by earnings per share by about 30%. So it was a good quarter, good momentum. So as we're into Q3, it's -- we're picking up some velocity. So as we lean into our scheduled plan, we're running about almost 90% on time from an origin perspective, our local service operating plan moving along much more better, providing better service to our customers. Our car velocity is sitting at about 212 miles per day in this quarter. We haven't hit those numbers since 2016. So we're getting the rhythm. The volumes were up about 6% quarter-to-date. The team did a great job in the second quarter, grain, as you know, was off 30% to 40% based on the crop last year. So they have back filled that and we're going to -- we've got a big grain crop coming in Canada and really get a pretty decent crop coming in the United States, that's starting now. We still have strong coal. We've got a lot of strong petroleum chemicals, autos are very strong. So on a volume perspective, I think it's going to be there. We're going to have record kind of demand I think for the rest of the year, particularly in the western part of the network. So we're ready for it. We have resourced the railroad and the plan and we've got more locomotives. We got more high-capacity hopper cars for grain and we've got the crews that we need, so we're ready to go. The one thing, of course, that we need to make sure we get done is we need to fix this labor situation here down here in the United States and it's a critical one for all of us. We are hard at it, very intent. Nobody wants a labor shutdown at all. And even as we speak today, we're in discussions. We'll find out later today how that's gone. We have to as the railroads, we have to start putting some plans in place, which we have earlier this week, in case there is a labor stoppage, but we're doing everything we can to make sure that didn't happen.

Got it. So who knows what's going to happen in the next 7 to 10 days. So let's shift gears, so talking about the very short term to talking about the long term. CN is one of the most exciting stories in transportation, definitely with railroads and the storage because of you no pressure. But it's been a few quarters since you've been in the seat, kind of what have you found? What have you realized? And you went through a lot of the waypoints that demonstrate the progress you've made in the last few quarters. But what are some of the kind of structural takeaways you've had some of the learnings you've had that we can take and hear from going into the Analyst Day next year?

Well, listen, we're back to basics. You got to run a good railroad in order to kind of earn the right to lift your head and say, where are we going to take the place. So we're doing that, as you say, pretty well. When I came into the company after being out of the industry for a little while, I was pleasantly surprised. I mean ours new CN had a great network and that remains true. And well, I'm sure we'll talk a little bit about that today. But what was the pleasant surprise is there's some unique growth opportunities that we're kind of putting the shoulder into as we go forward. There's a change -- fundamental change in some areas in trade flows that I think CN is really well positioned to capture. I think I've spent the last 8 years of my career in energy. There's some real opportunities from a railroad perspective in the next generation of energy that I think CN's network is really well positioned for. And so as we look forward, it's around making sure that we leverage our network and we extend our reach in ways that is going to position us for that next level of what could be more than just organic growth, some unique growth opportunities. So that's been really exciting and we're doing a lot of thinking about that. But as you say, when we get into Investor Day next year, we'll lay out in a more purposeful way.

Got it. And I think investors in the U.S. rail space have been kind of very focused on OR, OR, OR for the last several years, right? And you guys had even before you kind of made it very clear that it's about growth and/or. Can you explain that a little bit more, kind of how do you deliver that? How do you make sure that you're delivering the growth and improving the OR or at least on the stable or kind of what's CN's algorithm when it comes to growth versus margins?

Here's the way I think about it. You need to put a plan in place, like you need to run a plan and that plan has got to contemplate your commercial portfolio, how you want to deliver to your customers. You need to resource the plan and then you need to run it. And so that's our mantra, which is going to run the plan. And as we do that, we get higher and higher velocity. You see dwell go down, velocity go up, train performance improve, your service to your customer improves and you get much more predictable. You also get a view of where your capacity is, right? And then you can start selling into that, which goes right to the bottom line. But you also have the line of sight of where you need to grow your capacity for the next investable opportunity. And we're looking for those and there's a lot of those growth opportunities that are investable. And we're going to put some money into our infrastructure where it makes sense to do that. So I think that for us, the metric is there's no boring growing if you can drive it to the bottom line, right? The way you drive it to the bottom line is you have a tight, efficient operation, you understand your network and you sell into it. So if we do that, we're going to grow the bottom line and that's what we're holding ourselves accountable to.

Got it. I want to spend some time talking about intermodal because it's such a huge opportunity for you guys. Obviously, Prince Rupert has been a phenomenal asset for you for the last decade. What's the outlook there, especially with what's going on with LA Long Beach kind of I think what's the structural share gain opportunity on the West Coast, at the same time, you guys have been very excited about Halifax for the last few years and the potential for that on the East Coast. How do you see your international intermodal franchise evolving over the next few years?

We're watching trade patterns and flows very closely and how they're moving around and we're doing that with a number of the partners that we have in the intermodal supply chain. And that supply chain has been a little rocky over the last year, as you know, it's kind of straightening itself out and that will continue. But as we look forward, Vancouver is a great kind of anchor place and we're all working very hard to make sure that we can get the next piece of growth out of Vancouver. We got a big city wrapped around it. I really like the flexibility in the gem that is in Prince Rupert, no city around it. It's got all kinds of growth some, both potential but plans in place and it's not just intermodal, it's a variety of commodities, we'll perhaps have a chance to talk about that. But it's a natural with its proximity to Asia and the importance of those trade flows, it's a natural growth point for CN. Our job is going to be make sure that we have the capacity in place to keep up with that growth and where it's investable, we're going to do that and it's important part of our franchise. We're also growing. If you look -- if you look down in mobile and we're growing that southern part and we've seen some of the West Coast volume for reasons that you mentioned have moved to the East Coast and into the South, we've picked up some volume and we're going to look to see what we can do from an intermodal perspective with that kind of -- that franchise down there. And then we've cut this beautiful little anchor out in the East Coast in Halifax, which is a -- since PSA is taking over that terminal, both terminals. They're doing some pretty cool things in efficiency and have attracted some volume. We've got a straight shot out of there to Montreal, Toronto, Detroit, Chicago and some the fastest transit times. So when you put those 2 together, we're 25% up in volume year-over-year right now in this quarter. We've pretty much sold out that second train that the guys put in place and looking at where we go from here. The opportunity is great. Even now, Halifax is -- they're running about 60%, it continues to grow of their existing capacity, they've got plans to grow as we both kind of fill that up. And if we're looking at what's going on in Southeast Asia in that growth and some of Europe and how that trade now can get to the Mid-Continent as effectively cost and time through the East Coast is the West, we look at kind of what's happening in some of the other East Coast ports. We think Halifax is sitting in a very great place for some growth and continued growth there. So pretty excited about it. As we look at growth, the next step level growth in the West, we'll invest into that. It's very investable. If we look at the East, we've got network capacity largely for this growth. So that falls pretty nicely to the bottom line and we're going to take full advantage of that. Both sides, as you come into Mid-Con, our Chicago operation with EJ&E is probably better than any and we'll leverage that as well.

Got it. I just want to unpack that a little bit more because this is a big focus area in your last conference call talking about the growth in the West and the opportunity in the East, right? Are we talking about moving investments and resources from one side to the other? Are we talking about like bringing on new resources in the East? Or what exactly does it entail kind of making sure you continue to really draw down the opportunity in the West while also tapping into what's leased?

Yes, it's not one or the other, it's going to be both. And so I think this company has and we're going to continue to talk a lot about the growth opportunities in the West. You saw us announce the partnership with Keyera in -- outside of Edmonton for kind of the new energy supply chain, that's a really exciting opportunity and Prince Rupert as well as Vancouver both perfectly positioned for that. So there is going to be the next level of growth in the West and we will step into that. So we're going to invest into it. We like the idea of leveraging the other rest of our network. So whether it be intermodal or other commodities, we've got a new fuel terminal opening up in Toronto Yard next year. It's going to bring some pretty significant volumes. We've got -- if you look down in the southern part of our network where we also have capacity, we've got a plastics facility opening up there in 2023 and another expansion of another one. You look at automotive volumes in the East, we're up 20% or 30% quarter-over-quarter, which is fantastic. But what's really interesting is some of the investment that the auto sector is putting in there as we move more towards the EV marketplace. And of course, Canada, has this great resource based in Northern Quebec of some of those fine minerals and lithium. We're already starting to move some of that down for refining in Houston the EV, what could probably be a whole new supply chain rather don't get many of those. And we think that's pretty exciting and we'll invest in that. But the difference is, we've got existing capacity in the East and the South. We're going to fill it up, we can do that more quickly and then we'll invest. But you'll see us doing both, not one or the other.

Got it. Just moving from the volumes to the service, I think you -- as you highlighted in your opening remarks, you've done a really good job of bringing that service back on track. I think for some of the other -- some of your peers have been a little more of a challenge doing that especially in the U.S. Is that just a function of you guys being much further along with PSR kind of obviously, you did it first. And so you have more visibility into it? Is it because you're doing differently? Or kind of what's helped you bring that service back on track sooner than some years?

Well, the way I look at it is it all starts with your plan, you got to have a plan what you're going to run. And once you have a plan in place, you can see where you need to resource it, right? So we put the plan in place. It's never completely -- you're always moving it around a little bit as volumes kind of come and go, but you have to start with that because that's the basis of how you resource and of course, you need power, you need cars and you need crews. And so you have to look at the totality of the plan and resourcing it. So we have -- we've stepped into all of it, right? And so we have 47 new high horsepower locomotives online. We could see that we needed that power. When you think about the grain crop, which is going to be a big one, we've got 500 new high capacity hopper cars on and we are crewed up, right? So we didn't make any reductions. We had a little bit of a blip on the vaccination scenario in Canada, but 75% of those guys came back. And we've been hiring like everybody else has, we've got 500 new conductors that will be coming on before the end of the year, they're in the process of that now. So we're crude and ready, but you need all 3 of those things in order to kind of run your plan. We're ready to go.

Got it. I forgot to ask you about grain. Clearly, you're very excited about the potential opportunity there and the visibility you have on the crop. Can you just remind us again kind of how big is that going to be? What are like -- do you have the resources to move that and kind of what may be the pricing environment rather looks?

Well, you know what, we got to talk about the full network when you talk that. You've got a -- we've got a really important U.S. franchise, I'll get the Canadian one as well and that popped when the unfortunate events in Europe happened earlier this year. It was a surprise to us, we were able to handle it. We ran record GTMs in our southern part of our network in Q2, which was a great thing to be able to respond to. Down in the U.S., they've got a pretty good crop coming along, particularly in our draw territory. So we're going to be calling on those same resources this fall. In Canada, the way it's turning untold it's going to -- it is a 75 million metric ton or so crop, which people tell me it's going to be one of the top 5 that we've had before and it's all going to want to move. The good news is it's moving now. Our territory is a little bit to the north and then we will come on a little bit later, but we're on early and we'll hit next week. We'll hit kind of our peak expected weekly volumes. And it's going to be a rush, but we're ready for it. We have Vancouver, we have Rupert, we have Thunder Bay, we have Montreal and we're going to have to use all of those port options if we're going to kind of move this crop to the market the way that the industry really wanted to move.

Got it. Maybe just the 2 questions of service and the grain crop together. Obviously, from a resourcing standpoint, labor has been a huge bottleneck for the entire industry. You've been reducing headcount going to last year, but at the same time, you probably are in a better resource standpoint from a labor perspective than many of your peers. What's your visibility into that? What is your visibility into, again, having the headcount you need to move these volumes?

So the reductions that this company made last year were all in the management ranks.

Well, that's true.

Yes, we didn't -- we -- unfortunately, this team had the foresight not to make any reductions in T&E. That's put us in a good position. We have had the normal attrition of folks kind of retiring. And so we are largely backfilling behind that and then we're preparing for the growth. So we will have record demand in western part of our network this year. We're going to run our plan and we've got the crew resources to run the plant. And so we're pretty confident that we'll be able to do it. It's going to spread over a period of time, but we'll move it.

Got it. Last question on service. What's the latest on the congestion between Toronto and Montreal? You kind of brought that up on the last call, still there are steps in place to mitigate that or ease the pressure. Is that now back normal?

Pretty much, right? This is one of the symptoms of the supply chains that are still trying to find their new normal or get back into a good rhythm. There was -- it got pretty lumpy there for a while, but we put some facilities in place in the East. We've still got them, some of them in place. But we have Toronto, Montreal, both back to normal levels and pretty fluid. In fact, we moved 20% more through Toronto from an model perspective than we normally what do we have in previous years. So the plans the guys put in place that were pretty effective. We are fluid in Vancouver. We had some diversions go up to Prince Rupert. We're still working through those, but we're fluid and it's not an issue for the ports. So you're going to see those continue to move. Of course, the big question is and we're 25% up in Halifax. So the intermodal business is getting its rhythm back without a doubt. And the big question is where does that go from here, given how much inventory was moved early through that system. And my guess would be from what we're hearing, we're going to see a softer kind of peak this fall than we normally would. And if we see any lightness there in those volumes, we'll then put green in those slots.

Got it.

So lots to move through the network.

Got it. So just as a follow up on what you said about peak, just broad view on macro, kind of are you seeing any soft spots, any cause for concern or still things...

The market has got some...

I know.

Over the last couple of days.

It's been such a wide gap between the leading indicators versus what's actually happening around.

Yes, it's something we're watching very closely. And the majority of our portfolio, of course, is less consumption sensitive. And so we'll continue to move the bulk commodities and all of the rest. We're watching, particularly the Intermodal space pretty closely. So far, we've got line of sight that we can still see it's coming. And -- but I wouldn't be surprised if we saw, as I said, that normal kind of peak before Christmas be a lot softer than it was in previous years and then we'll see where it goes from there. We are getting ready for any softness there. In our western part of our network, in our southern part of our network, any kind of capacity that materializes because of that, we're going to move grain and in some cases, coal into that.

Got it. The truck market in the U.S. is softening, but at the same time, the Canadian truck market is kind of putting in place ELDs. Now we don't have as much of a direct overlap in Canada as you do here, but do you think there's going to be any tailwind at all to pricing in intermodal?

You know as we look at -- if we look at kind of our length of haul in both carloads which is about 1,800 intermodal is about 200, we don't see in the near term what's going on in that market really affecting us, something we're watching, but we're feeling the strength of our market.

Got it. So kind of switching gears to margins. Obviously, you said OR beginning with the 5, clearly that implies some improvement in the second half. How do we think about the cadence of that improvement and are volumes tracking with what you need to do to get there?

Volumes are going to come in as we said they would is about the low single digit. I think the team has done a great job in covering off the grain shortfall in the early part of the year. We're 6% up in RTMs this quarter to date and the grain is just starting. And so we're going to see that land roughly where it should. We've got automotive up 30% in the quarter, that's going to continue to grow. We've got real strength in petroleum and chemicals. Coal is up year-over-year quite significantly. So there's a lot of strength. We're going to see a strong finish on the year without a doubt.

Got it. Any questions from the audience? Just maybe I can continue and see if anyone has any questions, please put your hand up. Just the regulatory environment, I mean I think it's no secret there's been some shift in that in the last few years, a) would you agree? And b) how are you approaching this kind of -- is it just about having more conversations kind of being in touch more? Do you think any of these changes in the coming years? How do you -- what kind of multiple do investors put on that regulatory environment?

Well, that's a big question. So I think that the best thing a railroad like us can do in this kind of environment is provide the best possible service to our customers, right? But what that requires is our customers working with us to let us know what's coming. The railroads can adjust to move pretty much anything. They need track, they need power and they need cars. But they -- we need to know it's coming. And some of what's happened this time is the pop-back from COVID plus then given what's going on in Europe, kind of a big rush. But with notice and working in partnership with our customers, we can move those volumes. And what I would hate to see is anything happen on the regulatory side that is actually going to create unintended consequences of if you put the big systems in one place, there are other things that fall out of that. So I think what CN is going to do is focus on making sure our plan delivers to what our customers need. We're working to get very close with our customers so that we can create a joint point of view around what the future is going to bring. And if they're willing to invest in it, we're willing to invest in it and we'll move it.

Got it. Question up here. Go ahead.

[indiscernible] you expanded a little bit on Analyst Day, but expand a little bit more on that in terms of any implications for M&A there? Is there anything strategic you'll have to do to kind of be able to meet some of those growth opportunities?

Thanks for the question. What we're looking at now is right now, the normal organic growth, the grain crop is going to be big. We've got coal moving. But with the way that global trade flows are going, we think that there's going to be other opportunities. You can look at energy. We announced an MOU between our organization and Keyera that we're going to do some work together with the base in Edmonton, the foundation in northern part of Alberta to see if there's -- we can step into kind of clean energy, which is something that is less -- we've not done as much of that before. So I would call that less organic, not it will be something that we'll do that's a little bit different. We have different kinds of those opportunities in different parts of the network. So we're looking at all of that, some of it will require some investment by us. We want to have that in place with our partners and our customers in advance of that, so we can lean into it in the right way. And you're right, these are the kinds of things that we look forward to talking to you about next May when we sit before you with our longer-term plan.

Any update on the businesses that you're evaluating strategically?

Not yet.

I thought it right.

Okay. Thanks, Ravi.

Any more questions from the audience.

I can maybe kind of just finish off. So this is -- it is an exciting place to be railroading and it's kind of the center of a lot of what's going on in the economy and as railroads and as CN, we know that we play a big role in allowing and driving and facilitating economic growth and we want to be there. We've got some things, we're taking care of around running a good operation, delivering to our customers and we're going to continue. We're not finished on that. We're going to continue to do that because it gives us license to lift our head and say, where can we be helpful? Where can we grow in the future. And we've got a lot going on. We talked about Halifax and the potential there. We talked about all of the potential growth in the East Coast network. We've talked about the next tranche of growth in the West and the kind of things that we can do with our Southern franchise. And so it's exciting time to kind of be here doing this and we're really looking forward to hosting all of you next year in May, where we get a little bit more in-depth in talking about less the day-to-day operations and more where we're going to take the place.

Got it. I remember the last couple of analyst days you had were very exciting, everything from CanaPux to which -- I'll never forget, that was an amazing product do autonomous trucks. So Tracy, thanks so much for joining us here today and good luck for the next couple of weeks.

Ravi, it's a pleasure always.

Thank you.

Thank you.