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

So first up, on the transport back here, we have Canadian National, being joined by Ghislain Houle, CFO of the company; Paul Butcher, Head of IR. So we're going to [indiscernible] questions here. But throughout the fireside chat, we have audience response [indiscernible] hear these throughout the day. And if we can go ahead and queue up the first question, please. Do you currently own Canadian [indiscernible] and if there's a little keypad in front of you there, [indiscernible] better. We did [indiscernible] one, yes, all the way to marketplace [indiscernible]. Go ahead. All right. And then question number two -- okay, we'll give some more participation here. Question number 2, what is your general bias towards Canadian National right now, positive, negative or neutral.

Very positive. I can ask some of you if you want to [indiscernible] let me to keep that, help you out.

All right. And then number three, in your opinion, through cycle EPS growth for Canadian National will be above peers, in line with peers or below peers. All right. Ghislain. So thank you guys very much for coming down. I really appreciate you being here in sunny Miami. But can you tell us what's going on with Canadian National right now because I think the commentary has been the first half of the year [indiscernible] more visibility. For the [indiscernible] second half.

Well, first of all, thank you for having us. If you can hear [indiscernible] of my voice. I've got a little bit of a cold, but it's nice. It's always nice to come to sunny Florida in February when you come from Montreal. And I have got Butcher with me, as we call it. So hopefully, we'll answer all the questions, and thank you for people in the room and people on webcasting. So I'll start with a couple of comments, and then we'll turn it over to your questions. First of all, when you look at our business today, I think we're doing a little bit better than what we expected quarter-to-date. I mean if you look at our volumes, in terms of revenue ton miles, our volumes quarter-to-date are up 13%. So that's pretty good. Now you remember, Brandon, last year, we [indiscernible] year. If you remember, it was extremely cold. And when you look at the month of January and February last year, we had 85% of those days that we have some type of restrictions on our claims versus 40% this year. So we had easy comps, but what's in the bank is in the bank. And when I look at what shows strength right now is really on the bulk side. When I look at grain, when I look at sand, when I look at whole West Coast, I mean, these continue to show strength. But when I look at the consumer segment, they continue to show weakness in consumer segments, I mean intermodal and intermodal international, I mean, lumber, I mean, chemicals and plastics and refined petroleum products. So they continue to show weakness. And when I look at the macroeconomic environment, if you look [indiscernible] came out of February, last week or so, and I think [ industrial production ] in the U.S. continues to weaken. I think we're close to 1.5% negative as we speak. So the environment is quite volatile. We're still calling for a mild recession. At CN, we'll see what happens. Interest rates, we believe, will continue to rise. So we're being quite [ cautious ]. When you look at the railroad and the network, I'm extremely pleased that it's running extremely well. Thanks to a scheduled railroad focus on our velocity, but also the weather is helping us. I'll give you a few stats. First of all, our car velocity is 210-plus car miles per day. That's up close to [ 40% ] on a year-over-year basis. When you look at our cars online, we have 15 less -- 15,000 less cars online, and we're moving 13% more volume. That's the strength of the scheduled railroad model. You move more products with less cars. When you look at our origin train performance, we're at 85%, and that's versus 60% or so last year. So I think we're doing quite well. And then our 32 car dwell is down 65%. So railroad is running very well. But as I said, we have only 1.5 months behind us. I don't want to count our chickens too early. We do have good visibility on grain for the first half of the year, as you mentioned. I think, at one point, in the second quarter, we will run out of grain to move. Right now, in the second half of the year, we're assuming that Canadian grain will be a 3-year advert. We don't have visibility of this yet. So we'll see as we move towards the year. And we're being cautious. So now from a longer-term standpoint, I think the skies are quite bright for CN. I mean the team is gelling together. I'm very happy to have Ed back. I've known him for 20 years. So Ed, myself and Doug, I've known each other for 20, 25 years. I think we have some solid growth-specific opportunities for CN that we'll walk investors through at our Investor Day on May 2 and 3rd and hopefully, Brandon, you, I'm sure you'll participate and some of you in the room and on webcast will participate as well. We'll walk you through those. And you'll meet more people from CN during those 2 days as well. So I think on this, I'll turn it over to your questions.

Okay. Well, I appreciate that, and I want to get to very specific CN questions, but I'd be remiss if I didn't ask about safety concerns for the broader railroad industry right now. There's been a lot of media attention on another accident. So do you see any changes coming from the regulatory side with a lot of political pressure on this right now, and how would CN respond?

Yes, I can't talk for the regulator. What I can talk about, though, is CN. I mean, safety has always been a key focus at CN and will remain a key focus. I mean when you look at, and I'm knocking on wood here, but while we're close to 800 days without a fatality and about 600 days without a serious injury. So [indiscernible] with -- we invest a lot on safety. I mean we've talked a lot to the market about our automated track inspection cars. Again, this is to improve and to automate the way we inspect track to avoid issues. And when you look at our rail [ rates ], well, I think they're down 90%. And that, at the end of the day, the economic benefit of these automated track inspection is the byproduct. Really, the first and foremost product and results of that investment is safety. I mean, when you look at it, we now cover the entire railroad on our entire tracks, including our branch lines. We have 10 of those cars on the premise. And we're able to see defects in the rail and frankly, this is what it's all about. So I think from a culture standpoint as well, we're focused on preventing accidents. Unfortunately, sometimes, they happen, and when they do, we have to respond in an appropriate manner. And -- but again, I think that the investments -- the other investments we've made, and we've talked a lot to the markets about is the portals. So again, inspecting cars through high-resolution cameras, while the train goes into a portal, to see defects that are there without -- that you wouldn't be able to see with the human eye. This is all to prevent accidents or issues. And we will continue to invest. Now the regulator needs to come with us and support us on these investments. And some of these investments we do with other rail carriers as well and we discuss them. And I think that everybody, the entire industry focuses on safety. I mean, safety is just with business -- and rest assured that we will continue to focus on and invest in its safety at the end.

One -- and train inspections are still a very manual process. Is that right?

That's right. They're still. You need -- by regulation, you need to do a certified car inspection. This is a kind of [indiscernible] going through, and it will take 1 hour, 1.5 hours trying to see under the -- under carrier to inspect the train [indiscernible]. With the portal, if you go through the portal, the portal will be able to see defects that the human eye won't be able to see. And we have identified a lot of defects on some of the trains that we wouldn't have identified visually. And you do preventive maintenance and by preventive maintenance and better -- we will surgically modify some of these things, then it allows you to reduce accidents, and it allows you to get a better safety record, and it allows you to save lives. So we're not 100% there on the portal. My view on both track inspections and train inspections, the holy grail would be eventually, and I think the industry will get there, is to fully automate our inspections. Fully automated inspections, where now you take the human factor out of it, it's data driven. It's now you get better surgical maintenance on your track, your train, you do it before issues happen. And this is just good, it's economically. But as I said, that's a byproduct. First and foremost, it's good for safety.

Appreciate that. And if we have questions from the audience, just raise your hand and we'll get you a mic. And Ghislain, I think you hit it in your prepared remarks, but you've had a lot of change in the C-suite, bringing back Mr. Harrison with Tracy, as CEO for the past year. What's the culture like at the top now at CN?

I'm extremely excited. I've been around for many years, 25 years. I'm going on my 26th year. I see my friend in the audience smiling here. I've lived through 5 or 6 CEOs. I think that we've turned the corner. I think that we're going back to running a scheduled railroad. I've learned that when Hunter was around. I've known Ed for 20 years or so. Doug, Tracy's coming in with -- it's really a breath of fresh air. She's extremely focused. As you can see, she's really focused on running a scheduled railroad, focused on car velocity. The message is simple. Message is simple for employees. I mean, look at the results last year. We have the [ best ] results of the industry. I mean EPS was up 25%. I mean we had an OR. We had the second best OR. CSX [ beat us ] by a little bit, but we had $59.9 million. ROIC was close to 16%. Free cash flow $4.3 billion when we had guided for $4.2 billion. The results are just there. And we're -- I've lived the years, where we [indiscernible] great, and we were looking at everybody in our rearview mirror. And I've got the last couple of years where I turned quite humble, and we were lagging the others. We were growing the top line like crazy. But we weren't able to grow that -- to bring that top line to the bottom line. And that's the key focus, is to bring the top line growth to the bottom line. How you do that is you need to grow in a disciplined manner and you need to grow to your capacity. And then we have more demand and capacity than you need to take the opportunity to either curate the business or you take the opportunity to get more price. So it's very simple. The team [ knows ] message. And [indiscernible], I don't know whether you want to add anything, but I think people have a smile on from an incentive compensation standpoint, people had a good year last year. It's a spiral, right? When things go downward, they go downward. And now you've got long faces on Monday morning, et cetera, et cetera. Now people have a smile. Tracy is -- I mean you've met her and people in the audience have met her, people on webcast. She's extremely humble, and she's focused on doing the right thing. She's not scared to make decisions, but she will collaborate and get feedback from a lot of us. She's made some tough personal decisions, but she's made the right ones. And I think -- and listen, I'm -- I know she's my boss, so -- and she didn't pay me to say these things, by the way. But I'm extremely excited, and I think that under her leadership I think that the future is very bright. And then the changes that we've had at our Board is also very positive. I mean Shauneen Bruder, our Chair, is extremely competent, and we've had a few additions on our Board, guys like Rob Knight that used to be the CFO of UP. Rob knows what it's like to be sitting here and talking at an investor conference. He used to do them all at UP. And we've had some other additions. So frankly, we'll have -- we have one member right now on our Board that has more than 5 year of tenure, and he's retiring in April due of age. So we'll have a brand new Board of Directors at CN as of the AGM in April. So these are all changes that fit together. And the key right now for us, myself, Ed, Doug, is to groom the next generation of railroad. I mean we've been around for a while. At one point, we will retire. I'm not going anywhere, Brandon, by the way. I'm only 59, and I've got a 15-year-old at home. So I need to pay for his school, and the school is quite expensive. But at one point, we will. So my role right now is to groom the next CFO and to groom the next generation of railroaders. And people that will attend to the May 2nd, May 3rd Investor Conference, we'll meet some of these people. They will meet -- they're in the mid-40s, early 50s. Some of them are even in their high 30s. You will meet some of them on the train trip, you will meet some of them at dinner. And our role right now is to do push on schedule railroading and deliver results, but also groom that next generation that will lead this company for the next few years. Well, I'm talking a lot there. Do you want to...

No, no, I think you answered that very well. Mr. Butcher, what shall we expect at the upcoming conference?

Well, I think you've -- many of you have been to some of our events in the past. So I think something very similar. We typically do that over a few days. And as Ghislain said, the first day is about more living the experience, right? So we're going to have a train trip, you're going to have an opportunity to visit our locomotive shop. We have our training center in Chicago as well. And as you know, Chicago was very important in the rails, right, about 25% of the business goes through Chicago. So we will also highlight the key advantages we have in the EJ&E. So the first day, that's the experience, you have the opportunity to meet a lot of people. And then the next day, it's more about telling the story about what we see here over the next few years. Definitely, a lot of the focus will be on growth. We feel that we have a lot of growth opportunities that are out there. And I think what's important is to be able to show that we can bring that top line to the bottom line, and that will be key. So it will be an exciting 2 days here.

Appreciate that. So...

Chicago is pretty nice in early May. So...

Even now.

Pardon?

Better than going to the winter.

Better than -- absolutely.

Can you touch on -- I think you guys have full year guidance for low single-digit EPS growth. Can you touch on at a high level the input...

Yes. The key input, as I mentioned, that's why I talked in my opening remarks about industrial production. So first of all, we're calling for a mild recession. So obviously, the math doesn't really work if you say calling for mild recession, but then my guidance will be double-digit EPS growth, and it just doesn't work. So right now, industrial production, we said we would do slightly better than industrial production. Industrial production is continuing to weaken. As I said, it's close to 1.5%. So if you're wrong and industrial production does better and volume does better, then we will do better, obviously. But if the recession is deeper than what we believe is not mild, then we may do worse. So that's certainly an input that was important when we look at the guidance. We said that we would continue to price above rail inflation. So we're focused on that as well. And I mean, those are the big 2 key inputs maybe because...

Yes, you want to talk maybe about the buyback as well as, Ghislain.

Yes. So people have commented on the buyback. As you know, we reduced it a little bit from $5 billion budget to $4 billion. Share buyback is not all that accreted to earnings. When you assume the new, consider the financing costs, but we do not want to delever the balance sheet. I mean -- so again, this is a good way and a good flexible way to return money to shareholders. At this time, share buyback of $4 billion, we're still remaining in [indiscernible] from an adjusted net [indiscernible]. We will -- we are debating this internally about the use of our balance sheet. We continue to do that. I think that we are thinking of providing a little bit more visibility on this during our Investor Day, let's see. But -- and then -- yes, that's about -- those are the main inputs for the guidance. So we do have visibility, as I mentioned, on grain and bulk continues to be strong in the first half. We have to see what happens in the second half. Grains have decreased right now. When you look at Q4, I mean, our volumes were up, but -- it was -- it's a misleading a little bit, especially when you consider volumes from Q3 to Q4. All segments are down, but it's all offset by grain. So grain was significantly up, and it all -- like they're all downfall, but I think, by 10% or so in terms of RTM, but grain offset it, and we had volume growth. So we have to see what happens. But at this point, as I said, we remain cautious. And frankly, when we get to the end of the first quarter, we typically give some -- we typically talk about guidance, either we reaffirm it, or we will give a little bit of notion on guidance when we get to that call in April.

Okay. Maybe if I could just add to that. I think as we don't have that much visibility right now on H2 on the labor front, what we're doing is we are actually not letting go or furlough any of the operating people, understanding that there is that on [indiscernible]. What that means is that if the economy does actually better than expected, we'll be ready for [indiscernible]. We'll be ready to be able to move that additional business. We have the capacity. The network is running very, very well. So that's the other -- if we do -- if the economy does better, yes, we will do better as well.

Yes. To add on that, exactly. So we've said publicly that if the volumes go down, we're going to make decisions for the good of medium and long term of the business. We're not going to chase a couple of [ biddings ] for a given quarter and send people home. So if volumes, we can -- we will take the opportunity to get a hand of ourselves in terms of training locomotive engineers, for example, because remember that to train a locomotive engineer, you've got to take a full-fledged conductor out for about 4, 5, 6 months and train them. So we will do these things. We have some locations in Canada that's hard to hire, and we will wrap our arms around these people because we do want to be ready for the rebound. So if volumes go down a little bit, then we will carry a little bit more cost than we would have maybe in the past by quickly sending people to furlough. We will look at hiring, and we will adjust our hiring, but we're going to refrain ourselves from having a jerky reaction [indiscernible] people hold quickly just [indiscernible] on a good quarter.

And I guess, to your earlier comments about cash, can we queue up question number 4 for the audience? So in your opinion, what should Canadian National do with excess cash? Was bolt-on M&A, larger M&A? Share repurchases, dividends, debt paydown or internal investment. And then it's just a little keypad in front of you, I think you just put 1 through 6. And then question number 5 on the topic of cash. In your opinion, what multiple of 2023 earnings should CN trade? Less than 10, 10 to 12, 13, 15 through 18, 19, 21. Okay. And then question #6. What do you see as the most significant investment issue for Canadian National? Core growth, margin performance, capital deployment or execution. Thank you, everyone, for participating. We [indiscernible] after the event. Ghislain, I know you talked about a lot of growth opportunities, which I want to get into, but intermodal has been a [indiscernible] segment. And I think import activity actually was pretty weak in the fourth quarter [indiscernible]. And are you seeing destocking in the economy?

Yes, I can start, and Paul, you can jump in. We do see some [ weakness ] in the intermodal, obviously. I think the -- this is, again, [indiscernible] intermodal is consumer products. So as the economy weakens a little bit, you can see that. I mean, we've started to see some blank sailings [indiscernible] as well. So intermodal is a weakness, and I talked about that a little bit in my opening remarks. We'll see what happens. I think I think there was -- we did curate a little bit of that business as well, especially business that was coming into Western Canada, where our capacity is tight. We took the opportunity as some of these contracts came due. We -- the pricing that came to us was not conducive for us to renew the business. So we took the opportunity to curate the business, some of that business. But yes, I think we see some weakness. We'll see what happens, and we can see it again in January, February, continuing a little bit. So stay-tuned. That's why we're calling for a mile recession still, and we'll see what happens.

Yes. I mean it's a weakness that you're seeing across the system, right? So it's not just specific to CN. I think what's good for us is we -- with our 3 coast access, we have to provide that optionality for customers, for shippers and Rupert continues to be -- I'd like to say that [indiscernible] keeps on giving, and there's capacity available there. You all know we started talking a lot over the last few years about Halifax. Our partnership with PSA has gone very, very well. They've actually hit a record last year, bringing in 100,000 TEUs, and that's just half the capacity right now. So there's room to grow. And even in the Gulf Coast, right, whether it's Mobile in New Orleans, and we have the opportunity to bring in more business there. So I think, yes, short term, there is some -- maybe some inventory adjustments that are playing out here. But I think long term, we have a really, really good story.

Okay. We only have a few minutes left. Can you queue up the last audience question. This is about ESG. We have a new one here. Does ESG play an active role in your investment decision relating to CN? Yes, is a positive factor? Or yes, it's a negative factor? Or no, ESG does not play a role? And I guess can we hit on pricing, gentlemen, because there's been so much inflation across the supply chain in the last 2 years. I think a big investor concern is not only do we have weak volumes in '23, but is there deflationary pressures on price?

I think we keep on -- we're very consistent on pricing, and I think Doug McDonald and the team has done a great job into price -- rail inflation. As we've said before, we have about 1/3 of our book of business that expires, that contracts expires in a given year. So again, we'll be at those this year. I think we're confident that we'll continue to price above rail inflation. And this is something, by the way, that under Tracy's leadership changes. In the past, I don't think we've worked as integrated as we should have between operations, finance, marketing. And Tracy has instituted, which I facilitate, an operating committee, where the four of us sit together, and we look at all contract renewals, and we look at the business, we look at where it starts, we look at where it finishes, the OD [indiscernible]. We look at pricing, and then we discuss and we agreed whether this is a business that we want to continue or whether this is something that we want to curate a little bit. So I think this instituted a lot of discipline. And I can assure you that the commercial team under the leadership of Doug, they're really focused on the bottom line. So they're not just focused on growth, which in the past, we have a little bit, probably too much. They're focused on the bottom line, and price is important. And you know what allows you to get price is good service. And right now, under the scheduled railroad, we're more predictable, we are more reliable. And therefore -- and look, I mean, we just -- I just said that we have 15,000 less cars. Some of these are private equipment. So that's [indiscernible] customer now doesn't -- can return some of these leases if there's lease to the lessor and [indiscernible] the car ownership, or we move [indiscernible] the same amount of cars. So it makes it easier for us to go back and say, hey, look, you were able to move way more product with less cars. But I need this price, this price is what's reasonable for both of us as a win-win relationship. So the service is really the backbone of getting right and the scheduled railroad really allows you to push this because, again, you do -- you sweat your assets and you move that product with less cars, and therefore, the customer if it's private equipment, gets some benefit. And then reasonably, we get a little bit more price due to this.

Appreciate all that. I know we have like 1 minute left. You wanted to have a couple of closing remarks.

Yes. I think, first of all, like I said, I'm quite excited to be at CN. I think that we're humble. We've learned from the last few years. I think our star is shining again, I think, but that was 3 quarters behind us. We need to deliver a good year. I'm confident that on a relative basis, we'll deliver very, very well. I think the team is gelling, I think the opportunities are out there, as Paul mentioned, and we will walk those through at the Investor Day. I think that we will continue to improve our margins. We know we need to do that year in, year out. And I think that we've got a good bench strength at CN. We're grooming the next generation of railroaders. And I think this is going to be a good run in the next couple of years, next years to come. I think it's going to be a good ride. So ride along with us.

Well, Ghislain and Paul, thank you so much for coming down.

Appreciate it. Thank you.

Thank you.