Barclays' 41st Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst, and, up next here in the second session we have Canadian National, Ghislain Houle, Chief Financial Officer, and Derek Taylor, Chief Field Operating Officer, correct?
Yes.
So it's going to be a great conversation here, but as in the first session here, we're going to do the audience response questions very quickly, so pick up that blackberry-looking thing in front of you. If we can queue up question one, please. Do you currently own this stock? Yes, overweight, two, two market weight, three underweight, or four no?
If not, you should definitely own it.
Buy CN, huh?
Buy it.
All right. Some potential owners in the room, Ghislain. Question number two, please.
Uh-huh.
What is your general bias towards Canadian National right now? Positive, negative, or neutral?
Looks good, that one.
Okay. Some positive in here. Then, question number three, please. In your opinion, through-cycle EPS growth for Canadian National will be above peers, in line with peers, or below peers? All right. Ghislain, Derek, thank you so much for coming down.
Yeah. Thanks. Thanks for having us.
You know, I want to focus on the long-term here, but I do want to ask, you know, the pesky question about the quarter just to get out of the way. It's like, we just had Union Pacific up here on stage, previously. Obviously, January was tough from a volume and an operations perspective for a lot of railroads. How'd you guys fare in January, and what's really the trajectory on demand?
Right. So first of all, let me make a few comments related to this, Brandon. And first of all, thank you for having us. I mean, this is a great conference. We've supported your conference for many, many years, because we like to come to Florida in coming from Montreal. We like to come to Miami. Unfortunately, the weather has not been that great, but it's getting better. So first of all, I think looking back in 2023, and then I'll talk about January, I'm very, very proud of our relative performance. I mean, when you look at all the adversity that we had, whether it's a deeper freight recession and longer freight recession than we expected, whether it's forest fires, floods, it's the port strike, the West Coast port strike, we delivered, like, the best operating ratio of the industry.
So I just want to thank the 25,000 people at CN that delivered this great relative performance. To your point, in January, we had deep freeze in Western Canada, as you know, a good 10 days of it, where the temperature, believe it or not, was -40 to -50 degrees Celsius. When you get to that level, it doesn't really matter whether it's Celsius or Fahrenheit, it converges, where literally we could not move, like, we could not run our trains. And Derek will talk a little bit about that. So to your point, our volumes were down 7% on a year-over-year basis. But when I look at February, now that this is behind us, it's quite strong. Our volumes are up 2%. And this is against tough comps.
If you remember Q1 last year, you know, our EPS was up 38%, and our OR was 61.5, which is not a winter OR type of thing. And winter OR is more like 64, 65. So our volumes are quite strong. And when from a workload standpoint, like, gross-ton miles, we're running 1.3-1.4 billion GTMs per day. So that's quite good. Let me talk a little bit about the volumes for the year. We did provide the assumptions that our volumes for the year would be mid-single digit. I want to demystify this a little bit. First of all, half of that, mid-single digit, volume growth will come from those CN-specific growth initiatives that we talked about at Investor Day. These are happening. These are coming. These are not necessarily related to the economy.
These are CN-specific, customer-specific initiatives that we have great visibility on. The other piece that I want to talk about volumes is this: that the West Coast port strike that we had last year had a lingering effect throughout the second half of the year, which accounted for about 1% volume growth, which we don't believe will reoccur in 2024. So when you look at, you know, what we are counting on from the economy, it's quite small. And we are counting on a more supportive economy in 2024, but not to the tune of the 2% industrial production that we talked about at Investor Day. It's more like slightly positive, call it 0.5%-ish, which is what's coming out of consensus as we speak.
So when you take this into consideration, when you take pricing, continued to be above rail inflation, I think we will deliver, and we've committed on delivering operating leverage, and we will deliver operating leverage. I think my buddy here, and you can, poke him, I think he's a bit conservative on that front. I think that we will deliver the 10%. I'm very confident about our 10% EPS growth for 2024. And I'm very confident with these growth initiatives happening and the compounding effect of it, then we will, you know, that we'll have in 2025, 2026, I think we're well positioned for our 10%-15% guidance for 2024, 2026. So I'm very comfortable with that. Just want to make one point before I turn it over to him. He's he wants to make a couple of points on operations, on share buyback.
As you know, the board approved a share buyback program of 32 million shares, CAD 4 billion budget. I want to remind everyone that when you look at the share buyback from an after-financing cost point of view, it's essentially not accretive in 2024. It is slightly accretive in the out years because you get the compounding effect of having those shares out of circulation. But in 2024, it's essentially not accretive. And that's what we have in our model. So, maybe on this, maybe I'll turn it over just to him to make a few points on operations.
Yeah, thanks, Ghislain. Thanks, Brandon, for hosting us here today. You know, I'll focus briefly on, you know, how we finished Q4 2023. You know, the operating metrics, we were really good. The team delivered on that. That's important because it gave us really solid momentum coming in here into 2024. And, you know, as you may have heard, we're focused on make the plan, sell the plan, or make the plan, run the plan, sell the plan model. But a key foundational pillar of that, that we talk about from time to time, is the plan is sacred. And the reason I'm bringing this up is when you look at some of the challenges we faced, to Ghislain's point, in the 10 days in January, it was unpleasant. Now, you're not going to see in 24 years. But we do have a plan for winter.
We have tier restriction we put in place, decreased train lines. We have additional inspections we do. So there's a lot of things that happen, but it does inhibit our ability to handle the demand that is out there. The key with that is there is a plan. We deploy additional air cars. We do different things. So we operate in those pretty unforgiving conditions the best we can. When you look at it, the impact of that time, that 10 days, as he said, 40-50 below Celsius. I told my American colleagues, "Don't have to do any conversion at that point," as he said. It's pretty simple. It's just cold. You know, we had impacts all the way to Memphis, Tennessee. 70% of our network had an impact. You know, I lived four years in Memphis.
We had over 8 inches of snow and subfreezing temps for a week. That doesn't feel well in Memphis, Tennessee, for example. But the key is not what has happened. It's really where we're going. When you look at that, the operating metrics from a car velocity point of view, we're between 150-170 miles a day during that challenging 10-day period. But by the week of January 22nd, you're at 205-215 in car velocity. And that's summer-like performance really coming out of that really tough trough we had there, right? Then you look at the workload that we had, to Ghislain's point, you know, the GTMs, we had a couple 1.4 billion days so far here in February and mostly 1.3. So solid recovery by the team on that. You know, Pat and I, respectively, put a lot of focus on that.
To Ghislain's point, we give a lot of credit to the men and women out there that really get through those tough conditions but also aid in that recovery. Then I'll just close with this. When you look at it, I think we knew going in that there'd be some challenging Q1 comparisons. I think we've been transparent about that. In 2023, I mean, we were really knocked out of the park, really no winter to speak of, and really solid operating metrics. But as we recovered Q1 of 2024, we're seeing some of the same momentum.
Okay. But maybe this first quarter looks more like a winter operating ratio. Is that right?
Yeah. It's more like a winter operating rate. Absolutely. It's,
Derek, you're in a new position too as well, with the operations leadership being split. So can you talk about the new strategic priorities for the organization?
Yeah, sure. Listen, my good friend Mr. Whitehead and I. And it's not a true split, actually, if you look at what Pat and I do. Put it together, now it's actually larger than Whitehead, like I have intermodal freight, for example. But really, you know, day to day, I'm very focused on all the tactical things, working with my team, delivering the execution of the operating plan. But that allows Pat, with the focus on not just mechanical and engineering, but Pat's looking at that three-year plan, that five-year plan, capital efficiency. So it's really created space for us both to really be laser-focused on two key things, you know, there's a short-term thing and there's a long-term thing. Now, with that, it's a true partnership. You know, we work very well together. We've done each other's jobs. I think people don't realize that?
He's done my role in his past life. I've done a bit of his role in my past life. So it's working very well. But, you know, another key piece is the coordination with marketing and Doug MacDonald's team, right? You have the day-to-day type, and then you have the forward-looking type, where we're bringing on the right volume in the right quarters at the right time, for example, right? So, you know, I believe it's going very well. And, you know, if you look at the numbers, I believe we're delivering on the new concept and Tracy's vision of what it looks like. What are your nicknames again?
Our nicknames are Burt and Ernie initially. Being in Miami, we're hoping to graduate to Crockett and Tubbs at some point, so.
Ghislain, coming back to the annual guide for about 10% EPS growth, with, you know, I appreciate the clarification on volume for mid-single-digit growth there. Do you have positive price expectations here, correct?
Yes, we do. Yes. We're assuming we're very disciplined on pricing above rail inflation, Brandon, as you know. And frankly, the fact that we have great customer service is helpful. The fact that we're able to move more volume with less cars, especially for customers that have private equipment, is helpful because they get the car ownership benefit. So, you know, I mean, I know we don't provide any numbers related to the specific pricing because none of the rails do. But I can tell you that we continue to price above rail inflation. You know, it's always a you know, it's always a negotiation with our customers. But it's much easier, a discussion when you have good customer service than when you're lagging. So absolutely.
But from a top-line perspective, we should be thinking a little bit more than mid-single digit growth. Is that correct?
From a top-line snap, absolutely. Yes.
Okay.
Yes.
So, I guess embedded in this guidance, is there assumed improvement in operating margins or operating ratio?
Yes. Yes. And that's where I think he's sandbagging a little bit. I think that, you know, we kept resources in 2023. We did not have a knee-jerk reaction in sending people home. We got ahead of the game in training locomotive engineers. We did not reduce our train starts as much as volume was reduced because we wanted to keep customer service. So now we do have capacity on our trains, specifically on what we call the Manifest or the Merchandise trains. So we do have capacity. So we will add, you know, volumes there at very low incremental costs. He will tell you that on Intermodal, though, we did reduce train starts when Intermodal went down. And remember that that was a weak sector, Intermodal international. So we did reduce train starts. So we will add some train starts.
But these will be, Derek, full trains. They will be 12,000-foot trains in Canada going to 10,000-foot trains in the US because that's our network. We have a 12,000-foot network, siding network in Canada and 10,000 in the US. So I'm confident that we will improve. And we did commit that, as well at Investor Day and talked about it at the earnings call that we will deliver operative leverage in 2024.
Okay. Appreciate that. And, Ghislain, on, on the 50% of that volume outlook that are from CN initiatives.
Yeah.
Can you give some examples of where you're getting these customer wins?
So, it's the beauty of it is it's not one thing. It's a list of different diversified opportunities. So we have opportunities on the BC North, where, you know, we invested money. And we've, you know, invested on the branch line. We've invested in the siding. And now we have propane that is coming out of it and frac sand coming in. We have Derek can talk a little bit about the Norcan facility in Toronto there.
Yeah. No, it's new facilities and wet commissioning now. We'll be getting cargoes and into Q1 here. But it's a very exciting thing. It's a fuel facility bringing fuel to the greater Toronto area. And for us, you know, whether that's stuff coming out of Eastern Canada or the US, say, out of Iowa, it's exciting times. And you know, to Ghislain's point, a lot of that volume, this is incremental. It's moved in current train service. A key proof point, when you look at Q4 of 2023 compared to Q3 2023 sequentially, volume is up 10%, but our train stock's running up 6%. So we're already seeing some of that leverage specifically from the manifest side. And to his point on the intermodal side, when that does come back, we build that plan very judiciously to max out those trains when they come back.
Then we have two new coal mines that are going to come in operation in Western Canada this year. And when you look at the coal indices, these are two metallurgical coal. But when you look at coal indices, whether it's thermal or metallurgical, it's still very profitable to use coal. And then I'll finish on our Falcon service because Jim Vena was just here, our ex-COO. We have CN people implanted a little bit in all the other rails. Very excited about that service, in our view. I think this is moving forward. I think there's going to be a bunch of RFPs, Derek, going with IMCs. But we have a truck-like service right now. Imagine going from Monterrey to Toronto in five days. So that service is truck-like.
It takes a little bit of time because if you've been, you know, using trucks for the last 20 years to do a 1,500-mile haul, you're not going to give it all to the rail tomorrow morning. You're going to test. You're going to test. So we get test loads, you know, 20 loads here, 30 loads there. But my view, it's, it's, it's growing, every day. And the last piece I will say on this is I think that this is, the role model that railroads will need to partner going forward. I think when you look at railroads, we can be like, the, the, the strength of a rail is we cannot be replicated, okay? We, we own 8,000 bridges. The limitation is you go to where you go, and you don't go to where you don't go. It's through your network reach.
So now we don't have access to Mexico. But with UP, we have access to a new market called Mexico without having to pay $30 billion and have integration, possibly issues. And UP has UP can come to, to Canada. They don't have access to Canada. So if you want to extend your network reach, we know that you will not be able to do it through an acquisition going forward. The STB has spoken. So it's got to be through partnership. But partnership, that partnership has to be operationalized down to the ground level, day in, day out, as if the three railroads are a single-line rail. And this is not about taking market share away from our Canadian competitors. This is about taking long-haul trucking, 1,200, 1,500, 1,700 miles, and putting it on the rail. And there's enough of that traffic for both railroads.
So that's what it's about. That's what we're after. And I'm happy to report that it's moving forward in the right direction.
Well, well, Derek, how do you deal with those service challenges, though, on an interline movement like that? Because historically, shippers have said that's where you can run into some operational challenges, not knowing who to call, who's in charge, where's my shipment.
Yeah. First off, it starts with relationships, to Ghislain's point. Mr. Vena was just here earlier. Relationships matter in this industry. So how we do that is very focused, right? This isn't just a top-to-top focus. If you ask the frontline supervisor in Chicago on our railway, they're going to know that UP connection coming to us, what the time is, and what train to take it out on. So this is permeated down to that very ground level. The second thing is we don't let, you know, railroads and handoffs, there's going to be challenges from time to time, right? But the coordination between the FXE, the UP, and CN is that there's an issue, it doesn't fester. So many times in this industry, sometimes we let things fester and fester. In this case, a different approach.
We take it head-on aside a matter of blame. It's what can we do to address the issue for the customer? So, you know, this Falcon service I'm very excited about. It is very seamless and continues to grow. And we're excited to for what the future holds for them.
So we know the traffic coming at us. Let's say we get a change with UP in Chicago. We know it's coming at us the same way as if it would be our own train. We make sure that the track is available. We call our crews. That train doesn't sit there. And that train goes as if it's our own railroad. That's the key. And then we get a report every morning. I get a report. And the report goes up to Tracy and to Jim. And the teams is like one team. And we know this is a win-win. So, it's working very well so far, Derek.
Yeah. No, there's been very good challenges with that. And like I said, the different handoffs have been very seamless. And the fruit's in the pudding. I mean, we're delivering on the five days from Monterrey to Toronto. I mean, on a very consistent basis, we've been doing that.
Remember that through Chicago, we're the only rail that goes through Chicago on our own tracks. So owning the track is key because you want to own the dispatching. When you get someone else's track and they decide to give you a red and you sit there for two hours, it is what it is. We own the dispatching. We go through Chicago. It's seamless. And then we go up to Eastern Canada.
The former EJ&E k eeps on giving.
That's right. Exactly.
And by the way, if the audience has any questions, raise your hand. We'll get you a mic. Feel free to keep it interactive if you want. But I guess along the lines of consistency, is that what shippers are really looking for when, especially if it's a truck-denominated market?
Reliability. They want they want reliability because that's how you manage your inventory. So if you're saying, "I'm going to do 5 days between Monterrey and Toronto," you've got to be able to do it 95%-96% of the time. If you do it only 60% or 70%, then you bring a lot of unknown, a lot of uncertainty. And frankly, when you put it with that length of a haul, 1,500-mile haul, you know, when you put it on the rail, because of the synergies of the railroad, and the scale, you typically have a price discount. Like, it's typically cheaper. Now, if you do this reliably, that's when people and, and that's when people believe in it. And that's what they do. And, and that's how you get the traffic.
Okay. Ghislain, you did hit on costs. Inflation's been pretty high for the industry. How are you guys managing inflation? And can you give us an update on your labor contracts?
Yeah. I mean, the labor contracts, as you saw, both railroads are negotiating with the TCRC. These are the people, the conductor and the locomotive engineer. You know, we have filed for a conciliator. That's a regular part of the process. We are sitting at the table with them. We are hopeful that we will get to a negotiated deal. That's what we're looking for. You know, I'll leave it at that. In terms of costs, yeah. I mean, inflation, with all the other rails and all the other industries was quite high last year. I think inflation is getting better. I saw yesterday, I think in the Globe and Mail that in Canada, inflation now was down to 2.9%, for January, which was lower than what people expected. We manage inflation.
The key, though, is for us, we price higher than our rail inflation. So, that keeps our head above water. And I think inflation will get a little bit better as we move forward.
I think you did identify with it, $200 million of specific headwinds.
Yeah. Specific headwinds. We wanted to make sure that, you know, this was big enough, that it was visible. This relates to depreciation, incentive compensation, and pension. And that's modeled in our 10% EPS growth. And I think that will be offset by some of the operating leverage that we just talked about.
Okay. And then at Investor Day last year, I think the longer-term outlook is 10%-15%.
Remember, I got fired at that yesterday. Hey, what Tracy did say, she's looking for a CFO, I believe. I'm still around. Congratulations.
Thank you.
Not easy.
Can you tell us what's going to be required to get, you know, the midpoint of that compound growth?
So I think it's not one thing. It's a lot of things. First of all, if you remember, we said we need at least a supportive economy. Now, we look at 150 economic indicators that we track. But to simplify for markets and for investors, we said industrial production has to be at least 2%. So if you look, you know, in 2024, it's not going to be 2%. Hence, one reason why we're going to be at the low end of the range. But if you look in the out years, it looks like it's going to get there, even maybe getting a little bit above. With that, and then we went through all the CN growth initiatives that hopefully convinced everyone that we can grow more of our volumes more than the economy.
We need to continue to price above real inflation. We committed to improve our margins on the year-over-year basis. We did not give a number, but we said we need to do this. So when you do this and then we said we're going to increase our leverage to 2.5 times over time, through, you know, continue dividend growth and possibly share buyback. So when you look at 2023, our leverage was 2.25. So we have a good share buyback program in 2024. And we continue, and we'll see what happens in 2025, 2026. When you put all of this together and then finally the right team in place, so the right players, I think Tracy made a couple of moves on people, which was important. Remember, the team is what really delivers at the end of the day. Ed finally retired for the fifth time.
Hopefully, he remains in retirement. Doug MacDonald will now retire. I'm very happy to have Remi Lalonde, who was a CEO of one of our forest products customer, coming with us. He's actually on the train, right, Derek, in Western Canada as we speak. He's a young guy. I think, you know, investors will meet him when appropriate. But he's going to he's fitting with the team, you know. So when you have all of this all of these ingredients, including the right team, I think you deliver, you know, 10%-15%. That's what you need. That's what we'll do. And we'll come into that.
And Derek, you talk about, like, longer-term operations planning and how that fits into market and customer strategy.
Yeah. No, absolutely. I mean, from a customer touchpoint, you know, we, we've been very focused. It's called LSOP, right? That's, you know, do we deliver to the customer the right car on the right day and the right window? And, you know, some of the feedback we've gotten too, you know, service has been solid, but ease of doing business, right? So these are all things that Pat and I are aware of and we work with Doug on because we could deliver a good service product, let's say, but maybe there's an ease of doing business challenge. So these are all things we take from work off. And on a longer-term horizon, you know, both Pat and I look at it, you know, what is the people we need to meet the targets? What is the capital?
And to get that capital, you got to meet the ROC. How's the capital efficiency, right? You know, so when you look at it all in, and Pat and I are very close tied together, but Doug MacDonald and, you know, soon to be Remi, this is very important, how we go forward. You know, you can grow our low incremental costs in the east and the south, right? We can bring volume on and not bring a lot of cost. In the west, we're going to be very smart with what we do. That's part of the planning that we did today.
Okay. I'd say it's a great question, number four for the audience. I think we have a question up here, too. Number four, in your opinion, what should Canadian National do with excess cash? The first two are M&A. I don't think there's much to do there from a rail perspective. But three, share repurchase, four, dividends, five, debt paydown, is, like, internal investment.
We bought the Iowa Northern.
That's correct.
I mean, there are short lines. You know, if they're contiguous to our rail network, they bring us to market that we don't have access on our own, and they come available, you know, at the right price, we're certainly open for business.
I think there's an audience question here.
Yes. Yes. We are going to issue some debt. Absolutely. I don't have the exact amount, but we are going to be in the markets. We typically go either in Canada or the U.S. We've tended to be a little bit more in the U.S. than in Canada. We are going to be in the U.S. And I have to report that the last bond that we issued in Canada, we actually had a negative new issue concession, which I have not seen in my 26 years of experience. So that's quite positive.
Yeah. Thank you. All right. Maybe question number five for the audience. In your opinion, what multiple of 2024 earnings should Canadian National trade?
Can I answer that one? I'm kidding you.
We'd love your opinion, Ghislain. And then finally, question number six. What do you see as the most significant share price headwind for Canadian National? Core growth, margin performance, capital deployment, or execution strategy? And Ghislain, while we get the results there, I do want to talk about your capital budget because it is relatively larger compared to some of your US competitors.
Yeah.
What's driving that relative higher spending?
Our, well, we've demonstrated we can grow. I mean, if anything, we've grown probably too fast in the last few years. So we need to be more disciplined on growth, specifically growth in Western Canada. I think the sweet spot for us on CapEx, when you look at it as a percentage of revenue, it's in the 18%-20% range. And that's what we've been. And what we do, you know, one of the things that is important is, as you know, like, our growth, when we talk about mid-single-digit volume growth, it's overall. But our growth has typically been more concentrated in Western Canada. So, you know, that's where our investments. And some of these investments, like the easy pieces of investments we've made, it's passed on.
So now sometimes it's investments on the bridge, which is now the new benchpoint. And I think we now have one or two double tracks on the way up, which is the corridor between Edmonton and Jasper. So the fact that our growth is concentrated in Western Canada, the fact that we're growing our volumes, yeah, I mean, I can't speak really for the other rails. But for us, you know, when you look at 18%-20%, is the sweet spot. We do it with a view of capital efficiency as well. We know that if you try to do too much, like, we have parts of our network where the construction period is, like, a couple of months if you don't want to build under snow or under freezing.
So, you know, we want to have, you know, close to 100% of our investments in the ground. On capacity in Western Canada, you do it year in, year out because we know this is overbooked capital. We know that if volumes are down, it'll be time value of money because essentially, eventually, you will need that capacity. And then we need to sell to that capacity and not oversell our network. And then if demand is higher than the supply, then you take more flights. I mean, that's basically what's our game plan has been. Maybe, Brandon, there's only 40 seconds left. I can conclude here for a few points. I think, listen, I've been around CN for over 25 years. I've seen the good times. I've seen a little bit of the more challenging times.
I think that CN is back on the good times. I think that under the leadership of Tracy, I think under the leadership of our board, we have essentially a brand new board. I think that we're well positioned. I think the team is gelling. The team is having fun. I think you see in the results, I mean, we were either the best or the second best for the last eight quarters, seven or eight quarters. We had the best Operating Ratio last year. So hopefully, people believe. But, you know, for us, what's important is to continue to deliver proof points that we're on the right track. And people will come back to CN. We're in a good space at CN. And we're very pleased about it.
Thank you both for coming. Ghislain, Jim Vena did say, "Watch out for him in the rear of your chair.
Yeah. We will. Absolutely.
All right, guys. I really appreciate you coming on. Thank you.
You did a good job. Thank you.