Great. Next up, we have Canadian National Railway, and very happy to welcome back EVP and CFO, Ghislain Houle, and from IR, Stacy Alderson. Thanks so much for being here.
Thanks for having us, Ravi. This is a great conference. I know we've been here for a few years. Stacy and I have been here last year and the year before. I'm not sure whether we're coming because of you or we're coming because of the location, but we love this place, and we love this conference.
I don't care why you come, as long as you come. I'm signing you up for next year.
The attendance is good. I wanna thank people, by the way, in the room and people listening on webcast and taking interest in our great company, Canadian National Railway.
Great. Great, awesome. So, you put out a press release last night, so maybe you wanna kind of address that, and kinda start from opening remarks.
Yeah, maybe give investors a little bit of the context of that press release that we issued last night, or late afternoon on guidance, and the evolution of where we got to where we are today. As you know, Ravi, and most people in the room, there's been a lot of labor uncertainty in Canada for quite a while.
That labor uncertainty was focused on the conductors and locomotive engineers that were represented by the Teamsters. For us, it represents about 6,000 employees. The collective agreement expired, and we were hoping to get... We've been negotiating for about a year, and we were hoping to get an agreement and a deal as early as last May.
Obviously, that did not happen, and as you know, the Canadian Industrial Relations Board got involved into the file to look at whether rail service in Canada should be or could be essential service. And it took them a while to get to a decision, and although while they were reviewing it, there could not be any work stoppage, it created a lot of uncertainty for our customers. And mostly, the sector that was the most impacted, I would tell you, was Intermodal.
We saw it loud and clear. We saw it loud and clear in our volumes. When you look at June, although on a year-over-year basis, RTMs were up 8%, this was, again, easy comp. We were resourced to do way more volume than this, and we saw a lot of business being diverted from the shipping lines, from Rupert and Vancouver to the U.S. West Coast. and also, domestic intermodal going to trucking. 'Cause these customers implemented a contingency plan. They wanted to make sure that they were going to get their products to the market.
So, you know, when we sat back at the end of Q2 and in our earnings call, when we looked at this and we evaluated this, this is when we reduced our guidance, as you know, from 10% EPS growth for the year to mid- to high single-digit EPS growth. Now, at the time, we were still hoping to get a negotiated deal with our union. We were still at the table, we were still discussing. So the assumptions we took, and I think we were quite clear with the market, was that we were not assuming a work stoppage, and we were also assuming that the labor uncertainty would be behind us by the end of August.
Roll the dice, that did not happen. We had a work stoppage. Although it was short, we had to entirely shut down our network in Canada, and that, of course, it causes issues, and that embargoed customers, and so on and so forth. And the other thing that happened is we had forest fires in Jasper.
I'm sure some people saw it on TV. It was horrific. About half of the city was burned down. For us, Jasper is a very strategic location because it's one of the busiest corridor we have on the network. It's all our traffic going to or from the West Coast have to transit through that location, and I know that location quite well. I've run trains. Believe it or not, I'm a locomotive engineer and conductor, you know, on the west end going to Jasper, and then when you get to Jasper, you either fork north to go to Rupert, or you go south to go to Vancouver. So that's what happened. So we quantified that in our press release, as you saw, both the forest fires and the work stoppage to be about $0.20 negative impact on EPS Q3 to date.
Now, the good news is the labor uncertainty for our workforce is behind us. I mean, now the CIRB has mandated binding arbitration. I'm happy to report that workers are back, employees are back on the ground, moving cars and running trains and so on, but however, there's still labor uncertainty in Canada, mostly related to the longshoremen, where there's still a potential strike that could happen as early as late this week or early next week, that could impact Rupert and Vancouver,
so that still exists, and we see some additional weakness in the macroeconomy, mostly related to lumber and metals and minerals, so when you consider those items that's where we are today, at our low single-digit EPS growth for the year. And we've also updated our ROIC, because ROIC is an important measure, and you and I know that ROIC is very sensitive to earnings.
And with that level of earnings, now ROIC will be 13-15%, versus the 15% we had previously. Now, as I said, our employees are back to work. Our network is back up and humming. We were able to pick that up and balance our asset quite quickly, thanks to our scheduled railroading model that we have, and I'll give you a few statistics, and the metrics, the operating metrics are improving every week as we move forward. Our car velocity last week was over 220 miles per day. That's up 3% versus last year and better on a week-by-week basis.
When you look at train speed, it was north of 20 miles per hour. That's up 1% or better on a week-by-week basis. Then our dwell, I think, was lower than 7 hours. I think it was 6.7. That's better by 2% versus last year and up. So good news on that front. Our network is humming. Our network is fluid. Our operations, and we're ready for business.
Coming back on demand, as you know, we've laid out a plan on Investor Day on CN specific growth initiatives that are very specific to CN. They're very geographically diversified. They're not home run here, and they're singles and doubles. They're diversified geographically. They're diversified commodity. I'm happy to report that these are panning out the way we expected.
I'll give you an example in a few minutes. Those CN specific growth initiatives is what will allow us to grow more than the economy, and we quantify that, if you remember at Investor Day, to be eight to nine hundred thousand car loads.
Right.
Now, there's some puts and pays, and there's some things that are falling off, some things are putting back. But give you a few example, we have, and we've talked about it in Toronto, a fuel distribution facility. This is a significant investment by our customers that invested in this facility in Mac Yard. That started to be online in May.
That's giving us great car loads. We have frac sand going to our Northeast BC, where we have tons of projects over there. We have a customer that actually is now expanding, is a receiving facility, so that bodes well for on that front. We have strong propane export with AltaGas. There's two crush facilities on grain that are new, that are come online, in one in Canada, one in the US. We have a new metallurgical coal mine that's actually coming on board as we speak. Bodes well, like I said, it's diversified.
Rémi, our new commercial officer, which is onboarding extremely well with our company, and the team, is pushing the team hard to continue to fill up that pipeline and make sure that, you know, we continue to push. As I said, these are not necessarily related to the economy. These are customer specific with investments, so volumes are moving on these initiatives. Giving a little bit of an update on Canadian grain I think the Canadian grain bodes pretty well. The last stat that we have, the last forecast that we have from Stats Canada was a new crop to be about 72 million metric ton.
Okay.
That's compared to 69 million metric tons that we had last year. The grain quality around our Prairie area, remember, we're the railroad of the North, seems to be very good at this point. Coming back to the three-year outlook, if you remember, we provided this at the Investor Day. We said 10-15% CAGR from 2024 to 2026.
We've revised that now to high single digits, and the biggest factor that is causing this is really we're starting from a lower 2024. Now, as well, if you remember, we said we need a supportive economy, and we look at a lot of different economic indicators, but for simplicity, for our investors, we zone in on one indicator, industrial production, and we said that needs to be 2% plus.
Now when you look at consensus forecast, you know, it's more like 1%, so those are the two factors. But I would tell you the biggest factor is starting on a lower base. Now, when you look at all of this and all this noise, you may say, and you probably would have the question, "What is CN doing? What are you guys doing about this?
You know, you have a weaker volume environment. I mean, what are you doing about it? Well, we're not sitting on our laurels, and we do right-size our assets and our resources on a regular basis to make sure we're in line with the volumes that are ahead of us. So with weaker volumes, we've parked 100 high horsepower locomotives.
These are the worst of the worst. You know, they're gas guzzlers, so that will create some mechanical maintenance savings, as well as fuel efficiency. On the car front, the weakness that we see, as I said, is intermodal and lumber. We are returning about 1,000 Centerbeams, and the Centerbeams, if you remember, they're like the sailboat-
cars, and you put lumber, bundles on them. We purposely. We have the biggest, centerbeam fleet in the industry, 'cause we're the biggest rail moving lumber in North America. And we've purposely, leased these cars, 'cause we know that market is cyclical, and we've intentionally have staggered expiry dates that allows us to return a bunch of cars to the lessors at any given year.
So, you know, we have these lease expiring. We're returning 1,000 cars to lessors. And then on the intermodal wells, we're pushing offline about 20-25% of our fleet offline with a per diem relief that will give us car hire expense savings. From a labor front, we've stopped hiring in almost all, if not all, our locations, and we're letting attrition work.
I would say in the East, we're even, we're even, going further than that, and we have furloughed some employees in the East. In the South, I'm happy that we were able to work creatively with our union to effectively go from a five-day a week workweek to a four-day a week workweek, where employees get one day time off more but they get it on their nickel, and it allows us to get savings without, at this point, having to furlough.
So that's a very creative way of working. And then we're looking at all the other types of expenses. We're looking at discretionary expenses, we're looking at tax, we're looking at everything, making sure that we are aligning our expenses with the volume environment that we have in front of us. So closing in on my opening remarks, on our opening remarks, I would tell you that the fundamentals of CN are still very, very healthy. I think that, you know, this noise that was out there, hopefully now there's way more behind us than there is in front of us. You know, our scheduled railroad operating model is the right model at CN. This is the model that creates value.
Now, noise behind us, we'll have a good environment in front of us to deliver and railroad the way we need to, to deliver great customer service, value to our customers, and value to our shareholders, and maybe on this, we'll turn it over to your questions.
Great. That was very detailed, very insightful. I think you've answered all my questions, so I have nothing more for you.
Clearly, you know, maybe-
Maybe we'll turn it in French now. Yeah, we'll do it in French now, exactly. But I do have a few follow-ups, though. One is, you mentioned the potential kind of longshoremen disruption, potentially end of this week, early next week. Can you expand a little bit more, kind of what's the next steps there? Kind of when do we hear more about that? And just to clarify, is that in your guidance now, or any disruptions related to that?
We don't know right now what we know, and Stacy can jump in. What we know is that a 72-hour strike notice could be served by the end of this week.
Okay.
So we'll see whether that will be the case or not. And then we'll see what happens. My view is, in the guidance, we did assume that there could be, you know, some work stoppage there. Remember that both ports have not recovered 100% yet.
Correct.
So-
This happened last year.
That's right, this happened last year, and now, you know, the diversion that happened in Q2 and continuing to Q3, we're starting to recover a bit, but not. We're not 100% yet. So we factored in some impact absolutely in our guidance that this could happen.
Got it. And on the other labor contract, obviously you're in arbitration right now. Can you remind us again kind of how that process works, and kind of when do you expect an outcome there, and kind of maybe put some dates on what kind of outcome that might be?
Yeah. So there's no set timeline for the arbitration process, and I'm not an expert in labor relations, so bear with me two minutes. I think both parties have to agree on a process. Both parties have to agree on an arbitrator, that-
Those discussions are happening as we speak. I think that, you know, like I said, there's no timeline, but the good news is people are working. There cannot be any work stoppage while this is going on, and when you look from a wage pattern, when you look at the pattern that has been set in the latest agreement that have been signed, four or five last agreement, it was in the 3% range, so we'll see. I'm not gonna speculate on what the outcome will be.
The only other point I would say is, you know, with the new work rest rules, as you know, there has been some unintended consequences in terms of scheduling, in terms of crew availability, in terms of having our crew spend more time away from home, which they don't like. And there's some of these issues on both sides of the fence, and typically in the past, when there's been an arbitration, these issues are typically not dealt with. It's basically a wage review type of thing.
Right.
We'll see what happens on this one, but there is a likelihood that some of these work issues will not be addressed through the arbitration process.
Got it. But now that you are in arbitration, and you said kind of the network is humming, I think was your phrase, is that enough for customers to come back, and kind of are they still kind of, "Hey, this is not fully resolved, you don't have agreement yet," and is that a 2025 normalization?
I think customers are coming back. I think they're coming back slowly, and again, like I said, the place where we saw diversion is in intermodal.
Yep.
So I think that, you know, we're seeing some of it coming back.
Mm.
I think it's gonna be. Remember last year, when we had the port strike, on and off, you know, it took two to three months to get back to pre-strike level.
Yep.
So we'll see, but it's starting to recover. We think that, you know, and in our guidance, we are assuming that we're recovering somewhat.
Mm-hmm.
In Q4, but we're being cautious about that.
Got it. I think you mentioned lumber and metals are the other two weakened markets. Lumber, is that mostly Jasper, or is that, like, a demand issue because of housing?
Some of it is demand. Actually, it's when you look at, you may have seen Canfor has just closed down two of their biggest sawmills.
Okay.
- in Western Canada, so some of it is macro, absolutely. Now, so we've taken that into consideration in our guidance. Now, you saw this morning, inflation-
Mm.
is coming to the reasonable levels.
Yep.
Hopefully, you know, like the beginning of-
Rate cuts.
That's right, exactly.
Yeah.
Exactly, rate cuts. I mean, we thought we were gonna get a lot of rate cuts this year. We haven't gotten yet. We've got a few in Canada, maybe now in the U.S. it'll come. This market is cyclical.
Mm.
I mean, I've seen it in two thousand and nine on the housing bubble. We returned three thousand cars to lessors at that time, and then it came back. So this is cyclical. We're managing our fleet and managing our resources towards what we see today. You know, I'm sure it's gonna come back. It's when, and we're being very close to our customers, but it's more macro than it is Jasper.
Got it. And I'm not sure to ask you this question or not, but I've been reading a few stories about crude by rail potentially coming back and some opportunities kind of in the Alberta region. Kind of, is that really a thing? I know in the past you've needed a lot more kind of tangible evidence for that, but obviously, oil prices are pretty low right now.
Yeah
... but there's been some speculation on that, but.
Tracy, Stacy can correct me if I'm wrong, and remember, she's the internal auditor, so if my numbers are wrong, guys, she's gonna correct me. She's not shy, and she used to be in marketing before. Correct me if I'm wrong, Stacy, but crude at CN has been very stable, and we don't move a lot of light crude. We move a lot of bitumen, like the heavy stuff that's not even a dangerous product.
Yep.
And I think it's been quite stable for the last few years.
Yep.
I'm not aware of any signs that crude would come back to the industry and to us in a big way. I don't know whether you are.
No, I'm not.
All right.
But we have made a number of investments in Western Canada down to the U.S. over the years, so we're certainly ready and able to handle that if, if that's an opportunity for us.
Got it. So just to kind of leap off your response, obviously there were some network disruptions in the Q2, which you have resolved, and like you said, the network is humming right now. Can you just kind of talk about that a little bit more? Obviously, since Tracy took over, there was a lot of focus on network fluidity and ensuring that, you know, the volumes you onboarded kind of had capacity in the network, and that's a huge focus area. So how did this happen, and kind of what's the fix then?
So here's what happened in Q2. Two things happened. Number one, as I said, we were doing extremely well up until the end of May from a volume standpoint, and then we had all these diversions.
Yep.
And so we were resourced to do way more volumes than what we actually did. And in the railroad business, unfortunately, when volumes go down abruptly in front of you, your costs in the short term are pretty much fixed.
Mm-hmm.
'Cause you can't send people home for two weeks.
Yep.
You can't park, so your costs are fixed. So that's one thing that happened. The other thing that happened is on the directional running corridors with our Canadian competitor going to Vancouver.
Mm-hmm.
We've entered into that deal twenty-five years ago, because remember that our rail line going to Vancouver follows the Fraser River and on the mountain, so very tough to put sidings. So we actually go on one railroad to the west, and the other railroad to the east. What happened is, starting at the end of May, and it started even a little bit earlier, but our Canadian competitor decided to do a lot of unplanned work maintenance on their track, and that took a lot of capacity. That took, like, capacity 4-8 hours every day-
Oh, wow
... out of capacity, and why it impacted us more than them is because we moved two-thirds of the volume going to Vancouver.
Mm-hmm.
These were on plan.
Mm-hmm.
So, and it was every day until the end of June. So that is what happened.
Wow
... on the capacity. So, and we were not aware that that was gonna happen. So it impacted us from a productivity standpoint, and if you listen to the earnings call, I gave some numbers on the-
Mm
... productivity, the labor productivity, so Pat, Pat Whitehead, and the operating team are gonna sit with our Canadian competitor's operating team this fall to make sure that we agree on a plan on how we're gonna maintain this corridor together, plan, and follow the plan so that this does not happen again.
Yep.
So, outside of these on-plan work blocks, we were very fluid, and right when these on-plan work blocks finished, we became very fluid because we effectively have double cloud going to Vancouver.
Seems like very unusual events, just kind of-
So that's exactly it.
Okay. Got it. Understood. I want to focus on, obviously, CN is a long-term growth story, kind of laid out at the investor day. And I think even with your new lower long-term guidance, you're still implying double-digit earnings growth for the remaining two years of the three-year plan. So talk about how macro-sensitive that plan is. You know, is this a high line of sight, high visibility, new projects coming on, or do you need macro to kind of support that as well?
You, of course, you always need some macro.
Sure.
You know, you can't double-digit EPS growth unless you've got a lot of cost to take out if you have a recession.
Yep. Fair.
So you need macro. You know, and we called it 2%, so you need a supportive economy.
Mm-hmm.
You know, like this year, for example, if you remember, we were assuming, you know, mid-single digit volume growth, and half of it was coming from our CN-specific growth initiative. So we need some macro. We believe that the CN-specific growth initiative is what allows us to grow more than the economy.
Mm-hmm.
Then you need to continue to price above rail inflation, and I'm happy to report, and I know you've got a question on revenue per revenue RTM.
Yep.
For investors here, this is not trying to get to profitability. This is trying to get to pricing, 'cause we don't give out the same store pricing. I want to reassure you that we are following pricing very closely, and we continue to price above rail inflation.
Yep.
So you need that, and then you need to improve on your operations.
Yep.
You need to improve on your operations and improve on your margin. And when you put all of those ingredients together, then that what gives you that double-digit EPS growth. And you need to have people working.
Yep.
You need to have people working, and when you have all these agreement ingredients, then you get to double-digit EPS growth.
Got it. Can't have a rail fireside conversation without asking an OR question. So-
Yeah
... obviously, you can have a lot of puts and takes in the Q2. Seems like some noise in the Q3 as well. But do you feel like the full Q4 should be a pretty normal run rate to kind of go into 2025? Or how do you think about-
Yeah
for the-
As my view, assuming we don't have a long-winded strike on the West Coast with the longshoremen-
Sure
... that the volumes continue to bring up. I'm confident that we'll get an OR that will be more normalized. Absolutely. I mean, we do have capacity on our trains.
Mm-hmm.
We have capacity on our manifest trains. When we add intermodal, typically that we have to add train starts, but we have capacity on our trains. Rémi and the team are working very hard to bring volumes in the south and in the east, where we do have lots of capacity from an infrastructure standpoint, and absolutely,
when you look at these operating metrics, and the grain will help as well, because it's gonna bring quite a bit of volume, because remember, too, last year was one of the only years. I've been around for quite a while. Typically, in Canadian rail, we move grain in Q4 full out, and what happens when you get a big crop is, you run out of grain later the next year.
Yep.
Last year, if you remember, because of the world geopolitical issues and the world markets, the grain producers and the grain farmers sat on their grain in Q4, and I've never seen that.
No.
So now, because the bins are full-
Yep.
I think they will need to push those bulk grain to the market, and I see grain being quite strong and in Q4. Then frac sand continues to be quite solid. Then P&C, as Stacy, I think was up 11%?
Yep.
There's pockets of area. Hopefully lumber, slowly but surely, comes back, and then, you know, this labor thing gets resolved on the longshoremen.
Mm-hmm.
And then hopefully we get, sooner than later, to pre-noise level at both ports of Rupert and ports of Vancouver, and we have tons of capacity. Listen, Rupert, we did seven hundred thousand TUs last year, and it's got a capacity of one point six million.
Yep.
So there is capacity there, and we're open for business.
Understood. Any questions from the room? Christine?
Okay, go ahead.
Thanks. You talked a little bit about how you have the capacity on the east and the south already there, but you guys have also been investing in building capacity on the west, so maybe you could talk a little bit about kind of where you are in that process, and what you know expect the growth to be in order to kind of to justify that kind of capacity investment.
Yeah. So obviously, our growth continues to be a little bit more skewed to the west than to the east. The east, we have capacity, because remember, like in northern Quebec, there was a lot of sawmills and other industries that are not there anymore, and the railroad was built for those, so that.
So we have capacity in the east to move a lot of business. In the west, you know, the growth continues to be skewed there. And the way we look at it is that we invest year in, year out in capacity, and we have a long-term plan, three to five years, even we have a ten-year plan, believe it or not, where we know where our pinch points are.
We invest year in, year out, recession or no recession, with a view of capital efficiency, i.e., we want to make sure that we have as close to 100% of our investments in the ground, and we know that if we try to build too much in one given year, you've got leakage where people do it on overtime, and you pay time and a half, they don't get the work blocks, you do it under snow, so you build this, you get this done, and then you sell to that capacity, and we're being extremely careful not to oversell our network.
All new business coming at us, including new contracts, are being reviewed and approved at the operating committee, where I facilitate, but Tracy is participating, the two operating guys and the commercial guy, and making sure that we've got the capacity from an infrastructure standpoint, but also the resource from a conductor,
locomotive, so that we, and that we price that business to make sure that we bring that top-line growth to the bottom line and make sure that we can offer the customer service that the customer is entitled to, and great customer service, and if demand is higher than supply, which in some years it has been the case, then we'll use price as a lever. That's what we're doing, and that's how we think about it. Maybe we're out of time. I'd like maybe to conclude-
Sure, absolutely. Yes.
I want to reemphasize to investors that the fundamental of CN is very healthy, that our operating model is working, that our, you know, I'm ecstatic or continue to be bullish on our CN specific growth initiatives, and these are being, you know, rebuilt as we speak with Rémi and the team. And I'm happy that the noise of the Teamsters and the conductors and locomotive engineers now is behind us.
Mm-hmm.
We're ready for business, and we're ready for railroading.
Great. Jean-Pierre, Stacy, thank you very much for being here.
Thanks for having me.
I wish you a very boring Q4.
Thank you.
Uh, and, uh-
Sure.
We will see you here again next year.
Thank you. Thank you very much.
Thanks.