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

All right. Fantastic. We're going to get going with our next session with Canadian National. To my left, we have Derek Taylor, Chief Field Operating Officer; and Ghislain Houle, CFO. I'm going to pass it to Ghislain for some opening comments, and then we will get right into questions. So thank you, guys, for being here. Appreciate it.

Thanks, Scott, for having us. Beautiful day in sunny New York, right downtown. I was here last week. I'm here this week. I'm going to be here next week. Maybe I'll rent an apartment eventually here. So thanks for having us. Thanks for people in the room. I think there's a good turnout, and thanks for people listening on webcast, taking interest in our great company. Let me make a few comments on the business, and then I'll turn it over to Derek to make a few comments on the operations, and then we can turn to your questions, Scott. So as we said last week, and I'm going to say a little bit the same this week, we're quite pleased with our performance. I think that we're performing per plan. I mean if you look at Q1, I would say we even did a little bit better than planned. And when you look at Q2, our volumes are holding up. I mean, when you look at -- and when I talk about volumes, I talk about RTMs because I think it's a better proxy than carloads. So our volumes are up 9% quarter-to-date. When I look at the various categories, I'm quite pleased to see Intermodal International being quite solid at 23% up on a quarter-to-date basis. As you remember, last year, we were hitting the deep of the freight recession in the second quarter, and that was a sector that was quite soft and quite weak. So that's coming back. I would tell you probably a little bit better than what we've modeled so far. When you look at Canadian grain, we're moving more Canadian grain now at this time of the year versus what we typically move. And this is because, typically, as you know, on Canadian grain, we move it all out in Q3 and Q4. But last year, some of the Canadian farmers and Canadian companies didn't like the prices on the wall market, and they decided to sit on the grain. So that pushed some of that movement to this quarter, and grain is up 25% on a year-over-year basis. When you look at the merchandise business, merchandise business is up 10%, led by P&C up 17%. I would tell you -- and then lumber is stabilizing. If you remember, we talk about lumber in the car orders per week, and these are center beam. So these are the kind of the sale boat where you have the big bundles of lumber. If you look at last year in the trough, we were getting about 1,600 car orders per week. We finished the year around 1,800 to 1,900 car orders per week, and we're stabilizing pretty much at 2,000 car orders per week. So that's pretty good. That's a little higher than what we've modeled. So so far, so good. I will tell you the place where it's a little softer is in coal. If you look at coal, overall, it's down on a quarter-to-date basis. In Canadian coal, it's -- it was down in April. When you look at May, it's up 6%, and these are mainly the coal, West Coast. There were issues at some of the mines that are on our line. They seem to be behind us now. So hopefully, that will turn around. But the coal U.S. remains soft and will remain soft in the near future. When you look at -- this is thermal coal coming from Southern Illinois to the terminal in New Orleans and then going to export in Europe. And that demand is soft, and the low natural gas prices as well is not boding well for that. But just to put this in perspective, coal for CN is about 3% of our book of business. So it's relatively small versus some of the other commodities we're moving. So that's on the volume side. Just want to give a heads up to people as well because we did -- we said it last week that -- from a fuel standpoint, you can expect to have a bit of a headwind again in the second quarter on a year-over-year basis. And we've quantified this or estimated this to be about $0.10 of EPS or 140 basis points on -- dilutive to the OR if fuel prices remain the same in the second quarter. So I think I'll pass there, and I'll turn it over to my friend, Derek, to give a couple of comments on the operations.

Thanks, Ghislain. And so over the last 24 months, the [ railroads ] run extremely well. And one thing we discussed briefly on our Q1 call, but since 2017, our Q1 operating metrics for Q1 were the second best we've had since 2017, only surpassed by Q1 of '23, for example. So the [ railroads ] running, and it's in a good spot right now. When you do comparables, too, not we're going to give the [ inches ] right now, there's always room for opportunity, but metrics are at where they need to be, or we're close to it. Car velocity this morning was 219, for example. From my CN folks on the webcast, 220 is where it needs to be, but 219, I'll take it for today. But when you look at it, too, coming out of some of the challenges post-COVID with the industry, including us with some service challenges, we're in a bit of a different spot. We had some challenges, but our base coming off wasn't as big as an opportunity. When you look at our LSCP, or local service commitment performance, we're at the 92%. So that measures that we get our customer the right car on the right day and then the right switch window. And that's really important from a service point of view and look at what we're doing in our growth trajectory, and that's up 6% from last year, and we're maintaining that through Q2 right now. So that's a really important metric that I look at operation every day as does Pat and our respective teams. And then I'll close with some of the volume stuff Ghislain mentioned. The manifest is up about 10% and change really driven by P&C right now. We've been able to sort that growth at a low incremental cost right now that fits in our existing manifest package. So when you talk about delivering some operating leverage, that's been a nice C for us there. Intermodal has been very strong of the Canadian West Coast, both in Rupert and in Vancouver. We did have to add about 6 to 8 train starts a week on that, but those new train starts are between 9,000 and 11,000 feet. So they're already full -- or relatively full, where they're going. Some opportunity to grow a little bit there. But Pat and I'll review that plan. If more volume comes online, we're ready to handle it accordingly. And then lastly, Canadian grain, very interesting here in May. A lot of grains still to move in. Now to this point, Q4 last year, the markets didn't really allow for what would be usually move in Q4. We've seen a lot of that move in Q2 now. And then interestingly, too, some of the, I think, [ Statistics ] Canada actually upgraded the grain crop that was mostly in our [ catch ] basin. So we have a little maybe unexpected tailwind there as we enter Q2, but [ seedings ] going full on now in Western Canada, and we expect as May wraps up here to those volumes to normalize.

Okay. Great. So I'll start with some questions. And if you have some, raise your hand, and we'll get you involved. So I want to start just -- maybe just Derek, with kind of something I've been thinking about with CN because you guys are doing something a little different than the others in the industry in terms of breaking up the [ COO ] role into 2 parts. And just your perspective and just in, I guess, if you have thoughts watching it as it's happening, how is this -- what's the -- maybe the rationale for that? And from your perspective, Derek, how is this working so far?

Yes, sure. It's a great question. We get it more often than not. But listen, the first thing I would say, we didn't really split the role. I mean if you actually combine what Pat and I have now, it's actually more than what the former role had. So for example, Intermodal is my responsibility now from an operational point of view, the terminals, the planning, the design, so that falls under my purview right now. And listen, Pat and I have a great relationship. We think a lot alike, we have open conversations. And you don't agree on everything. That's okay. You wouldn't want everybody to agree on anything. So it's a natural ying and the yang a bit, right? You have natural things with make the plan and run the plan. There are certain things I've had to adjust on because data shows Derek need to go this way. There are certain things Pat adjust on because data shows it goes that way. But I think it's a really interesting and productive approach because it also spills up -- allows us to space and gives us time to really get into details that maybe is one you couldn't do. So when you look at what Pat does when he gets into with engineering and mechanical and really giving him the space to think 3, 5, 10 years out, Scott, versus tactically day-to-day, I'm in everything with my respective region leaders and the team. So I've been very happy with the approach. It's a great partnership that him and I have, and I believe we're delivering together.

Let me jump in here a little bit. In layman's term, the way I see this is, see, when you have a 20,000-mile network, there's always things that has happened that you couldn't plan for. And these guys become exception management experts, okay? So they come in, in the morning at 3:00 in the morning, they look at the screen, they look at some of the systems they have, and they look for fires. And then what they do is they put out the fire. That's his job. In the past, when you just have a COO, they would spend most of their time putting out fires and not spending enough time for the mid- to long term, not spending enough time in engineering, for example. People forget that at CN, engineering is about a $3 billion construction company. So not spending enough time there because they're busy to put out the fires and they become expedited. And if one morning, there's no fires, they'll create some because they want to put it out, and they're good at it. So now he's putting out the fires, and Pat is elevating himself to look a little bit more to the mid- to long term, looking at our capital needs, looking at the pinch points we have on the network and diving into the engineering and mechanical. Remember, we're a single-line railroad, you need a locomotive reliability. If you have a locomotive that craps out on you in the NOD, on the Northern Ontario Division, this is a problem. So that's what he's focused on. So I love it because really, what I see now is Pat diving in. We've just promoted a young person called Jamie Lockwood to be the Head of Engineering. And I think there's tons of opportunity we'll find. Engineering is the biggest budget at CN. So just finding small benefits because it's so big, it will make a difference. So to me in layman's terms, that's what it is. And like I said, the role is bigger because intermodal that used to report into marketing now reports to Derek, makes more sense that way because running in intermodal terminals is really operations. It's -- so I think that it's worked well. And by the way, that's the way it worked before Ed retired, and it went extremely well. So now, to be honest, if you would have a COO that has an ego that have -- that's more -- that's bigger than the world, then maybe it wouldn't work. These guys work very well together. They're hand in glove. What's the nickname that you call each other...

Bert and Ernie.

Bert and Ernie?

We really delegated that nickname.

And hopefully, some of you participated to the Investor Day, but you could see the chemistry between both of them on stage, and they do that day in, day out. So the fact that these 2 characters, and the fact that they've done each other's job before as well makes it very, very -- works very well. I can't speak for the other railroads, but it works very well for us, and I'm very pleased with that structure.

So we're not going to split up the CFO role, it sounds...

Oh, you could. I mean, remember, I was fired...

Let me tell you, you have been fired in the past year, Ghislain.

I have been fired a few times. So...

I just want to follow up on a few things from your opening comments, Ghislain. So you talked about fuel as a $0.10 headwind in Q2. I think it was bigger in Q1. Once we get to Q3, do we sort of -- does that headwind go away? Or is there still a little bit more...

Over time, typically, as you know, fuel reverts to the mean, but it does create noise in the quarter. And I think it's helpful as we get into a quarter if there is noise, like if it's $0.01 or $0.02, I'm not going to talk about it. But when it's $0.10, I think it's important for investors and for you guys to know about it. And it's the same with the other rails, by the way. I mean, it's -- we're all in the same -- like we all have a similar fuel surcharge. And I think the U.S. railroads have a little bit of a structural advantage on fuel because fuel in the U.S. is cheaper than in Canada. I know we are deep diving on -- and we do that on a regular basis to make sure that we fuel our locomotives at the optimal point. So we do all these things, but it's a similar situation with the other rails.

And you talked about international intermodal, up 23%. Is that -- I mean that's a lot of growth, or last year was tough. Is that sustainable? And then one thing I think is all different, I think, right, when we -- the U.S. rails talk about international intermodal strength, they're talking about that as sort of negative for mix. Is that the same...

So let me give you, because 23%, what does that mean, especially over comparables that were quite easy last year because that's when we hit the freight recession. So when you look at Rupert, Rupert last year, we did 700,000 TEU, okay. Rupert, pre-COVID, we did 1.2 million TEU. When you look at quarter-to-date, if you annualize quarter-to-date TEUs we do at Rupert, we would do 900,000 TEUs, and we've modeled slightly lower than that. I hope -- I think it is sustainable. And when you see -- I mean, when we talk to our customers, I don't think it's going to come back to pre-COVID, especially in 2024, over time, hopefully, it will. But like I said, we have not modeled the 1.2. I think that would be imprudent. But when you can see, like the customers, the orders are picking up. The retailers, now inventories are normalizing. So inventories will have to be built up eventually. So that's what we see. When you look at Rupert -- when you look at Vancouver, Vancouver, we did 1.5 CN, it's up 1.5 million TEU pre-COVID. And last year, we did about 1.1. And this year, Q2 annualized today, we would do 1.5. We've modeled slightly lower than that. When you look at Halifax, because we're 3 coast railroad, Halifax has a capacity of 1.1 million TEU. Last year, we did 300,000. We did model what we did last year, and we're doing slightly lower than that. But I don't think that's big, but slightly lower.

Why is Vancouver recovering all the way and Rupert not?

Good question. Good question. I think it took -- I think the fact that we had the West Coast port strike, I think that, as you know, some of the traffic was diverted. I think that I'm happy to report that, that traffic is back. Sometimes it's just the way the vessels are being called and so on and so forth. I would not read too much into this. I think that Rupert, and we've seen it like Rupert, when there was some talk about some labor issues, we could see the Asian bookings destined for either Vancouver or Rupert to soften up a little bit. And right after it was said that no, it's business as usual until there's a decision on -- from the [ CIRB ], the bookings went up right away to Rupert. So I think Rupert, as you know, is the gift that keeps on giving. We're very bullish on Rupert. You may have noise a little bit in a given quarter in a given year, but Rupert has lots of capacity to grow and lots of potential for expansion. And we're trying to make it not only intermodal, but a multi-commodity. And now we have AltaGas, Derek. We've got grain going up there. We still have coal going up there. So -- and we're working. There's a logistics park that's being built. So Rupert is a long-term play. We just have to make sure that we grow Rupert in a disciplined fashion so that we bring the top line growth to the bottom line.

And then you both talked about grain. So maybe either one of them you could take this. I thought 6 months ago that Q2 was supposed to be the big green headwind quarter, but you're saying grains up 25%. So I don't -- I guess I'm what's changed so much versus what -- at least what you thought?

So 2 things, Ghislain mentioned. I mentioned it briefly. Q4 last year, that's usually a big grain push in Canada, obviously, traditionally. The world market prices at the time, people sat on the grain. It just didn't move at the cadence that we normally see in Western Canada. And the second thing, like we said, just a little bit of a gift in nature is [ Statistics ] Canada came out and actually increased actually what the crop was. So you kind of had the double whammy. It was bigger than we thought and naturally, we just had a little more grain in our catchment basement. So what we've seen is that move in Q2 and then maybe a little in Q1 were usually moved in Q4. So same product, it just shifted the timing of it.

And Derek, you said you think it normalizes at some point...

Yes. I think by the end of May, you're going to see it normalized. Plus, they're already [ seeding ] in Western Canada right now. So this is a bit of a movement of what they wanted to do later last year, but we do see this normalizing say, by the end of May, very early June because now they're focused on seeding issues crop.

Derek, I know you talked about the some -- you guys talked about this some last week, but just give us the latest in terms of update on the labor front. It sounds like any potential work stoppage has been pushed out 2 months or so, but what's the latest?

Yes. No, listen, we're going to keep this tight. I know Ghislain and Pat actually talked about this quite a bit in the last 2 conferences, and that's out there. But at the end of the day, I'll let Ghis jump in. But from an operational perspective, we'll focus on, my analogy is it's like a winter storm, right? It may be there, you may not know how big it is or when it's going to happen, but we prepare for those things, right? So from a -- regardless of where this goes, there will be an organized shutdown plan. If it gets there, we obviously -- negotiated solution. We're still talking with them, to be clear. At the same time, it will be a very organized startup, right? And I think for me is there's been some talk about the multi-commodity or looking at different things. The railway is a network business. To carve out, do you know you need to move this or that. Obviously, if there's a ruling, we shall abide by the ruling. But when you look at it holistically as a network business, you can't just move one commodity, the railroad doesn't function that way. So maybe Ghislain.

You colored it well, buddy.

Just 2 real quick follow-ups there. So are we -- are you guys still trying to make a push towards hourly labor deals? Or is that now not on the...

The new -- I think we posted the new offer on our website. And right now, I would tell you the hourly deal is off the table.

And then if they sort of mandate certain products is essential, how much harder is it -- and there's a work stoppage, but certain products have to move because they're essential. That sounds hard.