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

Thank you, everybody, again, for joining us for our 30th Annual BofA Transport, Airline, Industrials Conference. Next up, we welcome Ghislain Houle, CFO back for his fourth time in the past 5 years; Ed Harris, in the 20-plus years we've known you. We welcome you to our first BofA Transport Conference. A special thanks really to the CN team. They have been a participant in every single one of the 22 years we've been hosting the conference. So really truly appreciate the firm's steadfast commitment. After a 7-year stretch, we have a new face from Investor Relations, following Paul Butcher's recent retirement, Stacy Anderson in the back…

Alderson.

What is it?

Alderson. You said, Anderson.

Alderson, everybody has tough questions.

I'm French…

Ghislain and Ed, again, truly appreciate your commitment here. With that, let me turn it over to Ghislain and Ed. You hosted your Analyst Day 2 weeks ago, set your long-term targets. I know you want to start with some big picture overview, thoughts on your 10% to 15% EPS CAGR. So with that, I'll just -- I'll throw it your way and then we'll jump into questions.

Great. Well, thanks, Ken, and thanks for everyone to be in the room to take interest in CN and also people on webcast. I want to thank my old boss here JJ, who is in the room as well. He's grown a little beard here, so maybe when I retire, I do the same. And yes, we've been supportive of your conference, more so because we like Boston. Okay. So -- yes, so thought it was -- it would be good because you opened up with our Investor Day to just cap up, and hopefully, some of you in the room were able to participate and some of webcast. I thought it was a very good 2 days. And thank you, by the way, Ken, for participating yourself. And I thought I was going to put that slide where I -- it kind of summarizes all the key targets that CN is going to shoot for, for the next 3 years from 2024 to 2025, and it's on our website for people that want to take it with them and so on. So first of all, the first -- the key assumption here is we're assuming a supportive economy. And what we mean by that is that we are assuming an industrial production of at least 2%. So that could be a question as to whether we're going to get there for 2024, but over the 3 years, that's what we're assuming. So if you take that into consideration, then I think we feel comfortable that we will deliver 10% to 15% EPS growth. I think that's going to be driven by growing our volumes more than the economy. If you remember, Ken, we had Doug and the commercial team go through a slew, a very CN-specific growth opportunities that are very exciting that are very real. They're not all done. I think Doug was clear that 25% of those are currently under contract. There's still 75% to be done. But you will agree with me that there's enough of them that I think we're comfortable that we will grow more than the economy. Now some of these projects are in Western Canada. So we're going to have to be very intentional about how we bring that growth to our network to make sure that it fits our capacity so that you know what we don't oversell the network and that we bring that top line growth to the bottom line. That's the key here. And we will continue to invest in capacity in Western Canada with a view of capital efficiency, and I went in detail to talk about this. Ed and the team going on the scheduled railroad and they double-clicked on that, him and Pat and Derek. I think it's clear that it provides a lot of customer value in terms of reliable service and we made the point as well that we're able to move more volume with less cars. So with this in mind, I think we're comfortable that Doug and the team will be able to continue to price above rail inflation. Now we are going to continue to push on scheduled railroading, and Ed will talk a little bit about this today. And we will use technology and we do invest in technology at CN, not just for technology's sake, but to create value to bring that scheduled railroad plan to the next level. And on this, I think we're comfortable that we will be able to improve our margins on a year-over-year basis. Now you and I know that this is a tougher thing to do when volumes get weaker. But over the 3 years, that's what we have set out as a target. From a CapEx standpoint, I think our CapEx is going to inch up over the 3 years, starting at $3.5 billion in 2024 to $4 billion in 2026. This is not set in stone, okay? So this is a kind of a ballpark figure because some of that CapEx will be dependent upon some of these growth opportunities. And if some of these growth opportunities do not materialize or you push them forward in time, then obviously, we will adjust our CapEx accordingly. But with this and with the capital efficiency I've just talked about, I think we have as a target, and we're comfortable we'll deliver an ROIC of 15% to 17% over the 3-year period. And then we'll continue to generate shareholder value creation with a very consistent approach to capital allocation. We've done -- we've grown, as you know, our dividends since we privatized in 1995, so we'll continue to grow our dividends essentially in line with earnings. And then we'll use the share buyback as a very flexible and residual tool to get to our new leverage target level of 2.5x. We'll do that over time. We're not going to have jerky reaction and we'll do that subject to economic conditions. So that's the -- and I would finish to say that, hopefully, people that participated could see the team, could see the fund that the team has. I think the service right now is summing and the team is gelling. And I think that bodes very well for CN for the next 2 years. On the short term, and then I'll shut up.

[indiscernible]

I'll turn it in French. So on the short term, as you know, volumes are weakening, and we provide our volumes every week. If you look at our volumes in Q1, they were up 6%. And when I talk volume it's always RTM because it's a better proxy. But that was masked a little bit by a more normalized Canadian grain crop. When you look at April, our volumes were down 7%, and May month-to-date, they're down 9%. So negative 8% Q2 today, but if you adjust for grain, it's negative 14%. And obviously, the culprit, and you've heard Kevin talk a little bit before on intermodal. Intermodal, our volumes are down 26% quarter-to-date. Some of it is -- some of the business that curated that we curated. So it's not all economy, but definitely, there's sum there. Domestic intermodal is down 16%. When you look at lumber, lumber is down 16% as well. If you see yesterday, the housing permits in the U.S. came out, it deteriorated on a month-to-month basis by another 1.5%. So housing permits are down over 20% on a year-over-year basis. And lumber prices, I mean, they're low. I mean they're very low. If you remember, a few years ago, they were USD 1,600 per 1,000 board feet. They're now at 340. So Canadian producers in Western Canada are losing money at that -- at those prices. So we'll see, but bulk continues to be relatively strong. I think potash, we believe, is strong. Frac sand, there's a little bit of a spring lull as we speak, but I think frac sand will be strong. Coal with coal indices, both thermal and metallurgy is way higher than the breakeven point. So that we believe will continue to be strong. And then we're counting on a good Canadian grain crop. I think it's early. The seating is happening as we speak. I think it looks good for now. People are starting to say that and speculate to say that we should have at least a 3-year average grain crop or maybe even a little bit better. We'll see it certainly we'll monitor, but we're counting on a good grain crop. And what we have in our view is -- and in our forecast, is a -- is an average 3-year grain. So now I'm an optimist, as you know. So I'm trying to see signs that this thing is going to turn around. I think in our view, we hope that this will turn around by the end of the year. And you're starting to see a little bit of signs. When you look at blank sailings in Q1, they were up by 86 blank sailings and will be about 44 blank sailings in the second quarter, so half of it. Talked to our intermodal team, our intermodal team very close to our customers. They're telling us that the boats are fuller now than they were before. And I think there will be some inventory restocking in the second half of the year, specifically on school supplies and winter goods. So I'm hoping that intermodal is going to come back better than it is now. Hopefully, we've hit bottom. And then obviously, bulk is continuing to be strong. So Ed, do you want to talk a little bit about the operation and what's happening in Western Canada related to what people are hearing on wildfires in the West?

Let me direct that a little bit more, right? Just because Ed, we heard multiple times -- I wanted you to answer that, but also we heard the plan is sacred so many times, right? And it was such a great to hear from CN that the focus is on the operating plan into your answer to Ghislain also add and how easy was it to get the system back, right? I mean, you had the culture there, but it obviously veered away from it and you brought it back fairly quickly.

Well, some of you may know I consulted there for a few months before I actually took the job from Tracy. And I know exactly what we needed to do, where we needed to look. This is not a long train railroad, running trains 15,000, 16,000 feet, just to reduce train [ starts ] as an element of disaster. You can't do that across this railroad. Quite frankly, you can do it across any railroad if you only have sidings that are averaging 12,000 to 13,000 feet. So the first thing we did was to reduce the train length, safer, quicker, more velocity. That was what I wanted out of the operation. We did that first and foremost. Secondly, when you originate a train at Canadian National, you start on time. That's the major guidance. That's the rule. And yesterday, I'm glad to report all of our major terminals had 100% on-time departures. That's not an easy feat in this industry. Those of you that share my job or share what we do across the industry itself, that's a fantastic testament to a scheduled operation. And quite frankly, our scheduled operation focuses on the car, focuses on the merchandise car, focuses on safe transit, focuses on customer service. So we want to move the car as fast as we can. We want to do it as safely as we know how to do it, and we want to make sure our customers are happy in how we do it. That is the plan. That is our operating plan as it stands today. Ghis mentioned a little bit about the wildfires in Western Canada, Alberta specifically. We probably took a 36-hour hit between Edmonton and Jasper, once the fires were extinguished, we brought together our -- what we call a [indiscernible] train 3 or 4 tanks with a fire extinguisher type hose [ mechanism ] on it to water down it right-of-way. We also water our bridges believe it or not. So we have sprinkler systems over our road in trestles and we keep the right-of-way wet. That cost us about 36 hours until we got our equipment in place. That fire moved very quickly, high winds. We had employees lose their homes, who were helping out and trying to do what we can for the communities that we're engaged. Right now, there's still a fire burning north of Prince George on our Slave Lake sub. We're shut down there for a short period of time, it looks like. But again, if it isn't snow, if it isn't avalanches, now it's fire. So we've learned how to deal with adversity. Our scheduled operation is resilient. So while we lost 36 hours in one of our heaviest travel quarters, we were back on track again 2 days.

So now with all this water going on our railroad, you go on the railroad and you think you're on a golf course.

Yes. Well, some of it is like golfing too. So -- but that's a tough way to railroad. It's tough to do that, but you have to protect your infrastructure, yes, we're doing that first and foremost, while we're in the middle of our capital plans, too, in our bulk work.

This is really interesting to me because we talk about getting back on plan, right? The whole thing of -- to me, when I was growing up and learning the business was scheduled railroading was, it allows the network to take a hit, but then it gets back on track quickly. So what -- and maybe is there something specific? How do you get things when -- whether it was floods or tornadoes that you just mentioned all the things that hit the railroad, what has to happen to get the network that others don't do that seems obvious to you?

The only way I can respond to that is that our train dispatchers, our field officers, they know what the plan is. They know what it takes to get the plan back in shape. Yes, we're delayed, and we take delays. But right behind the delays that we're taking, we're out there running 100% on-time departures again. So that helps us regain our lost velocity and actually, our train speeds are higher than they've ever been across CN's network now, and it's because of that resiliency to the plant itself. We all know what the plan requires us to do, we're ready to do that. It may take a short-term delay, but it's soon forgotten about. And customers are notified when we do catch a delay…

It's amazing how it's so obvious to you, and yet we see with the industry over the years where it gets out of whack and doesn't. So just let me come back to you short term. You mentioned that carloads down double digits. You call for a mild recession. Is this now looking worse than you thought when you talk about intermodal volumes being down 26%? I mean, these are phenomenal almost GFC type numbers when you look at some of the downside here.

I mean, it's definitely in what we were expecting. As I said -- we said 2 weeks ago, I think we are in a mild recession. As you know, Ken, we did upgrade our guidance this year from low to mid-single digit EPS growth, but more so on the back of our solid Q1 performance. Yes, I mean, -- it is -- I mean, the volumes are down. I mean I would be remiss to say that intermodal probably is a bit lower than what we expected. But there's some other counter effects that involve that offsets it a little bit. So overall, it's still within the realm of our guidance a lot. Like I think the key for us will be that there is some type of hit the bottom in the second and third quarter and then some type of going back up a little bit in the fourth quarter. I mean that's what we're assuming right now. So I mean, in the short term, right now, it's what we expected, maybe a little bit worse, especially in intermodal. But as I said, we've got other commodities and other segments that partly offsets it.

And all built in when you were thinking about that growth for '24, '26, this is the kind of environment we're starting point…

Yes, the starting point that we had was that we would be -- we would start with a mid-single digit EPS growth and that's our starting point to go forward.

So let's take it from volumes to pricing, right? I know you can't talk specifically on pricing, but maybe just help us inform us because there's so many mix changes that you think about, whether it's even intra commodity, right, whether it's international intermodal, domestic intermodal, right? So maybe talk about how we should think about revenue per RTM and the impact on that and the loss of fuel as we go forward?

Yes. When you look at revenue per RTM and you and I have had this discussion many, many times, there's lots of different components that bring a lot of noise. There's FX in there. There's -- to your point, there's a fuel lag. So we said in Q1 that we had a positive fuel lag, as you remember, by about $0.10 in the first quarter, and it was about 130 basis points to the [ OR ]. I think we're expecting a less favorable lag in the second quarter. We're still expecting a favorable lag but less. I think that from a pricing standpoint, I think that we are in a great position. I don't think that at CN, we've been in that position to get good pricing for a few years. And it all relates to service. I mean, I think we've made the point at the Investor Day. First of all, how can you be -- how can you have a reliable service if you don't start your trains on time. And customers come to railroads for reliability. So if you go Rupert to Chicago in 110 hours, do it 95%, 96%, 97% of the time, don't tell me Rupert to Chicago in 90 hours, and you do it only 50% of the time. And the second is, I think we made the point that when you look at Q1, Ed and the team, they were able to move 6% more volume with 15,000 less cars. So now if you're a customer and it's private equipment, and today, about 60% of the cars active online are private and 40% is railroad, then they get the benefit of being able to either move more volume with those cars or return some of those cars to the lease. So when Doug and the team goes and knocks on the door and says, hey, I'd like to get a little bit more price because here's all the benefits you're getting from this plan. But again, negotiating price will always be difficult and [ loans ] will be negotiations and so on and so forth. But I think now we've got more data points and more facts to put in front of the customer to get more pricing. And Doug, I must give it to him as a CMO, he's extremely focused on the bottom line, extremely focused on the [indiscernible]. And then the last piece I would say, and Ed, you can add to this, we don't -- we look at all the contract renewals. They all come to this operating committee, where Ed, myself, Tracy, we all look at the business, we all make sure that we have the resources, we have the capacity. We all look at the profitability, and we approve it. And we are looking at this, all of us with a view of taking that top line growth to the bottom line. We're bringing discipline to the system. Ed, do you want to add anything on that?