Q4 2020 Canadian National Railway Co Earnings Call
Gentlemen, and fourth quarter and full year 2020 financial results conference call will begin momentarily.
I would like to remind you that today's remarks contain forward looking statements within the meaning of applicable securities laws.
Such statements are based on assumptions that may not materialize and are subject to risks described and Cn's fourth quarter and full year 2020 financial results press release and analyst presentation documents that can be found on <unk> website.
As such actual results could differ materially.
We can sell the issuance for any non-GAAP and <unk> are also posted on <unk> website at Www dot.
Dossier.
Please standby for Covid will begin shortly.
Welcome to the CN fourth quarter, and full year, 'twenty and 'twenty financial results Conference call.
I would now like to turn the meeting over to pulp Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Butcher.
Thank you Simon and good afternoon, everyone and thank you for joining us for <unk> fourth quarter and full year 2020 financial results Conference call.
I would like to remind you about the comments already made regarding forward looking statements with me today is JJ for you at our President and Chief Executive Officer.
And just in April our executive Vice President and Chief Financial Officer.
Rob Reilly, our executive Vice President and Chief operating Officer.
Keith Reardon, our senior Vice President consumer product supply chain.
And James Cairns, our senior Vice President rail centric supply chain.
I do want to remind you to please limit yourself to one question. So that everyone has the opportunity to participate in the Q&A session.
The IR team will be available after the call for any follow up questions.
It is now my pleasure to turn over the call to <unk>, President and Chief Executive Officer JJ <unk>.
Thank you. Thank you Paul and good afternoon, everyone.
CN and we wish you all a safe healthy and constructive 'twenty and 'twenty one.
Reflecting back on 2020 per year with blockade for spring of Covid of summer of sharp, but uneven business recovery and <unk>.
Year, when our railroad, there's became recognized as truly essential workers per year.
And what are people produce for our society.
And just for CN and.
And for that I personally offer and my appreciation to all of them.
The business recovery continue.
<unk> steady and strong at CN and some sectors remained challenge, but our operating metrics are improving and the commercial team has a game plan to work on the yields of our new business mix.
We are optimistic about 2021 and.
Especially the economy and the GDP of the second half we are more cautious about Q1 and.
Especially as it pertained to lockdown and preventative quarantine on our operating employees and the communities where we operate.
This recovery has a different mix of business and some market recovered very fast and V shape like consumer goods coming onshore avaya above five ports and.
And some market stayed depressed like crude and refinery product.
And one market.
And simply solid like Iraq, and that would be great and export and both Canada and United States.
We ended 2020 solid we generated record free cash flow of over $3 $2 billion for the year for.
For Q4, adjusted EPS growth was 14%.
We have industry, leading fuel efficiencies and.
And our revenue ton miles volume growth was 10%.
Today, we are showing our confidence and the future by reinstating guidance.
Announcing a 7% dividend increase and resuming share buyback and and investing to accelerate technology to our operation and investing and connectivity with our customers and simple term investing and the long term.
While debt note I will pass it onto Rob Rob Alright. Thank you J J and I also want to thank for women and men of CN for their efforts not only this quarter, but also during this truly unprecedented year for.
For many people and the world and even on this call we're able to work remotely.
Our railroad, which have shown up day in and day out to move our customers freight I am extremely proud of the work performed this year by the team.
We continue to build on the momentum we came out of Q3 with falling the volume recovery and we're optimistic about the future and are prepared to handle the volume that is coming at us.
During Q4, we experienced a volume increase of 10%, but through the team's disciplined execution of the plan are corresponding crew starts grew by just 4%.
We also saw both our train length and train weight improve moving more freight with fewer crew starts while maximizing the use of our locomotive fleet.
Our train and engine crew labor productivity improved 19% year over year as we move more freight with fewer people.
And our head count and transportation was down 8% engineering down, 7% mechanical down, 11% and network operations down 20%.
The team has also delivered for our customers setting all time records for movement of Canadian grain.
And 10 consecutive months and and January here as of yesterday, we've already set another record for the 11th straight months all of this while effectively handling volume increases and propane lumber and intermodal.
And the railroad continues to operate well.
We continue to raise the bar for fuel efficiency, improving by 6% versus the same quarter last year and achieving over a 4% improvement for the entire year.
And the team's efforts this year and have helped us avoid nearly 300000 tons of cotwo emissions and saved us nearly $60 million from our fuel efficiency initiatives alone this year.
<unk> continues to be the fuel efficiency leader of all North American railroads.
And safety is a core value at CN, we were able to improve our personal injury rate by 15% for the year, while our accident rate also improved 18%.
We have and uncompromising commitment to safe operations, making sure that CMS will be the safest railroad possible for a railroader and our customers and the communities and which we operate.
In the quarter, we continued to prepare for the future by expanding our capacity and Western Canada and completing three additional signings on the route to the port of Prince Rupert we.
We have a strategic advantage and Prince Rupert and we plan to deliver on that advantage by having the available capacity to handle the projected growth over the next decade.
As we look ahead, we're prepared for the projected growth and we will continue to safely deliver for our customers, we will expand our leadership and fuel efficiency and carbon emissions reduction.
We will build on our strong foundation and <unk> principles with the evolution of digitize scheduled railroading DSR, improving the safety efficiency and the customer experience with CN.
And our autonomous track inspection cars and our autonomous inspection portals will add next generation technology to them and 2021, expanding their positive safety impact to our railroad.
While our handheld device technology will continue to eliminate millions of printed pages of paper annually and improve our customer facing services.
As I passed as to James again want to recognize the extraordinary resilience for our <unk> network and our employees that helped deliver these results James.
Thank you Rob here in Q4, we started to see a more balanced and recovery, but many carload markets tracking near or above pre COVID-19 levels. Overall, our carload franchise finished the year strong, adding several new record in December.
Energy related carloads, which tend to be much longer haul are still well off 2019 levels and had and outweighed the negative impact on yield for the quarter.
Grain, both Canadian and U S remains strong for Q4 and as Rob mentioned, we set new records for Canadian grain each month for the quarter.
We saw strong shipments of potash and the quarter and December market, all time record for domestic potash shipments as we grow market share.
Lumber and panel volumes were strong and the quarter setting a record in December a four 6% better than our previous record debt 2015.
Propane volumes for the quarter, both domestic and expert export for a bright spot with ultra gas propane exports exceeding 53000 barrels per day in December.
And Q4 crude revenue declined by close to 65%, but we saw an increase and the relative percentage of heavy crude which made up almost 60% of our crude revenue and the quarter.
Demonstrating the resiliency of our heavy crude franchise.
U S U S export coal volumes were up nearly 40% for the quarter, while Canadian coal was negatively impacted by the temporary closure of CST and coal valley mines and the permanent closure of the Tech Cardinal River mine.
In summary, the positive momentum we saw in Q4 and December and particular positions us well for 2021.
We expect to see continued improvement and our mix and yield.
Smartly managing capacity and price will be the theme for 2021.
And we have introduced several new commercial programs car auction seasonal pricing and threshold pricing and create flexibility to adjust price to meet increasing market demand. Additionally, lower volumes of speed restricted light crude and Q1 will help us protect network fluidity and winter and create capacity for quick and quicker turning higher margin freight.
And.
This year, we expect to see continued strength and lumber and panels with strong housing demand as well as repairs and renovations pushing inventory restocking earlier than usual, we continue to focus on turning assets faster to improve yield and meet demand.
Canadian and U S grain are expected to be growth drivers in 2021.
And the current Canadian crop was at all time record and they are still more grain to move.
Demand for U S grain is driven by strong export pricing for soybeans and corn.
We are well positioned to move more grain and both Canada and the U S.
By the end of Q1, we will have over 4200, new high capacity Hopper cars and cycling on our network.
We all we will also continue to take advantage of the 50% increase and Vancouver grain export capacity, all exclusively and physically served by CN, allowing us to move more grain faster using fewer resources.
Our three coast network reach and helps drive durable carload growth and as a long term structural advantage that cannot be replicated.
Propane export volumes through Prince Rupert will continue to ramp up at and that is new export facility comes online and Ulta gas momentum continues.
And export coal volumes will grow in Q1, driven by new Petco, and moving from Chicago to the U S Gulf Coast.
Ray Mont logistics will open a new export plastics bagging facility and mobile, Alabama and late 2021, once again, demonstrating how our unique tri coastal reach and ex producers with desirable and markets.
We continue to price ahead of railway cost inflation and maintain a disciplined approach to yield management and order to optimize our network utilization with that I'll turn it over to Keith.
Thank you James.
He and his participation and the strong consumer based economic recovery continued into the fourth quarter, we handled record port volumes in Q4.
Combined the West coast ports of Prince Rupert and Vancouver grew at just under 17% versus 2019 and set an all time quarterly record high.
Ill effects and Montreal combined grew just over 5% versus 2019, setting a Q4 record.
Domestic business was also strong as grocery E commerce and consumer products purchasing drove the new economy.
Our combined container volume to lead all railroads and growth for Q4 at about 15% above 2019.
2021 volumes are strong into week, three and are projected to continue at these levels into at least the end of Q1.
And automotive, we have a year over year decline and volumes and an improvement and per unit profitability.
<unk> economic factors delays and SUV product launches and some volume day marketing related to profit margin drove the volume decline, we made progress and fixing the port train and balances up Q3 due to the huge surge of imports and the lack of enough exports back to the port.
Ongoing joint efforts have increased train sizes slot utilization and trained ballot key levers of profitability and.
And Q4 yield management initiatives produced year over year margin improvement for intermodal and automotive debt.
Suffocation of trains elimination of work events online and in terminal reduction of empty miles improved efficiencies and container and auto handling and our terminals are some of the many initiatives, we will continue to drive and 2021.
Technology solutions, and our first and last mile door to door services are producing significant fuel savings and de carbonization improvement.
Collaboration with our supply chain partners to expand their gateways into our network has produced significant growth opportunities.
And our teams continuously work on key infrastructure and technology initiatives that improve our supply chain costs.
And service levels.
With a robust 2021 demand climate, we are focused on the best use of our capacity while pricing our services and line with the economic value being created by our unique three coast network I will now pass it on is just land for the financial perspective.
Thanks, Keith and good evening, everyone. My comments will start on page 11 of the presentation with highlights of our solid fourth quarter performance.
During the quarter, we witnessed significant volume improvements both sequentially and on a year over year basis and continue to rightsize our resources for the recovery, while remaining disciplined and focus on tightly controlling our costs.
Volumes in terms of Rpms were up 10% versus last year, while revenues were up 2% at almost $3 7 billion.
Impacted by continuing changes and business mix.
Operating income was up 16% versus last year.
Our operating ratio was 61, 4%, a 380 basis point improvement over adjusted operating ratio last year.
Net income grew by roughly $150 million with diluted EPS of $1 43, 17% higher than last year.
Excluding our workforce adjustment provision in 2019, our adjusted diluted EPS was up a solid 14% versus last year.
Foreign exchange had no material impact on our financial results and the quarter.
Turning to page 12, let me highlight a few of our key expense categories.
Labor and fringe benefit expense was essentially flat versus last year.
This was mostly driven by higher incentive compensation and pension expense.
<unk> offset by a workforce adjustment in 2019 and.
And 8% lower average head count and 2020 or 2200 less employees.
Purchased services and material expense was 4% lower than last year, mostly due to lower outsourced services and incident costs, partly offset by higher repairs and maintenance expense.
Fuel expense was 25% lower than last year, driven by a 27% decrease in price and.
And over 6% improvement and fuel efficiency.
Partially offset by 9% higher workload.
And.
Now, let me turn to our full year results on page 13.
I am very proud of our performance that again demonstrated our resiliency and capacity to adapt to quickly changing conditions and unprecedented times.
We completed 2020 with revenues close to $14 billion, 7% lower than 2019.
Our operating expenses were 3% lower than last year, resulting and 15% lower operating income versus 2019.
Our adjusted operating ratio stood at 61, 9% essentially flat with 2019 adjusted operating ratio.
Excluding onetime nonrecurring events in both years, our adjusted diluted EPS came in at $5 31 eight.
8% low and in 2019.
Now moving to cash on page 14.
We generated free cash flow of over $3 2 billion for the full year.
Excluding a $330 million tax refund related to the U S. Cares Act new loss Carryback rules free cash flow was close to $2 9 billion.
While there is still much uncertainty and instability and the current environment. We are seeing some positive economic signs and we remain confident about the outlook for this company.
With that said, we are pleased to reinstate our financial outlook for 'twenty and 'twenty, one which is summarized on page 15.
The current demand for 'twenty and 'twenty, one that James and Keith talked about should translate into mid single digit volume growth in terms of our Tms for the full year versus 2020.
With pricing ahead of rail inflation at a minimum and continuing our strong focus on yield management.
With this we expect to deliver EPS growth and the high single digit range versus 2020, adjusted diluted EPS of $5 31.
This assumes a Canadian to U S dollar average exchange rate of around <unk> 80.
For the full year versus approximately 75, and 2020 generating a headwind of roughly 20% to 25 on EPS year over year.
Our capital envelope for 'twenty and 'twenty, one is approximately $3 billion with initiatives to increase capacity and Western Canada enabled growth and continue investing in technology as we move to a digitized scheduled railroading model.
With that we expect to deliver free cash flow and the range of $3 to $3 3 billion.
Which will continue to drive improvement in free cash flow conversion.
Finally, we are pleased to announce that our board of directors approved a 7% dividend increase for 'twenty and 'twenty one.
This represents the 25th consecutive year of dividend increase since the IPO of <unk> 1995, providing consistent returns to shareholders year after year.
Okay.
The board also approved a new share buyback program of up to 14 million shares for an amount of up to $1 5 billion debt.
Returned through a normal course issuer bid from February one 2021 to January 31, 'twenty and 'twenty, two and we plan to resume buybacks next week.
We are supporting the recovery, while controlling our costs and we remain confident and our ability to deliver value to our long term shareholders. On this note back to you J J and thank you display and before we turn it to question and just want to use.
The second tier two and make some closing remark.
Our focus is very clear we price ahead of inflation and the minimum we manage yield and productivity, both we generate steady and solid free cash flow. We are a leader to bring technology into rail operation and the customer experience and.
And we have a solid and broad ESG agenda CN has a long long term investor play focus on sustainable profitable growth with that operator, we will.
So and it back to you to answer the questions from the island.
And.
Thank you ladies and gentlemen at this time all participants to ask a question. Please press star and the number one on and telecom.
Thank you for most of Whats turn the question this price.
Keith.
And so just a moment to compile the Q&A roster.
And your first question comes from the line of Savi <unk> with BMO. Your line is open.
Good afternoon.
Good afternoon, and thank you for taking my question.
Maybe on this mix and yield.
Our story and kind of going into 'twenty and 'twenty one.
Sure.
Yields per RPM was I think down, 1% and Q2 and that went to 3% and Q3 and 6% from Q4.
Can you give us a little bit of kind of background around what's kind of causing this.
More specifically within the categories and how should we think about the yield.
Going into the first half of 'twenty 'twenty, one and I'm guessing, it's probably one of the factor why the operating revenue is implied in the guidance seemed a little bit muted and if there are other factors that are kind of holding debt operating leverage if you can kind of walk us through the flow.
Thank you for that and so it's an important aspect definitely and we are <unk>.
And note that so I think James could probably provide good colors.
On the mix, but also on the action plan that we have in terms of working on the mix of our new book of business James Yes.
Yes, well thanks for the question Patty.
As we came out of Covid, and we've seen a quicker recovery and our consumer products business, that's our intermodal business and we saw and the carload business.
Industrial production of key indicators carload growth continues to improve and our mix is getting it's getting back to historic levels.
And thinking about Q3, we moved about 69% of our business with car load going into Q4 that escalated at 74% of our business was carload as industrial production picks up and rest assured we're going to continue to move the needle on the carload growth driven by improvements in North America and industrial production.
We're also working to make our own lock and improved yield within each segment. For example on the carload side, we purposely purposefully scaled back speed restricted light crude through December and into Q1 to create capacity for higher margin freight moving through the winter months, where capacity as you know is precious.
In addition to that and we have a number of commercial and yield initiatives.
That protect capacity and ensure that we can move and most profitable freight as we see the pace of recovery escalate as we move into the second half of the year I think things get back and balance for sure and we want to make sure that we have the capacity protected to move the highest margin freight and thanks for that day.
Yeah.
Thank you fabby and mix is an important aspect and we're working on it very hard.
Okay.
Part of the question.
And just the other part of the question on the cost side are there.
And anything on the pension side or cost per comp or anything like that that could be kind of holding debt operating leverage going into 2021.
So essentially you're the first one asking question will we will do it and to par, but I will ask everybody to.
Focus and one items on the cost side.
Yes, savi on the cost side, we do have cost headwind, we have about $200 million of cost headwind related to depreciation and related to incentive compensation and I would say, it's about 50 50.
And on the pension side I would say we are.
A very insignificant tailwind in 2021 versus 2020, so no nothing to report huge on pension, but definitely $200 million up cost headwind coming into 2021.
Thanks Patty.
Thank you.
Thank you.
And your next question comes from the line of Chris Wetherbee with Citi. Your line is open.
Hey, Thanks, guys and maybe if I can sneak on that line there for a minute just thinking about the operating ratio and.
And certainly if you want to provide some color around 2021, okay, great and then I guess, maybe bigger picture as you think about sort of the opportunities for growth on the network.
Are we finished years where there's.
Equal parts revenue opportunity as well as operating ratio opportunity I guess I'm kind of thinking about that 60 benchmark that's out there.
And whether you have the ability to kind of get past that.
Other than that and what you.
You see from a revenue opportunity that's out there.
Yes, Chris and very good questions, specifically for FC and as we don't have a volume problem.
And unfortunately see but regarding the operating ratio of Ravi you want to talk debt, yes, absolutely and thanks for the question, Chris and I think theres opportunities abound here as we look into 2021 and.
And in terms of the operating ratio and we're certainly shooting for a full year operating ratio below 60% and we do believe thats achievable beyond some of the structural headwinds that <unk> talked about that are non operating challenges on depreciation and compensation and even some of the mixed headwinds that we'll have.
We found ways coming out of the volume recovery to do things more efficiently some of that youre seeing and the head count.
And some of those efficiencies are structural but we still see opportunities as we look into 2021 cargo last day train speed train length, we see opportunities to improve all three as we go into this year and we will continue to drive even though we're the leader and fuel efficiency will continue to improve that here in 2000.
And 21, and so we're optimistic about it and all of that with the work hand in hand, with James and Keith and what Theyre doing from a topline that'll help us we're about people fuel and purchasing and we're focusing on all three to try and make this cost structures and effectiveness can be but very very optimistic as we look into 2000 and.
'twenty one thanks for the question.
Thank you Chris.
Your next question comes from the line of share Reman Rockwood with TD Securities. Your line is open.
Thanks, very much and good afternoon.
I wanted to ask a question on the technology agenda, which I believe is expected to yield for us.
Nine lines of savings over time and I agree.
<unk>.
And our back end loaded, but just curious whether theyre starting to crystallize more fully.
Luc progress against that agenda.
Yes. Thank you Krish early and very good question and that's one of our focus for the.
This year and the years to come and.
And we're making terrific progress.
Especially as it relates to preventive maintenance you want to give some example, rob.
Some of the benefit that we currently experience right now and maybe talk about somewhat we have and money for 2021, yeah, absolutely. Thanks for the question Cherilyn. So.
Specifically when you talk about the portals and the <unk>.
Chip cards, we know of for cases in the past 12 months in terms of track caused derailments that our <unk> chip cards would have would have prevented had they've been running and.
And now we've got those during the course of 2020 covering our entire core main from the Atlantic to the Pacific to the Gulf.
As we move into 2021, and we take on a couple of more cars will start to expand into our branch lines. So along the safety piece of it and reducing train accidents. We did see a decrease in terms of the cost of train accidents and also the number of train accidents.
And on the portals themselves.
And we're about halfway through our algorithm development, but each week and each day I can tell you. Our portals are actually finding defects that the human eye is not and they are actually making a railroad safer. We will continue to develop that here into 2021, as we add cameras to our portals and then we'll reassess as we go forward.
Thanks for your question.
Thank you Charlie and thank you.
Your next question comes from the line of Ken and texture with Bank of America. Your line is open.
Great and good afternoon, Hey, good day.
Just I'm a little surprised that I don't think I've ever heard the term structural costs. So many times from C&I on a call it used to be the other rail, but let me go to the gross debt do you think coming back to James and Keith and his comments before do you think youre being conservative on the growth given the need for western and investments like is that something that's slowing you down from chasing more volume and 21 or.
And where does that not an issue it's more of the market piece.
So, let's say James if James or Katie if you want to talk about debt I mean, there is volume growth at CN.
There's no shortage of debt, but we also want to manage what comes at Us Keith.
Yes, thanks for the question Ken.
We do have other other coast that we serve as well, we saw growth and Halifax and.
We actually see some some opportunities and the first and second quarter. There may be have some new services, while we will.
We also see in the Gulf Coast opportunity for another service, we bring we've been bringing more business. So on and the and Q3 Q4. We also are leveraging R. R.
Transact and H&R product Thats, one of the things that we've been able to do is grow and the consumer and the.
Refrigerated market, but we do have plans for growth on the west with our customers.
Whether it's through Rupert or Vancouver.
And so we are we are trying to grow Canada, we're just working with.
Rob and his team to manage it effectively of effectively and efficiently we want to make sure. We provide a good service for our customers day in and day out so.
We are going to grow.
And that Ken if I might ask on Q1 to a little more conservative because.
And Theres still a lot of things that might happen with COVID-19 and vaccine and <unk>.
Either things start to go the right direction, and we might slip a bit but when we look at second half you got to believe that.
And the pandemic will have be more under control and we're much more bullish and a second half, especially as James mentioned earlier on the industrial product side on the carload side and Thats <unk>.
Good business for <unk> so.
We'll see how the winter goes along into the Covid, but I think so far so good we're off to 10% above RT and year to date and the.
<unk> and frostbite like at CN are currently very solid.
Thank you for the question.
Your next question comes from the line of.
Buckingham with Deutsche Bank. Your line is open.
Yes, good afternoon, everyone.
With respect to Milton you just received approval for the logistic project could you maybe talked about the next milestone the capital deployment and how it will impact.
Flow on your network down the road. Thank you very much.
Thank you for Midwest and yes, we did update and approval Keith do you want to talk about the next step from here.
Yes, Thanks, Dan and thanks, Ben Locke.
Yes, we're very pleased with the approval that we received last week.
We know Theres a couple more small steps to go through that we will that we will go through here and the next several months, but we do plan construction to start in 2021.
We do see that this new terminal will allow us to expand our capacity and the GTH day, it's going to allow us to provide better service and it's going to allow us to have better cost of providing that service and again, it's going to grow our capacity.
What trains we run through there and.
And that type of thing is and will become since it's probably going to be about two years out before it.
Before it's completed Benelux.
Okay perfect. Thanks for taking my queue. Thank you.
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Hey, guys.
Thanks, So I just wanted to make sure I'm understanding the model the model and pieces right Julien.
Mid single digit RPM, and some price and the buyback and you get to a sub 60 or it gets you above.
And that gets you to at least double digit earnings growth, maybe just on <unk>.
Missing something there and any thoughts for us. Thank you.
Yes, no listen I mean, as you know we have a big headwind on FX that I talked.
And my remarks, Scott and I'll, just remind you of the of the rule of thumb. It's every cent of the appreciation of the Canadian dollar.
To the U S. Dollar is <unk> <unk> of EPS on an annualized basis.
And it's $35 million of net income so I mean, if you back that in and we.
We are assuming that this FX will create a headwind of anywhere between 20 and 25 and we're assuming that FX will remain at <unk> now God knows where it's going to be but that's what we're assuming so if you. If you adjust for that I mean, we would be and the double digit range to your point. So the FX is really a big headwind for us at this.
And time, and we'll see we'll see how it evolves during the year.
Thanks, a lot for your question.
Okay, Yes, so it's high single digits, but if you if it was a cost that FX, we would be up for double digit.
25 of EPS EBIT.
Thank you Scott.
Your next question comes from the line of <unk> Gupta with Scotiabank. Your line is open.
Thanks, and good afternoon.
My question is on capacity and obviously several container terminals on our network expand capacity and target growth and you're obviously seeing some industrial economy recovery here.
Would you see and think of the 20% kind of capital and density envelope, maybe kind of boil down to this year and maybe in the future, but that would be enough to prepare for potential opportunities you have in 'twenty and 'twenty, one and beyond.
Rob you want to talk about network capacity, especially through Rupert and Vancouver, Yes, absolutely and Conoco and just want to make sure I understood. It you also asked about container.
<unk>.
Capacity currently and then talking about the total capital that envelope.
Expansion Capex.
Absolutely and in terms of the mainline capacity.
We continue as I said in my opening remarks continued to expand our capacity, particularly headed to the port of Prince Rupert, but really youll see our focused investment in terms of mainline capacity.
Going forward as it is last year and continuing west of Edmonton, we see the growth opportunities and Western Canada, both and Rupert and Vancouver, and we will continue to prepare to handle that.
From a container terminal standpoint, I know Keith Kisan and here, maybe you want to add a few things Kate.
Thanks, Rob Thanks.
Yes, we do have plans, we're going to we're going to finish up our construction process at our new terminal just outside of Minneapolis.
We're also expanding and.
Making some improvements and Chicago.
We have a couple of things that we're doing here and and.
And Brandon we have some things, we're doing and Calgary Edmonton. So all of these up these <unk>.
Minor.
Expansions or.
Updates to some of our terminals are all and the all in the capital plan.
Thank you.
Thank you.
Your next question comes from the line of Walter <unk> with RBC. Your line is open and.
Thanks, very much good afternoon, everyone.
And then I was wondering if you could talk a little bit about some of the inputs into your labor labor cost side. I know you mentioned the pension, but can you give us some color on on how you see head count evolving through the year, certainly going through winter now and and whether that is aiming to come off and and a little bit.
And on your kind of.
Total cost per employee I know you didn't pay out all your bonuses this year and what kind of headwind.
And certainly if you hit your targets here, what kind of headwind would we be looking at in terms of.
Bonus payments for next year.
Okay. So thank you all for so maybe on the head count and you're operating.
The ratio of people through volume you want to take.
Debt, rather than just link and finish with regarding the replenishment of the bonus Rob here, absolutely and when you look at some of our operating functions mechanical engineering net ops, we will see those that head count remained muted.
Some of the changes we made will continue to produce dividends going forward on the train and engine standpoint crew members will continue to grow that head count as volume.
Dictates, but we'll do it at a lesser rate than the increase in volume. Good example is Q3 to Q4 and the sequential growth, we saw 12% growth and volume.
Only a 5% head count so we will be hiring to handle the volume, particularly and in second half of the year, but it won't be at the same rate as the.
Volume increased two zone, maybe on your second part Walter of your question. So as I said the.
Previously, we have $200 million of cost headwind.
And next year $100 million as incentive compensation and so it's really the replenishment of our bonus. So obviously when you look at the average comp per employee and you should expect that to be slightly up because again, you'll have more incentive compensation per employee next year. Then we have this year.
Thanks, Thank you Walter.
Yes.
Your next question comes from the line of David Vernon with Bernstein. Your line is open.
Hey, good innovative and guys.
I was wondering if you could talk about the gross margin topic.
Outside of the framework for 2021, you guys and put a lot of money into technology and capacity efficiency.
Sounds like the revenue side, Youre, managing yields pretty well and you think about where you're going to be running the railroad and the next three to four years.
What should we be expecting as far as kind of how those investments and technology and things.
Play into that Theres going to be a case and that helping to accelerate growth or should we be thinking that you're going to be running the business and somewhere in that mid to high fifty's.
And John and operating initiatives.
So broadly speaking, David they'll be coming sort of maybe have enough commercial <unk>.
Commercial effort and getting better value for our product and as well as on the costs, but you want to talk about incremental margin Raj and I can talk a little bit about your question on margins and David and also on the on.
And technology I think we're quite bullish and technology I think debt as you know and the last analyst day, We said and I think Cheryl and ask the question about the benefits and we told people 200 to 400, we're still tracking that very very well I think but first and foremost.
And that technology will really improve safety, that's first and foremost so the productivity and efficiency and the cost takeout is a byproduct very good byproduct don't get me wrong, but really its safety I mean, if we can fully automate all of the inspection, we do up tracking of train.
Incredible what we can do in terms of and are reducing reducing accident cost and solidifying our social license to operate so I think with the effective deployment and the value created deployment of technology, absolutely you can expect and the next two years that our margin will improve absolutely and we've said.
When we talked about this a few years ago that unfortunately and 90.
And in technology, the benefits are backend loaded because you need to build it and test it before it actually produced but now we can see it starting producing and you should see that and the next and the next few years and that will really not only produce the savings and produce.
Improve the margins to where we need to be but also it will fundamentally change the way, we do business at CN and we're quite bullish about it.
And if I might.
It's high fives for rail industry throughout the up technology, and automation and social high time for the rail industry to really define ESG.
And a much broader perspective and that we are very much focused on those two area also meeting day.
Apologies and ESG, we beyond just the fuel efficiency.
And then just and this is more of a follow up and request from question, but as you think about that rate of change or are we thinking about this starts to accelerate and the next two to three years over the next three to five I'm just trying to get a sense for where I should be directly and messages in terms of expectations on on how quickly this can be non.
I think we're starting to see benefits coming in this year and then it will continue to accelerate I mean, we didn't have a whole lot of benefits before because again you need to build it before you actually can see but Rob has got the good examples on how we use the <unk> and how we use the portal and.
And it's coming in and that allowed a loud and clear so stay tuned, but we're quite excited and quite bullish about it.
So may be simply said as Rob said earlier and August plus with a five is very achievable at CN and despite the $200 million Edwin that just lane was talking about on depreciation and.
Replenishment of bonus for the team is capable of doing.
Thank you David.
Thank you.
Your next question comes from the line of.
And with Raymond James Your line is open.
Yes, good evening guys.
And just a quick one on the coal side, if I may I don't think we've seen real net growth and your core business for some time now and we've obviously got some contract because it's coming over your way can you just maybe give us a bit better perspective on what we should expect here going forward, both with the new Tech business. It's ready to go live soon as well as the broader set of opportunities you guys have an interest.
Spoken from export opportunities and I'm, just trying to frame that and the context.
Not not a segment that we've seen a lot of growth and recently thanks. Thank you. Thank.
Thank you Steve Good question and James as our expert and coal that we have a couple of puts and taken up market. James do you want to give some more color.
Yes, I would say coal is looking very good very strong for CN in 2021.
And the Tech deal I think we're all familiar with that April is going to be our go time for detecting and when we should see a fairly.
Rapid ramp up to full volumes with that tech deal.
And of that Tech deal with some significant investments we made in unlocking capacity on and offshore in Vancouver, and because we've made those investments now we are well position and move more grain and our northshore and more upon us and Northshore and looking at growing our volumes beyond just the coal business also when you look at U S call U S. Coal is really going to be a significant.
A tailwind for CNS move into 2021, and a very strong export program and the pricing for export thermal and metallurgical coal seems to be favorable if you look at the futures certainly above our customer's breakeven and last I'd like to say that and we've got debt.
Coal plants, one metallurgical one thermal that were shuttered and on CN in 2020 and.
And looking at the forward curve on pricing, it's favorable for one or both of those new.
Alright, one or both of those coal plants to restart so we're pretty bullish on what the outlook is going to be for coal and the CN network through 2021 year.
Thank you for the question.
And maybe <unk>.
And maybe while we're talking about bulk Rob do you want to talk about how are we doing this month and from a green.
As I mentioned, we set 10 straight.
The record all time monthly records in terms of moving Canadian grain.
<unk> and we've actually already exceeded the all time January record. So we're well positioned we're bringing on new high capacity cars, just like we did in the latter half of 2020, we have more of those come in and which will help for.
For that but we're in really good position and we continue to handle it.
Six days to go and we have already exceeded our all time record and grain exports.
Thank you Steve.
Your next question comes from the line of Jon Chappell with Evercore ISI. Your line is open.
Thank you and afternoon.
Rob earlier you addressed.
The cadence around bringing head count back on slower than volume.
The term managing capacity and the excitement around volume and especially in the second half of the year. It's come up a few times. When you think about other parts of the cost structure, so equipment locomotives, whether leased or owned cars et cetera et cetera.
Should we think about it the same way as the <unk> labor.
Continuing to bring it on and anticipation of a recovery and the business, but still at a slower pace and then ton of wait to see the light for the eyes on volume before you really move on bringing some of those cost back.
Yes, Rob Yes, really good question and the short answer to that is yes think about it the same way.
We will make sure the volumes there as we bring resources on whether Thats equip.
Equipment people and.
And we will continue to build capacity for it.
And we see the car car miles.
And train speed.
Improved debt will also help in terms of our car velocity and trains and as I look at it so far this month and the months almost out we're operating really well right now.
And we're up double digits in terms of volume car velocity is up double digits train speeds up train lengths.
We're seeing some of the fruits of the labor here.
In late Q3 early Q4, and we plan on building on that that momentum here as we go through it and <unk>.
And say, we really haven't had a winter we've had.
And three straight days of nearly minus 40, and Manitoba, and Saskatchewan and although we see some degradation and a minor way to some of those key metrics are well positioned to respond to it and we don't see it we see a quick recovery so.
Really off to a very strong start this year and we plan on building on that momentum.
That's great. Thank you Rob and thank you John Thank you.
And.
Your next question comes from the line of Brian Awesome Beck with Jpmorgan. Your line is open.
Hey, good afternoon, and thanks for taking the question maybe one on on price.
A lot of new initiatives I think James mentioned, maybe you'll help if you can give an example of how those are being deployed and some of the early results and then I guess looking past, maybe offsetting the management of mix a bit.
These things are something you can push further on in terms of price maybe go a little bit higher than inflation as you mentioned J&J volumes not a problem. So looking to see your willingness to maybe pull the pricing lever.
To mitigate some of those.
Challenges and also have to get recoup of the capital spend and accelerated tech investment.
It's a very good question, Brian and so James that Youll, starting up the debt Keith if you could also a complement James.
Yes. Thank you, Brian let's talk about a little bit I mean, we've got a number of number of initiatives I think I talked about a couple of my opening remarks, I will give you a couple more examples.
On the iron ore side of our business, our iron ore volume was up 22% and the fourth quarter and it.
And it's part because of some yield initiatives, we have underway with debt with new fleet longer trains more efficient trains.
With the new fleet, we deployed where we have them in place we can move 15% more iron ore and using the same resources allows us to take out a train start a week and moving the same amount of iron ore for that's been successful also on the grain side of things I mean grain has just been and outstanding example.
And how we can put a detailed focus on the business and get some really really good outcome. The outcome. We're looking for here is moving more grain for our grain customers and this is a combination of deploying a new cars right sizing our unit trains to match match horsepower. So that we don't leave any empty spots available and we could have kind of moved.
And it's the customer investments in country, and port infrastructure and allow us to run and very efficient long unit trains and new signings on the <unk> side of things that we can accommodate this additional grain growth and not deteriorate our velocity on our network.
Another example might be some seasonal pricing that we put in place.
Q1 every year is a capacity constraint, so where we can and we want to drive traffic that would prefer to run and Q1 into Q4, where we have the capacity to move it. So we did that quite successfully and particularly on the frac side side of the business. So these are all activities that are undergoing to create capacity and so we can move more freight.
Or create the opportunity to move the best the best paying freight where we have that capacity now.
It's pretty exciting time at <unk> as we embark on this for.
<unk> focused on yield I would say.
And Keith Keith.
Yes.
Brian.
Our focus on yield and we're focused on price and we have a.
A lot of cross functional teams actually and the intermodal and and and Rob Shopper February Chuck and others, where we're working on those yield programs I mentioned quite a few of the operational side earlier, but on the commercial side. We also have yield programs in place and price program on the <unk>.
Yield side.
And making sure that the <unk>.
And containers are getting on the right trains.
We've worked with our customers they want they want capacity. So we're working with them to get them the right capacity and the right gateways. We've moved some trains around from some stuff that was maybe and one gateway we've moved it to another gateway to densify that train.
All of that together and then as Rob is talking about were running the railroad better we're able to go out and get more price and our target is inflation plus pricing and all that we do not just one or two customers, but and all that we do.
Yeah.
Thank you Brian.
Right. Thank you.
Your next question comes from the line of Tom <unk> with UBS. Your line is open.
Telecom.
Yes, Hi, Jay day.
I guess the question, maybe a little bit of a day.
And on the one you were just talking about but.
I guess when I think of your franchise and how you run it.
I think you guys gave a lot of potential for kind of leading the industry in RPM growth and volume growth are you seeing at the high end and your forecast is somewhat.
Muted given the.
Easy comps at least and second quarter I understand the quality revenue.
Is there.
Is there a capacity consideration, it's meaningful to or is there an element that flow.
We can be there can be upside scenarios that are or may be likely or maybe it's a little bit conservative on volume I guess I'm just surprised there is and maybe up a base case is stronger and the volume side. So I'm wondering if you could talk a little bit more about that.
Hey, Tom So it's a very good question, maybe ill take that one so.
We are the conservative for Q1, we would like to CDI of Q1 and call. It maybe you would like to CDI.
How the pandemic will evolve whether or not at some point.
We may have.
Number of employees and current <unk> and matter of fact and capacity network. So far so good but.
It's I mean, it's.
And Lockdown Montreal today.
They have a curfew overnight and so that's not necessarily your usual thing.
We are very confident that when the pandemic started to be co control with vaccination and vaccinations and give me a little slower and kind of into the U S. This should be a strong economy for us and the other side what are the industrial products and the consumer is already very solid so volume CN is not a problems volume at CN is a strength.
We have enough crews to run our training, we will and be sure. They all stay healthy and don't have too many of them and quarantine and.
And so that we'll see.
I think so on the capacity side, there is capacity at CN and Theres also a very conscious effort at CN, who recognize capacity is precious capacity cost money and.
We like to see intermodal vessel coming to a port, but we wanted to assure that they're free of the price the price, we pay especially when its business debt.
It may not be there at 12 months from now because it's obviously coming from U S per scores for that as well.
And we wanted to share we protect capacity for propane going for west coast coal going into metals grain coming through the west coast. So there's a mindset of.
And some arbitrage if you wish and to what we do first and what we do second long term business for us and.
And the business that may or may not be there for a months from now.
We if we do it.
And we pay a higher price for a different price than normal contract business. So as we do all debt.
Which is a bit of a newest Florida CN because.
Let's face it our port business has become almost too good I mean, it's.
And it's.
And it also and it was imbalanced early days, because we basically had lots of import and export which is not the most way too.
And you're running and balanced network.
Costs, a little money.
So we are conservative.
Thats again in April.
Right. Okay. Thanks, Thanks for the perspective.
Thanks for Tom.
Your next question comes from the line of Brandon from Glenn <unk> with <unk>.
Barclays. Your line is open.
Hey, good afternoon, everyone and thanks for taking my question and so I guess JJ following up on that or maybe this one is better for Keith but.
Can you talk about the competitive dynamic specifically in international and domestic intermodal market I think we saw another large contract to go to your competitor at the end of the year is that part of the conservative.
Outlook on volume as well.
So Brendan and I guess I'll take that one.
And.
And just not to correct for you, but the large customer that you are talking about.
And we'll hold the majority of that volume moving forward.
It was not a winner take all type of thing in fact, we picked and choose what we wanted where we wanted it that fit into our network.
Been working very hard on.
That contract, it's not complete yet, but we will.
We'll definitely get our more than fair share.
With regard to the domestic business, we are always competing but the types of products and services that we have and the geography that we serve has served us very well during COVID-19 I think there is a reason why you saw our growth in Q4, and why you see the growth in Q1 being.
Industry, leading so we're satisfied with our products or services and and we love our network. Thanks.
Thanks, Brian.
Thanks for the credit.
Your next question comes from the line of Allison Landry with Credit Suisse. Your line is open.
Good afternoon.
Good afternoon.
And so I just wanted to ask about the potential for M&A in the short lines that we've obviously seen some activity and our recently shortly.
And in total relatively active.
If you could maybe speak to any opportunities that might be and strategic fit for <unk> that you've seen and then sort of specifically.
As we think about the growth potential at how all of that and then eastern Canada, and and and perhaps if you could comment on the effects of the acquisition.
CNA commercial operating needs there that you did benefit from thank you.
And you wanted to talk about M&A activities or joint ventures, I can talk for overall allow us and thanks for the question of M&A.
As you know we're always on the lookout to do M&A I mean, it needs to fit our network. We're not we're not we don't want to diversify for the pleasure of diversification that's not our game for whatever can add to our network either extending our reach.
Sure.
We can put more business on our network, we're always on the lookout and.
And.
I mean, we have.
And is that were following up and nothing nothing really that is that is.
Is really hot right now, but it's certainly on our radar screen and we want that I mean part of our strategy is on inorganic growth.
So that's we're following up on that for sure and that and if it allows us to get to market debt today, we can get because of our reach and obviously it makes a lot of sense. Hence why we also want to keep a strong balance sheet, we want to keep a strong balance sheet because.
Not only it what we saw the value of it during the pandemic and 2020, but also because if theres a deal coming in we can act very very quickly and do it.
On an all cash basis and be successful so.
And we're on the lookout, if something makes sense and fit our network and fit our strategy it needs to fit our strategy long term and obviously, we can move very quickly on it.
So we have a small team that look at that all the time and we don't wait for phone calls to come in we also make some outbound call.
And we'll see what the future holds.
Alison.
Yes.
Your next question comes from the line of.
<unk> <unk> with Susquehanna Your line is open.
Hello, and thanks for.
Good afternoon, and thanks for taking my question.
And the extent sorted the growth question a bit further out I mean, you've embraced the supply chain collaboration and share gains driven strategy for a decade now and.
We're approaching the point where.
And every other class, one railroads and or a steady state of.
Running their version of the Hunter Harrison operating principles that underpin what you do at CN and operating ratios that reflects that.
The industry.
Kind of from this operational realignment to.
And maybe a broader and more consistent growth strategy does this open up some modal share opportunities for CN and the industry as a whole for say the next three years versus the last three just strategically how do you think about that thanks.
So very good question and it's certainly does so.
And that's one reason when we look for our Capex and when we looked at implementing technology. We just I'll talk just about railroad operation like inspection and the locomotive or eventually.
Equip and different and diesel but we also talk about we want to invest into the customers' experience, where we would estimate and digitize the customer's experience and a way that they want us to provide services to them and in that case doing that also with other supply chain partner and the supply chain like port operators or shipping line for.
And for a little company so definitely.
The CN story long term is one of growth profitable growth profitable growth and existing accounts and profitable growth from new accounts and some of those new accounts and my company to competition, but they might very well also come from supply chain that went up part of it today, but the reality is at CN and at least at CN, We believe that investing and tech.
RG that relates to the supply chain experience people will be able to track their product from Asia as Ed and.
And not just at CN, but when they are coming to us avaya for going back to report is very much part of how.
For the long term future of the company is so if we do its joint venture with acquisition some of them might be technology related for some of them might be with.
And with partners like Port operators and whatnot. So.
The evolution of <unk> gets into.
Digitizing the scheduled railroading, but also into bringing the element of service and the scheduled railroading and Thats also a closer to what the customers expect which means that its visibility and controls for their freight beyond the rail before the rail and up for the rail as well.
We actually have a group that's really working on debt reactively.
This morning, the board approved two promotion.
And in our technology group one of them is the person who is going to be very strong <unk>.
<unk> and rail rail operation and the other one is very strong and Tim about automating the supply chain the supply chain services that we offer to our customers.
So good question best and because it really talks about the future of CN and the future of the industry. Thank you.
Thank you.
And we have time for more question Paul.
Slide 30.
Thank you Simon and I would like to turn the meeting back over two years from from simple.
Thank you. Thank you for all of you to joining us today and.
As usual, we wanted to and we wanted to have as many of you to ask questions and make making good use of your time. So thank you for your time and we'll see you again in three months. Thank you.
Thank you ladies and gentlemen, the conference has now ended.
Connect your lines at this time and thank you.
Participation. Thank you and have a great day.
And.
And.
Yes.
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Okay.
Okay.
Okay.