Years we don't like.
That's right. Yeah. Well, I mean, it's interesting because, you know, we've known each other for quite some time and in different roles. It's great to see you come into this role and have such great success here at the early stages for sure. I wanna start, you know, with my first question, is that you just had your first post-COVID investor day. There you outlined some of your strategic priorities and financial perspective the next three years. For those who perhaps weren't in attendance, can you share with us a few of your, like, kinda high-level takeaways at that... It was a great event, but please give us your high-level takeaways.
Yeah. We wanted, you know, I didn't wanna do it right away, as you know. We had a lot of questions around where we were gonna take the place, but the priority coming in was to get the railroad running. We made a early decision on the operating model that worked for our network. We implemented it, and we had, by the time we got to our investor day, geez, that was just a couple of weeks ago.
I know, right? Yep.
Couple weeks ago, we had a number of quarters under our belts of a really efficient operation, which is core, of course, to railroading. I think it was a very successful investor day, we delivered the messages that we wanted to deliver. Were you out on day one, Walter?
Oh, I sure was.
You were out on day one.
I got to ride that rail.
Yeah, exactly.
I'll never miss that. Yeah. Yeah.
On day one, what we wanted to do was make sure that you all understood some of the technology that had been implemented and that we're working on across the railroad to improve safety, to improve the efficiency of our operations, and improve kind of how we deal with customers, right?
Mm-hmm.
As well as I think y'all got to see a great big locomotive shop and to ride the EJ&E, which is we feel very strongly about our network and our assets. One of the strongest is the EJ&E, which allows us to move around Chicago very, very quickly. 25% of the rail volumes in North America go through Chicago, so it's a significant advantage. On day two, our intent was to talk about the operating model that we have chosen, why it was the right one for our railroad, what it would allow us to deliver, improve customer service, improve efficiency, and reveal the capacity that we had, you know, across the network.
We talked about what we were gonna do with that capacity, as well as, how we were gonna accommodate what we believe is some very strong growth opportunities over the next period of time. We laid out what we believe we'll deliver over the next three years, although our planning, of course, extends much beyond that. It's a little bit soft out there right now in some consumer segments, what we laid out was a 10%-15% EPS CAGR for 2024-2026. We laid out an ROIC of 15%-17% over that period of time. We laid out some capital allocation priorities for us as we go forward.
We will be increasing our leverage from 2 to 2.5 on debt-to-EBITDA basis over time, and we'll do the right things in doing that. We believe in a strong, consistent dividend program that, you know, runs roughly with earnings, and the rest of it we'll do through a share buyback. We also laid out, you know, a sampling, what we call proof points of the growth opportunities we see out there outside of just, you know, what comes and goes with the economic swings, and what we would need to do to accommodate that growth. The East and the South, we've got capacity, and we're excited about what we can do with available capacity.
The West, we have some capacity, but there's some major growth opportunities there which we will build to accommodate, and we'll spend some capital doing that. At the end of the day, you know, the most important things we did was put in front of you, Walter, and others, the team that's gonna do this. I think CN's been a training ground for a lot of the real good railroad talent over the years. The next generation of that is coming up and is pretty excited. I'm pretty excited about what they're gonna be able to do.
Yeah, no, it was a lot to unpack there. It was a really, you know, productive sessions over the course of those two days and really got to learn and relearn about the organization in many cases. Let's start with, you know, you didn't come from the outside the railroad industry, for sure. I mean, you were for a little bit outside the railroad industry, but you've never been at CN before. What was your impression of what you thought you could do when you came to CN? When you got into the job, how did that impression, if it changed, how would it change, or how did it even refocus you in terms of what you needed to do?
Yeah. I knew CN well, but not from the inside-
Mm-hmm
...from the outside. Of course, it said when I was with CP, I competed against CN-
Yes
...for all of my career, and I had a very good perspective of their strengths, from that perspective. Coming into CN, you know, what it was very quickly able to do was to confirm a lot of those strengths, and that was the network. What we needed to do was land on the operating plan that works for our system. What I was surprised by pleasantly was, that once we made that change and said, "We're gonna run the scheduled operating plan," how quickly we were able to move there because we have a lot of talent in the organization that knows how to do that had been here before. We were able to ramp that up very, very quickly. That was a surprise.
As we've done that, the service to our customers has improved significantly. As you know, our operating metrics have improved significantly, and we're ready.
It was really interesting talking to some of those, you know, below the C-suite, senior people, how they felt more at liberty to talk and to speak up and to, you know, embrace and, the PSR tenets that we all know exist at CN. May have been subdued a little bit, but it seems to be coming up to the fore again now and certainly under your leadership as well. What changes do you think now that you've been there a year, you did that three plan, you know, of curating the book and so on? No more curating, I hear. Curating is done.
No more curating.
No more curating.
We fixed it all.
It was successful, right?
Yep.
I mean, you resized or you adjusted your book of business. What's next in terms of highest priority of CN from this point now going forward?
Our highest priority will always be safety.
Mm-hmm.
Because it's the right thing to do, and it's the right business thing to do, without a doubt. Whether it's technology or business process or culture, that will always be the most important thing. As we go by that, we need, no matter what the conditions, no matter what the economic cycle, no matter how, what the generation of leadership changes is, what is right for our network is a scheduled operating model, right? We need to stay focused on that. What we laid out in investor day was how we think about it, which is the plan is done at the center, network ops. It's executed in the field and transportation, and the commercial team sells into it. This is one plan, one effort.
What's important to me is that we have the discipline to run that plan. No overreacting, no stepping off the plan for any reason. Now what we're moving to is the same level of discipline around generating the growth that's gonna drive the plan and where we need to invest in infrastructure to get it, the discipline around the allocation of capital, but also how we're going to invest that capital. I came out of the pipeline industry, and one thing that, you know, I spent eight years doing was building pipelines, and there's a certain rigor around how you execute a capital program that, you know, is a little further advanced than we do in the railroad industry. We're gonna get much more disciplined and efficient about that.
That's gonna support our Return on Invested Capital.
Growth was a big part of the investor day, a couple weeks ago, and I wanna touch on that a little bit now. You have the economy, right, what the economy is gonna do, but there's also a number of aspects that you highlighted at investor day that's gonna bring you something above the economy, above what the economy has to offer. When you look at that 800,000-900,000 carloads that you talked about as a growth opportunity, I, you know, I translated that into your volume number per year and got somewhere in the 5%-6% range, which is really strong, right? I mean, that for a railroad is a very, very strong level of volume.
My first question is, what is the likelihood do you see that you can capture that? Is that aspirational? You know, if, you know, kinda blue sky, best case scenario. Is that your base case scenario? Secondly, you talked about capital, what's your view on capacity and ability to handle that growth?
What I wanted to do when I came in, Walter, was really understand what the growth potential of our network was. We spent six or seven months last year really going through customer well, trade flows at the macro, and we've seen some changes in trade flows. I think, you know, that's going to be something that impacts our network and creates opportunities for us, and we wanna be ready for. Right down to each commodity and each area and each one of our customers, what were the, beyond the organic up and down with economy, what were the real material opportunities? You know, I was surprised and pleasantly surprised by the strength of that portfolio. What we put in front of you a couple of weeks ago was a smattering of those proof points.
Mm-hmm.
These are ones that we have a tremendous amount of confidence in and that you'll hear us talk about more. There are others that extend over a longer period of time. There's, you know, a possibility that not all of them will come to fruition, but there will be others that aren't on our radar screen that do. We wanna leverage our network. What railroads need to do, I think, if they wanna run well, is make sure that the business that's on their network belongs on their network and fits there.
Yeah.
That's what we're focused on. If you think about the eastern part of our network, we have capacity there. We've seen shifts from China to Southeast Asia in production and the East Coast growing faster than the West Coast, and that's predicted to continue. For North America, the, you know, from an inbound perspective, East Coast will go faster than West Coast. We wanna be ready for that and make Halifax the right port of entry, and we've got capacity there, as does PSA in Halifax. If you look at some of what we've got going on the fuel initiatives that will hit the eastern part of our network where we have capacity.
If you look at the electric vehicle, the automotive expansions and retooling and the EV on automotive, as well as the some of the critical minerals that exist up in northern Quebec and Ontario, right where our network is, it's, you know, that's gonna form a focus for us. If you look at in the West, the continuing pull of various energy products-- projects from anywhere from, you know, the traditional propanes and fuels, to some of the newer energy products that are, you know, there's great demand off the West Coast for them, and the frac sand demand to go up into the Montney region, the pipe demand to go up there.
You know, we see tremendous growth across most of our commodity lines, international certainly, on all coasts, as well as energy, the forest products in northern BC and the East, and automotive. You know, it goes across the portfolio. We'll need very little, if any, capital in the East. We are contemplating a couple of sidings between Halifax and Montreal that will, as that train count goes up, allow us to retain our velocity. We won't need much in the South at all. In the West, as those meaningful growth opportunities materialize, we will expand on pace with those.
Mm-hmm. And I just wanna remind everybody, the Slido, you know, you can click the QR code or take a picture of the QR code on your table if you wanna ask Tracy any questions. I'm happy to keep questioning. I got a ton of them here. 30 minutes is a very short period to go through everything. Let's talk a bit about that, so that you mentioned Prince Rupert, you mentioned Halifax, and of course, the EJ&E is the great enabler of those two very strong port. Let's start with Prince Rupert. You know, I was up there in 2007 when you could barely get 300,000 TEUs up there, and now you've got 1 million.
You're scaling to 2 million with DP World. They're talking about and looking, there is an opportunity to build another terminal there. If you ask the Prince Rupert Port Authority, they're talking, they're saying 7 million, right? Is the potential blue sky. Is this? You know, where are you in terms of what you think is capable of being done at Prince Rupert, and at what period, what time period do you think that capacity could be brought on in the Prince Rupert area?
As you say, the capacity now is 1.6. By the end of next year, it'll be 1.8.
Yep.
The second terminal would take it up to four.
Yep.
You know, the rough timeline of that is 2030 or 2031. We're working hard with both the Prince Rupert and DP World on the proof points around that, so that as that happens, we're expanding in conjunction with it. Of course, we're also putting in place the Ridley Island Export Logistics Park because the intent is, you know, with the grain, with the pulses, with some of the plastics, to provide as much loaded backhaul on those containers as possible.
Yeah.
which supports, you know, the outbound and carload quantities into Rupert as well. You would see that the Vopak Liquid Terminal was just approved. The way we're thinking about Rupert as a whole, it's a, you know, it's a gem sitting up there. It's closest port to Asia by two to three days. It doesn't have a big, beautiful city wrapped around it. It's got a very supportive kind of community. It's where the sole provider, so we'll work with DPW and the other terminals up there in the case of international to build and develop destination trains. We have a premium service out of Rupert that can get to Chicago and around Chicago given the EJ&E faster than any other port, whether you're coming in.
We got the flattest route through the mountains. This is, we think, one of our key competitive differentiators. If you think about Rupert as a whole, whether it's frac sand and pipe, whether it's international volumes, whether it's grain, whether it's the liquids volumes up there, you know, our capacity right now on that line is about 25 trains a day, right? We're running a little bit below that right now, so we have some capacity. If you look out all of the opportunities that we see, this is not in that two-three year timeframe we talked about, Walter.
Right.
If you think over a longer period of time, we could see building that line out in support of all those growth initiatives, by another 25 trains, so doubling the capacity of that line.
Totally.
Now, that will be done only on a very disciplined basis as we see those opportunities materialize.
That can be done in the CapEx envelope that you have right now?
Mm-hmm.
Yeah. Just to put it for everyone in perspective, I mean, we're talking line of sight to 4 million TEU capacity. Vancouver, all of Vancouver did three and a half, right.
Yeah.
last year. The notion that we could have a Prince Rupert that will match or possibly exceed that of Vancouver is quite exceptional. Let's move to the East now. You were gracious enough to host us in Halifax. You know, like Prince Rupert, you're the sole access into Halifax. The folks from PSA were painting a pretty picture about what was going on in that. You touched on it from the Far East, the movement of container origination to Southeast Asia, that there's a wave coming and you wanna be ready for it. You said they wanna be ready for it. They bought both terminals-
Yep.
-to get ready for it. You talked about this as the Prince Rupert of the East. You know, we're running at around 600,000 TEUs right now. This could be the beginning of a much larger trend.
It could, we want to position our network in, as the entry point, whether you're coming in from the East or whether you're coming in from the West. Like Rupert, as you say, we've got the benefit of being the sole provider. We're working with PSA around creating the service products that those shipping lines are gonna want, right?
Yeah.
You can dock immediately, you're quickly through the terminal. We will have the same premium service in Chicago, the EJ&E advantage. If you build the sailing times, the terminal times, and the railroad times, you'll be able to get into, say, Chicago faster through Halifax than you will through New York, New Jersey. That's the objective. We're not as far advanced as we are in Rupert, we're certainly working in that direction, and we see potential. You know, as I say, no matter who you talk to, the growth rate on the East Coast of the continent is projected to be higher than the growth rate on the western coast of the continent. We're watching that very, very, very closely.
The reason why I put so much on Rupert and Halifax, that 800,000, 900,000 of growth you're talking about half of it did come intermodal. It's a big important part of it. Vancouver, we can't ignore either. I don't wanna spend too much on intermodal. Let's move to pricing a little bit. Obviously, you've had some higher costs. You also, unlike many industries, do have some oversight on your pricing. Regulator keeps an eye on it. How hard has it been for you to pass the higher costs onto your customers through higher pricing?
Over the last year, we've been very successful, but what we wanna do is make sure that we are providing our customers with the service that we've promised them, right? That makes any kind of pricing or contract negotiation or discussion on growth opportunities much easier, is that we're servicing our customers. Our service levels have improved dramatically. If you look at right now, our train originations are more than 90% on time over the last 28 days, 92%. Our local service operating plan compliance, which is once you get to a yard, it's the frequency or the compliance of the service from the serving yard to a customer facility, is over 90%. Our velocity is higher. Dwell is down 30% over last year.
This means that our service is much more consistent. Whether it's over the road or whether it's to a customer facility. That's the basis on which you wanna have a pricing conversation. Doug and the commercial team did a great job last year of making sure that we were covered, on, you know, our strategy, as you know, is inflation plus. We'll get our cost inflation, plus. That continues to be our plan. About a third of our book opens up every year, from a contractual perspective, so we'll get to touch that next third this year. It was not touched last year, you know, we're expecting the same inflation plus results on that. You know, there's always kind of areas that are more difficult.
We want our customers to be successful, but we feel pretty strongly about the product that we're providing them right now.
Part of a pricing question, you also have to look at the competition, and in this case, trucking. Trucking tends to adjust very quickly. You can have it go from a great environment to a less great environment, and the pricing comes down meaningfully. What are you seeing in terms of truck competition, and to what extent is that weighing a little bit on the areas of your business that are truck competitive?
Yeah. Without a doubt, the truck pricing has gotten a little bit softer. We haven't seen it. Our traditional intermodal product targets some longer hauls. You know, that we're kind of is less price sensitive. What we're trying to do as a company and as an industry is to provide a really good product, a really good alternative for trucks with our intermodal package. If you look at our Falcon Premium service that we just started this week, we're running the first train. You know, the intention is that it's consistent enough and it's fast enough and it's still priced competitively versus truck, even in those corridors, is that we should be a good alternative that takes trucks off the road, which has always been the intention.
It reduces emissions, and it provides as good or better service offerings. We'll see, you know, that pricing move around, but it's not yet to the point that it's competitive.
That brings me back to one of my other questions I didn't ask about the macro, and that's being a big theme here these days is. You being at the front line of the economy, no one better than you to kinda answer this question. You touched on trucking being a little bit weaker and presumably that being a reflection of the demand. You have guidance out there right now for 2023 that's predicated on a certain level of volume. Volumes are a little weak right now on the cargo data we're seeing. Can you talk a bit about the economy, and is the economy a little weaker than you would have put into your expectations when you set your guidance for 2023?
It's still, you know, Walter, consistent with what we put in our plan when we built the plan.
Okay.
We adjusted our guidance based on what we were able to do in the first quarter. We're now expecting, as you know, a mid-single digits on EPS growth year-over-year. The economic outlook from our perspective hasn't changed much. If you look at, you know, industrial production, it's still negative in the U.S., slightly negative in Canada, the projected. If you look at housing starts and building permits, they've come off. But, we know that there's such a backlog of housing need that that's going to come back. It's not down as hard as it was a number of years ago. If you look at automotive sales, they're still very strong. Surprisingly strong, actually. What we're seeing is similar to that.
Okay.
You know, we've watched Home Depot's results come out recently, and so we know that there's some softness there. We're seeing exactly that. Our forest products are soft right now, softer than it was last year this time. Our intermodal volumes, international in particular, but, you know, domestic intermodal are getting a little bit soft. If you look at, it's not related to the economy, but our crude volumes are off. Last year we had an opportunity, you know, in this time of the year to move a little bit of crude. We're not doing that this year. Most else is still strong.
Yeah.
If you look across the bulk portfolio, coal is strong, potash is strong. The grain crop was very strong.
Yeah.
You know, we're starting to see that tail off as the farmers are in the fields now seeding. That's strong. As I said, automotive is strong. A lot of the fuels, we're gonna see our new facility in Toronto come on earlier this year. That's strong, where AltaGas is gonna have another vessel come in every month for the export volumes, I think in Q2, starting Q2 or Q3 of this year. That's showing some strength.
Mm-hmm.
It's a mixed bag, but what we had modeled was, you know, a mild recessionary type environment on the consumer products side, through Q2 to start to see it kind of get stronger a little bit in Q3, and we'll be out of it by the end of the year. That's what we've modeled.
Right.
It's not clear yet that that's exactly how it's gonna play out, but, you know, our guidance is based on that.
Excellent. You mentioned your service is improving. We're certainly seeing that in the statistics as well, perhaps take us back a little bit about the supply chain issues, we'll call it that hit North America. They seem different in Canada than they were in the U.S. Can you explain to investors here how that was different and what you've done to perhaps adjust so that the supply chain issues are going to be less prevalent in the future if we had that kinda similar shock?
I would tell you the future, I think, effort in supply chains, and one of the important ones when you get beyond just what we're doing on railroads, is going to be around the integration of supply chains. It's a big opportunity on data transparency, and ultimately on AI. Because what happened last year was a big bubble of volume in moving through the supply chain, and all of us were dealing with the move-They hit us. A very kind of reactive type of response. You know, we don't want that to happen again. If somebody knows when a container is being loaded in Shanghai, where it's going, you know, the more all the whole supply chain knows about that in advance, the more effective we can be, both from a performance and a capacity perspective.
We're working on that with a number of supply chains right now, particularly grain and kind of intermodal international. We all know that the big question is: Where do we need that surge capacity across the supply chain? We're gonna do our part. We put some capacity in place last year to handle some of the containers that came through the system, and we're gonna keep some of that surge capacity available. We're not going to build for another kind of situation like we had last summer. Our efforts are gonna be on a further integration of the supply chain so that we can operate it to its fullest throughput across the broader supply chain.
That's a nice intro into the next set of questions on technology. You talked about AI, you talked about predicting and being able to get that communication flow. If you were to prioritize the technological investments you're making, what are the ones are you most excited about? What are the highest priority ones that we might see come to fruition in the near term?
Our, as you would have seen when you were down in Chicago with us, our priority in the past number of years, and as we go forward, is going to be on the physical operations.
Mm-hmm.
On the efficiency, because it's about keeping, trains on the tracks.
Yes.
Keeping our employees, our community safe. It's about operating with fluidity. You cannot operate consistently if you're not safe. You saw a lot of the technological investments that we've implemented and that are coming around the scanning technology. We've got an ATIP car that runs 1 million miles across our system. There's multiple cars. Our system is, what, 30,000 km, you know, we run this thing 1 million miles a year. Looking what it can do, it's in the middle of a train. What it can do is it's scanning the tracks for early senses of defects.
It's very cool.
Our tracks, our rail breaks have fallen 90%...
Yeah.
over the last 10 years. We need that to get to zero. We have wayside detectors, 3,000 of them across our system, that are looking for heat. It's acoustic, it's sound, looking for equipment issues. We have seven portals that you take a train through at track speed that can scan the entire train. That's good for safety, and it's good for operating efficiency. As we look forward, we're gonna continue that because that's very critical. We're focusing on technology that allows us to integrate further with our customers and integrate further into the supply chain. This is more about data, how we use data. It's more about the predictive capability of AI, which is, the more I listen to these people speak, it's, like, crazy what's gonna be possible.
It's a little frightening, actually, in some cases around what's gonna be possible. Our job is gonna be to figure out how to bring it to bear to make sure that the fullness of the supply chain can operate to its fullest capacity.
Okay. Well, we're almost out of time. Tracy, is there any final remarks or closing comments that you wanna leave the investors with here today?
Listen, I would just say that, you know, it's been a year since I've been here. I think it's not a surprise about the infrastructure, the assets, the network that CN has. What I'm really excited about is the level to which this team is performing, the discipline around the operating plan, what that can provide to our customers and what it's gonna allow us to do from a growth perspective. You know, we've laid out kind of our plan over the next three years for you. We are looking at ten-year opportunities. Now what we're gonna demonstrate is the same discipline around delivering to those, you know, whatever lightness in the current economic scenario. Aside, we see tremendous opportunity here, Walter. We're pretty excited.
Sounds great.
Thanks for the opportunity to talk about it.
Thank you very much.
Thank you.
Thanks, everyone.