All right. I think we're live. Good morning, everyone. Welcome to Barclays' 42nd Industrial Select Conference. I'm Brandon Oglenski, Airline and Transport Analyst, and I'm really excited to have Canadian National on stage next. And it's the first of all five publicly traded rail CEOs. So Tracy Robinson joining us from the company, and really appreciate you coming down. If you've been through the first session already, you're going to see these old BlackBerry-looking things in front of you with the keyboard. We're going to do audience response questions. So I'm just going to go through the first three for CN, and then we'll jump right into it. So if you can queue up question number one, please. Do you currently own Canadian National? One, overweight. Two, market weight. Three, underweight. Four, no. Potential owners in here, Tracy?
Yeah, there's the opportunity. Brandon, there you go.
Question. What's your general bias towards Canadian National right now? Positive, negative, or neutral? All right. And then question number three, please. In your opinion, through -cycle, EPS growth for CN should be above peers, in line with peers, or below peers? All right. So Tracy, thank you so much for coming down. Really appreciate you being here.
You're very welcome. Why don't I start with just a couple of comments, and then you can ask some questions? So let me say this, Brandon. The investment thesis for CN hasn't changed since our Investor Day in 2023, and it is as follows. We are committed to driving growth faster than the general economy, growth in volumes, and we'll do that by leveraging what is a very strong network that's well positioned across the continent in areas of considerable growth. We will deliver strong customer service through a scheduled operating plan that also drives asset velocity for us, allowing us to do more with less, and it gives us the ability to price above rail inflation, so all of that allows us to drive operating margin and to deliver earnings growth. We're really excited about this plan and around executing it.
We are off to a great start this year. In January, we had strong volumes. We had even stronger earnings, which is a great start. The operating plan for this company has been tested pretty rigorously over the last 12 to 18 months. The team and the plan have shown not only its resilience, but the fact that this is the right plan for us on this railroad. As we move into January, it's been strong. February, we have some deep winter operating conditions, but that's normal. I think we'll lift out of that in the next couple of weeks. We are underneath that, seeing continued strength in demand. To be sure, we're not looking for significant economic growth, as you know, this year. This is going to be mostly from our CN-specific initiatives, where we're leveraging our network.
We're doing some specific efforts with customers to drive their growth. And so we like this plan. Now, I know we're going to get some questions today about tariffs and geopolitics and trade and that kind of thing. And so let me say right out of the gate, I don't know what's going to happen and how it's going to play out. I would guess that none of us do. But as we thought about how to plan for this year, we ran a number of scenarios. We do think we have modeled that there will be some impact from tariffs, without a doubt, but not so much as to drive Canada into a recession and the U.S. into a high inflationary mode. So we have included that in our plan.
But we're getting a lift with our customers and from kind of the normalization after some labor issues last year. So we're ready, and we're on track for 10%-15% EPS growth.
Yeah, and I was going to open with the tariff question because I think that's on top of everyone's mind.
I think it is, yeah.
At the conference. But could this be a significant disruptor? Was it March 1st or mid-March when?
I think it would. You know, the dates are going to, we don't know what the dates ultimately will be. They've moved around as well, and we're watching it very closely. So we move our customers' goods. Ultimately, where they move them is where we will work with them to kind of make sure that we've got the service in place. As we think about the tariffs, we have seen this before. Last time President Trump was in office, he put, if you recall, tariffs of 25% on steel in Canada and 10% in aluminum. Those were on for a year until the USMCA agreement was negotiated and put in place. We didn't see a significant impact from that. He's done that again this time. It's about 2% of our southbound revenue.
Maybe to give you a broader context around our volume that goes across the Canada-U.S. border, about 30% of our volume moves across that border. 20% of it is southbound, 10% northbound. And of the 20% southbound, a good chunk of that is energy products: petroleum, energy, crude, those kinds of things, which so far seem to be attracting a little bit less interest from a tariff perspective. Northbound, it's a lot of minerals, a little bit of petroleum as well. And so there is. We are working with our customers. We need to be nimble. And many of them are talking about, particularly in the energy space, about other markets that they could get to. This is going to require us to make sure we're very close with them and make sure that we're doing that kind of planning.
We also have kind of a natural shock absorber in the currency exchange. So the Canadian dollar, when it gets weak like it is now, it's a positive for us from an EPS perspective. And to give you a sense of kind of how it moves, with every cent that the Canadian dollar weakens, we get a benefit of about $0.05 annualized on EPS. So all in, we're expecting an impact, not a dramatic impact, and we're ready for it.
FX is adding to your EPS guide this year, right, from 10%-15%?
It is, yep.
Okay, and you said you did build in some buffer there for potential tariff actions. But how much, I guess?
This is the question. The thing that I like about our volume projections this year is more than 50% of it is CN-specific initiatives. So these are projects that we're working on with our customers that aren't related to the economy and are respectful of kind of where the tariffs are. Much of this is energy export. It is minerals coming actually north of the border to support the energy. It is local fuel in eastern Canada that uses underutilized part of our network. So we're watching that very closely. But more than 50% of the volume growth we're projecting is on those customer-specific. A third of that volume growth is just the normalization of the labor impacts. The fact that we will not be impacted by labor outages this year and will lift because of that.
We think we've got a really good buffer in our volume forecast.
So it sounds like macro is pretty small in terms of.
We're not expecting much lift from the economy this year. When we set our original guidance back in Investor Day, we had anticipated a 2% growth in industrial production each year. We've set that aside. We haven't seen it since, and so this year, we're projecting very modest kind of economic growth. If it comes, it'll be a positive surprise, but our guidance doesn't, case.
Okay. And I think for the full year, you've got a low single to mid-single-digit volume. So I suspect the mid-single would be if you get a little bit of tailwind from macro and low- single-digit.
Yeah. And there's always timing related to our specific initiatives with customers, right, around how quickly they get out of the gate. Sometimes there are terminal builds or facility builds associated with those. So there's always a little bit of timing in that. But yes, the upper end would suggest we're getting a little bit of a gift.
Okay. And I want to move on to some of these longer-term issues, too. But with tariffs, are you seeing customers delay any capital projects or say, "Wait a minute, maybe we need to rethink" at the moment?
I think we're seeing nothing specific yet. But in the conversations that we're having with customers, that conversation is taking place, mostly in the automotive sector, I would say, is how much money we've got a couple of plants down now for retooling. And so those kind of conversations are going on. Listen, business investment never thrives in uncertainty, right? But most of the CN-specific initiatives that we have right now are focused on 70% of our business doesn't go across the border. So it's either to and from points in the U.S., to and from points in Canada, or between mostly Canada and global markets. So those aren't generally going to be impacted by tariffs. And so those are preceding this plan.
Okay. You did bring up the first quarter. It sounds like January was pretty good, February maybe more weather. But are things trending in line with plan right now?
Very much so. We were well ahead of plan in January. February will probably bring us back into the scope of plan. And what happens when you have extreme winter weather? It gets cold. You can't run trains as long. So you have to shorten trains so you don't lose the air, you don't lose the trains. And so we're running our full program. They're just shorter. And so we're leaving shipments behind. So it'll take us, you know, if it warms up, we're predicting it's going to, you know, it's going to break the real cold weather. It's minus, I think, same in Celsius as in Fahrenheit, but minus 40 in the Prairies these last couple of nights. And so we actually do a full stop of operations for a few hours for safety reasons.
But as that lifts over the next few days, it'll probably take us 10 days, maybe up to two weeks to catch up on the volume. There's grain that's waiting to be moved. There's containers that are waiting to be moved. And we're doing that in a very coordinated fashion with our customers. But so we'll catch up on that volume. Most of it is not perishable and will wait for us. And we're seeing continued strength in that underlying volume. So we're not seeing any question marks around where that.
From an operations perspective, is that improved this year?
I would say the operation plan has been tested strongly and has performed extremely well. You looked last year and the number of times that this railroad started up and was set down, and the guys did it extremely well. If you look at, I think, in the first quarter, the fourth quarter, we put up a chart of asset velocity, car velocity, and how quickly it responded once the railroad was turned on again. That's the sign of a really resilient network. What we're going to have this year is the chance to run this railroad without any of those disruptions. And we've got some pretty strong targets for velocity and for customer service, on-time train departures, on-time train arrivals, and their local service. Over the past 18 months, our local service operating plan has been running above 90%. In the fourth quarter, it was above 94%.
So we're doing very, very well at running the plan and our customer service, delivering the customer service that we've committed.
I guess you're going on your fourth year now with the company?
Just about to three.
Or three, sorry.
Yep.
Time flies.
It does indeed.
You've had a lot of changes in the executive ranks, too. Do you feel you have the team in place now to execute against the next two or three years?
I really like our team, but I would tell you that, you know, we're watching as we all kind of get to different stages in our life. And what we're doing now is planning much further in advance for when those transitions take place, so I like the idea. I've had to go outside a little bit to get to supplement the team, not just at the senior levels, but, you know, throughout the organization, and then, you know, what I want to do is build that talent so that as it comes up in the organization, our folks can build the career that they want at this railroad. That's what we're really looking for, and I really like how this team has evolved and moved over the last three years. We've got lots more to do, but it is a particular passion of mine.
Specifically in the operations role, because I think you've split that into two, right? Can you talk to the benefits of that?
Well, it's working very well for us, and so this is a really big role, and you're a chief operating officer in a railroad. You run 70%-75% of the company. You spend most of the capital, and it's an outdoor sport, and I had two young gentlemen who we brought up very, very quickly, and they're both very good, very different. They both have deep experience in running the kind of operating plan. Derek, who grew up at CN, rather, and has run it here for most of his career. Pat had the experience of doing it when it was done well at the NS and came over for us a few years ago, so they both know what we're doing. They're locked at the hip. Derek is in charge of getting it done every day, 24/7. It's running the plan. Pat's responsible for building the plan.
He has the benefit of looking back and saying, "What volumes are going to be moving where?" Not just now, but next year and the year after, and making sure that the plan is in place and the network is ready. And part of the reason that I thought it was important to do that is we have some really significant lift to do in our engineering, the way we approach our engineering programs. So we spend CAD 3.5 billion a year in capital. Now, half of that is on our maintenance program, just on track. And there is significant opportunity for us to become more productive and more efficient on that. And so Pat's been at that now for about a year. And at the end of last year, we started to see it really start to come out.
Our tie installation productivity is improved 6%, for example. The opportunity there is significant. That takes some focus that's not distracted by what's going on in the day-to-day out there. For us right now, this is the right structure. It's driving exactly the benefits that we had wanted it to drive.
Okay. You've also made changes on the commercial side or the sales and marketing side. How are these CN-specific initiatives delivering? And do you have the pipeline of visibility into 2026 and 2027?
We do. And so more than I said, 50% of our growth is going to be driven by these initiatives. And they're always being refreshed. And they change a little bit depending on what's going on in geopolitics and what's going on on trade. But this is a pipeline that is getting even more interesting as we think about it from a global trade perspective. And it's surprising in a lot of areas on the upside. If you think about what we had announced at Investor Day or thereabouts around a fuel facility using some surplus space in our Toronto railyard. And so we were building that. And before, we ended up calling it phase I because before we got phase I built, there was another customer who wanted to build as well. So we built phase II. That was sold out before it's opened.
It'll open later this year and that volume is significant. We're now moving volume for phase I from, you know, by car loading from western Canada and Chicago right now. That'll move depending on the market. We're delivering those volumes into Toronto. Phase I will be more of a Montreal to Toronto focus, but this is all in parts of our network that are underutilized. No capital required for us to build for this kind of thing and it has far exceeded what we expected. If you think about the NGL export, we're setting records on propane exports to Japan and to Asia every year.
There's more, based on the success of that, there is more investment going into Prince Rupert to expand the terminals there, the liquids terminals, and there's more investment going on in northern Alberta and British Columbia around, and this is largely around the gas drilling there.
And they pull the liquids out of the gas. And there's investment going on there in conjunction with LNG Canada to make sure that they've got the gas to export through the pipelines in LNG Canada. And then the residual is the natural gas liquids that's being refined and is going largely offshore. It also comes down to areas like this when it's cold like this and in the form of propane. But that is growing faster than we expected. In support of that, if you look at the frac sand, the minerals that are moving from the Wisconsin area, the very high-quality Northern White Sand that's moving up into Northeast BC, we used to move this in bits and pieces. We now have train load facilities our customers are building up there. There's two that were put in place at the end of last year.
There's more that'll come this year. You're going to see a step function increase in that volume this year. So there's more of these types of things. And it often starts smaller and slower as a proof point. Can we move frac sand effectively from Wisconsin to Northeast BC? When we prove we can, it attracts investment. And then it scales.
And by the way, if there's any audience questions, just raise your hand. We'll get you a mic. And maybe at this time, too, we'll queue up question number four for the audience. In your opinion, Canadian National Railway, sorry, is this question? Sorry. Yes, it is question four.
That's an interesting question.
Yep. What to do with excess cash, bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown, or internal investment? And while we get the responses, Tracy, I just wanted to touch on, like, all the labor issues that have been facing Canada and the transportation supply chain in the last two years, maybe greater. Where do we sit with arbitration with the unions?
TCRC?
Yep. And then are things going to be more consistent in 2025 and 2026?
Yeah, they will be. 2025 or 2024 was an anomaly. And I'll tell you about it. But we have about 12 unions in Canada. And so we're always negotiating with somebody. Normally, this goes very well. I mean, we're pretty aligned with our workforce and trying to make sure that this is the place that they want. We announced an agreement with Unifor, just announced the ratification of the agreement with the IBEW, which is the signal maintainers, the TCRC last year. This is a bigger one. And it tends to be a little more difficult each year. But we were ready for a work stoppage. They were, I think, were ready. Our customers were ready for a work stoppage. It tends to be very, very brief when it happens. Doesn't happen often. When it does, it's brief.
What happened last year was unprecedented in that the Canadian government stepped in at the last moment and issued the question to the Canadian Industrial Relations Board as to whether we should be allowed to take a shutdown. And that was something that hasn't happened in the history of Canada or this company. And that just, it was a process that did not have a regulated timeline to it. And it created confusion and uncertainty amongst all of our customers. This is when the container shipping lines said they started to go down into the U.S. ports. That created the issue. When it actually culminated, we had a one-day shutdown and got on with it. So that was the unprecedented, highly unusual event. That was an anomaly. I don't think you're going to see that happen again. So for the TCRC, we are in arbitration process now.
In fact, there'll be a couple of weeks of mediation leading up in March. And if we can't reach agreement there, we'll have an arbitrated outcome. There is no chance of a stoppage, you know, or a strike. The same thing with the ports. They're involved in the same process, separate from us, but the same kind of process that will take them to an arbitrated outcome if they can't reach an agreement. So there will be no labor disruptions this year.
I mean, is there concern longer term, though, that this is going to impact the competitiveness of Canadian markets?
I think if there is a benefit to what happened over the course of last year, and if you recall the previous year, the tail end, is that the Canadian consumer, public, government, industry has all become aware of how problematic this is and that this needs to be fixed, and so we have conversations underway now with the Canadian government in various forms around structurally what needs to change. This has been a big impact on the Canadian economy, and nobody wants that to happen again.
Okay. David?
On the last earnings call, I think Remi mentioned a highly competitive environment for the Falcon Premium Intermodal service. Just wondering if the environment is any different than expected and what you and your rail partners can do to maximize that service?
Thanks, David. It's intended to be a highly competitive environment. What we're going after is truck traffic, and this is traffic that has long been served by the trucking community, so what it requires of us is to work very tightly together to put a product in front of them that consistently delivers truck-like service. And so we've been able to do that, and that volume has been growing, but it's going to take some time. This is not an overnight thing, and when we had our labor issues last year, because the product ended up in Canada, it was impacted, and so the volumes fell, but they're coming back up again, and this is a model that works, and we've replicated it. We now have the same kind of model with the NS and a link system that goes down into Atlanta. Same kind of thing.
Those volumes are now up to the levels of the Falcon volumes. This is not something like we've got on sand where there's going to be, you know, unit train loads of volume. This is a slower over time, proving that we can operate like trucks in those long corridors where it should be rail and just demonstrating that and attracting it over time. A lot of these are customers who've never shipped by rail before. There is a lot of work to do with them to make sure that, you know, they understand how it works and they're well-positioned to utilize it.
Tracy, maybe along those lines, I think folks, you know, have been a little disappointed in general, not necessarily with CN, but the railroads the last couple of years with yield performance, just realized pricing and very high cost inflation, margins have been kind of stagnant across the industry. How's the pricing environment playing out now in 2025?
Listen, if we look back on that, Brandon, it's, you know, it's a complicated space. It's hard to see pricing on rails because what's in the revenue is not just the year-over-year price change, but it's also things like fuel. So we charge a fuel surcharge. So over the last year, for example, fuel prices, as they changed, that drove revenue down. And so that looks like price as well. If you remember, we had the big container problem a couple of years ago. And we all made a lot of money on container storage fees. That's reversed itself. So that looks like negative price. And it masks what is actually some really strong, what we call same-store price, which is if you look at the same movements moving this year versus last year, what the price difference is.
It's actually been very strong over the last two years. We don't report same-store pricing, so it's difficult for you guys to see it. As we look at it this year, we're predicting the same. Our objective and our mandate to tame our rail cost inflation. He's doing that this year. Our job is to make sure our pricing comes in above it. What we give him in order to help him do that is some really strong customer service. We're planning on that again this year. I would say in some of the, you know, domestic intermodal where we're really in the shorter lanes where we're more competitive with trucking has been a little bit tighter. You know, our average intermodal, whether it's international or domestic, length of haul is 1,800 miles.
So we don't have a lot of volume in that really tight trucking market length.
Have any other markets been very competitive in the past year?
They're all, you know, what we work with our customers to make sure we get them into their markets at a competitive place, right, because they're always competing against something. I think that as this operating plan has allowed us the ability to deliver not only consistently, but it's moved our assets a lot faster. For places like energy, where it's our customers that own the rail cars, that provides a benefit to them as well. They share that with us. I think it's been a pretty positive story.
Well, and maybe coming back to the capital question. And obviously, the room here was looking for share repurchases. But along the lines of CapEx, I think you do spend a little bit more on a relative basis if we benchmark to your U.S. competitors. But you said a lot of this incremental growth is coming with not a lot of capital commitment. Is that right?
That's our objective. So if we look at our full suite of growth opportunities, there's some that are coming in the further western region, which is fuller, right? And so there, we're focusing on building that out very carefully and in a very efficient, cost-effective way, right, so that we get a high ROI on that expansion capital. If you look at the east and the south, we have available capacity. And so when we can drive incremental volumes there, that goes directly to the bottom line. There's no often, if we can put it on existing train service, it's not only that it doesn't require capital, it goes directly with very little incremental operating costs as well.
And so should we see those incremental margins improve in 2025 with the volume outlook?
Margins will improve in 2025, without a doubt, and it's based on, you know, volumes, as you know, is magic in a railroad. The more volume, that's where you get your operating leverage is volume. We're a high fixed-cost organization. So the more volume you put on us, as long as you don't oversell the network, that's where you have the opportunity for lots of operating leverage. We know exactly where those spots are, and where they aren't, we're not overselling our network. And we are building carefully over time for things like the frac sand and the NGL export. And so we've got a great operating model. There will be no labor instability or issues this year. We've resourced our railroad this year pretty tight with the option to flex up, given the uncertainty in kind of the, you know, the trade world.
We've got great line of sight to our growth initiatives. Remi's going to bring in pricing above cost inflation. There will be margin improvement this year.
Okay. Can we queue up question number five, please? In your opinion, on what multiple of 2025 earnings should CN trade? And it goes from less than 10 all the way to.
Do I get to vote?
Yeah. We'll get you a keypad. But management teams tend to skew these and.
I'm sure they do. Yep.
All right. And then question number six. What do you see as the most significant headwind facing Canadian National, core growth, margin performance, capital deployment, or execution and strategy? Core growth. Well, Tracy, on the capital side, beyond CapEx, what are the priorities for shareholder distribution that CN?
First is CapEx. You say we reinvest in our business. We have the dividend growth every year for 29 consecutive years, and so you're going to continue to see dividend growth from us. Generally, we target something that looks like earnings growth over time. It doesn't correlate exactly every year, but so you're going to continue to see dividend growth. And we've got a very healthy balance sheet, and so we intend to maintain our A rating from a debt perspective, but you know, and so we'll manage to the leverage ratio that's going to keep that, and for us, it's 2.5%, so you'll see us doing some share buybacks in support of that as well.
Okay. And on the issue of core growth, and I know we only have a couple of minutes left, but obviously, the industry has gone through a little bit of M&A and restructuring from, you know, the CPKC acquisition. How important is the, you know, the competitive landscape looking ahead, especially the interchange partners that you guys work with, to your core growth strategy?
One of the, so firstly, 65% of our volume, I think we're unique in this, both originates and culminates destined on our line, right? So that's a pretty big percentage. And a lot of our strategic growth initiatives with our customers are the same, either on our line or into a port or a terminal. So that's a considerable strength for us. But one of the, we're working very closely with our interline partners. And one of the perhaps surprising benefits out of the CPKC transaction was it kind of threw the industry up in the air a little bit. And it has come down in a way that we are working together very differently, whether it's the UP on the Falcon Service and Ferromex, whether it's the NS or any of the others.
And so we look at this through a customer's eyes and say, what is the best way to get a customer shipment from their origin to wherever it is that they're going to go? And we will work very effectively. I think you're seeing that across all the rails and very competitively to make sure that we're the ones that can get it there the best for them.
Okay. And I guess just last one here on the long-term outlook. I know you guys reduced it, you know, recently to reflect that 2023 and 2024 are a little bit more challenging. But looking in 2025 and 2026, you should be seeing these elevated levels of EPS performance. Is that right?
Yeah. There's two things that we've adjusted for. One is, you say, was 2024 with the labor issues. The second is when we launched at Investor Day, our earnings guidance, we were expecting the economy to grow a little bit more than it has. I think at the time we were seeing 2% industrial growth in industrial production a year. It hasn't been anywhere close to that. We've adjusted our expectations of economic growth down as well. But we're really happy and comfortable with the pipeline of growth opportunities that is with our customers, less tied to the economy. If the economy comes along, that's an upside for us. But yes, you're going to see growth.
All right. Well, Tracy, thank you so much for coming down. Appreciate having you here.