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

I can start, and then Pat can come in here. I feel pretty good when you look at -- as you know, this year, we have mid-single-digit volume growth. I think people were worried a little bit at the beginning of the year that we were banking too much on a positive economy. I think as you know, half of that volume growth will come from CN-specific growth initiatives. They are happening as we speak. They're all being delivered as planned. These are not necessarily connected to the economy per se. They're very specific client initiatives, customers have invested in a lot of cases, like in Norcan, on the Norcan facility in Toronto, it's been a significant investment. And we've started to move some cars there. So I think why I feel comfortable about these, and you and I, when we were in Europe, we've talked a bit -- a little bit about it is because we're not banking on one initiative. It's a slew of different initiatives. It's diversified from a commodity standpoint, diversified from a geographic standpoint. So if we're wrong on one from the negative side, hopefully, we're wrong on another one on the positive side and you've got the law of compensating errors. So we're very comfortable on that. The economy is panning out pretty much the way that we are thinking, like, I mean, when you look, we're not banking on a 2% industrial production, but when you look at industrial production, in Canada, at least it started to be positive 0.3 at the beginning of the year. It's now positive 0.9. And economists, as you know, they forecast very often and change by small increments because they never -- they can never be wrong. So the economy is there. As you know, there's 1% of growth that was related to the fact that we didn't assume that we would be -- that we would have a West Coast port strike. So I'm quite comfortable on the volume. Now we'll see what happens with this labor environment. But if you push this aside, I'm quite comfortable there. When you look at pricing, we continue to price above rail inflation. We monitor this very carefully. And again, to do our double digit, it's not just one thing, little bit of pricing, a little bit of volume. Then on efficiency, I think we will deliver operating leverage. We haven't given out a number. I think my friend here maybe a little bit sandbagging here, but we'll see. We do have definite path. We have space on some of our trains, especially on the manifest side of things. We purposely did not reduce our train package last year when our volumes were down because we want to keep good customer service. And then lastly, share buyback in the current year does not give a whole lot, especially after financing, but it will help in the out years. And so I feel comfortable about the 10%. And then the 10% to 15%, in my view, is, as you know, these CN-specific growth initiatives will have a compounding effect because now you'll have the full year effect of the ones this year and so on. And if the economy continues to do a little bit better and gets closer to the 2 and we continue to improve our margins year in, year out, then I think that hopefully we will move from the 10% to more the 12%, 13% and maybe to the high end of the range to when we get to 2026. So I think I'm quite comfortable. And then the last piece I would say on all of this is you can't have these results without the right team. And this is where we're focusing. I'm very pleased to have our new COO, Remi Lalonde. He's going to have big shoes to fill, and you know Doug very well. But he's fitting in very well in me and our team. The team is gelling. We're having the right discussions. We trust each other. And then finally, we have a great Board. We have, you could say, a brand-new Board. We have good rail expertise, good business expertise on our Board. We have the right discussions. And at least -- like you and I know, you can have the best assets and the best track and the best network out there. If you don't have the people and the right people in the right position to convert this into value, you have nothing. And so I would not underestimate the value of having the right team and this team I'm ecstatic about.

So one thing I was asked to clarify is, are you comfortable with double-digit earnings growth even with a brief strike? I think you had mentioned that before.

We'll have to see, right? I mean, we're speculating. We'll have to see how long it would take, number one. And we'd have to see as well how much of the catch up. As you know, there are some commodities where it's kind of a timing type of thing or it could be timing when you look at the bulk. Obviously, when there is some disruption in some way, shape or form, you've got other sectors that go quite quickly to trucks, namely Intermodal Domestic, lumber a little bit as well, especially on the short haul. And then to your point, and we mentioned that, whether shipping lines now would call other ports on the West Coast, and that could have a lingering effect. And it's not speculate -- I mean, if it happens, I mean, we lived it last year. So we don't know. And so I'm not going to speculate on whether or not we would make guidance. But again, I'm crossing my fingers that this noise will be behind us sooner than later. And the best way to do it would be to have a negotiated deal, a negotiated settlement ASAP. That would be a win-win for all parties. That would be the best way to do it.

Wonderful. Well, good luck on that. The target you mentioned, the incremental operating leverage as part of that thing to get to the double-digit growth, you posted a 60.8% operating ratio last year. Does that mean we're looking at a sub-60 OR?

Not sure if it's a sub-60, but we need to do better. I'm not going to -- we purposely are not throwing a number out there. And as I said before, and I think other rails have done the same. Operating ratio is really the result of everything we do, but we know we have to improve our margins. And on this, maybe I can turn it over a little bit, if you don't mind, Ken, the path on the operating side and what you're doing to make sure that we are being more efficient in 2024 versus 2023.

Yes. I would say, as it relates to leverage, and I'll start with the merchandise package. As Ghislain pointed out, we continue -- we are seeing the trainload and train length in our merchandise package is up year-over-year. And there's still room to grow without us getting to the point, you heard Ed Harris talk about this a lot, not to the point where we are having trains out there that don't fit our network. We still have room to grow that package and fit our network that continues to keep that velocity and that speed that we expect to see as one of our health of network metrics. So we have seen the growth in Intermodal tip over into about 6 new train starts off the West Coast coming into Canada, all volume related. And as we see that volume continue, those trains are pretty well maxed out. So any additional Intermodal volume, we will see some new train starts come from that. But there is room to grow into that merchandise package.

So I'm going to stick on you for the operating ratio for one more because let's go near term for a second barring a strike, right? The operating ratio typically improves about 570 basis points from first quarter to second quarter. Can you talk about what would aid or detract from that historical average? If we just talk about -- I know you're not putting a number down, so that would suggest it goes from 63.5 to just shy of 58. So maybe your thoughts on what the parameters are?

So by the way, you're 570 basis points. I had Stacy, check your math on this one. And as people may know in the room or on webcast, Stacy used to be in marketing. But before that, she was our Chief of Internal Audit. So we could debate, and we could have an offside discussion on your 570 basis points. But we're not going to give a guidance on OR in Q2, but you know that when you look at seasonality in the railroad, especially railroad at the North in Canada, the OR in Q1 typically is the highest, the OR in Q3 is typically the lowest. And you can look at the last 10 years, depending on if there's some extraordinary events that happen, but assuming there's none. And then the OR in Q2 and Q4 is somewhat in the middle. And Q2 will depend on the spring and how the snow melts in the thawing season and so on. And in Q4, it depends on how the winter hits. Like in some part of our network, people forget, but you are cricket [indiscernible] under snow. So it depends on how that hits. So you could expect, you should expect, obviously, that barring any extraordinary event that Q2 OR will be better than Q1, but we're not going to give a number. And you knew the answer to that.

Yes, of course, I do. So Patrick, you inherit a network from your COO predecessor and perhaps PSR Trainer, Ed Harris, who was famous for talking about the operating plan being sacred. How do you and Derek split the duties? And how do you ensure that the network OPs continue this performance in this environment?

Well, first of all, I would say to speak to Ed Harris, I've had the opportunity in my career to have many great mentors. And so for Ed to come back for one more round and have that opportunity to learn from a legend who is at the table as precision scheduled railroading was a concept that turned into probably the most popular operating model in the industry was a great opportunity for me. I would say this, that Ed's comments about the plan is sacred is exactly what we believe. So our job is to make a plan that most -- that optimizes our network, run that plan efficiently so that the marketing team can sell into that plan and we all believe that. When we get off plan, it's our -- it's the North Star. We work to get back to that plan. As far as how we divide up the duties, I'd say this, that it is at our core, it is make the plan, run the plan, sell the plan. So in my team, we make the plan. And we look at that plan is how to best optimize our network, get cars as deep into the network as possible without handling them again so that we have the least amount of assets being cars and locomotives increase out there to handle the business that's coming on. And we continue to iterate that plan in conjunction with Derek's team who is running the plant. And that's really where we are aligned is, one problem you see in the railroad industry is when you see operating metrics dip, it becomes this debate of is it planned or is it execution. Derek and I completely aligned on, here's the plan, until we have run that plan and found the -- where are the issues with that plan and where can we iterate it and make it better, until we've given it a chance to run, we're not just going to change it for the sake of continuing to change it. The plan is sacred. And if we've run it and we cannot make it work, then we will change the plan to make sure that it is executable in the field. And we are perfectly aligned on that. And my team, now also have engineering and mechanical and it's the same philosophy and the same mantra in those departments. It's we're going to make the plan, we're going to run the plan to make sure that we deliver for our customers.

Let me add a few points on this in very layman's term the way I see this because I've been around for many years. So because we're a network business and because the traffic never really runs the way that you had planned at 100%, especially when you're a 20,000-mile network. So the CEO typically will go in and they will look at the metrics, they will look at the traffic, and they will look at where the fires are, and they'll put them up. And they become experts as exception management and when there's no fires, they'll create a few because they're good at it and they want to put them out. This is Derek's job. In the past, because they're so busy doing this, they spend less time on a little bit to -- they spend less time on the medium to long-term planning, capital planning. Spend a little less time on engineering and mechanical. People forget that engineering at CN is like a $3 billion construction company. Spend less time on mechanical. We know that locomotive reliability is key, especially in a single-line network you cannot have locomotive scrap on you. Especially depending on where it does, it could be very detrimental. So with this structure, that allows Pat to look at the longer-term planning. That allows Pat to dig in into engineering, mechanical, more than what he would have been able to do in the past. And I'm happy we've just promoted now a new person in engineering as we speak. And I think we will find opportunities there because the budget and the cost center is so big. It's one of the biggest in the company that just a small advantage, just a small benefit, either capital or operating will make a difference. So it allows him now to elevate himself from the pure day-to-day and focus on some of these things, which in the past, he would not have had the time to do.

So CN was kind of innovative in getting us to look at RTMs versus carloads? Jim Vena, former CN, now at UP, talks a lot about car miles per day, right, as how to look at the network versus velocity and dwell which are metrics that we get because it's what the STB -- reported to the STB. How do you look at the network in terms of understanding if things are on time? Is it car miles per day? Is it first mile, last mile, what is the most important thing to really figure out how efficient and on time at the network is doing?

So to that point, I would say, that was one of the first things that Ed Harris focused on was, it's about the car miles per car day. And let me say it this way though, it is truly about the balance of all of those health of network metrics. So really, when I look at it, it's -- we're looking at the train speed to make sure that we see where any of the issues are across the network that are slowing trains down. It's about that car velocity or the car miles per car day, interchangeable terms to know that at the car level, the cars are getting as deep into the network as we need them to. And then it's about the terminal dwell. How quickly is Derek's field team processing cars through the terminals, which, as you look at it are true. Terminal dwells is lowest in the industry, processing cars through terminals. At the end of the day, I look at all of those, though, as health of network. At the end of the day, our local service commitment plan where all of those things have gone well, those cars are at that final terminal and that local is going out to service the customer. We're doing that at nearly 95% of the commitment that we've made to our customers. So yes, we watch all of the metrics to make sure that the health of the network is where we need it to be. But at the end of the day, it's that, that cars at that final terminal, and we're adding value for our customer.

I'm going to ask you to try and be quick, but we're going to talk about kind of M&A potential, right? So the end of the railroad M&A period, large-scale mergers you've talked about us being over, you're in the midst of acquiring Iowa Northern. So we're seeing some regional acquisitions all around the network. We're seeing some of these go on. You've talked more about maybe little tuck-ins, but also the partnerships, the alliances are really the next phase of railroad efficiency. Do you want to talk to us about that?

I think just a couple of points. I mean -- and we've talked about this you and I in Europe. There's basically when you're a railroad 3 ways that you can grow volume. Very simple. You either grow with your customers or you convince somebody to build a line on your network, and we're blessed to have the network of the north. So we have at CN, and we have, therefore, better access to Canada's natural resources. And then you've gained the customer's commitment for the next 30 years or you need to extend your network reach. And therefore, we are open to extend our reach through acquisition. We know it's not going to happen through Class 1s. The STB has spoken. But Iowa Northern is a good example where it's contiguous, any line that's contiguous to our railroad that will bring us to geographic markets that we can have access on our own at the right price, we're interested and we have the balance sheet to do that and to do it quickly. And then the last piece, to extend your network reach will be through partnerships. And that's why I'm so bullish with our partnership we have with UP. I think that when you look at our service from Monterrey to Toronto, 5-day service is truck-like. And the key here is exactly to convert long-haul trucking back to railroad which have been the most overpromised and least under delivered in the last 10, 15, 20 years. When you look at market share between railroads, over long term, it's a zero-sum game. We brag about a contract, competitors would brag about another one that they gain from us, but it's a zero-sum game. Where the industry needs to do is get that truck long-haul trucking back on the rails and there's more long-haul trucking than people actually think and that's what we're all about. And you can expect that there will be more of these partnerships in the industry going forward. And I think that our partnership with UP going to Mexico will be the role model of how partnerships have to be operationalized and to execute and to have a consistent transit time that are competitive to trucks to gain market share back. And it's a win-win because it gives us access to network reach in Mexico, and it gives UP access everything north of Chicago. So maybe one last point on concluding, Ken. As you know, I've been around for over 25 years. I've seen the good years. I've seen the years that have been a little bit more challenging. I can say that we're having fun at CM. I can say that the team is coming together. I can say that the management team has a lot of trust within ourselves, have a lot of trust with the Board. I think we're discussing the right things together. I think we are challenging each other, but we're doing it in a constructive and in a fun way. And I think that under Tracy's leadership, I think that CN is in good hands for the next years to come.

So if I were to kind of sum up what we just talked about, right? So things are performing the plan, as you mentioned, RTM is up 9% quarter-to-date. Network is fluid. I think Patrick kind of hit on some of the key points there. Labor discussion is ongoing. New wrinkle as of late, right? We might have just a little extension to the May 22 deadline or we will have one. Double-digit earnings EPS growth continues, again, without the strike, confident in hitting those targets. OR improvement, 1Q to 2Q, we should see Stacy for the exact level since you're not putting it out there. Anything else you would throw out there?

No, thanks for having us.

All right. Wonderful.

Happy to be here.

Ghislain, thank you so much for joining us.