Good morning, everyone. Thank you for joining us here this morning. Last and final day. It's been a flurry, I know, but we saved the best for the last. Very pleased to have-
Yep
CN here with us today. Ghislain Houle,
I love you.
CFO, Patrick Whitehead, new COO role, co-COO role. So I wonder if,
Okay
We'll have the opportunity.
Yeah
To get into some debate this afternoon. I really encourage you to come into the breakout room. We've really only got 30 minutes here, so I'm gonna allow these gentlemen to give a quick state of the nation. I'll get a Q&A. We'll try and get to the pressing points quickly, and then we can, of course-
Move out to the breakout room after for more pointed questions. So I'll just ask to hold questions to the end.
Well, I'll be too.
I think with that, Ghislain, we're gonna get right into it. Let's, let's hear,
Okay
how things are faring.
Yeah, the best for last. I would agree with that. So thanks for being here, and people taking interest either on webcast or in the room. The room is about full, so that's great. Taking interest in CN. Always nice, either coming from - Yeah - Edmonton for Pat or for me - Do you know where the the remote is? - Florida in the spring. Fuck! And... Yeah, let me give a couple of remarks, and then I'll turn it over to Pat, and then we'll go right on to questions. You know, when you look at 2024, just to give a little bit of visibility on the quarter, I think that's always nice to hear. As some of you know, we started from the back tees in January.
We had 10 days in Western Canada, where temperatures were -40 or -50 degrees Fahrenheit, believe it or not. When you are at that level of temperature, it doesn't really matter whether I said, I think Fahrenheit, but it doesn't really matter whether it's Fahrenheit or it's Celsius. They converge-
It's really cold.
at that temperature. So we literally could not operate during those days, and those guys did a hell of a job, Pat and Derek and the team, to recover. And he'll talk about that a little bit more in detail. So starting a little bit from the back tees, but once this was behind us, February came on pretty strong. When you look at, you know, January volumes in terms of revenue ton miles, we're down 7% year-over-year, and this is against a tough comp. If you remember, we had a great Q1 last year with very seasonable weather. You know, when February came on, as I said, quite strong, and Pat will talk about some operating metrics, but some of the days they were close to summer-like operating metrics.
Our volumes were up 4% on a year-over-year basis, but 8% if you, if you take into consideration that we have one more day. We are the leap year this year versus last year. So February, pretty good. March is starting out a little bit tough. So again, I think, it's a wake-up call that the winter is not all over across Canada, and we had quite a bit of snow in the last couple of days, and some of the other issues that Pat will talk about. So when you look at the quarter, I think, you know, February to date, I was quite comfortable that, you know, we're performing to plan.
I want to remind everyone that last year, we were helped by a favorable fuel surcharge lag of about $0.10, and if you assume that the fuel prices remain the same, you know, we don't assume we're not going to get any either favorable or unfavorable fuel lag, this year. When you talk about the full year, you know, a lot of you, hopefully, you listened to the earnings call. We stated that we are assuming a mid-single-digit volume growth during the year, and let me help some people decompose that number. First of all, half of that volume growth will come from CN's specific growth initiatives that we walked investors through at our Investor Day. These are diversified. These are a slew of opportunities. We gave some estimates as what we thought we were gonna get.
The good news is these are starting to pay off in 2024. They're not really related to the economy because they're very specific CN's and customer initiatives that we have good visibility on. And obviously, as they come in, we will get a compounding effect of those growth initiatives as we get into 2025 and 2026 with the full year effect and so on. You remember in 2023, we had quite a bit, and you and I were talking about this adversity, forest fires and floods, and we had a West Coast port strike. West Coast port strike had a lingering effect on our volumes for the second half of the year. That accounts for about 1% unfavorable volume in 2023 that we're not assuming will happen in 2024.
So when you take these two items into consideration, then really we're counting on a favorable economy to help us grow volumes by 1-1.5%, which I think is quite reasonable. If you remember at Investor Day, we said to deliver 10%-15% EPS growth, we need at least 2% industrial production. Now we look at 150 economic indicators, but to facilitate for investors, we singled out that one. Obviously, we're not counting on 2% industrial production in 2024. We're counting on a slightly positive, call it 0.5%. So that's what we're counting on, and with this, I think I'm quite comfortable that we will deliver our 10% EPS growth.
And as I said, in 2024, and as we get into the compounding effect of our CN-specific growth initiative in the out years, and hopefully the economy gets a little bit better, then we'll go from the low end of the range to the mid, and hopefully to the high end of the range on that 10%-15%. On operating leverage, I think we will deliver operating leverage. We've talked about that. We have capacity on our trains. When I look at, you know, sequentially, our volumes in Q4 versus Q3, we're up 10%, I think, Pat, and our train starts were up only 6%. So we are, we have capacity, especially on our merchandise manifest trains.
I think this is an area personally, and I've said that before, that these, him and Derek are a bit sandbagging, but we'll see, the proof will be in the pudding. Maybe the last point I want to make is on the team, because actually the team is what makes it all happen. You can have the best network and the best locomotives, but if you don't have the right team to convert the value, then you have nothing. And I think that team, under Tracy's leadership, is coming together extremely well. As you know, Ed retired last year. These guys are doing a great job, him and Derek. And Doug MacDonald, longtime CNRR CMO, will retire sometime in 2024. We've hired Remi Lalonde, a young guy that investors will get to meet when appropriate.
He was the CEO of one of our forest products customers. He's out there, Pat, I think, on the trains as we speak-
Yes
learning the railroad, and I think he'll fit very well with the team, and I'm very happy to have him on board. So maybe on this, I'll turn it over to you, Pat, for some comments on operations.
Okay, thank you, Ghislain and Steve. Thank you for having us. So I'll start with, we finished 2023 with favorable conditions, and we really had strong operational performance as we came out of the fourth quarter of 2023. We carried that momentum into 2024 and a very solid start to January. As Ghislain has covered, we hit a deep freeze. We had about 10 days consecutive of -40 to -50 temps. And one thing I have learned quickly, being a new Canadian citizen is, in -40, it doesn't matter. They're the same. They equalize, and it's just extremely cold.
What that does for us is it limits the length of trains, and quite frankly, there are times of the day, night, more specifically, where we really just-- we're better off to take a pause and regroup in the morning and start our operation back up. That operation, that's planned. That's the way we plan for those temps. We know they're coming. We have additional air sources. We change the configuration of our Distributed Power, the way we handle our trains. That has an impact. It has a backlog effect in our terminals, and we had to quickly, as the temperatures, as we got out of that deep freeze, we had to redeploy locomotives, those air sources, those additional air cars, to flush the yards out and, and get back fluid again. That's the resiliency of our plan.
That is, you know, we say at CN, the plan is sacred, and our job is to always, when we get off plan, whether it's by the weather or another unforeseen incident, our job is to get back to plan. Myself, Derek, our teams, we all use that plan as the guiding light. We quickly deployed those resources, and we were able to turn around that performance from that deep freeze in days, not weeks or months, as you may have seen in the past, because of that commitment to getting back on plan. And then as we moved into February, back on plan, February was very solid. We saw some very solid operating metrics. In fact, we saw car velocity at around 213 miles per day. That resembles what CN's property looks like, oftentimes in summer months.
So we quickly leaned into that resiliency of the plan, and we're putting up some really good velocity numbers. I will say this: we're running very solid as we entered March. March presented another Mother Nature let us know that we're not quite done with winter, particularly in Western Canada. We've seen another not quite as deep freeze, but significant heavy snow events. And I can attest to that. Last year, I bought a quad to clear my the snow in my driveway, is what I told my wife, and put my money where my mouth is. I've used it eight times in the last three days. So a significant snow event across Western Canada, again, affected our ability.
It's brought down our speed and velocity a bit, but again, we're gonna lean right back into that plan. We're all gonna lock arms, we're gonna run our plan, and we'll get back to where we need to be. We've had some other operating challenges in March, so we're off to a bit of a sluggish start, but again, we will get back on plan. Talk a bit about how we are resourcing up for growth as we right now, we are planning for that heavy volume that we expect to see in the fall.
Talking a bit about, before I leave the February performance, one thing we did see is, as we got back on plan and moving, we were seeing about 1.35 billion GTMs per day on our network versus 1.15 in January. So February over January is about an 18% increase in volume. So what are we doing right now to resource up? It's time to start thinking about what does fall look like, and typically, fall is our peak, October being the peak month of the year for us. It's time to start planning for the workforce, not just for attrition, but so that we can realize our growth opportunities. It takes about 6-9 months to recruit, train, and put a conductor out there safely in the workplace to move freight for us.
So we are recruiting, hiring, putting folks through our training center, both in Homewood and in Winnipeg, Manitoba, to ramp up for that fall growth that we see. We're also planning around the resources, the cars that we've brought online, locomotive asset planning. We are getting ready for that growth that we see coming in the fall. So I'll wrap up with this. We're gonna stick to the plan. This railroad is running as well as it ever has. We've seen some challenges with the weather, but again, we're gonna lean into that plan. We're gonna use that as our guiding light, and we're gonna keep moving forward. So good things ahead. Thank you.
That's great. Appreciate the overview. I'm gonna peel back the onion just a little bit on all that, because there's a lot.
Yep.
But I think, you know, I think as you described, you've got tough comps on the Q1 period in particular, but the traffic has rebounded quite markedly.
Yep.
And so you described sort of the combination of sort of macro and self-help. Is the self-help really contributing yet, or is it still just largely the macro picture that's been pulling that big recovery?
The self-help has started to contribute-
Okay
A nd will ramp up during the year. We'll get more and more of that self-help. I think when you look at the macro-
T he two sectors, Steve, that you're aware of that were the weakest for us, and from four other rails as well, is intermodal international, and it was forest products. If you start with forest products, I think when you look at our forest products related to our boxcar fleet, very strong. I mean, our boxcars, and we were talking about this this morning, we bought 1,600 boxcars.
Yeah.
I think we received 800 last year, and we're receiving 800. It's about sold out. The place where it was weaker is the lumber.
Oh.
So these are the lumber bundles that go on centerbeams. Just to give you an idea, when we hit the trough on centerbeam car orders per week, the trough was at 1,600 car orders per week. We met peaks at 2,300.
We're right now, at the end of the year, we stabilize about around 1,800-1,900. I think in the last couple of weeks we did 2,000.
Correct.
We've modeled 1,800-1,900. So we have not modeled to go back to the peak. I don't think that would have been prudent, but we modeled the fact that we were going to get a little bit better than last year. When you look at intermodal international, I think we're back to the volumes at Rupert that is after the strike.
Mm-hmm.
Beause as you know, some of that traffic was diverted to some of the other West Coast ports. When you look at Rupert, it's got a capacity of 1.6 million TEUs, as you know. It's got shovel ready to do another 200.
In at the peak in Rupert pre-COVID, we did 1.2 million TEUs.
Last year, we did 700,000 TEUs. We've modeled slightly over last year, but well below pre-COVID.
I see.
Vancouver, we did pre-COVID, we did 1.5. That's just CN only. Last year, we did about 1.1 million TEUs. Again, we've modeled just slightly higher, but much lower than pre-COVID. And then Halifax, there's 1.1 million TEUs, because we're the three-coast railroad. And Halifax, 1.1, we did 300,000 last year TEUs. That's what we modeled this year. So I think we've been-- we can see, and talking to customers, things are coming back. We believe it's gonna be slow. We believe it's gonna be as slow as she goes, and I think we were quite reasonable. And if we do better, then you know what? This is-- this will be gravy. Some of the other sectors continue to be strong.
I mean, when I look at frac sand, that continues to be strong. When I look at metallurgical coal-
Mm.
The indices is over $300. As you know, we have two new mines that are going to be on our line this year, Quintette and Willow Creek Mine in Western Canada. One that has 4 million tons, the other has 1 million ton capacity. So that's going to come on. I think we've started to move back some business on our BC Northeast.
Yeah.
This is frac sand coming in and propane coming out.
That's correct.
So the good news about our growth is it's not concentrated to one sector or one commodity; it's diversified. So if we're wrong on one, then hopefully we're wrong positively on another, and, you know, you've got the compensating offsets of compensating errors. So I think we're quite comfortable. I think we were very mindful about our modeling. We were talking about, you and I, before it started, where, you know, things in the summer have been happening in Western Canada-
Sure
... from an environment standpoint, from a service disruption standpoint, you know, forest fires, floods. Again, being the railroad of the North, we do model for winter because it has happened for 100 years and will continue, although in Eastern Canada, winter was almost essentially not there. We've modeled, you know, in our 10% EPS growth, we have modeled some things for Western Canada in the summer, because the last four years, things has happened.
Yeah.
Some of it is not just some of our costs, maybe a little higher, but it's some of our customers. I mean, when you evacuate a town and you close sawmills because of forest fires, then you see the impact on volume.
Of course.
So, I think, I think that's what we've done. I think I'm, that's why I'm quite comfortable with our guidance right now. And as Pat has mentioned, I think, you know, we are looking to hire.
Sure.
I don't think that we'll hire one for one.
Yeah.
I think that we are gonna absorb, but we need to get on because, remember, we have attrition still in the 8%-9% range.
Right.
So we need to keep up with attrition, but we're in a good space.
We are. I, I think it's just for everyone in this context, I mean, you are starting to face comps that also fall away really fast.
Mm-hmm.
So, you know, even though the volumes have come back more naturally and you're comping against some tough periods more recently, you know, in the next sort of five to eight weeks, they really start to fall through because you start to comp against these difficult periods last year.
Absolutely. If you remember, and we did quantify this for the market, in Q2, Q3, we had impacts of either the West Coast port strike or the floods or the forest fires, the $0.17 of EPS. So although, like I said, we've modeled some, you know, I mean, I don't think it's going to be to that extent. So you're right. And then in Q2, the freight recession was deeper and longer than what rails were imagining. So stay tuned. I think to your point, we're going to see, in Q2, we're gonna get against easier comps and then Q3 and then go back up in Q4.
You touched on intermodal, and we could probably spend the whole session on that, but I want to just touch on a few other categories. The one that's been particularly surprising, I think, in some respects, is grain.
Mm-hmm.
We had a really wicked drought last year-
Yeah
... in Canada. Less worse than the US, but still dry. Your volumes have been impacted, but not as hard as I would have thought.
Yeah. I can open up, and then, Pat, I can, you know, give it up to you. So grain StatCan, and you follow grain, Steve, quite closely. StatCan revised their estimates from 67 million metric ton to 69 million metric ton. An average grain crop, I would say, is around 72, 73. The dryness happened more in the south than in the north, so we were less impacted being the railroad of the north. We saw grain was funny because typically in grain, you move all out grain in Q3 and Q4, and because farmers and grain companies did not like some of the prices on the world markets for grain, they stood back on shipping grain. But I think it started quite strong in this quarter, especially in February, on grain orders.
I'll turn it over to you on the grain orders and what you're seeing out there.
Yeah. So some of it was a bit more rollover to just Lance point. We saw more grain rollover due to some of the pricing concern with farmers, so there was more to move as we transitioned into Q1. But then we had some of that pent-up demand from that deep freeze that I discussed. But when we got into February and operating conditions were better, we have really seen those grain orders pick up. We are seeing 5,000, some-
Yeah
... some weeks we've seen up to 6,000 orders, which is a really big order week. And we're fulfilling those at a high rate. So a lot of grain out there and continue . It's a very. We made good use of that extra day in February, and we moved a lot of grain tonnage in February.
We have a lot of brand-new grain cars.
We do.
So 3,350 grain cars that we put more grain in a car, and because they're bulkier, we have more cars per train. So that's good for the grain community. We're, we're quite pleased with that.
There's been a lot of talk about domestic intermodal in the industry the last year and a bit. There's been disruptions at port crossings, a bunch of different things have happened. But do you want to maybe talk about your new service that you've launched, and more, maybe more importantly, the uptake of that service, you know, since it's been launched?
You mean the Falcon service-
Falcon service
... going to. Yeah. Listen, I'll open it up high level, and then Pat is right on the ground with Derek on this. I think I'm extremely bullish on that service, and on that partnership. I think that, you know, this will be the role model of how railroads need to partner together, and operationalize the partnership down to the ground level to work as one single-line railroad. If you look at it, you know, rails, the strength of a rail is you can't replicate railroads, but the limitation is our network reach. We go to where we go. We don't go to where we don't go. If now we cannot access new geographic markets, because we can't make any acquisitions, then the only way to do it is through partnerships.
So that's an example, and now we have access to Mexico with UP. And the fact that Jim Vena, who I met two weeks ago at another conference, you know, he's a CN railroader. He understands it, bodes very well, you know, for us to access geographic markets. And then we have another one, another partnership with NS-
Yeah
... going to Kansas City. So I think you will see more of these partnerships coming through. The key is to really operationalize it. In the past, it hasn't been the case. That's why they haven't been successful, and that's what we've done with UP. And I'll let Pat talk in more detail about the service.
So the focus for us is making it. It's that interline partnership, it's one product. So the three railroads are aligned in what our expectations are for that service. We say it's five days transit, Monterrey to Toronto, and we're hitting that. And the reason we are is the teams are aligned. So down to the FLS level, the folks that are looking for that connection to come in from UP and put it on the outbound CN train, those interactions are happening. That execution is happening. Derek's team, the folks that are making this service work, they're getting that done. It's getting over the road on both railroads, and we're meeting that commitment. It comes down to that shared vision from the top down. We created this partnership. We have metrics.
Every single morning, all of us look at what's the volume, what are the connections, how are we doing against the transit? And it really is, we're treating it as one single line partnership and one product, working on the same thing with our budding relationship with NS and that Kansas City service.
And when you look at our service from Monterrey to Toronto, we have a five-day service, which is extremely truck-like. And this is not about getting market share from other rails, okay?
Right.
So to me, you know, this is a zero-sum game over time. You lose a, you know, a contract, you gain one. This is about getting long-haul trucking, you know, 1,200, 1,300, 1,500 miles, and you'd be surprised how much of that happens, and to put those on the rail. Now, this will not, this will not be done overnight, okay?
Yeah.
So if you've been giving your business to trucking for the last 20 years, obviously, you're not gonna give all your business to the rails overnight. You're gonna test the service.
Sure.
So you're gonna start with 10 loads, 30 loads, 40 loads, and eventually, as the reliability and the service is there, then you will put it on because it's the right thing to do from a price standpoint, it's the right thing to do from an environment standpoint. And again, it's, it's long-haul trucking. I, I get the fact that within a 500-700-mile radius, box makes sense to be on a truck, but to me, it doesn't make sense to be on a truck in a 1,200, 1,300, 1,400, 1,500 miles. That doesn't make sense, and that's what we're after.
I think I caught a couple of times you referencing a more conservative sort of view of the world or, you know, you—I don't wanna use the word sandbagging, but, you know, your guidance is assuming some conservative numbers, and that's fine. I think one of the things that's come up as well is this is all in the context of a buyback that you have in place this year, and so sometimes the 10%. So maybe just give us some context around, you know, the conservatism that might be built in there-
Yeah
... and maybe the impact of the buyback specifically this year.
So the buyback, maybe to demystify the buyback, because I know some people think that the buyback will be highly accretive in 2024, and that's not the case. First of all, our board approved a 32 million share buyback in 2024 for $4 billion. When you look at it from an after-financing cost point of view, and it's very sensitive to interest rates, and with interest rates going up, it's marginally accretive. Like it's very little. Now, it gets a little bit better in the out years because you get the cumulative effect of having those shares out of the circulation. Now, but we like buybacks because it's a very flexible tool to return cash to shareholders and to get to our targeted leverage level of 2.5.
We finished the year at 2.25, as you know, last year on the leverage. I think we'll get there over time, and, you know, we're not gonna have a jerky reaction, but, but we will, in my view, we will get to the 2.5, and share buyback is a good way. We like both. We like dividends as well, and I think shareholders have told us that they like both. Dividend is not the amount of growth, but it's the consistency of the dividend, and then the share buyback is, is, is that flexible tool. And, you know, if, if things turns south, then you can stop it or you can, you know, lift your
Or like last year, what we did when I thought—we thought at CN that our stock price was extremely advantageous, is we increased our buyback, as you remember, Steve, by $500 million to be a little bit more opportunistic on buying back our shares. So, and it continues to be a good investment for us. So that's the way we view share buyback.
That's great. Pat, I wanted to come back just to your operating leverage remarks earlier and just how the network is running. It sounds like just by your commentary already, that you're seeing some really good progress. Maybe the resourcing needs to be planned for the back half, but, you know, will we get a really good sense for that operating leverage is starting to kick in through sort of these middle quarters of the year as we again, recognizing Q1 is a tough comp, but into Q2 and Q3?
Yeah, I'll kind of put it into two. So talk about our general merchandise package first, and there's good operating leverage in that general merchandise package. We continue to see our train lengths, train weights grow, but they're not overgrowing the size of our network. So good news story, we continue to take on that volume without additional train starts and into a plan that actually fits in our network. We're not running oversized length trains and things like that. It's we look at it, we build that plan to optimize our network, and we're growing into that, and there's still some leverage there on the general merchandise side.
As we see the new intermodal volumes coming back, that's typically gonna be additional train starts, and that's where I talked a bit about the resourcing from the crew hiring, the locomotive resources, capacity planning. As we bring that intermodal volume back, we're likely to see additional train starts. But we're gonna be—these are 12,000-foot trains, typically across Canada and 10,000 feet in the US to fit into our network-
That's great.
-which will cause some more, additional resources, and that's what we're planning for.
Okay, we're on time, so I'll cut it off there. Breakout is downstairs, I believe, and just wanna say thank you, gentlemen, for the time. Appreciate it.
Thanks for having us.
Thank you.