Q4 2019 Earnings Call
Such statements are based on assumptions that may not make you realize and are subject to risks described in Seattle fourth quarter and full year 2019 financial results press release, and I know its presentation documents that can be found on scions website.
Such actual results could differ materially.
Reconciliations for non-GAAP measures are also posted on scans website.
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[noise] walk up to Fiona fourth quarter, and full year 2019 financial results Conference call.
I would have liked started meeting or to fall Butcher, Vice President Investor Relations, ladies and gentlemen, Mr. Butcher.
Well. Thank you Patrick good afternoon, everyone and thank you for joining for CN fourth quarter and yearend 2019 earnings call.
I would like to remind you about the comments already made regarding forward looking statement.
With me today is.
Our president and Chief Executive Officer.
They are executive Vice President and Chief Financial Officer, Rob Reilly, Executive Vice President and Chief operating Officer.
<unk>, our senior Vice President consumer product supply chain, and James Perez, our senior Vice President.
Enteric supply chain once again I do want to remind you to please limit yourself to one question. So that everyone has the opportunity to participate in the Q when he says.
Our team will be available after the call for any follow up question. It is now my pleasure to turn the call over to see.
President and Chief Executive Officer, Mr., Ji, <unk>, well take your boat and good afternoon, everyone.
Welcome to our fourth quarter, earning call I'm very proud to C.N. team and our resilience in the face of challenge during the last quarter.
Let me start received by feeding the last quarter, you know Colbert southern railroading operating matrix combined with the rollout will be sold we plan to its use asset costs labor cost fuel cost.
Line with what we have discussed during the third quarter, earning call.
In November what I've read disruptive eight days national strike. The nine days work stoppage in total that was the only very disruptive or do you can easily calling me and in fact the degrees in GDP for November but also it was very disruptive to our November operating cost I see position and our fuel efficiencies.
In December to support our customers the team deployed all the resources required to Moody, calling me and enable our customers to fully recover from the strike. So good fourth quarter, we produce I've, just cdps or $1.25 down 16% the revenue ton mile volume was down 13.
So.
The revenue at 3.6 billion was down 6%.
And our adjusted operating ratio of 65.2 was up 400 basis points.
I'll go into 2020.
During last fall, we did what we said we would do to rightsize the business to commit weaker demand.
We remove almost 5000 railcars from the network and be turned the least locomotives.
We sequentially ended the fourth quarter. It would approximately two if you know did less people.
We vacated their targeted 75000 square feet of lease off is mostly in downtown Montreal.
We are taking a $31 million provision, though result, mostly related to prominent has been cut back and we are reengaging into our industry. This fuel efficiency program.
Also based on feedback we received from investors, we have decided to provide annual guidance of free cash flow.
We also lounging treat customer service index one for each of works we are rail product line.
To summarize index, which are very relevant the weight customers deploying service, Rob with introduced them in a few minutes.
SPRI our guidance for 2020.
James and keep look good would produce GDP, plus RPM growth and rail inflation plus pricing what are the base assumption of improving freight and threed environment in the back half of this year.
2020, well also be a year or fruit initiative to contain and reduce costs in operation, but also in function.
The next few minutes, Rob will cover operation and technology, James and Keith will cover their market and just made will cover the financial into guidance I will now.
Rob. Thank you Jay Jay first thanks goes up to the women and men.
Delivered this quarter's results the team showed again the ability to quickly react to conditions, whether it was the softening volumes in Q4 quick recovery network in the nine day work stoppage.
Im remains focused on running a safe and efficient railroad and despite the challenges of the fourth.
The work stoppage the teams still delivered a strong.
Some of the highlights include car velocity improved 5% 2019.
Network train speed improved 3%.
Our dwell reduced 5%.
For 29 team, we delivered an all time record for fuel efficiency.
And we will deliver even better results in 2020, as we continue to focus on fuel costs and C. O two emission reductions as an industry leader.
As a reminder, CN consumes approximately 15% less fuel per gross ton mile than the North American industry average.
Over the past 25 years, we have reduced or locomotive emission intensity, 39%.
So by avoiding 45 million tons of Cotwo emissions.
Our active inventory on line was reduced by 5% as a result of greater car velocity and aggressive program and the second half the year to scrap so in return approximately 5000 railcars.
The increase reliability locomotive fleet, along with improved velocity, we were able to read or sales of all 125 leased locomotives. We had at this time last year and therefore not carry that costs forward for the rest of 2020.
In addition to this we've been able to retire 39 older less reliable locomotives from athlete.
As we move into 2020, we have made organizational changes that further strengthen our team and further assist us in running a safe and efficient railroad.
Led by very capable leaders.
In December we transition from three operating regions to too with James Thompson, leading the western region and tailor leading the eastern region.
We're also centralizing older Canadian crude calling and train dispatching under the leadership of Doug or check or senior VP of network operations.
This brings all of our day to day resource management under one leader as we run the railroad is one that work safely and efficiently.
Doug Derek and James are all season scheduled Railroaders that continue to provide strong leadership to our transportation team and take us into a new decade of rail leadership.
Jim Socal or VP of mechanical continues to streamline our mechanical footprint across the network as the reliability of our locomotives increase.
These structural changes allows to get locomotives to the correct shops for maintenance reduce materials inventory online and achieved this more effectively with fewer people.
From a safety standpoint, we continue to leverage technology to drive a safer railroad from employees our customers in the communities we operate in.
Remember, we completed conversion of all of our mandated subdivisions to PTC capability. This was a full 13 months prior to the deadline at the end of this year and we continue to make solid progress on interoperability with other railroads.
Considering where we started on this initiative this was a tremendous accomplishment by the team.
Also we now have eight autonomous track inspection cars operating railroad.
By the end of this year. These cars will cover 100% of our core mainline operation in the U.S. and in Canada.
From New Orleans to Chicago to Vancouver in Prince Rupert and all the way back east to health effects.
These cars will provide coverage of nearly 90% where annual GTM job right and we're already seeing safety benefits as they operate in existing revenue train service.
Operating and regular train service the frequency of testing across the track has increased dramatically, allowing us to find defects sooner and improved quarter capacity versus the man geometry cars offering with a separate locomotive today [noise].
In addition, we have seven autonomous inspection portals built and we're seeing more and more benefits as the algorithms or developed and mature.
Over recent 45 day period, our portals found over 3000 actionable car defects all of these defects, we're not found by the comparable manual inspection.
Hi resolution cameras linking to proprietary algorithms as a path forward in the long term.
As we move further into 2020, we will develop more proprietary algorithms to increase the coverage or what can be found the automation and make or railroad safer and more cost effective.
As Jim mentioned in his comments, we're also introducing a customer service index for three rail product lines in bulk in merchandise traffic.
This index take service measurement beyond the limits of a simple trip plan, which has been in place for many years at CN and encompasses factors that are more important to our customers such as order fulfillment of what they need to ship.
The waste to dwell time sitting at port terminals with containers missing trains left behind is minimal hubs in the consistency in our last mile delivery to the ultimate user waiting for goods.
This index will allow us an all in metric to assist in providing a relevant service our customers need and allow them to grow their business with the C and supply chain.
As we look forward to the remainder of 2020 and as I've said previously written we remain committed to running they safe and efficient railroad that is poised to continue to grow with their customers.
With that I'll turn it over the James cares.
Thank you Rob 2019 is now in the rear view mirror and we're focused on delivering growth in 2020 [noise].
Turning to capitalize on specific growth opportunities.
Turning in 2021.
Yes, I'll spend the next few minutes going over 2019 performance and a 2020 outlook for a few specific commodities.
Well highlight some of the projects under development on our network and we expect to deliver solid volume growth in 2021 of the on.
Let's start with crude.
For the full year 29 team grew from Carlos by 20%.
We expect significant year over year growth in crude carloads for the balance of Q1.
Well continue to be a growth driver in 2020 with about one third of our volume being heavy undiluted crude which is less dependent on price spreads and would have vigilant.
We'll begin to lap the structural decline in BC lumber production in Q2, this year and we expect a relatively steady run rate for the balance of 2020.
We do have the ability to flex up if we see a market rebound this year.
In Q4, 2019, we introduce new Frac sand services did <unk> designed to smooth out the man and protect rail share versus truck.
We finished this ever strong with 44% year over year revenue growth.
Increased January rig count in Western Canada is a positive indication that we may see a mild rebound in frac sand carloads in coming months.
As we move into the second wave in the energy Renaissance in Western Canada spurred on by new drilling to support LNG exports Frac sand will be the first rail commodity to wrap up and we are well positioned where their unique unit train service that directly connects desirable, Wisconsin Sad what end markets, Alberta NBC.
[noise] propane volume was up 17% in 2019.
We will do you see growth and see as unique propane export services in 2020.
The commissioning of the second Canadian West Coast propane export facility.
To be built my time at add Watson Island scheduled to start up for this year and the full year impact at the first Canadian West Coast export facility built by altogether, Prince Rupert that started up Q2 last year.
Our efficient single line service seamlessly connects propane production export facilities, and Prince Rupert, creating superior product for our customers at a long term structural advantage.
Simply cannot be replicated.
This past season with another banner year for Canadian grain.
<unk>, 8% and 2 million metric tons more in the 28 2019 crop year compared to the previous crop year.
In 2019, five new see answered heights that do track facilities came online.
Definitely increasing cnn's exclusive loading spots in the country.
The current crop year started off slow when it late harvest, resulting from wet weather.
Stuck with the full impact of customer and see investments and the grain supply chain, which will position us to move even more grain more efficiently in 2020.
In addition to significant investments in new elevator capacity at waterfront export terminals physically built on C.N. line.
The new GE three unit train facility on the North shore in Vancouver will be fully operational in Q2, this year and will be only loop track to loop track grain supply chain in Canada.
Allowing GE, three and again more grain using fewer resources.
We grew Canadian coal carloads by over 30000 in 2019.
And we will continue to see growth through 2020, as our client calls for significantly wraps up volume through the year.
Really terminals expanded capacity from 14 to 16 million tons in 2019.
And with new private sector ownership, we see potential for terminal capacity to double if the market demand is there.
Prince Rupert is a gift that keeps giving its been a great news story for intermodal business.
And also growth driver for our carload business.
Between propane coal plastic resin and wood pellets, we grew carloads to rubric by 11% in 2019, and we expect another solid performance in 2020.
Looking ahead 2020 will be a transition year for our Carlo franchise.
As we prepare for new met coal business with Tac and startup in 2021.
Jack will invest $800 million in their westphal supply chain with new export capacity at this against or Neptune terminal and increased capacity secured at the C answer really terminal.
2021, well see the full year impact of the Pembina Watson Island propane export facility.
Well as new facilities in place that will increase Carlo sulfur diesel and plastic pellet. Thank you and now I'll turn it over to keep.
Thank you James and good afternoon, everyone.
The consumer markets saw multiple headwinds negatively impact volumes in the fourth quarter.
The GM strike as well it seems they strike caused supply chain to either look for short term transportation alternatives or stopped shipping till the end of the work stoppages.
In addition to the multi modal impacts of the G.M. strike the closed GM Arash what facility produced its last finished vehicles in December .
For the international intermodal business, we saw 24 blank sailings to the West coast.
The blank coupled with the effects of the pull forward of international intermodal volumes in Q4 of 2018 created year over year comp challenges.
Despite the Q4 related short term headwinds, we continue to drive forward with our strategic initiatives to leverage our unique network reach and our consistent high levels of customer focus.
Starting with automotive.
We're seeing some short term volume challenges for the industry.
Our key strategies of increasing the number of automotive storefronts leveraging our great franchise. The finished vehicle manufacturing facilities, there on or close to our network as well is providing a consistent solid supply of railcar capacity will be key enablers to can to see end continuing to produce volume.
At rates greater than the industry averages.
We will continue to make gains with our Vancouver auto Port facility, which is producing solid expected results and we look forward to the late fall opening of our new automotive facility in new Richmond, serving the Minneapolis and Saint Paul markets.
Now to our other key consumer market intermodal and starting specifically with the international intermodal business.
Our structural and network advantages.
And with our focus on close collaboration and solution mindset with supply chain partners will continue to allow us to be less impacted than most by the headwinds facing the industry.
In fact at Prince Rupert we grew our volume by over 11% in the fourth quarter.
A great amount of work has and continues to be done with both of our partners on the West Coast DP World and GCT to strategically Phil the capacity that they have created at their terminals and their latest tranches of expansions.
We will see some volume swings in Vancouver during the first half of the year as the Yang Ming and the or any contract transitions occur.
We expect that in late April we will begin seeing upside in our business mix and west coast volumes versus last year.
Our new intermodal store front and rear China, a partnership with mobile grain is providing our export customers with additional opportunities for reach and gateway choice.
This new storefront has been generating impactful additional since gas one export volumes to markets around the world.
With many of the Ocean lines, we continue to develop a solid pipeline of import and export opportunities that will grow volumes in Saskatchewan over the coming quarters.
The close collaboration that we have established with all of our terminal partners, whether they're east coast West Coast or Gulf Coast, We'll continue to pay dividends as we extend our reach to the hinterland with additional store fronts additional export supply chains and round trip economics to support our Ocean life partners.
Finally, let's move over to domestic intermodal.
Despite the volatile the volume challenges of the C N eight days strike, which impacted our domestic business for close to a month, we have seen many of our strategic initiatives developing and gaining traction.
The transact in H. in our integration plans are going very well.
The M.P. program, our retail door to door program.
Our cargo cool temperature predictive services and our close collaboration with our U.S. partners, such as JB Hot and Snyder have all been growth engines for us in the fourth quarter.
Those segments are set up to gain momentum as we lead into 2020.
We're also continuing to gain momentum with our Canadian based wholesale partners as Rob and his team working with our intermodal ops teams have improved service levels continuously over the last several quarters.
To wrap this up to the consumer product segment, the short mid and long term strategies and structural advantages that we have developed acquired and partnered with others to employ our providing our customers with solutions that adds significant volume value to their supply chains.
We look forward to working with all of our customers and partners to drive growth and 2020.
Thank you and I will now turn it over does is land for the financial aspects of the quarter's results. Thanks, Keith starting on page 11 of the presentation I will summarize the key financial highlights of our fourth quarter performance.
We continue to witness weaker volumes driven by softness in the general economy and were also impacted by the conductive strike in the quarter.
We continue to rightsize, our resources to the weaker demand, while still being conscious of RCN specific opportunities some cautious optimism for the second half of 2020.
And most importantly for our mid and long term structural opportunities.
Revenues for the quarter were down 6% versus last year at slightly lower than $3.6 billion.
Operating income came in at 1.218 billion down 234 million or 16% versus last year.
While reported Q4 operating ratio came in at 66%.
We recorded a provision of $31 million related to workforce reductions in Q4, 2019 and had a similar 27 million revision in the prior year.
Excluding those provisions operating income was 1.249 billion with an adjusted operating ratio of 65.2%.
Net income was $873 million and reported diluted earnings per share was $1.22.
Excluding the impact of a non core asset sale in 2018, and the provisions in both years related to workforce reductions our adjusted diluted EPS was 16% lower than last year.
There is no impact of foreign currency in the quarter.
Turning to expenses on page 12, our operating expenses were essentially flat versus last year 2.366 billion.
I will now cover some of the key highlights.
Labor and fringe benefit expenses were 5% lower than last year.
This was mostly the result of lower incentive compensation of close to 50 million and lower pension expense, a 15 million, partly offset by lower capital surcharge credits a $40 million as our capital investment program was completed earlier than last year.
Purchase services and material expenses were 11% higher than last year.
This was mostly the result of higher trucking and transport expenses due to the inclusion of Transics.
Fuel expense was 13% lower than last year, mostly driven by a 12% reduction and workload and a 3% decrease in fuel prices.
Let me now turn to our full year results on page 13.
I'm very proud of our performance of delivering positive earnings in a negative volume environment.
We completed 2019 with revenues close to $15 billion, almost $600 million or 4% higher than 2018.
Our operating expense at 9.3 billion was 6% higher than last year, producing a 2% increase in operating income versus 2018.
Our reported operating ratio stood at 62.5%.
Adjusting for provisions for workforce reductions in both years and a charge related to the replacement of our positive train control back office system. Our adjusted operating ratio was 61.7% or 20 basis points higher than last year.
Net income was down 3%.
Excluding onetime nonrecurring items in both years, our adjusted diluted EPS came in at $5, an 80 cents up 5% versus 2018.
Now moving to cash on page 14 free cash flow was almost $2 billion for the full year 2019.
Our capacity investments are completed and our capital envelope and as close to $3.9 billion aligned with our budget.
We have purchased 154 locomotives advancing 14 locomotives on order for 2019.
Finally, let me turn to our 2020 financial outlook on page 15.
The demand environment remains softened most sectors. However, we continue to see some support from consumers and from C. On specific opportunities that James and Keith I've talked about.
This environment should translate into low single digit volume growth in terms of rtms for the full year versus 2019 with pricing continuing to be ahead of rail inflation.
With this we expect to deliver EPS growth in the mid single digit range versus 2019, adjusted diluted EPS of $5, an 80 cents.
After two years of elevated investment levels, our capital envelope of 2020 is estimated at approximately $3 billion.
With that we expect to deliver free cash flow in the range of $3 billion to $3.3 billion, which will drive a significant improvement in free cash flow conversion.
A number of key assumptions underpinning, our 2020 outlook, including a Canadian to U.S. dollar average exchange rate of approximately 75 cents.
W. T I in the range of 55 to 60 U.S dollars per barrel and the full year effective tax rate of approximately 26% a step up from 25% in 2019.
We continue to pursue a shareholder return agenda.
In 2019, we returned to shareholders almost 80% of our adjusted net income through dividends and share repurchases and.
And our current buyback program of up to 22 million shares will be completed by the end of January .
We're pleased to announce that our board of directors approved a 7% dividend increase for 2020, demonstrating our confidence in the future.
In addition, our board of directors approved the share buyback program of up to 16 million shares for an amount of up to $1.5 billion to be return through a normal course issuer bid on February 1st 2020 to January 31st 2021.
In closing, we continue to manage the business to deliver sustainable value for customers and shareholders today and for the long term on this no back to your JJ well. Thank you just slate and just before we open it up for the acuity I'd like to highlight four things, which are example, our focus on leveraging our unique infrastructure in building sustainable long term.
Business growth.
First I want to be sure there ever the recognize that because you are a relentless focus on PSR cost for example, Robbie centralizing crew, calling in network. This pricing is also rightsizing, our main and shop and the potion also looking deeper to see if we can outsource some activities, which are not core to the railroad second we invest to push picking.
Largely to modernize PSR, Doug Mcdonnell right now and his team is on track to create inspection algorithm would up without tech partners and these intellectual properties and many others will eventually become part of the next secret sauce of PSR Railroading in North America.
On growth, we are building new platform of long term growth.
Over the past then you see as revenue have nearly doubled to reach $15 billion last here, while our operating ratio improved from 65 in 2000 intends to 61.7 last here it did not happen by waiting for the economy to bring us to free and therefore, we intend to cause you to Britain to grow platform of growth has.
Additional M&A to our port platform to our domestic intermodal platform or the things that we do when we successfully find out some rail from Atlanta, we can add into our network and finally, I think what's very important, especially as we look at the 2020 NB on for the <unk> is the investors out there you will find devaluing CN.
We have we're very proud of our leaders and very comprehensive sustainable report, it's worth to read so maybe that's during his back Patrick Twod acuity right now.
Thank you. Please press star one at this stage you gave a question.
The first question is from Ken AXR from Bank of America. Please go ahead.
Great I guess, Rob that was a a great rundown on kind of some of the savings you're seeing already from the portals and track inspection, maybe you could just delve into that a little bit more in terms of the potential from that is there. Another phase is there another level of of savings or another advantage post the PTC investments you've made.
Rob.
That's a.
Great question, Ken So on both the portals in the a autonomous track inspection cars were just on the cost right now so we're going to see benefits as these continue to grow on the portals. This these results that I quoted there are the results of about nine algorithms in 2020, we're going to have about 10 times.
That that many algorithms produced and producing further results in each one of those algorithms makes or or railroad safer. Obviously, we've put in an algorithm. It's got to develop its got to mature it's got to get a lot of experience in it but you know as time continues as they get more data in there we find more defects.
And humans do a lot of things better computers, there's other things that computers and machines can find better than humans. This is one of those and with the cameras. We have it certainly makes a safer.
That's great run down and I guess for my follow up maybe I don't know JJ I'll try to do and pass around but just given the cold weather and the startup that you had to the year. Maybe is there can you talk about how you got to that low single digit volume outlook, you know how how.
What kind of growth do you need to inflect and at what point to make that target.
So I'll give you a maybe just as a short version dependency we think the second half would be more conducive to the first half. The first half will be a challenge you saw that for the industry, including CN December run rate was not great.
So obviously the month agenda is also going to be challenging we had the ace cold snap record snap in Western Canada of about seven days, where those of you follow or carload ready saw that big dip for these seven days and where it right now right now we're not quite correct on that can isn't west coast, we hope to be current by the next few days so.
Yes, second half conducting James give you some call earlier when you talked about crude when we talk about some of the coal project.
Well have to we'll have to do quite a bit of our self help.
Thank you.
Thank you.
Thank you. The next question is found the Brandon Oglenski from Barclays. Please go ahead.
Hey, Thanks for taking my question, everyone and I guess JJ I wanted to ask a more strategic question here, because we are getting a pretty interesting divergence from some of your competitors south of the border that.
Im thinking around Capex.
Closer to maybe or even sub 15% of revenue and I think you guys, obviously spend a little bit more of the last two years, but you know you're guiding to whats call at the high teens, maybe close to 20% of revenue this year I.
I mean, how do you discussed this with investors. Obviously, you guys have been able to get more core growth I think over the past than your peers, but.
As the higher level spending the way to run a railroad now.
So the a we invest for growth and we invest for costs. So when you looked at that.
Look at this overtime render look at this over time. The last 10 years look at your revenue growth of all the railroad and take the time to compare them and then then then this is where you see it at some point some of us to being able to grow therefore, we need to reinvest capex some of us having growth as much. So therefore, they don't need to invest as much capex, but grow.
It does not come by itself you have to go in chase. It as I said earlier growth is not just given by the economy is here, but also by the things that we do and when when were successful in attracting the growth we need to actually do deliver it put in the asset. So this years about 20% in that range.
And.
I think definitely we we're comfortable that rate.
You know PSR create some growth for short period of time, but eventually if they're successful in growing their business eventually they will need to invest.
Yes, hi for something and JJ and judge that would add rent and the fact as well is that the way that we've explained our capital allocation strategy to investors have been very disciplined and very consistent.
And a long a long term investors like that so we've always said that our first use of cash is towards the business.
And then the second is to have a strong balance sheet wonder soft economic conditions or to give us an opportunity to do a strategic move if there's one available and the third is that shouldnt shareholder distribution, starting first with dividend not the amount of growth, but the consistency of grow and and then we use a share buyback.
As a ways to get to it to a targeted leverage and that's so our first use of cash is towards the business and when there's projects.
C N that delivers a return on invested capital that's higher than our internal threshold. Then obviously this is good use of shoulder money and that's what we do.
Thank you read appreciate feedback.
Thank you.
Thank you. My next question is from Sandy Shanahan from BMO capital markets. Please go ahead.
Okay. Thank you.
Just a question on a plenty plenty guidance I'm, a little bit I mean, you seem to have a lot of its got a positive here going into the next.
18 months and thumbs up.
Operationally, a you're you're maybe hussmann you off the capacity.
And I'm, just Oh wondering the a topline growth and EPS growth doesn't really underscores that that has a lot of operating leverage that we would expect if you are there things on the cost side that you want to kind of highlight or what what's up what's behind the lot cooperating loved vision flies in the guidance.
Would you like to offer some color I was just yeah I can the aside the I can offer some color. Yeah. There are some cost headwinds that we haven't 2020 that are specific to CN. If you look at my prepared remarks, our tax rate our effective tax rate is going up by 25 from 25% to 26%.
If you look as well on the pension side and this is something that's specific to Canadian railroads.
Last year, the discount rate like in December the December of 2019 finish at 3.1% and a the year before it was at three point, 77%. So that creates a pension headwind in the range of about $60 million to $70 million.
And then of course, if you look at this year from a variance standpoint, our incentive compensation was a positive variance.
And that to the accrual for a for incentive compensation, including bonus has to be reconstituted.
And that is another a it give or take about 90 to 100 million. So so you have about three to maybe even close to $400 million of cost headwind that that we'd have to address and and that's obviously all embedded into the guidance that we've just provided that's right. So that goes tax pension and.
Replenishing the incentive compensation program.
I think your body and I would say the last one is depreciation which you can do the math, but the depreciation with two years of high elevated capex.
Depreciation is obviously a year over year, a step up as well.
Thank you.
Thank you.
The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks, very much good afternoon.
Two questions for Rob I also wanted to dig in a little bit on some of the automated inspection technologies.
Just curious what I'm your discussions are like with regulators and on both sides of the border and what you think you're going to have to demonstrate in order to.
Substitute technology for manual inspections.
Right. Thank you for the question Cherilyn, so specific to the autonomous track inspection cars, obviously, we operate in two different countries.
So two different regulators, we are working with both.
On the auto autonomous track inspection cars Weve already made a submittal to the for in terms of our phased approach plan.
Which really allows us to run them more and ultimately take some of the high real inspections, all to an extent and really turn or.
Track inspectors from finding things to really fixing things that would be in being.
A responsive to that so we continue to work with a with the F or eight and transport Canada. The same holds true with the Thomas inspection pools again, a little different regulations north of the border versus south of the border, but they're into everything we're doing and we continue to work with them.
Every month or whether its auto or Washington DC.
Thank you that's my one thank you Shirley.
Thank you next question is fine.
<unk> from Chardan capital markets. Please go ahead.
Thank you very much gentlemen, my question is for just slightly when you when we look at your a free cash flow. This years, it's expected to be up a one 1.3 billion. So just aside D. A dividend increase and <unk>, a and B, where would you like to the main.
Focus for 2020 is it too to reinforce the of the balance sheet, given the uncertainties or do you see a other a investment to to be made in the current business.
Yeah, I think mustard and why the thanks for your question I think you're right free cash flow will be up obviously, the capex is coming down.
And Oh, it's coming down to a two a historical levels, which was what we have told the market. So I think it's all balance when you look at our when you look at our capital envelope. When you look at the the the share buyback when you look at the dividend then that puts us again a in a in.
In a strong balance sheet and as you know we've said that Ah you know our target in terms of leverage adjusted debt to EBITDA is in the range of 1.7 to 1.9 and and all those things bring us bring us 2020 into that close to that range. So, it's all balance and and that's.
So that's how the numbers to together.
That's great color. Thank you very much.
Thank you. Thank you.
Thank you next question is from Chris Wetherbee from Citi. Please go ahead.
Yeah, Hey, thanks, very much appreciate the time, so I guess on that question about the operating ratio. So I guess for 2020, given some of the puts and takes just laying that you mentioned it seems maybe difficult to potentially improve on a year over year basis for one to get a sense of your view on 20 Twentys the potential for improving the award in 2020, and then maybe bigger picture.
Look the last kind of three ish years, you've been last two years, you've been running over 61. This year, maybe it's going to be over that again, we'll see longer term do you think once we get past 2020 in some of the cost headwind through there that there will be the opportunity to leverage some of the topline growth to kind of here returned to something closer to 60 or maybe sub 60 or is it more focus.
I'm sort of topline growth and potentially sort of expanding the markets that you're addressing.
I think again, thanks to the question I think Chris the like we've said before the.
We're not enamored at sea and by the or we'd rather be a 20 or 25 billion dollar business with 60 or than be a $14 a billion dollar business at a 59.
If you look at a what JJ quoted as some of his remarks I mean.
Our strategy is working quite well I mean, when you look our in 2010 from since 2010, we grew the top line by 80% at while maintaining our you know schedule Railroading Foundation, and even improving deal was going from 65.4% to 61.7. So I think this is this.
This is a this strategy is working obviously to your point.
For us the deal or is the result of everything we do.
And my view is with the cost headwinds. We haven't 2020, obviously is going to be difficult to get to the high 60, a war, which was our long term.
You know more or less guidance that we provided at the analyst day, but definitely a as volumes come back up and as a those <unk> technology investments are producing value when some some some of what Rob is saying is actually it's coming in we can see the results. It's very exciting I think we're still confident over the.
Over the long like mid long term over the next two to three years to get back to the high 50 range and this is what we told you at the analyst day. So our view is we're pretty confident the that thanks to the question Brett.
Thank you.
Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks afternoon guys.
Thank you. So can you give us a little bit of color on pricing, maybe or would you characterize the pricing environment is stable slowing maybe improving and then can you give us any color on what to expect for head count this year.
So maybe a James would you like to <unk> comment on pricing yeah, absolutely. So we continue our long term strategy as you head of railway cost inflation.
This has been something that we've been doing for many many years and there's no reason to divert from that strategy.
You know the end of the day, our customers that come to expect from assays that level of service rises requires us to invest back in our infrastructure network in order to do that we need to have very consistent reliable predictable long term approach to pricing.
To stay on head count Yeah listen on Headcounts. If you if you look from a sequential basis or at the end of Q4 versus Q3, our head count or is down around 1300 people. So we will continue to ER to rightsize, our resources, where we're following demand closely and Ah you know will right size.
Either up or down I mean, I think theres opportunities. This year that the James will we'll work hard on a crude is a good example, and if and we might have to hire a little bit if the volumes go up and if we're successful and getting a some of that business. So again stay tuned on head count but.
I think we've shown in 2019 that that were quite resilient and we show the as well that we are moving and we can move swiftly on on a rightsizing our resource whether its headcount whether its locomotives or whether it's the cars and we are going to continue as a team to do that for sure.
Thank you this question.
Yeah. Okay go ahead.
Oh It can you just clarify where you ended the quarter on head count if it was meaningfully different than the average.
Yeah, Hey, what I mean, if you if you look at on average in a in the quarter and you got to be careful did that you've got us you've gotta look that the fact that we onboarded transics employees. So if you look into for for example on average head count the slightly.
Yup.
You know by about a few hundred people, but if you adjust for the 1200 people of transaction that we onboarded. Our head count is actually on average is actually down close to 800 people look at it sequentially to Q2 Q4. This rise we had spends X in both quarter yeah.
And the sequentially the headcount was down around 1300 people yep.
Thank you guys. Thank you and Scott Thank you.
Thank you. The next question is from Walter Spracklin from RBC capital markets. Please go ahead. Thanks very much good afternoon, everyone I just want to come back to the Capex question I know the last question was framed around your capex being higher than.
And then a typical railroad however, it is down quite a bit this year, 25% roughly almost $1 billion. What my question is by reducing your Capex capex as much as you have and add I applaud it but I I at the same time Wanna be mindful that.
The capacity constraints that we we saw a little while ago arc rerate going to real their head again, they get can you give me and so in the <unk>.
Line of thinking what are you not going to be spending on this year in that 25% and and do you have any sense of what you are available capacity I know, there's a tough question to ask but you're you're roughly how much how much volume could you take on and what capacity do you have to take it on.
From your current level of and your Capex spend for this year.
So it's a thank you. Thank you well throughout its part of it in the rock and talking about capacity, but basically we have replenished capacity. The last two years. So we're not spending as much capex when capacity in 2020, because we did spent some capex in 18 and 19. So thats one of the lower run rate. That's now that we're not spending capacity Capex next year.
This here, we are going to be there's still to be somewhere, especially on the rupee to make whatever.
And number two remember PTC was a big.
Too big of a piece of the pie the Catholic envelope, we're now I caught up and PTC will no longer catching up.
The run rate of Capex will also a you know what else would come down.
Do you want to talk about how much capacity, we have and if we're concerned with the best here are absolutely and what I've seen in my seven months here is that the capacity we added over the last two years has been very beneficial in terms of the resiliency of the network, whether suppose strike, whether it's coming out of the winter blast. We just had here the second week of January to pay benefits.
What I see right now is that we're we're in good position to handle more volume with what we did we are adding capacity as JJ said, it's not like we're not adding capacity. This year, we are adding capacity in the critical spots on the west coast and we prepare if we start to see forecasts change going into the years in advance where we're gonna.
To add capacity.
Thing about our capex over the past few years that also included locomotives. We brought on 260 locomotives and we're at the end of that we're getting the last of those locomotives here in the first quarter and that when I talked about mechanical reliability a lot of that has to do with the updated and upgraded fleet we have.
Okay. Appreciate the time thank you.
Through alter.
<unk>.
Thank you next quarter. The next question is from Allison Landry from Credit Suisse. Please go ahead.
Thanks, Oh jeez, when I know you talked about the free cash flow and leverage Guy does as being balanced.
And you know you raised the dividend buy backs up a little bit, but it still seems like you'll have some incremental dry powder. So considering all that could you maybe speak to you know how you're thinking about potential for M&A. This year.
Well I can start and then JJ you can jump in on on M&A. Thanks, Allison I think.
I think again we.
As you saw we acquired a transacts, we closed agent or we're very pleased about that and whatever else is out there that can create value get that can feed the network. It's got to feed the network has got to bring us into markets that are that we don't go today. The Messina line that we bought.
CSX is another good example, where its bring us is bringing its bringing CN to the New York State market, where we didn't go before so we're always on the look out that's one of the reasons why we believe that a strong balance sheet is a good thing to have because because not only is it good when times are soft like you have.
Them today, but also that when these opportunities come along we can go and jump on them very quickly. So you know we're gonna look but again, it's about feeding the base what is what we call. It here, it's not about diversification, it's got to fit with our network has got to either extend our reach or bring more business on the rail.
And and that that's the notion and we're going to continue to look for opportunities to add value for shareholders. JJ you want to add anything yet. So I mean briefly again to the point I made earlier, we're not waiting for the economy to being goes the free. So we also need to as an industry. This isn't as it was over three months, but if you look at it.
This year Nexidia right after we need to self help and going get some freight create some product to do that so definitely the unfortunately presented acquisition the world of a well I would call domestic intermodal before platform or adding some you know small short lines could it for this year network, we would do that.
Because the economy in itself I think thats true for the whole array of industry. Eventually we'd only go so far.
Thank you I listen thanks have a thank you.
Thank you. The next question is from Jason Sito from Cowen and company. Please go ahead.
Thank you operator afternoon, guys I want to talk about capacity and little bit of a different light.
Can you talk about the different levels of capacity in both the eastern and Western network are you guys still in imbalance out east compared to your Western network and how should we think about you going after business to help rebalance sort of that imbalance that you do have.
Yeah. So thank you Jason So I think thats, a it's a team with a socialize among us off with a book, but also the number of investors. So like any other railroad. We have some are part of our network, which is running hard because there's a strong regional them in.
Through under network I would be out west and right now the places where the fastest growth is elements into Prince Rupert of all the stuff like James and fees are working namely on propane coal liquid the green and intermodal and then what part of a network, which is looking for business, which would be the Houston that word I would say Halifax to Chicago, we got to pass.
Speak a little or beating.
This yield space in North America is in slow decline last 25 years, we need to be relevant who did a consumers and the consumer generate freight that these are typical container freight and that's where a focus on the port platform as well as are focused on the can the the the the domestic intermodal so as the economy.
Evolve.
We need to invest and at CN. We believe is the case and we do that 20% this year and a in our case you either be east find ways to work with partners. They would feeder network and then the west it's more about investing in our railcar you know rail network because were partners like tick win back where it.
With that investing I thinks about 80 800 million $800 million into a coal terminal and we're going to be investing behind them. So we can feed it.
Okay. Thank you.
Do you think depending yield D regulations in 2021 will well help some of that eastern truck competitive traffic find its way back to the rail network.
Your comment on that Keith.
What we're seeing on the E. These you know always when it first came in a in the states and then now coming into Canada is a lot of the folks that are all in that freight today already had the LTV.
Your larger firms are have all that in place I'll tell you, where we're seeing some opportunities for to move up truck traffic over to the rail and that is with a lot of the insurance issues that the the trucking market is having right now so.
We're not waiting for either of those to occur. That's why you heard me talk about our E. M. P's arc temperature controlled business, our door to door retail product all of those are all of those.
Our firing on all cylinders and we're going after that traffic today, but the L.D. It could have some impact, but I do not think that that's going to be a huge impact.
Okay Fair enough appreciate the time as always thank you. Thank you. Thank you Jason.
Thank you.
The next question is from Southern Clark from Deutsche Bank. Please go ahead.
Hey, Thanks for the question I know you don't give quarterly guidance. Please could you just give us a sense of maybe how you think volumes should trend throughout the year and just remind us of some of the nuances in regards to contract wins and maybe where you are as it relates to the government crude by rail contract.
So without getting into to the we did provide a sense of volume for the year and.
If you look at the month of January were below last year. At this time. So you you we would hope to see some ramp up between first and second.
And when you look at our comparable for the second, especially the last few months of the of last year, namely our no labor labor issue.
They are compatible us, we're getting better, but if you get the fourth quarter.
At this point that you know anybody was really try to do forecast that level. The precision eventually you end up you know.
You end up eating your own crystal ball, so we're not going to do that the the guidance we give a volume. This year is as good as it can be in term of how we can predict the economy and some of our initiative.
Thank you sell the can you just talking about some of the contract roll off.
And how that shifts and like intermodal in particular.
Yeah, nothing really new I mean, you ought to repeat the we've always said.
My comments earlier is that as the a the two big ones that are changing hands a this first half the year.
The Yankees being in the O. any I will start to see upside as I said in a in that late late April and on into the second half of the year as the.
As the mix and the in the volumes exchange hands there.
Yes, no change from the gaming moved out and knowing eventually be moved in the late spring.
Thank you.
And then if I could just follow up on the EUR 3 billion of Capex. This year you talked at the 40 locomotives coming in the first quarter is are those already paid for is that in this year's budget.
This year as much of this is budget.
So when you guys refer to historical levels of Capex are you talking to that's sort of 3 billion number I mean, you didnt really give that much specifics of the investor day or I know you don't like to guide as a percent of revenue, but how should we think about that historical level of Capex is 3 billion like the right number moving forward or should we.
Well I assume it stays similar yes, well and this would be the last question.
So historically will be to circle the viewer Baca. There is three you would see it up we were in the range of 19, 20%.
Okay I appreciate it. Thank you. Thank you.
Thank you.
The next question is from core not Gupta from Scotia Bank. Please go ahead.
Thank you and good afternoon, just wanted to understand any or any other low single digit RPM growth assumption, it's carload growth to positive or negative and.
What are your assumptions for crude by rail and that because obviously crude by rail has a big impact on ODM source. This drop condo. Thank you.
So James you want to do that carload growth as positive you think about crude by rail.
We expect to exit.
The first quarter March at a run rate close to our record run rate of 250000 barrels a day, it's a very positive for the first quarter.
A little bit of unknown coming into the second second and third quarter is really going into kind of where the differentials line.
So we're not planning on a big bring out volume in Q2 in Q3 Q4 again I think is going to be extremely strong volume for crude by rail again. This is a seasonal pieces of business, where you see the differentials widen out gets pipe capacity gets constrained with additional Gil you might be added.
<unk> <unk> land in order to.
Make sure that product pipelines.
Yeah. Thank you know that's my wife.
Great.
Next question.
Thank you next question is from David Vernon from Bernstein. Please go ahead.
Hey, guys, Thanks, and only two questions JJ on first one would be on a framing the forest products volumes for the year and you mentioned something about a secular shift in there is there way that you can kinda give us a sense for what you'd expect to carloadings to be in that segment for 2020, just living in the kind of understand how big of a second we ship but.
Yes, so across product James Yeah, 2019 behind us.
And I'm very grateful for that of course product side of the business. You know about 2 million board feet of production capacity came out of the forest products industry. What we're expecting for 2020 is a more stable run rate kind of what we've seen in the first quarter. Here you know, we're projecting for that to be relatively stable for the balance of the year.
Hopefully we're right.
All right or is second short question.
Second short question on it felt like over the course of the <unk>.
Capital of 2019, they felt like a little bit of the battle of doing press releases. Every every couple of weeks, we get something from from you or from your competitor about great Big share wins in this is obviously a fairly consolidated market how.
Can you comment at all about how difficult to were how more competitive it is to find new opportunities to kind of drive traffic on the network. I mean are we going to see increasingly this become a little bit of a zero sum game, where do you think that there's still opportunity to kind of push.
With your existing customers in each leverage your own any franchises in ways that don't kind of step on each other's toes as much.
Yeah. So so it's it's a good questions a fair question and we're very mindful that the red industry.
To be successful, including ATSI, and we need to grow the pot right just exchanging piece of the pipe that's not a long term.
Solution. The long term solution is yes, we have to a product that compete and yes railroad do compete and we don't shy about the fact that we compete we're proud of it but the same time as I said a number of time earlier, we need to have a platform for growth beyond what Jesse calling me may bring in a number again, so the port platform the domestic auto platform, which has to compete with the highway.
And then if we can buy some short line to increase on that weren't there would be that would be part of what we want to do that's why we're we're very focused on what can we do that has nothing to do with a contract win or contract loss or long term. That's that's how we view the success of season.
And I think if you look back last 10 years, we must have done something right. Because CN is the railroad that drove on the steady base is softening ratio down, but it's going to revenue growth. We had the biggest one by far.
So do you still good.
Okay. Thanks, guys.
Thank you.
Is getting lays wanted to share because it tends to ask their one question.
Thank you already thanks question from Steve Hansen from Raymond James. Please go ahead.
Yeah, Thanks, guys a single one I promise.
Just look life question here pertain to the north shore Vancouver, perhaps rubber or Jay just curious if you're worried at all about the huge amount of volume that your customers are looking to push on the north shore I'm, making GE three in tech specifically I know that bridge over than our shores pretty limited Im just trying to understand the fluid the opportunity or risk that might.
Lie on that North shore corridor.
Yes, GTN Tech two major expansion in order to a football Robert Oh, Yeah. So you point that out and we are very well aware that with a working with a James and keeping this advice to that we talk about capacity improvements for this year part of that is directly related result that business. So.
We're prepared for and we're well aware the growth there and we welcome it and we've we've taken the necessary steps.
Thank you.
Yes, I mean, you've seen some press release in the past in term of Oh, we've been able to leverage the funds from the federal funds and fund from Port of Vancouver, and a a program to invest in a in two dozen northshore. He's actually had been in support of Ah two other two other sorts of money, which is a federal government and the port of Vancouver.
So.
These are good projects and that we love the fact that customers come in put up their major capital plan on CN, because where I was a physical carrier who can physically delivered to their facilities as long as we invest in yesterday you talked about it gives us the loan commitment is from a service point of view.
Thank you I think Chris.
Thank you next question is from Brian Ossenbeck from JP Morgan. Please go ahead.
Hi, Thanks Bye.
So question few Rob obviously fuel efficiency is a focal point you not only from the cost side, but on.
Yes, she is about network already being the most efficient in North America, what else do you think you need to do to keep driving that and how far you think you are from more of a steady state what else specifically, you're going to be doing decides adding new locomotives to drive that.
Then if you could just.
Clarify the comments on the automated train inspection coil, if if there's anything in the near term from a regulatory perspective, any any sort of timeline as to where you might be able to move away from Daniel inspections on a.
Pull network fees and thinking.
Okay. Thank you on a fuel efficiency standpoint, as I mentioned, all time record, but when you look at the year over year comes obviously, the first quarter last year was very difficult winter fourth quarter was impacted by strike. So when we look at going into next year, just looking at those comps.
We have the ability to.
To improve.
That's based on discipline in terms of.
Throttle limiting in isolation of locomotives as we move trains across the network and there's there's an ability for technology here is that continues to develop to help our engineers out there in terms of.
Saving fuel across the network. So we're very optimistic that will improve here going forward into 2020.
On the autonomous.
Inspection portals like I said, we'll share on we are working with the regulators there's nothing imminent at this time, but we continue to keep them very well in the loop in terms of what we're doing what we're finding sharing the data with them and we'll continue that and it's really it's about making our network safer and it's also.
About.
Our employees can now turn from inspecting and finding things to really repairing and fixing things. So that's really where we want to be it allows us to re purpose. The individuals that are out there ultimately mix a safer related services more reliable and actually freed up capacity because of service because.
Because the network is more reliable.
Thank you Brian Okay. Thank you.
Thank you. The next question is from Tom Wadewitz from Yes. Please go ahead.
Yeah. Good afternoon. So I wanted to ask you a bit perhaps JJ just above you on second half I think you pointed to improvement in activity in second half and I have a lot of iOS in Cradic things, but I guess, you know we heard from CSX kinda not much visibility to improvement you P. said, you know trade again agreement gives.
Some lift how are you think are you thinking about what drives.
Strength in volume in second half are you optimistic on economy or create agreement impact or how do you think about it. Thank you.
So we definitely we know pretty much about today. So they've enjoyed your first quarter because we're in it.
The first quarter.
Will challenge from a volume growth year over year as you go later in the year definitely the U_s_m_c agreement has been pass I mean that can only be positive I know, it's not as good as not give you a huge positive, but rather than going backward looking to be moving forward and eventually they should be momentum coming out of that the fact that there is a in agreement.
For at least for the first phase between try to United States is also a positive I know there's other question about these things as to how much impact that will be but that's definitely a better environment and having an increase tension. So we're now heading into a mode, where bebe, China, United States will make some progress, especially as we get closer with the idea to.
Action the into United States, I think the trade agreement.
The trade environment. When you look at how negative it was nice here and how things seems to be at least pruning that at some point in the months to come acquires to come that we will start to see some of the positive about I don't have the same time. They know nothing is guaranteed but our view that we've built our plan and overcapacity and.
<unk> as well as or employee resource effort is a you know we're looking into second half as a time, where we might be little more well have a little more business coming out of than the first half.
Can you offer a quick thought on inventories with respect to intermodal, whether they're kind of at the right levels now or are they but still that too high.
Yeah. Thanks.
Keith would cover that yeah, we're actually seeing some parts.
Seen some customers.
That their inventories are depleted and they they need to they need to fill stock again, so there's a mix story out there and I think JJ.
Correct that the.
The trade agreements.
Phase one or the U.S. nch all of those things are having our customers I wasn't much more positive attitude. If you look at the ocean liners there.
Although that they're they've been blanking some sailings, there's a lot of boxes, they want to get on those on those and as I said, we've done very very well and Rupert we've done well on the east coast.
Also so.
There's a lot of sentiment it says that the inventories needs to be.
Restocked yeah.
Thank you Tom.
Thank you.
The next question from Justin Long from Stephens. Please go ahead.
Thanks, and good afternoon.
So I was wondering if you could provide an all in s. impact from the labor strike in the fourth quarter I just wanted to get a better sense for why pay more normalized 2019, EPS number would would look like that would be more comparable to that 2020.
Yes guidance and maybe if we think about the cadence of earnings over over the course of the year, it's a bit tricky with fluctuations were saying in the comps.
Is your best guess high level that first half earnings are down low single digits mid single digits is there just a ballpark weighted to help us spring that up.
Yeah. Thanks, Justin This is an eye on the strike your question related to the strike a as you know we did issue a press release and we did estimate a at the end of November that the strike would have an impact of about 15 cents any P. S. I can tell you that and we did put a little caveat in there that.
It's some of this dependent on how the network would recover in December .
And I can tell you that robin the operating team did a hell of a job recovering the network and that the network, we covered much faster than we thought so.
So the so that the impact of the strike I will say is not as much as a 15. It came in better, but I mean, I'm not going to go into detail about how much it costs, but you can you can do the math, but we did a move more business in December than we would've otherwise, which was business that was that should that's been moved in November .
But it was it was not move because of the strike. So we did better but I'm not going to give you a detailed number and some of this estimate by the way as you know is more not in the science in talking about the a in talking about the again S. Cadence I mean, you heard JJ and the team talk a little bit about volumes. So you can make your you can.
To make your model here.
And we've said that a you know we saw a more optimism in the second have than the first half.
So again, we're not going to go into detail about a quarterly EPS guidance, we were very comfortable at this point with what we know that that we can deliver that mid single digit EPS growth and ER and frankly, when we look at the long term.
Past 2020, we remain still quite bullish on our long term structural growth opportunities and we did the talk about this and we'll continue to talk about it but whether its rupert whether its ridley.
Now being owned by a buyer of the private sector that the James talked a little bit about whether it's talking whether it's working closely with PS eight to bring a lot of business coming to Halifax on our underutilized Eastern network, whether its and then lastly, whether it's the you know strategic long term partnership that were extreme.
The proud of to have with tech. So I think again from you know we're cautiously optimistic for 2020, but we're still quite bullish for 2021 and for the mid to long term basis.
Okay, great. Thanks for the time.
Thank you could just to think that was the last question operator.
Yes.
Okay, well, thank you Patrick and thank you for all of you join US Tonight, sorry, if we took a little more time than usual.
And I want to take this occasion through also that give a very special thing for myself through all of the see an employee who are really really really award, causing a fourth quarter facing some unusual China's for a rail railroad. So kudos to go into all of you for a working through that and we're not in good shape to start pointed 20. So thank you.
This is one of the call.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.