Good afternoon. My name is Charlie, and I will be your operator today. Welcome to CN's 3rd Quarter Session. I would now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr.
Butcher.
Well, thank you, Charlie, and good afternoon, everyone, and thank you for joining us for CN's Q3 2021 Financial and Operating Results Conference Call. Before we begin, I'd like to draw your attention to the forward looking statements and additional legal information available at and Investor Relations. As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the U. S. And Canadian Securities Laws.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement financial results regarding forward looking statements in our presentation. After the prepared remarks, we will conduct a Q and A session. I do want to remind you to please limit yourself financials. Joining us on the call today are JJ Ruest, our President and Chief Executive Officer Ghislain Hul, our Executive Vice President and Chief Financial Officer Rob Reilly, our Executive Vice President and Chief Operating Officer James Cairns, our Senior Vice President, Rail Centric Supply Chain Helene Quirk, our Senior Vice President and Chief Strategy Officer and finally, Keith Reardon, our Senior Vice President, Consumer Products Supply Chain. It is now my pleasure to turn the call over to JJ Duet.
Thank you, Paul, and good evening, everyone. Today, we will do our prepared statement in 2 parts. Ghislain and I will cover the highlights of the Q3. We'll keep that section tight. Financials.
And then the team will cover the progress on our September 2017 action plan. Well, let's first start with the highlights of Q3 and I'm on Page 5. All in, on an adjusted basis, the base business produced an adjusted diluted EPS growth of 10% financial year. An adjusted operating ratio of 59.0 percent and free cash flow for the 1st 9 months of just over $2,000,000,000 The operating ratio started high in July, resulting from the 2 week loss of our CN mainline to Port of Vancouver, but improve afterwards in August September to an adjusted 59.0 OR as the average for the quarter. Regarding pricing trend, James Cairn will provide evidence of solid pricing at CN in the last couple of quarters.
Regarding headcount of the 10.50 that we mentioned in our September 2017 conference call, about 70%, 75% are completed. At CN, we have a long term strategy and we railroad for all key stakeholders. We make sure the railroad financials. We have enough infrastructure to support the economy. We have railroaded to reduce carbon emission.
We have railroaded to support our customers so they succeed and grow in their market. We are railroad to produce good return for our shareholders and we are railroad to create an engaging and safe workplace for our employees. I will now turn it over to Ghislain, who will walk us through the quarter.
Well, thank you, JJ. My comments will start on Page 7 of the presentation, which will provide more visibility on our solid 3rd quarter performance. Revenues for the quarter were up 5% to $3,600,000,000 year. Despite volumes on an RTM basis being down 1%, which were impacted by forest fires in July and supply chain constraints throughout the quarter. We delivered pricing well above rail inflation and continue to focus on yield management optimizing CN's precious network.
Adjusted net income was $1,080,000,000 with adjusted diluted EPS of $1.52 both up 10% versus last year. Results. Other income was down by around $30,000,000 versus last year due to a mark to market loss on an equity investment in autonomous driving technology. Results exclude various non recurring items related to the KCS transaction costs, including the US700 million financials. Our adjusted results also exclude a workforce reduction provision as well as advisory costs related to shareholder matters.
Turning to Page 8, let me highlight a few of our key expense categories expressed on a constant currency basis. Financial. Labor and fringe benefit expense was up 12% versus last year. This was mostly driven by increased wages due to a 5% higher average headcount and a workforce reduction provision, partly offset by higher capital credits from more capital work in the quarter. Year.
Excluding the workforce reduction provision, labor and fringe benefits was up only 6%. On a sequential basis, the end of quarter headcount was down 3% compared to the end of Q2. Fuel expense was up 40%, driven by a nearly 50% increase in price, with a 31% decrease versus last year driven by lower car, higher expense, mostly due to improved online productivity financials and lower volumes. Now moving to cash on Page 9, we generated free cash flow of over $2,000,000,000 through the end of September, Around $50,000,000 lower than 2020, mainly from lower net cash from operating activities due to higher cash taxes. We have resumed our share buybacks and plan to complete our $1,500,000,000 program by the end of January 2022.
Moving on to Page and we are reaffirming our full year financial outlook and expect to deliver about 10% adjusted diluted EPS growth versus 2020. While we are now assuming volume growth in terms of RTMs to be in the low single digit range for the year, we are executing on our strategic plan that has started delivering benefits in Q4. We still expect to deliver free cash flow in the range of $3,000,000,000 to $3,300,000,000 which will drive further improvement financial and free cash flow conversion. I will now turn the call back
to you, JJ. Thank you, Ghislain. And before I get into the progress of our September 17 action plan. As you already read from the press release, I am retiring effective as of the end of January 2022 financial results. I am not going anywhere and I will deliver with the team financial results and to be sure that we have a successful set up for the 2022 business plan.
Financial. The Board has also, as you read in the press release, has appointed a search committee for a world class CEO. The detail on the Board committee that will do so financials. Back to the business. On September 17, we announced the next step in our strategy to redefine railroading for the next generation.
CN will execute on our plan, deliver high quality service to customers year. I would like to begin by recapping our 2022 objective. We are targeting $700,000,000 of additional operating income for next year. We intend to use a balanced approach, results including optimizing railroad productivities and labor costs. We also expect to adjust our capital spend to 17% of revenue.
We can do this without compromising our absolute commitment to safety and customer service because of the current good condition of our network financials. Another major component of our plan is lowering our operating ratio starting with 57% in 2022. Achieving 57% next year We will achieve it with operational excellence, rationalizing our cost structure, price and finally volume when grain returns late next year. We are assessing opportunities to go lower beyond 2022, but responsibly and we will Say more to that in the New Year. We are targeting EPS growth in the range of 20%, return on investment capital in the range of 15% and about $4,000,000,000 of free cash flow for 2022.
I am pleased with the quick progress thus far financial results and the initial positive feedback received from shareholders and stakeholders both. I will now turn it back to the team, who will provide an update on how we started to implement the key initiatives that will deliver results in Q4 and
in 2022. Ghislain? Okay. On Page 13, we have already made considerable progress on our total operating income improvement of on our September 17 call. We will be substantially complete by the end of the year, which will provide a full year impact of these reductions in 2022.
Financial results. For the $300,000,000 in purchase services and material and other items, we have already secured around $100,000,000 of initiatives in the past month, results, of which a few examples include the reduction of contractors through the entire company, both in the field and at headquarters, results associated with their maintenance. Finally, we'll deliver $150,000,000 in additional price initiatives as we continue to enhance our yield management strategy. I will now turn it over to Rob.
All right. Thank you, Ghislain. As stated on September 17, operational excellence, Our commitment to safety and service to our customers have been and will continue to be cornerstones in our strategy. All of our core operating and safety metrics have improved over the past couple of years, leading to greater efficiencies and improved customer service. We continue to build on our positive momentum through our strategic initiatives.
A big part of our operational excellence operating the railroad sustainably. Our fuel efficiency for Q3 was an all time record. CN's industry leadership and sustainability and success in operational excellence have been achieved through a continuous and concerted effort financials. We are on track to deliver all time best in productivity in our operations, fuel efficiency, and most importantly, financials. We are running a safe, efficient and sustainable operation that consistently meets the needs of our customers.
I'll now turn it over to Keith and James to outline CN's growth vision.
Keith? Thanks, Rob. Current worldwide port congestion, financials. Our inland terminal network is well established yet continually improving. Improving safety and improving the customer experience.
The intermodal story for CN is strong with decades of opportunities ahead. James, I believe you also have some great long term carload markets that are developing.
Yes. Thanks, Keith. I've never been more excited about our long term carload growth potential I am today. Our unique geographic reach and exclusive access to the Port au Prince Rupert will help us be a leader in carload growth over the next several years. Financial results.
Canadian grain recovery in Q4 2022 will be followed by emerging new renewable fuels and refined petroleum products projects that will propel our growth financials. What I'm most enthusiastic about are new green energy carloads related to Alberta's massive growth in hydrogen energy projects, guidance by the slew of recent announcements around the Alberta industrial heartland. Hydrogen related carloads have the potential to be of the scale of crude by rail at its peak,
financial year.
Our end to end supply chain model that helped us create new export capabilities for propane is easily replicated for blue ammonia and other hydrogen derived energy carloads. We move to the next slide. We routinely get asked questions about revenue per RTN. Our view is that this measure is a better proxy for mix than it is for price. That said, since December 2018, When we started our customer centric journey under J.
J. Leadership, CN has seen the fastest growth in revenue per RTM for all Class 1s As you've heard us say before, we consistently price ahead of railway cost inflation. In the last 5 years, our corporate same store price financials provide real insight into the market rate for our valuable capacity, allowing us to smartly price to meet the market without undue volume risk. I'll turn it back
to JJ. Thank you. Thank you, Jane. Thank you, Keith. Thank you, Rob and Ghislain.
Looking to 2023 and beyond, the CN team is focused on delivering solid results and see the opportunity to further improve our operating ratio financial results. As we continue to prioritize safety, railroading for customers, railroading to reduce carbon emission, a balanced approach. Financials. CN's future is bright. Our network is great.
Our ambition is to build a premier railway of the 21st century, Investing in technology, investing in capacity, delivering service that attracts more customers to the rail network, financials. Financial results. We are investing in the success of our customers, success of our workforce and communities and as well as return for our shareholders.
Previously mentioned. We ask you to kindly limit your question to 1. The first question comes from the line of Ken Hoexter with Bank of America. Please go ahead.
Good afternoon, Ken.
Hi, good afternoon. J.
J, maybe I can start with one question, but I guess you're announcing your retirement, maybe your thoughts on the outlook here. You talk about decelerating growth.
You step away.
Yes. So where we're at, I think you can where we're at right now, I think we're in a world of increasing inflation. That's why we're driving price. We're in a world where volume is sort of it's positive in some places, not so positive in other places. So therefore, we have to adapt to that.
And I think we're also in a world where it's time for us to be ready setting for the future. That's why there's such a focus on financial. The rail of the future, we call that DSR, leveraging technology, using talent, making sure we're relevant to our customers, all of them, big and small, financial. So I think the rail industry has a huge opportunity is to be more relevant to the supply chain, Working with ecosystem at the port, making the best mousetrap to attract more vessel. It also has an opportunity to attract more freight on the highway and converting that to the railroad.
It doesn't come in at the same operating ratio. I think it's well understood by all, Well, it's very much part of the long term success of the rail industries competing with other modes and doing so in a way that's relative to customers Who's freight is they are the one who decide where to spend their money. So I think really the rail industry has a great future. It just needs to remind of the basic. You got to have as many customers as you want to make these rail assets as valuable as possible.
Thank you.
Thanks. Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.
Thanks very much. Good afternoon, everyone.
Good afternoon.
So I guess, financial. Some big news here with the announcements and when I look at what changes you're putting forward Obviously, with your strategic plan, there's changes now at the Board level and management. It seems to be fairly We're closer aligned to what TCI is asking for. I guess my question is, is there room for financials. And engagement here now following these announcements, do you think that that's possible?
Is that going to be something you're going to be looking for? Or is this More of an independent approach that you plan on taking with regards to the CEO search and proceeding as planned with the March 22 meeting.
Thank you, Walter. And if I may say, I think it's maybe the other way around is maybe TCI is getting closer to what CN's long term strategy is, I hear more comments about first of all, when they ran out the press release earlier this week, It was a bit of a vague presentation, but no clear target. And the press release is not a plan in itself. We're talking about the things like long term emission, the word customers came out more balanced. And I think regardless of but regarding further engagement with TCI, I won't especially speculate for that.
I'll The Board engaged with the activists. But the strategy that we have here is very, very clear, right? We want to balance for our railroad for all stakeholders. We want to be a growth company. We want to be a safe company.
We want to be a company who has enough capacity So that when demand surge or peak, and we've seen this in the past, that we don't let the economy stranded. And that we create an environment where Our industry is successful not because it's a duopoly or 3 duopoly within North America, but successful because More and more customers want to do business with us and more and more customers want to use our port by choice and more and more customers wants to leave the highway financials and join our respective edge model network. So I think that's long term, that's where the future is. And we talk about technology often. It needs to happen.
We need to have technology that makes the railroad safer. That's more about the maintenance side, technology that create capacity without necessarily having to lay down more track and technology also that makes the service to our customers who all buy supply They don't buy rail service. They buy a combination of transportation mode and therefore having technology that makes it easier for them to track and trace and maintain So it's maybe a little more sophisticated than how low can you go on the operating ratio.
Appreciate the color. Thanks, JJ.
Thank you. Thank you, Walter.
Your next question comes from the line of Cherilyn Radbourne with TD Securities. Please go ahead. Financial.
Thanks very much. Good afternoon. In terms of the pricing environment, could you speak to what the
financials. And how much of the book of
business has been repriced in this
So, thanks for the question, Cherilyn. So very interesting, we've
been preparing
for ramping up of inflation here Q4 of 2020. So we've been very careful with a lot of our contract renewals not to go out too far because it was an uncertain environment. We've got a pretty big chunk of our business that's going to be available for repricing still Q4 this year and into next year. I don't know the exact number, but somewhere in the range of about 35% to 40% of our entire book of business that we can reprice. So we're pretty excited about that.
We'll make sure that we're pricing well ahead of railway cost inflation. And to date, this year, we've been just over 5%
on our same store price. So it is bearing out
that we're able to secure So it is bearing out that we're able to secure these price increases because the customers realize they need the capacity that we have. Increasingly, as we move into 2022, that capacity is going to have more value and creating that level of certainty for financial rate with a contract in hand with CN is worth something to our customers. So we'll continue on that path. We'll be pricing ahead of railway cost inflation. I think a good market somewhere between 1.5% and 2% ahead of railway cost inflation is where we think we're going to be balance of this year and into 2022.
Your next question comes from the line of David Vernon with Bernstein. Please go ahead.
Hey, guys. Good afternoon, guys. Thanks a lot for taking the time. Hey, Keith, could you maybe talk a little bit more about what kind of tailwind we can expect on international intermodal pricing given where Steamship rates have headed over the last sort of 12 to 18 months and the timing for when some of your international intermodal contracts may come up?
Go ahead, Keith. Thanks, David.
Price has a
lot of different aspects I'll start off with our same store price and then I'll talk about some other things that we're doing. But the same store pricing, you're right, we have had some contracts come up. We will continue to have contracts come up. It happens all the time. In these last two contracts, they came up big ones.
We had the opportunity to look at the book of business and actually upscale our business. Financial. There's some business that we did not think was compensatory to the workload that we put into it. So we jettisoned some of that business. And we didn't do it in a financials.
Adversarial manner, we work with our customers and we said, you know what, we'd rather focus on these areas and we provide those services to you. So We will continue to do more of that. We started in our upscaling, as James mentioned. But we also are looking at Taking our latent capacity that's been created by some of these supply chain issues, and we're selling that at premium rates, working with our customers. So we're taking every opportunity to talk to our customers to figure out what they want to accomplish.
And then we're creating value for them and we're usurping that value for CN as well. Thank you, David.
Thanks, David.
Thanks for the J. J, if I could squeak one more in here. Is there a timeline for the Board's search process?
So the Board will The Board is looking for the best of the best, and they want to take the time to make sure that we find and determine the best of the best for the next generation of CEO here CN, so they're not on the clock. It doesn't mean that they will go slow. They'll work they'll want to be sure that it's a very important task. At the same time, I mean, we're not going to put out a specific time that I wish this will be done. As I said in my opening comment and I think it's also in the press release, I'm staying till the end of January or whenever is required to do the smooth transition.
And at this point, we're looking for the quality And sometime quality takes a little time. So I would refer you back to somewhat said in the press release. It was worded very specifically.
Great. Thank you.
Thank you.
Your next question comes from the line of Kornack Gupta with Scotiabank. Please go ahead.
So I
just wanted to understand, given the global supply chain disruptions we are seeing right now, like how the streamline shipping customers You have they're thinking about the whole dynamic here. Are they looking to incrementally look to Canadian West Coast ports, especially Prince Rupert or they are looking
So maybe Pernade can start and Keith can add a lot of color to that to space. But one of the comments made earlier, I'm not sure if it was As some of the business, we decided to renew some of the lane. That created capacity Rupert capacity Rupert was sold out. That created the capacity at Rupert. So now Keith and his team have been able to do some new vessel.
Finance. You've heard about this pendulum vessel, smaller vessel that some of the retailers in North America are now going out and charter themselves. So they only pick up freight at a few ports in Asia and they drop it off At 140 North America and they want to avoid at all costs, any Long Beach or any places where vessels are delayed. So for us to be able to do this finance. And do this at a premium price, it has to be with other customers when we were not on a contract and also do this at the port Rupert, financials.
Which now has some latent capacity because some of the business that we and the customer would not see eye to eye on the yield of it, We've actually let it go. So I don't know if you want to talk about the future, Keith, and how many more months or quarters this may last?
Yes. And Just to point out, the supply chain disruptions and what's happening to these vessel strings are what's causing some of this transitory volume issues that you've seen for Rupert and Vancouver down for us. So That was the factor that got us taking a page out of our playbook To go back to some of these customers as JJ pointed out, I will also say that year over year we've seen the East Coast Ports that we service as well as the Gulf Coast ports that we service were up 20% over last year, and that's a diversification approach financials by the customers, not only the steam chip lines, but the people that are in the box, they're saying, I want another gateway. And that's why the CN network is set up so great for that. We've got 3 codes, the 3 different ways that they can get in, 13 different ports.
So that's why we're so happy that we have this network. That's why we're so bullish on the future.
Thank you, Kornar.
Thank you.
Your next question comes from the line of Jason Seyal with Cowen. Please go ahead.
Thank you, operator. I wanted to talk a little bit about the headcount reductions. You said you're 75% through that. Did all those come in 4Q here early on? And what's the mix sort of between the U.
S. And Canada with those reductions?
So I think We'll cover that. Just to let you know, we're extremely focused on executing on that, Jason. And we actually track this daily to a great detail.
Financial.
Yes, Jason, I'll give you
a bit of color on the mix of headcount. As we said, we have about 75% Out of the 1050 that we announced on September 17, I would tell you close to 600 is the management and close to 200, call it 190, is union. Financial. I would say the lion's share of it is in Canada, and that's what I would tell you between Canada and the U. S.
But I'm giving you the color here on the management versus union.
Yes. I know, Jason, that people are Tracking headcount in the U. S. For Class 1 railroad. Most of what we talked about is actually in the Canadian side.
So you'll see you won't see that in our headcount for U. S. Network because most of our management position on the Canadian side and most of the reduction that we've done or are doing are you'll find them on the Canadian headcount, not the U. S. Headcount.
That's right. I don't know if that helps.
No, that helps. I'm sorry.
I might have missed it. Did you
say they were most of that was done by the 2017?
Most have done They were done after the 2017, right? On 2017, we announced it. And then after that, we started to rollout and 70%, 75% of that is done as we speak. As we speak, This is
as of today, give or take, it's about 75% of the 10.50 that are done.
Yes. So that will impact the 4th quarter result. Financial
results. Gentlemen, I appreciate the time and color as always. Thank you, Jason.
Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead.
Hey, good afternoon, everyone. And JJ, I just want to acknowledge it's quite an extensive career at CN. So best of luck on the other end. But I guess, It would be great to get some perspective from you because obviously you were part of a team earlier when CN was viewed as really best in class. And I guess what
are you looking for
your the person that takes over for you, what do you think they need to get right to get back into the driver's seat of being the best railroad or at least the best viewed railroad in North America.
Well, thank you, Brandon. Yes, joined CN Back in the month of May of 1996, which was about 6 months after CN got was privatized, I think the landmark of CN is to be innovative, This is what scheduled railroading was all about. A lot of naysayers at the time, it was not going to work. The IPO was a Big thing that a lot of people at that time, especially Canadian investors, thought it was not going to work. And then where we're at today We're looking to the future, not the past.
CN is not to rather be in 2025 what it was in 2010. CN is looking to be what the future looks like. So we're looking to be a growth company. I think we want somebody who's focused on growth, Somebody was focusing on bringing technology into the company. Somebody was focusing on having a workforce that presents today's society.
So bringing talent from where it is, different gender, diversity, inclusion, a workplace that is The future is where you want to be. As Gretzky said, you want to go over the park, the park will be next, Not where the puck was in 2010 or 2015. So I think that's really when you look for a CEO in early 2022, You want to have somebody who can actually get the company the way it needs to be in 2025. I don't know if that helps.
Your next question comes from the line of John Chappell with Evercore. Please Go ahead.
Thank you. Good afternoon. Ghislain, we've talked about the cost initiatives and the pricing Maybe the trucking units specifically, how are those reviews gone? And are you still on plan for the impact that those are expected to have on hitting the targets for next year?
So John, Helen Cork is actually working those 5 risks specifically. She will give you the call you need.
Yes. Thanks, John. On our nonrail assets review, we've commenced the sale process for the Great Lakes fleet of vessels, and we have a number of interested buyers on that. Financials. With regards to TransX, it is accretive to EPS, and we've almost doubled the intermodal business of TransX Since the acquisition, the profitability of the core TransX business is in line with best in class for similar types of assets.
Financial year. And we're still working through the options to potentially reduce our ownership interest while maintaining and growing the rail revenues there. We'll keep investors
Thank you, John. Your next question comes
from the line of Amit Mehrotra with Deutsche Bank. Please go ahead.
Hey, J. J, best wishes. It's been a remarkable and successful And this question, your commentary about the new CEO. There's obviously another world class executive on the sidelines, so to speak, that TCI is bringing forward. And I just want to make sure we're not reading The search, these searches can be long.
They can be very expensive. Have you guys already considered this other candidate that TCI is And you feel like that's not the right way CITN wants to go. What's the strategy around doing an expensive long search when
Thanks for the question. This is an important question. But the Board will consider all candidates inside the company, outside the company, male and female. And there is a search, meaning that we will be very thorough and be sure that the next person who will replace me is a person that can really carry the CN strategy on a go forward basis. So that takes a little time and that takes It's a very specific process.
We're committed to the process. The Board has set up a CEO search committee, financial results. It's going to be led by is led by Seanene Bruder. Seanene is our Chair of the Governance Committee. And with her, we have Robert Philips, who is a retired Chief Executive Officer or Chairman of British BCR.
And then you also have Kevin Lynch and as well as Justin Howell, who joined the Board From cascade, so this group will be doing reviewing what is the profile for the CEO of the future at CN. They will look for all candidates known and unknown. The search will remain confidential. We won't talk about candidates before The committee has a recommendation to make to the board and the whole board of CN eventually, as it did in the past, will weigh in, in the final decision. So We know there is some candidate out there, at least 1.
But I think the world is bigger than that. And before the Board make a decision,
Your next question comes from the line of Brian Ossenbeck with JPMorgan. Please go ahead.
Hey, good afternoon. Thanks for taking the question. I wanted to come back to technology and what sort of benefits you think you're going to get from that across the network and Maybe some of the injury ratios, the safety, the fuel efficiency capacity. We've heard about some of these initiatives for a number of years now.
So I don't know if we're
on the tipping point of them actually What type of benefits you're expecting in the plan for 2022, specifically as it relates to some of these technology initiatives?
Yes. So Rob is probably the closest to that. Most of the technology that we deploy right now is in the space of operation mechanical. Rob, you want to talk about Technology and your space. Yes, absolutely, and thanks for
the question. So probably the best example we have right now is our Thomas track inspection cars.
We now have 10 of
those that are running from coast to coast to coast covering our core main and some subdivisions are covering 15 to 20 times the previous inspection. That's really given us real time information as we see it today, and that's allowing us to make better decisions really. When you look at our CapEx for next year, A big part of that is based on using the technology, especially when it comes down to how we replace ties and our undercutting, That's a big part of our basic maintenance. So we are seeing those results. When you talk about fuel efficiency, we continue to raise the bar.
We are the industry leader. Just in the last two years, just from our initiatives alone, we saved $75,000,000 just from those initiatives. That's excluding fuel price and consumption. So Really, really good work. We're continuing to see it.
Jiz, I don't know if you want to mention anything regarding the actual dollars for next year, but we are seeing
the benefits. No, I think in terms of dollars, as you remember, Brian, we were shooting for a range of $200,000,000 to $400,000,000 I think that we slowed down a little bit in 2020 because of COVID, as you can imagine. But And we're continuing to track those very, very closely. So quite bullish about technology.
Yes. And maybe technology also has a big part of our future on the commercial side. I don't know if Helen or Keith wants to talk about some of the stuff that we do technology wise That
is really aimed to attract more business or make business more sticky on the CN. I'll start, Helen. But We're actually deploying some technologies now at our intermodal terminals that are improving the efficiency of the terminal, the Capacity of the terminal and the safety of the terminal, and that's going very, very well. It's enabling us to do more business through the It's creating a better customer experience for our trucks. They come in and out of the terminal.
And we have Many more of those initiatives that are underway. But Alan, you've got a few. No? Okay.
Your
Your next question comes from the line of Benoit Poirier with Desjardins Securities. Please go ahead.
So, Benoit, Benoit.
Yes. Good afternoon, everyone, and best wishes, JJ, on
the next steps.
With respect to the supply chain issues, Could you maybe provide some color on the business segments that are impacted the most and whether it should become a
financials. Maybe I can start, but definitely when you look at the 4th business, business is somewhat down because Things on the ocean are not working the way they should. So we're turning this into a positive the way Keith described earlier. So now that we have some capacity at Rupert that on paper was not going to be available. He can do so now take spot business, shuttle service, pendulum service with only Rupert as the only protocol on the North American side.
And on automotive, I think everybody knows the story. The whole automotive industry is struggling to get shipped, which means that You and I are probably going to be deferring our purchase of a new car to next year when we have more choice of brand and color. And that's going to be a story for 2022. I don't know if you want to add, James, to what's happening in
the world
of cows.
I would say the weak outlier we have is Canadian grain. I think everybody knows that story. The 1st 10 weeks of this current grain crop were down over The good news is we're in a very unique position and that we have some strong tailwinds with coal. We got potential of 2 coal plants reopening on our network. We got the full year effect of the tech deal that's going to drive us through for at least the first half of twenty twenty All in, we expect that coal is going to make up almost half of that gap we have with Canadian grain crop.
And then, of course, financial. The grain crop gets reset Q4 next year, and we got some very high hopes. So if you think about coming out of 2022, we've got some strong momentum with a recovery in grain End of 2022 into 2023. And then we've got some significant carload growth projects related to new crush plants and financials. New activity around renewable fuels carries us forward 2024 and beyond.
That's when we start seeing financial year. The significant growth in carloads related to the hydrogen economy all around Alberta. And I got to tell you, like I said in my prepared remarks,
This could be big. This could be
of the scale of crude by rail, but this is going to be long term ratable carloads that move by rail, not rail when it's convenient, but rail all the time. So Very exciting prospects for the future.
So thank
you very much.
Carlos from Alberta to the West Coast via Rupert of Vancouver. There's also a positive story on iron ore export. CN is doing iron ore export from the Gulf and then we have a trial over Rupert financial. And the coal story at CN is all export either via the U. S.
Gulf or via the Port au Prince Rupert. Thank you, Benoit.
Your next question comes from the line of Jordan Balaguer with Goldman Sachs. Please go ahead.
Good afternoon, Jordan.
Good afternoon. A lot of the focus always is on operating ratio, the 57% target next year. But Sort of thinking beyond that, not operating ratio, but sort of given the customer centric pivot that you had done, What's the update and thoughts around the longer term revenue projection for you guys, not necessarily next year, but sort of beyond that as Maybe we're at the optimal OR, but how do you think about the revenue growth long term?
Thank you for the question. It's also I financial. It's a refreshing way to look at railroading. Operating ratio is a key KPI, but it's a byproduct of the business. So we're focusing on growth.
So CN is looking to bring more volume in the railroad. It makes the railroad more profitable, more viable when you have more freight on financials as opposed to the market freight. So we're a growth company. We want to railroad for customers. So we need to have a customer centricity mindset and culture CN to do that, as well as an area where you can attract freight on the railroad.
Port business is another area where we can speak with other railroad network to bring business on the CN. And James mentioned on the carload side, for us to attract companies like G III, for example, We announced recently 2 more grain elevators, 100 loops of loop track on 50 cars being built on our railroad because they like the way we railroad For them as much as we railroad for shareholders. So all these things really are that's the way of the future is To use a network for what it really is meant to be, to move a lot of freight and to be in the neighborhood of the economy and to attract people like G3 or Dow financial. We have a very strong financial position in the U. S.
And we have a very strong financial position in the U. S. And we have a very strong I think these are the things that really are what DSR is all about is use the network because it's very fuel efficient, Lower carbon emission. It's safer than stuff on the highway and use it for all it has the potential to be, is
Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.
JJ, you made some comments at the beginning of the call about financial year. July versus September operating ratio and maybe if you can just get some color there. And then longer term, it sounds like maybe there's a little bit of financials. Change from the September call as the business grows past 'twenty two that there should be further margin improvement, maybe just a little color there on how you're thinking about operating leverage longer term.
Okay. Thank you, Scott. So as I said in my comment, and that's important to clarify that, lowering the operating ratio start with 57% in 2022. We're not saying 57% is the end of it, but we say 57% in 2022, and we're confident what I can tell you are against that, is one way to railroad with And making sure we don't leave the economy behind if for whatever reason the demand for trade transportation, especially in Canada, is going to surge back So it's not about how low we're capable to go and how fast we get to that. It's more about how low should we go and over what period of time.
But starting with 57 in 2022, potentially some firm improvement beyond that. Let us go back To the trade here back in the early in the New Year. And volume obviously is an important point. I mean, as much as the Canadian grain crop right now is a huge disappointment because we are set up for it. We have the capacity to move it, but it's not at the rendezvous.
Financial. We are planning for an average crop for mid for late next year. And therefore, growth, revenue ton mile growth will be back At CN, this year, I think if grain was to be normal, we would have, James, how much GPN growth next year? 6%. So, it's 6% of the time you put in grain, the fact the crop is not there.
So, definitely, it's a growth story. And definitely 57, we believe, is where we should go next year, not as low as we're capable of going, but it's more about where we should go and start with 57 in 2022. And after that, we'll see more to come in future earnings call. Thank you, Scott.
Thank you.
Amit, sorry, yes, you had a question about August July. So maybe I I think on that point, Rob, we'd be in better position to talk about sort of the movement in our OR kind of a month to month and what happened here in July at
Yes, Scott. Even though we don't talk about OR in terms of months, if you just if we look at June and where we're at headed into July, Of course, we lost the bridge right at the beginning of July for 2 weeks and then that was followed by a ministerial order. So there's no doubt that July's financial performance impacted the quarter. But if you look at June to July, there's nearly a 10 point swing in OR and Same thing when you look at September to July. So hopefully that gives you a little bit of color of what we're looking at there.
July was quite challenging from solid June and then we had we lost the mainline and all that goes on with it.
Your next question comes from the line of Tom Wadewitz with UBS. Please go ahead. Financial.
Hi, Tom. Yes. Good afternoon. T. J, I had one that's kind of a minor Follow-up on a prior question and then another one, if you will.
I guess on timing, is the timing of your retirement At the end of January, intended to kind of coincide with when the Board would be done with the decision. Is that why you said it accordingly? Or it seems financial. Almost implicit in that. And then I guess the second question just would be your broader thoughts on supply chain and kind of We hear so much about labor constraints, but there's not a ton of visibility to that easing up.
So I don't know if you want to offer some broader thoughts about rail capacity improvement in volume growth broadly in 2022, whether that's pretty visible or is that is labor a significant risk to kind of
But at the same time, my job and I was in my opening comment, the whole team here on the table, our job is to deliver a very solid result in the 4th quarter We're really set up to enter 2022 on a very solid footing and I want to be here to deliver those results financials. Back to you guys and girls sometime in January. In terms of the timing, the Board is not on a specific timeline. They will find and determine the best candidate when they're ready. And therefore, my mandate to the Board is to be No, my heart is to CN.
I've been here for 25 years. I want to do what's right for the company. And I will leave when the Board needs me to leave. That is when the Board has The proper successor to be ready to step in the job. So that's where the flexibility and the beauty of all this come together.
But very committed to the Q4, committed to setting the company strong for whoever the next CEO to have a very solid 2022 I'm committed to be here till the time that the Board has announced to the person that will succeed me, whether it's a candidate I'm inside or outside, from anywhere around the world in North America, female or male or female. So, I'm here at the disposal of The Board and our shareholders, and I've done this long enough. My heart is to make sure that we do the right thing for the next step of CN. And regarding the supply chain, I think maybe James and Keith may have a better view than me on that part of the question.
Yes. I would say, if you look at out of 2022, every single segment across CN is going to be growing in 2022 with the exception of our grain business. And grain, as we talked about, is a big hit. I pivot back to say we're so lucky That start kicking in the second half of twenty twenty two and the twenty twenty three. It's something really to be excited about and it's going to Really create some opportunities for us as we move forward here.
And Rob, on labor,
I know there's some questions on some of the U. S. Property around the United States,
but what about CN? Yes. So we're in good shape from a labor standpoint. We do see the sporadic as we have over the last year and a half with pandemic, we do see the sporadic outages that impact our labor, but really it's short lived and We're in good position here to handle it from a labor standpoint.
Great. Thank you for the time. Thanks for the perspective. Thank you, Tom.
Your next question comes from the line of Chris Wetherbee with Citi. Please go ahead.
Hi, Chris.
Hi, thanks and good afternoon. Yes, and certainly best of luck JJ in the next endeavor for you. I wanted to maybe ask better in gaining some momentum. But when you think about that coupled with what you already announced around headcount reductions, dollars 100,000,000 of cost savings that you're capturing I guess I'm curious how you guys think you're sort of running or maybe will be exiting 2021 in terms of that run rate towards the 57. I It's always been our assumption that there are some benefits of removing say Great Lakes from the business in order to get to that 57%, financing.
So, mixing the OR down by the loss of some of those higher OR businesses. But I'm kind of curious what maybe the underlying business is running at today based on some of the progress you've been able to make
Yes, maybe just without getting into guidance by quarter, by month. Financial. So we said we have a target of operating ratio 57 for 2022. And in any railroad, including Northern Railroad, there's some seasonality in UOR. So December, January, February, March, our 5th winter month, especially in Western Canada, where 50% of our business is.
So The operating ratio for these 4 months is higher than the other 8 months. You got to take that into account, number 1. Number 2, we have made progress I mean, of course, of the summer, as Rob mentioned, recovering from the loss, the fact that we have lost the main line to Vancouver for 2 months for 2 weeks, I'm sorry, And also the work we've done here on labor and on the September 2017. So we're making progress. And I said, we're really committed to enter 2022 on good footing to deliver against our commitment.
I don't know if you want to add some other things, Ghislain, without getting into. Yes, I
can add, Chris, that based on what JJ is mentioning, we are very Essentially 10 months behind our belt. So we have 2 months left. So we're very confident of that. And The OR will come with that guidance on EPS. I mean, it will be the result of that EPS growth.
Yes. And also the result of financial. As you know, you've been at this for a while. The last 2 weeks of December sometime are kind of a crapshoot, meaning if we could have good weather, bad weather, Our customers might decide that they shut down because they want to save on labor costs and sell the product they have in their warehouse. It all depends how they view the economy.
So the last few weeks of the quarter and the 4th quarter, sometimes our demand Sometimes the men spike down. It all depends how everybody is reading the economy and all what they want to do, some of the Closing the year end book with lot of product on hand or we have nothing on hand. So but we're working hard to do what we said we would do. And I think that hopefully you see that in our 3rd quarter results and you see that we've been able to bounce back since
Your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.
Yes, good afternoon. Thanks for squeezing in here. Just I'll just echo everyone else. JJ, congrats on a fantastic career. But as it relates to my question And the new focus in the 2022 plan.
I'm just curious whether the Board is contemplating any changes to the compensation structure of management to align around this new plan as we're looking forward, I guess, beyond even 2022? Thanks.
Yes, it's a good question. And it's a question that the Board asks itself at all Every year there's a discussion around what kind of compensation system should we have and whether or not we make some change compensation system. So this stays current about who we are today and what we want to be tomorrow. And those discussions take place all the time, including in current time. So I would say, I mean, it's just an ongoing discussion whether or not we have an activist or not.
This is something that the boards always look at. And they always look at the discussion in terms of the long term and what is that they defined from the CN long term strategy and it needs to be aligned with that. So We have nothing to say about what it might be in the future. In any event, that's not for management To do that, it's for the Board. But it's an ongoing discussion, but it's an ongoing discussion at all times, not just in current time.
Financial. Thank you. Appreciate the color.
This concludes the question and answer session. I would like to turn the call over back to Mr. J. J. Rubik.
Well, thank you. Thank you, Charlie, and thank you for joining us today. We're into exciting time at CN at all times. We worked very hard this summer on closing a transaction, which was very strategic financials. To us and very much in part of the long term strategy of growing our network, we convinced a lot of supporters, convinced the Board of KCS Twite Could not get the regulators to be on-site.
So now we're very focused on our current network and the great network that we have and exploiting that the best in September 2017, and that's what we're very focusing on. As I said earlier, I'm not going anywhere. I'm here with the team to deliver a very next year in producing the results that we talked about. And I think today, we've also clarified some of those things that maybe are more clear to you at this point. So
The conference call has now ended. Thank you for your participation. You may now disconnect your lines at this time.