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

This is Justin Long with Stephens. We'll go ahead and get started. I want to welcome everyone back to our National Conference in 2023. Excited for our next fireside chat with Canadian National Railway. Joining me from the company today to my right is just Ghislain Houle, he's CFO; Derek Taylor, whose job, I think, is changing in one day. So I'll go ahead and use your new title, EVP and Chief Field Operating Officer. And then Stacy Alderson, down on the end with Investor Relations. Thank you so much for being here today and continuing to support this event. And Ghislain, maybe I'll kind of kick things to you to get things started off on just an update on the business, given we're now halfway through the quarter, and then we'll dive into some additional questions after that.

Super. Thanks, Justin, to have us. Thanks for the people in the room and people on webcast that are taking interest in our company. Thank you very much. And of course, our valued shareholders. Thank you to be with us and to have confidence in us. To your point, let me make a few introductory remarks and then and I'll give the floor a little bit to the floor to Derek and then after that, we'll go on your questions. So you have a lot of questions on volumes. I don't want to steal your thunder, but just a couple of remarks. As we've said publicly, I think it's clear that, in our view, that we hit bottom, and we hit the trough in Q2 and Q3. When you look at our volumes sequentially, we're getting much better. When you look at the volumes in September, they were higher than August. October volumes in terms of revenue ton-miles were 10% higher than September. We're tracking November volumes to be slightly higher than October. And then December, you've got to be a little bit careful because of the seasonality of December, like we hit -- we're hitting the holidays and the winter. So you've got to be careful on that one. When you look at the sector that continues to be weak, obviously, and everybody knows, and it's just -- it's not just CN, it's the entire industry. It's intermodal international. I think that we're starting to see some type of light at the end of the tunnel, and I hope it's not a locomotive. But when you look at the loadings of the Asian cargo, that's now destined to Rupert and Vancouver, they're coming at levels that are before the longshoreman strike. So that's a sign. I think we're talking to shipping lines as well. They're saying that there will be some type of recovery in 2024. I don't think you'll see anything in Q1 because Q1 is always very noisy, especially being the railroad of the North and Canada with the weather. And we had some very tough -- we will have some tough comps. If you remember, Justin, our EPS was up 38% versus last year. So tough to see in Q1, but you will I think you'll start to see some recovery at the end of Q1 or early Q2. People will need to consume. Retailers, I think when you look at inventory levels, they are normalized. So eventually, those inventories will have to be restocked. I don't think they will be restocked to the level of what we saw in COVID. And I don't think intermodal international will come to the level of where it was because it really -- they really had a bump a year or 2 post-COVID or in COVID. But I think it's going to come back to the levels of '19-ish, which is pre-COVID levels. So stay tuned on that one. But I think that's what we believe and that's -- and then I think that the recovery will be slow. But you talk to other people, talk to various economists, you talk to various people from big banks and some of them believe that the recovery will be V-shaped. So we all have our views. We'll see what happens. But definitely, I think there's better light in 2024 than there was in 2023. The other sector that's a little bit soft was Forest Products, as you know, with -- so when you look at lumber prices, they were as up as $1,600 in the bump. Now they got down to about $300 per thousand board feet. I think we're staying now around $500-ish. When you look more specifically at CN, when we hit the trough sometime in Q2, early Q3, from the centerbeam. Centerbeams are the railcars that we use to move lumber. The orders from customers were about 1,700 cars per week. When we do -- when we go full out, we're about 2,300 cars per week. And today, we're doing anywhere between 1,900 to 2,000 cars per week on a given week. So not where we need to be, but at least we're seeing some improvements. When you look at housing starts, they remain next year to be in the 1.4 million, 1.5 million housing starts. When you look at -- and I think that's a lagging indicator. Housing permits, I think is a leading indicator. It used to be negative 25% housing permits on a year-over-year basis. I think now we're lower than 10%. So -- and there's some -- there's still a deficit of houses in the U.S. And the number that's being thrown out there is $6 million deficit on houses in the U.S. So as interest rates stabilize, hopefully, that sector will gain some strength back up. When you look at our bulk segment, that continues to be relatively strong. When you look at frac sand, when you look at potash, grain, we do have a lower crop this year than we had last year, 72 million metric tons versus 75 million metric tons. We think that we're not going to be as impacted by that reduction, being the railroad of the north. So this lower crop was due to a lot of dryness that happened in the south. So it's not going to be 50-50 on a relative basis on the impact of that lower crop, typically on grain, when you have a lower crop, we will move grain full out Q3, Q4 of this year. It's just you're going to run out of grain a little earlier on in the following year in 2024. From an operating standpoint, I must say, and I'm not saying this because this guy is beside me and by the way, congratulations, Derek, on your promotion. I think it's one thing to get it. It's another thing to keep it.

As he has told me many times before over the years.

So we've done extremely well, and I'll let him cover operations in 2 minutes, but we've done well in light of the significant disruptions that we've had, and we look and we've tried to quantify this for the market so that you could put your finger on it, but these forest fires, the strike and some of the flooding, I mean, $0.07 of EPS impact in Q2 and $0.10 in Q3. And yet when you look at our operating metrics, they're in line with last year, slightly maybe -- slightly up a little bit, but in line. So tremendous job. And then when you look at our OR year-to-date to September, I'm even surprised that we're just 70 basis points higher than last year on our OR. So we're doing extremely well. I'll let him cover it. And then to finish, I think at this point, from what we see, and again, as I said, we were seeing improvements. We're confident we'll deliver in our guidance for this year of flat to slightly negative EPS growth. And obviously, with the economy doing better and some of the growth initiatives that are coming on board that we'll talk about Justin in a couple of minutes, I think we're comfortable that we will deliver 10 to 15 EPS growth from 2024 to 2026. So maybe talk a little bit about operations and give a bit of an update there.

Sure. No, thanks, Ghislain, and thanks, Justin, for hosting in today. I appreciate it. So one thing I want to touch upon a bit with the operating structure. When you look at make the plan, run the plan, sell the plan, that's something that's ingrained in this railroad again. We mentioned it in Investor Day in May, Tracy, it had a vision of what that looks like. And the end result is the role Pat and I are now in. So when you look at that, they're very complementary. At the same time, those roles are equal important, right? And if you look at how things have evolved here, it's not just splitting Ed's role. There's actually more that have been given at Pat in terms of responsibility. An example is intermodal now has come back operations is one thing. And this could evolve a bit over time, but it allows both of us to focus on two unique things so we can really be laser-focused as time goes on in this organization. Pat is actually in route. I think at Toronto. we'll be with you tomorrow. So my good friend is right isn't here with us today, but I'll touch a little bit upon his structure. And one important thing to remember why this works so well. Pat and I, over our careers have actually done each other's roles. I've done net operations roles like he has done. He's been in the field before. It's very complementary. And one thing at the end of the day, that wins out is what's right for CN. That's the most important thing, and that's what drives the decision-making and the outcomes. So a little bit about Pat's group, there's two key responsibilities. First, from that role, they design the network plan, right? You don't suboptimize the network for a terminal or a region. You got to do what's right for the entire network. And that's what his team does for -- call it the foundation of the railroad to what that plan looks like. We look at certain corridors, how to best use our locomotives, crews and other assets. Now it's not done in a vacuum, right? There's a lot of feedback that comes from myself or my team to make sure we've got the best plan, but that's where that plan lies that is under pass organization, for example. A second thing, when you look going forward with the new organization, though, he also has a good example of engineering and mechanical as part of that. Now when you think about that, not only does he own the network plan, but take engineering, you're going to have a 1-year outlook, a 3-year outlook, a 5-year outlook, right? Very important when you look at -- he's looking at where do we need potential capacity at, where do we need to hire people at. But another key thing near and dear is [ line sourcing ] capital efficiency, right? With myself really being focused on the day-to-day operation, Pat and his team can really get into the engineering team and drill down how can we do stuff at a lower incremental unit cost. How there are different opportunities out there. It creates space where you're not into the day-to-day like where you can sit back and have a vision on where things are and where they need to go. That's really important. I've been in this industry 23 years. And when you have a lot went on in the field side, it tends to distract because you've got to have a day-to-day going the way it needs to go. The other thing I would say with that mechanical side, he gets to look at that network, he look at the shops, how locomotives are distributed, but think about it right now, what does the locomotive of the future look like? We may not know yet. So he's working with the mechanical team and others to -- our DC to AC conversion fee, for example, what does that look like? What do we need on a year-to-year basis as this goes out till we transition? It creates that space for that group to really have a strategic focus in a timely manner. Now that you come to say my team on the field operating side or the run the plan side. As I've always said, and he'll tell you the same thing. You can have the best plan in the world if you can't execute the plan, it doesn't really amount to a lot, right? So this is a really key piece. And listen, the plan is a living and breathy thing. You've got to be able to adapt to economic conditions and different things, but always the plan is sacred. That is something that was 100% alignment on organization, and that includes the marketing team. This is not just an operations function. Everybody is aligned. So in my realm day-to-day, we're supposed to execute the plan. So you look at your major hump yards, your major terminals, the customer centricity piece of the first mile, last mile, all that comes in the operational function and what falls under my responsibility. And that's important, especially when you're bringing the intermodal piece back too, there's another customer centricity piece that may be a bit different than your manifest centricity piece. So how we do that and roll that out is extremely important. And then the second thing we do is, obviously, [ railroad ] is an outdoor sport. We manage disruptions daily. Obviously, we do that in a clear coordination with Pat's team, but my team is out there, rain, snow, sun or shine and we are the Northern rails so we get plenty of the above. and it can be challenging sometimes, but by really focusing on that under my organization, it still creates space to have a network planning point of view. And as I said, well, maybe two teams, it's all for one goal. And talk a bit about experience. And I've been at CN 23 years. You heard Ghislain alluded to it. He's told a few times over the years, and I have had opportunities. Good luck, congratulations but good luck keeping it. That's the important part.

We've met -- I've met Derek. I would say about 20 years ago when he was a young superintendent in Memphis, and we were both being groomed by Harrison at the time. I was on the railroad MBA. You were small -- you were a new superintendent and then you move to Winnipeg. So I've known this guy for over 20 years.

Relationships are important. You used to be fire engine red by the way, in freckles, that's all I got. I noticed during the COVID during Teams calls, I was getting a little a shy too. But to Ghislain's point, though, relationships are important. Leadership are important. And I've been very fortunate if you look at how the leadership from CN has evolved from the days of Mr. Harrison, but you've gone on and CN alumni in a different organization now leader positions. They've all impacted me in a positive way. I've been fortunate enough to have a lot of exposure to those folks, and I like to think I take the best of them and learning those experiences, and applied it to here. And the reason I bring that up is we still have a lot of good talent at CN. We grew up and he was just scheduled rarely, and that's what we know it has in that environment. And you look down the organization when Tracy set the expectation that the team really rallied around that and how we rolled that out. We still have that muscle memory here, and I think that's shown over the last 18 months. And that resiliency, Ghislain mentioned, when you look at the disruption, this was a very disruptive Q3. You look at the floods we had in Eastern Canada and Halifax, the wildfires in Northern Quebec, Western Canada, which were very impactful. The ILWU strike, which rare is like an aircraft carrier, you can't just turn it on a dime, but to stop and start this railroad essentially with three different times with that. But we came through that, I'd say, in the best shape I've seen it from a disruptive point of view. The resiliency of make the plan, run the plan really showed its true colors over this Q3 because when you look at some of our operating metrics, like car velocity was only off 1%, for example, right? Train speed, 2%, dwell up 1%. So while there's a little give there, it did not disrupt the overall flow of the railroad. We are very adaptable in terms of dealing with some of the disruptions. And lastly, the reason I bring that up is important. Customer centricity is really where I think the future opportunity lies. We have a metric called [ LSCP ] there's plenty of acronyms on the ralway but what I'll tell you is what it measures is do we give the customer the right car on the right day and actually in the right window. And I'm proud to say that's been a 91% over the last two quarters. And as Stacy graciously shared yesterday, I think it was an RBC report that came out, and it really showed the difference we've made in the last 18 months as we have now provided according to that, the best service in the industry. So I think that's something when you look to grow in the future or some of the opportunities as Ghislain will touch upon. It's an important part to that last mile or first mile touch point with our customers.

All right. Well. Thank you both for all that detail. I appreciate it, and we'll dive into some questions.

Maybe to start with one that's more focused on the near term. As I think about the last earnings call, I felt the tone from CN was notably more optimistic than what we've heard from a lot of other exportation companies, particularly in the U.S. Just in terms of how you talked about the end markets improving sequentially. So do you feel like this is mainly a function of mix? Are there some market share gain benefits that we're maybe not fully appreciating? How would you explain the discrepancy in the tone there?

Yes. I can start and then Stacy, you can jump in here. I think I don't think it's a whole lot of market share gains at this point. I think there will be opportunities for some market share. I think we're very happy, and you had Jim Vena talk from UP before us on our Falcon service. I think that's a great opportunity to get market share from long-haul trucking back on the rail. And you and I, Justin, were talking before, before the webcast. I think when you look at the rails, we lost market share to the trucks in the 1950s. I mean, because on the market share standpoint between rails, over time, it's a zero-sum game. You'll lose a contract to your Canadian competitor, you'll gain one. But over time, it's a zero-sum game where the industry loss is in long-haul trucking. I'm not talking about trucks that go 500 to 700 miles. That, to me, that can should be on the truck. They're more versatile, they're more on time. But there's no reason why a freight in a can, going 1,300, 1,400, 1,500 miles should be on a truck, it should be on a train. The issue in the past is railroads have not worked well together, okay? So we've been quibbling about where we're doing no interchange. So of course, now you're interchange, you have to split the revenue. So we will say, "Hey, we want to interchange ourself as south as we can". Our U.S. UP, for example, no, no, we want to interchange this north. So when we started the Falcon service, we looked at this and said, where is the best route and the best interchange point to be competitive with the truck, okay, from a customer standpoint. And we got that in mind. And then we said, okay, in the past, these partnerships would be CEOs having dinner together, papering it on a piece of paper, having a press release, but it wouldn't permeate into the organization from an execution standpoint, from a governance standpoint, from a share of information standpoint. This is what we've done with UP, okay? It's permeated down -- it's permitted down in standpoint. So we know the traffic coming. We know we're monitoring every day when it comes, the dwell of the cars, how long it took to swap power, if we needed to swap power get the crews. And the notion is we need to run as a single-line railroad, and if you do that, and today, when we look at our service from Monterrey to Toronto, we have a 5-day service. So one, it's a win for us because remember, when you look at our network, you can't replicate a railroad, which is the biggest strength of a railroad, you can't replicate, but you're limited by your network reach. You go to where you go and you don't go to where you don't go. So all of a sudden, it's beneficial for us because now we have access to Mexico. We tried to buy the KCS, would have been a big purchase. We weren't able to do it. We finished with $700 million in our bank account. But now imagine we're able to access Mexico with UP, that is just greatly for us. And then UP doesn't go north. So the market access north, it's win-win. And then if we take those boxes that run 1,300, 1,400, 1,500 miles, put it on a train, customers are able to pay at least equivalent, if not a lower price, and this is environmentally friendly, like shame on us if we screw this up. I think that if we're successful, which I'm confident we're successful, I think that this will be -- the Falcon service will be the role model of how rails need to work together to gain market share from other modes of transportation. I think CN, we're well positioned because we've been the drafting that has failed other rails with our talent. I'm very pleased with Jim being the CEO of UP. He knows us. I remember when he was our COO of CN Rail and you and I have ridden trains with him. So we know him well. He knows our company. He's got CN tattooed on maybe his right side and UP on his left side or vice versa, but he's got CN still tattooed on him, I'm sure. So and we've launched another partnership with NS going to, again, long-haul trucking going to Kansas City and Atlanta. So that's market share. You won't see this needle moving in the short term as much because somebody -- a customer that has done business with truck for the last 10 years, won't give you all that business tomorrow morning. They'll test you out. So they test you off at 10 lows, 20 loans. I like what I see -- but if we're successful and we're reliable on our service, I think this will grow, and I'm quite excited about it. So that's a little bit more what's happening now. But what you see on the short term, it's more the end markets. that makes us a little bit more bullish. I think in Q2, you're always wondering yourself when volumes are down, have we hit bottom? And in Q2, we definitely were not sure we hit bottom. And when you look at our volumes in Q2, sequentially, they were the same as Q3, and then they're up now. So that tells us, okay, bottom has been hit, and then we see signs of betterment, and it's not one, but it's a little here, a little here, a little there, that makes us confident that this is coming back. I don't think it's going to come back to levels, especially intermodal international that the COVID bump demand that we saw, but I think it's going to come back to the pre-COVID levels. And I don't know, Stacy, if you want to add anything.

I think that was a really good summary. I would just add, we're really excited about the portfolio of opportunities that we laid out on Investor Day. And we're seeing some of them come to fruition kind of in the near term, like this quarter and throughout 2024. So it gives us kind of to your point, that really optimistic coming from a growth perspective.

Great. Maybe I'll ask a follow-up question on that, and then I'll open it up to the audience if you have any questions. But as we move into next year, what's your confidence level that you can achieve that volume growth framework of being above the economy, IDP and what are the key drivers to that? I know you laid out a lot of details at Investor Day, but specific to next year, what are some of the above economic growth volume drivers?

So we can give a couple of examples. Stacy and I., first of all, I think that you're right. I think on 2024, we will give more visibility in January. That's typically what we do on the year per se. When you look at our Investor Day, we said that we were going to deliver 10% to 15% and we need it, and we said that assumed constructive economy. And we looked at 150 different economic indicators and how they correlate to the segments of our business. But to simplify for investors, we took one. We said industrial production of at least 2%. So if you look at consensus forecast today, I mean, you would debate that we will not have 2% industrial production next year. I think it's more targeted to be flat to slightly positive. But we do have some of these opportunities that we laid out that are going to come to provide volumes in 2024. I think you can talk about the AltaGas, Stacy contract that we just signed and some of the opportunities we have on the BC North, which we're going to start moving volumes I mean, we're finishing the investment as we speak. We're going to start moving volumes in 2024. Maybe you want to touch upon a couple of those.

Yes, sure. We press released the new AltaGas contract that we signed a few weeks ago. It's a long term agreement and it's going to provide us with incremental growth for export propane into Rupert as well as Ferndale, Washington. So as you may recall, we did outline an opportunity of, I think, 40,000 to 45,000 cars of propane at our Investor Day. So this is actually a big chunk of that opportunity already secured. So we're pretty happy about that. And as I said, it's starting up already. I think Derek could probably talk about Northeast BC because we just finished doing a siding there.

Yes. Absolutely. And coincident with that, obviously, frac sand growth out of Wisconsin go into Northeast BC. We just completed a sighting budget there to enable some further growth and train needs there. So that's exciting. But with frac sand going that means the NGLs are coming out of there, hence some of propane and different opportunities. So Northeast B.C. is a location. We have a lot of collaborative focus on from marketing and operations to make sure we have good alignment. And as Ghsialin said, when we bring on these folks with these investments, it is backstopped, right? We're not just spending money to spend money. It's backstop with different things there to make sure our investment and we get the proper ROIC on it.

There's also the Norcan jet fuel transport facility that we actually finished building in Toronto in Mac yard. So that will see volumes coming in, it's going out in 2024, but we'll have a full effect of those. And then maybe from a little long term, in Eastern Canada, we're quite excited about the electric vehicle and battery facility. We've started to move some lithium from mines in Northern Quebec. Why we're up -- why we're favorable about this is, as you know, we have capacity in Eastern Canada. So we're working hard to try to densify our network there. On the electric vehicle battery side, there's been six announcements that have been made of building some of these facilities, some of them on our line, like there's one that's been announced by Ford, they will build a facility, a $1.2 billion investment battery facility in Becancour, which is just between Montreal and Quebec on our lines. So obviously, that's not going to give a whole lot of volumes in 2024. But from a mid- to long-term standpoint, if they build on your line, then you'll service them for the next 30 years or so. So there are six of them that have been announced. So maybe not all of them are going to come through, but I'm hoping that a few of them will. And there's a big one that actually, I think the Quebec government is subsidizing in the billions of dollars south of Montreal that is coming as well as one of the big battery producers in Europe. So the good news about our opportunities, it's not one single where if it doesn't work then your toes, you know what, like I mean, it's -- and it's not a big home run, but it's a lot of singles and doubles and maybe a triple. But they're there, they're diversified. They're diversified geographically. They're diversified from a commodity standpoint. And we've said again that we're not assuming in our 10% to 15% go that all of the 800,000 to 900,000 carloads will happen. I mean we said that we had 25% locked up in May. I think now we're a bit higher than that and we're continuing to work. And we're investing, especially on revenue side, we're investing as these opportunities happen and as we're signing up the customers to make sure that our investments are as close by the revenue as possible, so not to have a dilutive effect on ROIC. So in some cases, if the opportunity doesn't materialize or if the opportunity is being pushed, then we will adjust our CapEx accordingly. Obviously, we're not going to spend just for spending. So we will adjust accordingly. So when we said CapEx from -- when we gave goalpost $3.5 billion to $4 billion. We said to people, this is not set in stone. Like I mean at the end of the day, this is a bit dynamic. Some of the maintenance is steady eddy, as we typically do and some of these capacity and/or revenue opportunities, we will line up with the opportunities that are in front of us. So I think we're in a great space. And then we've got the operating model. We've got the operating model to deliver. I mean when I look at the reorganization that's been led by our CEO, with having Derek on the field and Pat on the network, it really solidifies from an organization standpoint, the scheduled railroading model that CN will have for the next 10, 15 years going forward. And the key on that, and to me, this is telling because I've seen the good and I've seen the good and I've seen the bad. You remember, Justin, when in '17 end of '17, early '18, we started to be jammed up a little bit, and it wasn't clear at CN whether we're going to run long train model or scheduled railing model. We got to January, we had 35,000 more cars on the network and we moved 11% less volume. Just as an example, this year, because it's tougher to see in Q2 because our volumes were down. But in Q1, our volumes were up 6%, and we did that with 15,000 less cars on the network. That's compelling because now you're sweating your assets. You have -- you got less congestion. Some of the car ownership benefit we get if we owned the car. But remember that some of it goes to the customers because they own private equipment. Well, guess what happens? That's great. They get the bit but it helps us when we try to get rail plus inflation pricing with them, then we're able to demonstrate not only that our trains are more reliable because how can you be reliable if you never start your train on time. but that they're able to get the benefit of running either more volume with the same amount of cars or return some costs to the lessors. It helps us to get better pricing. So that model and the reorg that we've just done. And with Tracy did not do this on vacuum. We were all involved into looking at is making sure it's the right thing to do. And to his point, he's fighting fires every day and his team are the best at it. When they don't have a fire a given day, they'll create one. because they want to put it out. They're good at it. And then Pat is a little bit more longer term. I think -- and these two work hand-in-hand. And I think you've seen the dynamic at Investor Day and some of you, if you attended or looked at the -- because it was video, you looked at it, you can see these two guys working very well together. And we did this intentionally. We wanted to put the bread crumb out there so that knowing Ed was eventually going to retire that we would not going to take the market by surprise. So this was all intentional.

Okay. Well, I can keep going, but let me take a question from the audience.

Just two quick questions here just on -- you talk a little about why the volumes in Vancouver and [ Prince Rupert ]. So we just seems like those boards have lost a lot of share to L.A Long Beach. And then second, I was just trying to clarify your grain comments. So the [ comment], it's a lower grain this year than you had in 2022 and then there's a spillover impact of that into early '24. The overall grain business should be down for you? Or is there a southern visibilty northern dynamics there?

So I can talk and you, guys, can jump in and I can open up. So in terms of the volumes going to Rupert and to Vancouver, obviously, we did lose some market share to L.A Long Beach and Seattle-Tacoma. What happens with the strike as the shipping lines started being concerned about a potential strike, they signed up deals to those ports because they needed to land the box and to North America. And typically, when they sign those deals, they don't sign it for a week or two, they'll sign it for a couple of months. They won't sign it for a couple of years, but they will sign it for a couple of months. We think that as volumes come back, where L.A Long Beach will continue or we'll restart having more congestion issues and so on, that definitely, it will come back to Rupert. Because Rupert is too compelling for business going to Chicago, Detroit and North U.S., just from sailing time, it's 2 days shorter sailing time to go to Asia and then you pay the port fees in Canadian dollar. There's no harbor -- anyway, so there's a lot of these things that make Rupert very compelling. So that's the question on this. On grain, as I said, it's a lower crop. Typically, like it depends on ore prices of grain, but farmers typically, historically will push the grain as much as they can in Q3, Q4. And then some of them, they try to play the market as well from a pricing standpoint. But what we've seen historically is you move as much grain as you can in Q3, Q4. But then you just run out of grain in the following year until the new crop comes back on August 1. So that's typically what we've seen. Now you could have a week where it could be stronger or weaker, depending on how sometimes the farmers and the big grain companies are trying to play the market. And God knows there's a lot of geopolitical things are happening out there and so on and so forth. But that's typically what we've seen.

Question on the end.

Yes. Just maybe a quick follow-up to West Coast margin. So then you are talking about the folks that signed the agreements for some length of time, 3 months, 6 months, I get around the strike versions. And then on the conference call in Q3, you talked about those volumes recovering sort of over the course of the year. Why would it take that long if these diverted volumes have been put on fairly short contracts to just sort of get it.

I mean maybe it won't take that long. We're speculating. I think that on any given conversation, it could be a month or 2 versus it could be 3, 4 months. I think that it could take a little longer if it takes longer for L.A Long Beach Port to get back to some congestion issues. But if they get to congestion, for example, the recovery and some of the people are telling us they're expecting the recovery to be V-shaped in 2024 and Intermodal International, then I think it will come quicker. So right now, we're just speculating. But from a long-term standpoint, for me, the strike in Rupert is noise, like it's a little bit like noise we have on the fuel surcharge in a given quarter. Definitely, Rupert for us is the gift that keeps on giving, and it's a long-term play, like Rupert has tremendous opportunity to expand. We're trying to make it a multi-commodity also, it has capacity to expand its terminal from 1.6 to 1.8, and then it's got land to build another one. So to your point, I don't know. So we -- you talked about McDonald's, it could tell you, well, it's going to be in a month or 2, talk to somebody else. They said, well, it depends if L.A Long Beach gets better because these agreements may say, "Hey, we'll extend it for another month or whatever," you know what I'm saying? Like so -- but definitely, we feel that over time, it will come back. So it's just a question of when.

I think there's two pieces. There's kind of a temporary share loss because of the strike, which we already starting to see kind of in the order data that we look at, which is 3 to 4 weeks out, that we're going to see better volumes at Rupert in the coming weeks. And then there's a longer-term issue about just the overall environment has been very soft for everybody. That's where we think the recovery is going to build through 2024.

I'd say, too, there's some recent announcements, new import, export facility, Rupert, for example, this is going to make an even more sticky competitive with this new facility building to be able to transload plastics back into containers, different lentils or products. So that when you have the ability to reload these empties going back even more than we do today, it just makes it more of a competitive thing to want to bring imports in, right? So the team, whether it's CN, our customers and the port not citing it, there;s things we can continue to evolve at Rupert to make an even more sticky and competitive over time.

Question here?

In May, I don't believe grain [indiscernible] I don't believe this sort of issue at [indiscernible]. Should we sort of expect that move to rise a little bit? Or is that still very much achievable despite these volume [indiscernible].

We'll see. I mean, obviously, as I said, we will give more visibility on 2024 as we get to January. But you're right. So the grain is a lower crop. Now when you look at our 3-year guidance, it could very well be a higher crop in 2025, 2026. Grain on a given year, just with technology from fertilizers and from agriculture goes up, I say, 3%, Stacy says 2%. So -- but it's in 2% to 3%. And I mean -- and industrial production is not going to be at 2%. So -- but again, like I said, industrial production was a metric that we provide to simplify for investors, but we're looking at 150 of those economic indicators. So I would say on this one for 2024, stay tuned, and we'll give more visibility in January as we typically do.

The last 2 years, there's been a lot of discussion around inflation and what we've seen there. Obviously, that's added some pressure. Any initial thoughts around inflation in 2024 and how that could compare to this year? Just curious if you're expecting some easing into what magnitude?

Yes. When you look at inflation, when you look at labor inflation, with deals that have been signed in the U.S. would be a little higher than in Canada. I mean, I think you're probably in the 4%, 4.5% range in the U.S. I think in Canada with the various deals that have been signed during the 3% to 3.5%. I think inflation from a material and product standpoint, I think that the biggest of inflation is probably behind us. When I look at buying rail, for example, on a year-over-year basis, now it's pretty much flat. Tight prices are -- they do have inflation. They're higher on a year-over-year basis. So I think that -- and then with interest rates coming up and what the banks are trying to do, I think as they're trying to contain whether we'll go to inflation at 2%, that's questionable. But I don't think we'll remain at 4%, 5%, I think we'll go down to the 3-ish percent. And then from our standpoint, what's important is when we state, and I'm sure that's going to be your follow-up question is what about how do you feel about pricing above, above inflation. And I think that like we feel pretty good because of a couple of reasons. It's because our service is not -- has never been as good. So we feel pretty good about pricing. We're reliable. This customer survey that came from RBC yesterday, is very favorable to CN and our service. And the fact that we're able to move business with less cars and some of the benefit going to the customers, I think it's is favorable for pricing. So I'm confident that we will continue to price above rail inflation.

And without giving any specific numbers on price, do you feel like the pricing environment can accelerate in terms of the pace of increases as we move into next year?

Yes. I mean, it's [ rob rush ], we say rail above -- we say pricing above rail inflation. But it's lane by lane. We're looking at it on a lane by lane. We're looking at it on a commodity standpoint, obviously, a dangerous commodity does not have the same pricing as price in coal, for example. So we look at it and the good news at CN because we have not done this all the time. It's in the past, marketing would go up and they would sign up these contracts, and we would not -- all of us would not have visibility on them. And then I would see these e-mails of all the volumes that we have been able to pick up, but I would not be able to see at what price did we pick them up, and I have to go through my costing people and so want to find out. I think now this is something that Tracy came along, not only did she push us to go back to the scheduled railroad model but also to better work on it, integrated -- on an integrated fashion. So we have this operating committee where Derek, Pat, Ed used to sit on it myself, Doug and Tracy, and we look at all the renewal of contracts, either new business or renewals of contracts to make sure that we all agree that we have the capacity to move the business so that we can deliver great customer service. We like the price. We like the profitability. We have the resources to move the business, we have the capacity. So we have visibility on all of this. And in some cases, pricing will be way ahead of inflation because of the OD and because of the commodity and [indiscernible], in other cases, maybe we'll be a little bit more aggressive on price, let's say, in Eastern Canada, where I do have capacity, even if it's a little lower margin, it adds to be able to pay our fixed cost. It adds to, and is accretive to earnings and so on. So it's the right thing to do. Sometimes we pick up some spot business where we said, hey, we have capacity for the next 3 months, let's move some crude from Western Canada to the Gulf, but we'll do it for 3 or 6 months because we have the capacity. But then after that, we're going to supplement this with frac sand or with grain. So we have these types of discussions that we're very intentional about. The keys to be very intentional about not only grow the top line but grow in a way to bring that top line growth to the bottom line.

Makes sense. I think there is a question down there. We probably have time for one more.

If I can follow up the clarification because you obviously more to price above inflation over the last sort of 18 to 24 months like super inflation on call. So how long do you think it would take you to get back to sort of that historical kind of margin run rate or whatever like can you claw back over the course of 3 years or something major simple.

I don't know what you think, can we claw back over the next 2 years. I think that it depends what you call inflation. So if you look at the [ RCAF ] inflation, 7% or 8%, you're right that it's -- the pricing and most railroads have not priced at 10% or so. But if you look at the real rail inflation, which is lower than that, because remember that some inflation comes from fuel, and that fuel is actually being sent to customers to surcharge. I think that in the last 12, 18 months, when I look at our own rail inflation, we've been able to price above it.

We're not as exposed as our peers in the U.S. to the labor inflation as he spoke about earlier. So it's quite the same thing for us.

Yes.

Well, maybe to end Derek, with one for you, just given the change in your role. Did this reorganization drive any change to incentives for you or others in the organization? And maybe along those lines, what are the metrics that you're most focused on improving? I'm sure there are hundreds that you look at very morning. But what are the kind of top 2 or 3 that you're focused on and we should be focused on as we kind of grade how the execution of the plan is going?

Yes. No. And I think the key is, as you mentioned earlier, this is a network business. We're going to do what's right for the network in CN, right? So you look at the whole make the plan, run the plan, sell the plan, there's always going to be alignment in that. That's the expectation of Tracy. You heard about the ops committee, that makes us much more nimble. When you talk about alignment these opportunities, as Ghislain mentioned, don't happen without alignment at that level, right? And I'd say this, just because there's a couple of new guys sitting in chair with that retiring with Pat and I. Listen up, Pat and I have got one very good, we think a lot alike. We understand the schedule rail concept. Now we're different leaders and what's interesting, we want the same outcome, how we get there may be different, but that's the diversity of thought and ideas. That's important because you may not be able to leverage everything as good as you could without that. And in terms of metrics, there's hundreds, as you know we look at. One, I would touch upon car velocity. I don't think I am the first or the last operations leader that would tell you that. And for us, if cars velocity is at 200 or above this network is run in a place. Now what I would say about car velocity. I always got to keep in mind, there is mix that impacts car velocity. There's seasonality to car velocity, so you can't necessarily just take a snapshot in time and say, "Oh, there's something right or there's something wrong." But overall, that car velocity metrics is one of the purest things we can use from a railroad point of view. Now for me, obviously, being in the field, I'm looking at on-time performance. If you don't have on-time performance out of your initial terminals, it can negatively cascade throughout the network, right? So there's a lot of focus for my group on time performance. Another thing is when you look at 32-hour cars, for example, how long are those cars dwelling in your major terminals or outline points. You look at, call it, industry process, well, that's measuring hours in the yard. Now those things are all smaller, but they all create the velocity. It's just like anything else. velocity is the wonderful thing that's the all-in but there's countless things that I'll get into, I could, but we can be here all day. But the other thing I will touch upon here is LSCP. That's that touch point with our customers. I don't want to lose sight of that. That's extremely important. When you can get your customers, the cars on the right day and the right window, that's extremely powerful, right? And at the right time, that something allows you to be able to maybe have her [indiscernible] maybe there's some doubles, out there some triples, but hey, there's some is the day-to-day operation, how you can draw these long-standing customers, how do you bring more volume on the network. And I close with this from a compensation point of view, nothing has changed. We all get measured when you look at it from the different metrics there, corporately, that's what drives compensation, right? It's no different than what I have with Ghislain, it has Pat, there's no change in that. It's an interesting question, but are there some personal submetrics that him and I may have different from. I'm more focused on some of these terminal metrics, but it actually still coincides with car velocity just like some of his. So although we have different personal metrics as a part of that, it still goes to the same thing what's best for the network.

From an incentive standpoint, we're measured on revenues. So we have targets for revenue, operating income. So revenue, we need to grow the business. operating income, we want to grow it profitably and then free cash flow because we believe cash is king. We have also -- we're also -- our incentive compensation is tied to safety. So we have a component tied to safety, FRA accidents and FRE injuries. Some of our metrics is tied to customer service, and we have an NPS score that we go with to make sure that our customers are satisfied with our service and we're incented on that from an incentive compensation. And then finally, another piece is employee engagement. So again, making sure that employees are engaged and we do surveys. We measure it and if -- and depending on the targets on, we're incented by it or we just don't get a bonus related to it. And then we have long-term like other rails and other companies, we have long-term compensation, a lot of it related to our targets on ROIC because ROIC is such an important metric with a capital-intensive business like ours. And then we look at TSR. TSR versus other rails and TSRs versus some type of index. So it's well rounded. And the bottom line, though, is what he's saying is those metrics that car velocity and so on, they all feed into like if we don't have car velocity or dwell, then you won't have operating income. Like it all boils down to what it should be. Like if we perform what we should be rewarded. And if we don't, then we should not be rewarded, we should penalized.

Okay. Well, we're out of time. So we're going to wrap things there. But thanks again to the CN team for being here.