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

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That's. Yes. Well, I mean it's interesting because we've known each other for quite some time and in different roles. And it's great to see you come into this role and have such great success here at the early stages for sure. I want to start with my first question is that you just had your first post-COVID Investor Day. And there, you outlined some of your strategic priorities and financial perspective in the next 3 years. For those who perhaps weren't in attendance, can you share with us a few of your kind of high-level takeaways -- it was a great event, but please give us your highlight...

Yes, we wanted -- I didn't want to do it right away, as you know. We had a lot of questions around where we're going to take the place, but the priority coming in was to get the railroad running. And so we made an early decision on the operating model that works for our network. We implemented it and we had by the time we got to our Investor Day a couple of weeks ago, we were able to -- we had a number of quarters under our belt of a really efficient operation, which is core, of course, to railroading. And what we won, I think it was a very successful Investor Day in that we delivered the messages that we wanted to deliver. And that was -- and we on day 1 -- on day 1, what we wanted to do was make sure that you all understood some of the technology that had been implemented and that we're working on across the railroad to improve safety, to improve the efficiency of our operations and improve kind of how we deal with customers, right? As well as -- and I think you all got to see a great big locomotive shop and to ride the EJ&E, which is we feel very strongly about our network and our assets. One of the strongest is the EJ&E, which allows us to move around Chicago very, very quickly. 25% of the volumes -- rail volumes in North America goes through Chicago, so it's a significant advantage. On day 2, our intent was to talk about the operating model that we had chosen, why it was the right one for our railroad and what it would allow us to deliver, improve customer service, improve efficiency and reveal the capacity that we had across the network. And then we talked about what we were going to do with that capacity as well as how we were going to accommodate what we believe is some very strong growth opportunities over the next period of time. We laid out what we believe will deliver over the next 3 years, although our planning, of course, extends much beyond that. And although it's a little bit soft out there right now in some consumer segments, what we laid out was a 10% to 15% EPS CAGR for '24 to '26. We laid out an ROIC of 15% to 17% over that period of time, and we laid out some capital allocation priorities for us as we go forward. So we will be increasing our leverage from 2 to 2.5 debt-to-EBITDA basis over time, and we'll do the right things in doing that. We believe in a strong, consistent dividend program that runs roughly with earnings and the rest of it will do through a share buyback. Now we also talked about laid out a sampling what we call proof points of the growth opportunities we see out there outside of just what comes and goes with the economic swings and what we would need to do to accommodate that growth. The East and the South, we've got capacity, and we're excited about what we can do with available capacity. In the West, we have some capacity, but there's some major growth opportunities there, which we will build to accommodate, and we'll spend some capital doing that. So at the end of the day, one of the most important things we did was put in front of you, Walter and others, the team that's going to do this. And I think [indiscernible] training ground for a lot of the real good railroad talent over the years. And the next generation of that is coming up and is pretty excited. I'm pretty excited about what we are going to be able to do.

Yes. No, it was a lot to unpack there. There was really productive sessions over the course of those 2 days and really got to learn and relearn about the organization in many cases. Let's start with -- you came from -- you didn't come from the outside of the railroad industry for sure. I mean you were for a little bit outside the railroad industry, but you've never been at CN before. And what was your impression of what you thought you could do when you came to CN -- then when you got into the job, how does that impression, if it changed, how would it change or how did even -- how it refocused you in terms of what you needed to do?

Yes, I know CN well, but not from the inside, from the outside. Of course, it said when I was with CP, I competed against CN for all of my career, and I had a very good perspective of their strengths from that perspective. And coming into CN, you know what I was very quickly able to do was to confirm a lot of those strengths, and that was the network. But what we needed to do was land on the operating plan that works for our system. And what I was surprised by pleasantly was that once we made that change and said we're going to run the scheduled operating plan, how quickly we were able to move there because we have a lot of talent in the organization that knows how to do that, that had been here before. And so we were able to ramp that up very, very quickly. And so that was a surprise. And as we've done that, the service to our customers has improved significantly. As you know, our operating metrics have improved significantly, and we're ready.

It was really interesting talking to some of those below the C-suite senior people, how they felt more at liberty to talk and to speak up and to embrace and the PSR tenants that we all know exist at CN. I may have been subdued a little bit, but it seems to be coming up to the floor again now and certainly under your leadership as well. What changes do you think now that you've had -- you've been there a year, you did that 3 plan of curating the book and so on. No more curating but it was successful, right? I mean you resized or you adjusted your book of business. What's next in terms of highest priority of CN from this point now going forward?

Our highest priority will always be safety because it's the right thing to do, and it's the right business thing to do without a doubt. And so whether it's technology or business process or culture that will always be the most important thing. As we go by that, we need no matter what the conditions, no matter what the economic cycle, no matter how -- what the generation of leadership changes is, what is right for our network is a scheduled operating model, right? And so we need to stay focused on that. And what we laid out at Investor Day was how we think about it, which is the plan done at the center, network ops, it's executed in the field and transportation and the commercial team sells into it. So this is one plan, one effort. And that we -- what's important to me is that we have the discipline to run that plant. No overreacting, no stepping off the plan for any reason. And now what we're moving to is the same level of discipline around generating the growth that's going to drive the plant and where we need to invest in infrastructure to get it, the discipline around the allocation of capital, but also how we're going to invest that capital. So I came out of the pipeline industry, and one thing that I spent 8 years doing was building pipelines, and there's a certain rigor around how you execute a capital program that is a little further advanced than we do in the railroad industry. And so we're going to get much more disciplined and efficient about that, that's going to support our return on invested capital.

Growth was a big part of the Investor Day a couple of weeks ago, and I want to touch on that a little bit now. You have the economy right now what the economy is going to do, but there's also a number of aspects that you highlighted at Investor Day that's going to bring you something above the economy above what the economy has to offer. And when you look at that 800,000 to 900,000 carloads that you talked about as a growth opportunity, I translated that into your volume number per year and got somewhere in the 5% to 6% range, which is really strong, right? I mean that for a railroad is a very, very strong level of volume. My first question is, what is the likelihood you see that you can capture that -- is that aspirational kind of blue sky best case scenario? Is that your base case scenario? And then secondly, and you talked about capital, but what's your view on capacity and the ability to handle that growth?

So what I wanted to do when I came in, Walter, was really understand what the growth potential of our network was. And so we spent 7 months last year really going through customer -- what trade flows at the macro. And we've seen some changes in trade flows. I think that's going to be something that impacts our network and creates opportunities for us, we want to be ready for. But right down to each commodity in each area and each one of our customers, what were the beyond the organic up and down with economy, what were the real material opportunity. And I am was surprised and pleasantly surprised by the strength of that portfolio. What we put in front of you a couple of weeks ago was a smattering of those proof points. These are ones that we have a tremendous amount of confidence in, and that you'll hear us talk about more. There are others that extend over a longer period of time. There's a possibility that not all of them will come to fruition, but there will be others that aren't on our radar screen to do, but we want to leverage our network what railroads need to do, I think if they want to run well is make sure that the business that's on their network belongs on their network and sits there. So that's what we're focused on. And so if you think about the eastern part of our network, we have capacity there. We've seen shifts from China to Southeast Asia in production and the East Coast growing faster than the West Coast, and that's predicted to continue for North America that from an inbound perspective, East Coast will grow faster than West Coast. We want to be ready for that to make Halifax the right port of entry, and we've got capacity there as does PSA in Halifax. If you look at some of what we've got going on, on the fuel initiatives that will hit the eastern part of our network where we have capacity. If you look at the electric vehicle, the automotive expansions and retooling and the EV on automotive as well as some of the critical minerals that exist up in Northern Quebec and Ontario, right where our network is. It's -- that's going to form a focus for us. If you look at in the West, the continuing pull of various energy projects from anywhere from the traditional propanes and fuels to some of the newer energy products that are -- there's great demand off the west coast for them and the frac sand demand to go up into the Montney region, the pipe demand to go up there. So we see tremendous growth across most of our commodity lines, international, certainly, on all coasts, as well as energy, the forest products in Northern BC and the East and automotive, it goes across the portfolio. We'll need very little -- if any capital in the East. We are contemplating a couple of sidings between Halifax and Montreal that will -- as that train count goes up, allow us to retain our velocity. We won't need much in the south at all. In the West, as those meaningful growth opportunities materialize, we will expand on pace with those.

So -- and I just want to remind everybody that [indiscernible] can click the QR code or take it to the quote on your table if you want to ask Tracy any questions. I'm happy to keep questioning. I get a ton of them here 30 minutes is a very short period to go through everything. So let's talk a bit about that, that you mentioned, Prince Rupert, you mentioned Halifax. Of course, the EGM is a great enabler of those 2 very strong port. Let's start with Prince Rupert I was up there in 2007 when you could barely get 300,000 TEUs up there. And now you've got $1 million, you're scaling the $2 million with [indiscernible] talking about and looking -- there is an opportunity to build another terminal there. And if you ask the Princeport authority, they're taking -- they're saying $7 million, right, is the potential blue sky. Is this -- where are you in terms of what you think is capable of being done at Prince Rupert and at what period, what time period do you think that capacity could be brought on in that per...

So as you say, the capacity now is 1.6. By the end of next year, it will be 1.8 million -- and the second terminal would take it up to 4. And the rough time line of that is the 2030 or 2031. And we're working hard with both the Prince Rupert and DP World on the proof points around that so that as that happens, we're expanding in conjunction with it. And of course, we're also putting in place the Ridley Island Export Logistics Park because the intent is with the green, with the pulses, with some of the plastics to provide as much loaded backhaul on those containers as possible, which supports the outbound and carload quantities into Rupert as well. You would see that the Vopak Liquid Terminal was just approved. And so the way we're thinking about Rupert as a whole, it's a gem sitting up there. It's 2 closest port to Asia by 2 to 3 days. It doesn't have a big beautiful city wrap around it. It's got a very supportive kind of community. It's we're the sole provider, so we can work with DPW and the other terminals up there in the case of international to build and develop destination trains. We have a premium service out of Rupert that can get to Chicago and around Chicago giving the EJ&E faster than any other port, whether you're coming in. And so this is -- we got the flattest route through the mountains. And so this is, we think, one of our key competitive differentiators. So if you think about Rupert as a whole, whether it's frac sand and pipe, whether it's international volumes, whether it's green, whether it's the liquids volumes up there, our capacity right now in that line is about 25 trains a day, right? We're running a little bit below that right now, so we have some capacity. But if you look out all of the opportunities that we see, and this is not in that 2-, 3-, 2-year time frame, we talked about Walter, but if you think over a longer period of time, we could see building that line out in support of all those growth initiatives by another 25 trains, so doubling the capacity of that line. Now that will be done only on a very disciplined basis as we see those opportunities materialize.

And that can be done in the CapEx envelope that you have right now -- the -- just to put it for everyone perspective, I mean we're talking line of sight to 4 million TEU capacity. Vancouver, all of Vancouver did 3.5%, right, last year. So the notion that we could have a Prince Rupert that will match or possibly exceed that of Vancouver is quite exceptional. Let's move to the east now, and you are gracious enough to have a host us in Halifax. You have -- like Prince Rupert, you're the sole access into Halifax and the folks from PSA we're painting a pretty picture about what was going on in that you touched on it from the Far East, the movement of container origination to Southeast Asia, that there's a wave coming, and you want to be ready for it. They said they want to be ready for it. They bought both terminals to get ready for it. You talked about this [indiscernible] to the East. Is this -- we're running at around 600,000 TEUs right now. This could be the beginning of a much larger trend.

It could and we want to position our network as the entry point. whether you're coming in from the East or whether you're coming in from the West. And like Rupert, as you say, we've got the benefit of being the sole provider very -- so we're working with PSA around creating the service products that those shipping lines are going to want, right? So you can dock immediately you're quickly through the terminal. We will have the same premium service in Chicago, the EJ&E Advantage, so that you'll be able to get into, if you build the sailing times, the terminal times and the railroad times, you'll be able to get into, say, a Chicago faster through Halifax and you will through New York, New Jersey. And so that's the objective. We've got -- we're not as far advanced as we are in Rupert, but we're certainly working in that direction, and we see potential. As I say, no matter who you talk to, the growth rate on the East Coast of the continent is projected to be higher than the growth rate on the Western Coast of the continent. So we're watching that very, very closely.

The reason why I put so much on Rupert and Halifax, that $800,000 to $900,000 of growth you were talking about, about half of it did come intermodal. So it's a big important part of it. Vancouver, we can't ignore either. But I don't want to spend too much on Intermodal. Let's move to pricing a little bit. Obviously, you've had some higher costs, but you also -- unlike many industries, you have some oversight on your pricing, regulatory keeps an eye on it. How hard has it been for you to pass the higher cost on to your customers through higher pricing?