Q4 2020 Canadian National Railway Co Earnings Call
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Ladies and gentlemen, <unk> fourth quarter, and full year, 'twenty and 'twenty financial results conference call will begin momentarily.
I would like to remind you that today's remarks contain forward looking statements.
Clickable Securities losses.
Such statements are based on assumptions that may not materialize and are subject to risks described and cn's fourth quarter and full year, 'twenty and 'twenty financial results press release and analyst presentation documents that can be found on tea and website.
As such actual results could differ materially.
Reconciliations for any non-GAAP and states are also posted on Cn's website at Www Dot and.
Dossier.
Please standby for holiday begin shortly.
Welcome to the CN fourth quarter, and full year, 'twenty and 'twenty financial results Conference call.
Now I'd like to turn the meeting over to Paul Butcher, Vice President Investor Relations.
Ladies and gentlemen, Mr Butcher.
Thank you Simon good afternoon, everyone and thank you for joining us for Cn's 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 J J for you at.
Our president and Chief Executive Officer.
And she snake oil and 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 products supply chain.
And James Cairns, our senior Vice President rail centric supply chain.
I do want to remind you to please limit yourselves 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.
And it's now my pleasure to turn over the call to <unk>, President and Chief Executive Officer, JJ day rate.
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 'twenty and 'twenty, our year with blockade spring of Covid, and some of sharp, but uneven business recovery and the year.
Year, when our railroad Theres became recognized as truly essential workers.
A year and went out people presume for our society business for CN and for that I personally offer and my appreciation to all of them.
The business recovery continue.
Volume on a steady and strong at CN and some sectors remained challenge, but our operating matrix on improving and the commercial team has a game plan to work on the yield of our new business mix.
We are optimistic about 'twenty and 'twenty, one, especially the economy and the GDP of the second half.
We are more cautious about Q1, especially as it pertained to a lockdown and preventative quarantine on our operating employees and the communities where we operate.
This recovery has a different mix of business some market recovered very fast and V shape like consumer goods coming on Shaw via a five ports.
And some market stay depressed like crude and refinery product.
And one market.
And then simply solid like Iraq, and that would be grain export and both Canada and United States.
We ended 2000, Twenty's solid we generated record free cash flow of over $3 $2 billion for the year.
For adjusted EPS growth was 14%, we have industry, leading fuel efficiencies and our revenue ton miles volume growth was 10%.
Today, we are showing our confidence in the future by reinstating guidance by announcing a 7% dividend increase.
<unk> share buyback and investing to accelerate technology to our operation and investing and connectivity with our customers and simple term investing and the long term.
On that 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 well 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 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.
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 <unk> 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.
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. The teams' efforts. This year have helped us avoid nearly 300000 tons of cotwo emissions and saved us nearly $60 million from our fuel efficiency.
<unk> alone this year.
And continues to be the fuel efficiency leader of all North American railroads.
As 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 CN 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 pass this to James again want to recognize the extraordinary resilience of our CN network and our employees that helped deliver these results James.
Thank you Rob during Q4, we started to see a more balanced recovery with many carload markets tracking near or above pre COVID-19 levels. Overall, our carload franchise finished the year strong setting 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.
Brain, both Canadian and U S remained strong through 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 marked an all time record for domestic potash shipments as we grew market share.
Lumber and panel volumes were strong and the quarter setting a record and December a full 6% better than our previous record set in 2015.
Propane volumes for the quarter, both domestic and export exports were 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 and.
In summary, the positive momentum we saw on Q4 and December and particular positions us well for 2021, where we expect to see continued improvement and our mix and yield.
Smartly managing capacity and price will be the theme for 2021.
We have introduced several new commercial programs car auctions 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 Mark.
And freight.
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 and are expected to be growth drivers in 2021.
The current Canadian crop was at all time record and there is 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 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 volume through Prince Rupert will continue to ramp up at 10 minutes, New export facility comes online and alter gas momentum continues.
Export coal volumes will grow in Q1, driven by new pet Coke 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 connects 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.
That I will 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 co.
And bind the west coast ports of Prince Rupert and Vancouver grew at just under 17% versus 2019 and set an all time quarterly record.
Halifax, 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 then prove mint 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 trained imbalances of Q3 due to the huge surge of imports and the lack of enough exports back to the ports.
Ongoing joint efforts have increased train sizes slot utilization and trained balance key levers of profitability and.
And Q4 yield management initiatives produced year over year margin improvement for intermodal and automotive.
<unk> of trains elimination of work events online and in terminals and reduction of empty miles.
Proved and fish and CS and.
Container and auto handling and our terminals are some of the many initiatives we will continue to drive in 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.
Our team's 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 and there's 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 continued 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 and price.
And and over 6% improvement and fuel efficiency.
Partially offset by 9% higher workload.
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 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.
And 8% lower than 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 2021, 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 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 enable 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 three to $3 3 billion.
And 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.
The board also approved a new share buyback program of up to 14 million shares for an amount of up to $1 5 billion.
So we've returned through a normal course issuer bid from February one 2021 to January 31, 2022, 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 JJ.
Thank you just play and before we turn it to question and I just want to use.
Second for you to make some closing remark.
Our focus is very clear we price ahead of inflation at a minimum we manage yield and productivity boat, we generate steady and solid free cash flow. We are a leader to bring technology into our rail operation and the customer experience and.
And we have a solid and broad ESG agenda CN has a long long term investor plate focus on sustainable profitable growth with that operator, we will.
And so on it back for you to answers questions from the island.
Thank you ladies and gentlemen at this time, if you would like to ask a question. Please press star and the number one on your telephone keypad.
Thank you would like to withdraw your question. Please press the pound key we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of fatty Shimbun with BMO. Your line is open.
Good afternoon on Friday.
Good afternoon, and thank you for taking my question.
Maybe on this mix and yield.
The story and kind of going into 2021.
Yields per RPM was I think down, 1% and Q2 and that went to 3% and Q3 and 6% and 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 leverage implied in the guidance seem a little bit muted and if there are the factors that are kind of holding that operating leverage if you can kind of walk us through those as well.
Thank you for that so it's an important aspect definitely and we are <unk>.
Recognize 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 that on the mix of our new book of business James.
Yes, well thanks for the question Fatima.
As we came out of Covid, we've seen a quicker recovery and our consumer products business, that's our intermodal business and we saw on the carload business.
Industrial production and key indicator for carload growth continues to improve and our mix is getting it's getting back to historic levels.
And so thinking about Q3, we moved about 69% of our business with car load going into Q4 that escalated a 74% of our business was carload is 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 luck and improve 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 yield initiatives.
That protect capacity and ensure that we can move the 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 guidance.
Yeah.
Thank you fabby and mix is an important aspect and we're working on it very hard.
Okay.
And part of the question.
And just the other part of the question on the cost side are there.
Anything on the pension side or cost per comp or anything like that could be kind of holding that.
Operating leverage going into 2021.
Okay. So since for the first one on asking question, we'll we'll do it and two part, but I will ask everybody to focus on one items on the cost side just like.
Yes, <unk> on the cost side, we do have a 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 have a very insignificant tailwind in 2021 versus 2020, so no nothing to report huge on pension, but definitely $200 million of cost headwind coming into 2021.
Thanks Patty.
Thank you.
Thank you.
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 and just thinking about the operating ratio and.
And certainly if you want to provide some color around 2021 that would be great and I guess, maybe bigger picture as you think about sort of the opportunities for growth on the network.
Or are we going next years, where there is.
Equal parts revenue opportunity as well as operating ratio opportunity I guess I'm kind of thinking about that 60 day benchmark that's out there.
And whether you have the ability to kind of get past that lower than that.
You see from a revenue opportunity that's out there.
Yes, Chris and very good questions. So definitely at sea and as we don't have a volume problem.
And unfortunately for you, but regarding the operating ratio of Rob do you want to talk that yes, absolutely and thanks for the question, Chris Yeah, I think theres opportunities are bound here as we look into 2021 and.
And in terms of the operating ratio, 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 mix 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 car velocity 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 and in 2000 and.
'twenty one so we're optimistic about it all of that with the work.
And in hand, with James and Keith and what Theyre doing on the top line that will help us.
And we're about people fuel and purchasing and we're focusing on all three to try and make this cost structure is as effective as it can be but very very optimistic as we look into 2021. Thanks for the question.
Thank you Chris.
Your next question comes from the line of Cheryl and Rob born with TD Securities. Your line is open.
Thanks, very much and good afternoon.
Wanted to ask a question on the technology agenda, which I believe is expected to yield $2 million to $400 million of savings over time and I. Appreciate those savings are back end loaded but was just curious whether theyre starting to crystallize more fully and unique progress against that agenda.
Yes, Thank you, Chris Harriman and very good question, it's one of our focus for the.
This year and they used to come.
And we're making terrific progress.
Especially as it relates to preventive maintenance you want to give some example, rob of.
Some of the benefit that we currently experience right now and maybe talk about some of what we have and money for 2021, yeah, absolutely. Thanks for the question Cherilyn. So.
Specifically when you talk about the portals and the chip.
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.
And 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.
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 the question.
Thank you Carolyn and thank you.
Your next question comes from the line of Ken <unk> with Bank of America. Your line is open.
Great and good afternoon, Hey, JJ.
Just a little surprised I don't think I've ever heard the term structural costs. So many times from CN on on a call it used to be the other rail, but let me go to the growth side 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 investments like is that something that's slowing you down from chasing more volume and 21 or.
Or does that not an issue it's more of the market piece.
So, let's say James James.
James and Keith if you want to talk about that I mean, there is volume growth at CN.
There's no shortage of that but we also wanted 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 maybe you have some new services, while we will we.
We also see in the Gulf Coast opportunity for another service, we bring we've been bringing more business. So on and the Q3 Q4. We also are leveraging R. R.
Transaction 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.
So we are we are trying to grow Ken we're just working with.
Rob and his team to manage it affected 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.
Yes, Ken if I might ask on Q1, we were little more conservative because.
There's still a lot of things that might happen with COVID-19 and vaccine and.
Either things start to go the right direction that we might slip a bit but when we look at your second half <unk>.
And I believe that.
And the pandemic will have be more under control and we're much more bullish on the second half, especially as James mentioned earlier on the industrial products side on the carload side and that's that's good business for <unk>. So.
And we'll see how the winter goes along into the Covid, but I think so far so good we're off to 10% above <unk> year to date and the.
Great and that's a bottle and frostbite like at CN and are currently very solid.
Thanks for the question.
Your next question comes from the line of business, plus and you 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 talk about the next milestone the capital deployment and how it will impact the <unk>.
Flow on your net work 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, J J and thanks Ben.
Yes, we're very pleased with the approval that we received last week.
We know there is a couple more small steps to go through that we will we will go through here and the next several months, but we do plan and construction to start in 2021.
We do see that this new terminal will allow us to expand our capacity and the GTA Jay it's going to allow us to provide better service, 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 then.
That type of thing is still to come since it is probably going to be about two years out before it.
Before it's completed bandwidth.
Okay perfect. Thank you Inger and thank you. 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 want to make sure I'm understanding the model the model and pieces right Lane and so if we have it.
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 are we 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 is every.
<unk>.
And the appreciation of the Canadian.
<unk> 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 'twenty and.
And 25, and we're assuming that FX will remain on <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 point and time and we'll see we'll see how it evolves during the year.
Thanks, Scott for your question.
Okay, Yes, so it's high single digits, but if you if we if it was a cost that FX, we would be up double digit.
It's 25 cents of EPS at <unk>.
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 the capacity as obviously several container terminals on the on network expand capacity on target growth and you're obviously seeing some industrial economy recovery here.
Would you see and tank on the 20% kind of capital intensity envelope that it kind of boils 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.
Ravi you want to talk about network capacity, especially through Rupert and Vancouver, Yeah, absolutely and Conoco I just want to make sure I understood. It you also asked about container hub.
<unk>.
Capacity currently and then talking about the total capital that envelope.
Expansion of plastics, yes, absolutely 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 you'll 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 keeps on here, maybe you want to add a few things Keith.
Thanks, Rob.
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.
And making some improvements and Chicago.
We have a couple of things that we're doing here and.
And brands, we have some things, we're doing and Calgary Edmonton. So all of these up these minor.
Expansions or.
And some updates to some of our terminals are all and the all in the capital plan.
Okay. Thank you.
Thank you.
Yes.
Your next question comes from the line of Walter <unk> with RBC. Your line is open and thanks very much good afternoon, everyone.
Hello.
And 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 on your cash.
Total cost per employee I know you didn't pay out all your bonuses this year and what kind of headwind.
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 Walter so maybe on the head count and the operating.
The ratio of people through volume on it.
And that Robin and then just link and finish it regarding the replenishment of the bonus Rob Youre, 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. We 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 increase zone.
And maybe on your second part Walter of your question, So as I said the.
Previously, we have $200 million of.
Cost headwind next year $100 million as incentive compensation. 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 youll have more incentive compensation for employees next year. Then we have this year.
Appreciate the time.
Thank you Walter.
Your next question comes from the line of David Vernon with Bernstein. Your line is open.
Hey, good old David guys.
I was wondering if you could talk about this margin topic outside.
Outside of the framework of 2021, you guys have put a lot of money into technology capacity efficiency.
Sounds like the revenue side, Youre, managing yields pretty well and you think about where you are going to be running the railroad and the next three years to four years.
And what should we be expecting as far as kind of how those investments and technology and things play into that business is this going to be a case of and helping you to accelerate growth or should we be thinking that you are you're.
And youre going to be running the business and somewhere in that mid to high fifty's.
Range and an operating ratio for spaces.
So broadly speaking David there'll be coming sort of maybe have enough commercial the commercial effort on getting better value for our product and as well as on the costs, but you want to talk about incremental margin and.
I can talk a little bit about your question on them on margins and David and also on the on technology I think we're quite bullish on technology I think that as you know on the last analyst day, We said and I think Cheryl and asked 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.
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 I mean, it's incredible what we can do in terms of reducing.
We do seeing accident costs and.
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 few years that our margins will improve absolutely and we've said that when we talked about this a few years ago that unfortunately and it.
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 I mean, it's it's.
Hi, fine for the rail industry to adopt technology and automation is also a high value for the rail industry to really define ESG.
And a much broader perspective and that we are very much focused on those two area automating.
Allergy and ESG, we beyond just the fuel efficiency.
And just and this is more of a follow up on the second question, but as you think about that rate of change or are we thinking that this starts to accelerate and the next two to three years or the next three to five I'm just trying to get a sense for where I should be directing and messages in terms of expectations on on how quickly that's coming on.
I think we're starting to see benefits coming in and 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 you actually can see but Rob has got some good examples on how we use the afib car and how we use the portal and.
And it's coming in and loud and loud and clear so stay tuned, but we're quite excited and quite bullish about it.
And so maybe simply said as Rob said earlier on Oct is plus with a five is very achievable at CN and despite the $20 billion Edwin that just Lai and was talking about on depreciation and.
Replenishment of bonus the team is capable of doing that.
Thank you David.
Thank you.
Your next question comes from the line of Steve Hansen with Raymond James Your line is open.
Yes, good evening guys.
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.
You've obviously got some contract business 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 I know you've spoken to some export opportunities and I'm, just trying to frame that and the context of non.
Not a segment that we seen a lot of growth and recently thanks.
Thank you Steve Good question and James as our expert and coal that we have a couple of puts and taken that 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.
The Tech deal I think we're all familiar with that April is going to be our go time for the tech deal and we should see a.
Barely.
Rapid ramp up to full volumes with that tech deal.
Part of that Tech deal with some significant investments we made in unlocking capacity on the north shore and Vancouver, and because we've made those investments now we are well positioned and move more grain and the north shore and more products and Northshore and looking at growing our volumes beyond just the coal business also when you look at U S. Coal U S. Coal is really going to be a significant.
A tailwind for CNS and 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 we've got tools.
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 a call on the CN network through 2021 year.
Thank you for the question.
And maybe.
And maybe while we're talking about bulk Ravi you want to talk about how are we doing this month and some of green.
Yes, as I mentioned, we set 10 straight monthly records all time monthly records in terms of moving Canadian grain.
January 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 coming which will help for.
Further to that but we're really good position and we continue to handle it.
Six days to go and we've 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 good afternoon.
Rob earlier you addressed.
And the cadence around bringing head count back on slower than volumes.
The term managing capacity and the excitement around volume, especially in the second half of the year has 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 TNT labor.
Continuing to bring it on and anticipation of a recovery and the business, but still at a slower pace and kind of wait to see the wait for the eyes on volume before you really move on bringing some of those costs back.
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 as we see the car car miles.
And train speed.
Improve that will also help in terms of.
Our car velocity and trains 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 up. So we are 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 say, we really haven't had a winter we've had.
Three straight days of nearly minus 40, and Manitoba, and Saskatchewan and and although we see some degradation and a minor way to some of those key metrics, we 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 Austin 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 to get recoup of the capital spend and.
On the accelerated tech investment.
Very good question Bryan So James Youll start and after that Keith If you could also a complement James.
Thank you, Brian let's talk about you 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.
And it's part because there's some yield initiatives, we have underway with new fleet longer trains more efficient trains.
And 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 on a train start a week and with the same amount of iron ore. So that's been successful also on the grain side of things I mean Green has just been and outstanding example.
How we can put a detailed focus on the business and get some really really good outcomes. The outcome, we're looking for years and moving more grain for our grain customers and this is a combination of deploying the 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 could have moved.
And it's the customer investments in country, and port infrastructure and allow us to run a 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.
And other example might be some seasonal pricing that we've put in place.
Q1 every year is a capacity constraint, so where we can we want to drive traffic and 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 sand side of the business. So.
These are all activities that are undergoing to create capacity. So that we can move more freight or create the opportunity to move the best the best paying freight where we have and that capacity levels.
It's pretty exciting time at <unk> as we embark on this.
<unk> focused on yield I would say.
And Keith Keith.
Yes.
Brian.
Our focused on yield and we're focused on price and we have a.
Lot of cross functional teams actually in the intermodal and and and.
Rob shop.
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 yield side.
Making sure that the.
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 rate gateways. We've moved some trains around some some stuff that was maybe and one gateway we've moved it to another gateway to densify that trained on.
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.
Thank you Brian.
Right. Thank you.
Your next question comes from the line of Tom <unk> with UBS. Your line is open.
And it will come.
Yes, Hi, JJ.
All right.
And I guess this 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 have a lot of potential for kind of leading the industry and Archie on growth for volume growth or at least being at the high end and your forecast is somewhat.
Muted given.
Easy comps at least and second quarter I understand the quality revenue, but is there.
Is there a capacity consideration, it's meaningful to or is there an element of it.
Yeah.
We can be there can be upside scenarios that are maybe likely year, maybe it's a little bit conservative on volume I guess I'm just surprised there isn't maybe up a base Keith it's stronger on the volume side. So I'm wondering if you could talk a little bit more about that.
Okay. So on so it's a very good question, maybe I'll take that one. So we are the conservative of Q1, we would like to CDI of Q1 to call and give you would like to CDI.
How the pandemic will evolve whether or not at some point.
We may have.
Number of employees and current team and the amount of fixed and capacity, even though net worked so far so good but.
It's I mean, we're and logged out and Montreal today.
They have a curfew overnight and so that's not necessarily your usual thing.
We are very confident that when the pandemic start 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 on the other side what are the industrial product 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 train we will and be sure. They all stay healthy and don't have too many of them and quarantine.
And.
So that we'll see.
And it takes so on the capacity side there is capacity at CN and Theres also a very conscious effort at CN to recognize capacity is precious capacity cost money and.
And now we'd like to see intermodal vessel coming to a port.
We wanted to be sure that.
They are free to price the price to pay, especially when it's business that.
It may not be there for 12 months from now because it's obviously coming from U S West coast Port out as well and.
And we wanted to share we protect capacity for propane going for west coast coal going into West coast, Gray and going through the West coast. So there is a mindset of.
Doing some arbitrage if you wish and to what we do first and what we do second long term business first.
And the business that may or may not be that 12 months from now.
We if we do it.
And we paid a higher price for a different price than normal contract business. So as we do all that.
Which is a bit of a new sport at CN because.
Let's face it our port business has become almost too good I mean, it's.
And it's.
And also he was imbalanced early days, because we basically have had lots of import and export which is not the most way too.
And you're running and balanced network.
Cost a little money.
So are we conservative ask us again in April.
Right. Okay. Thanks, Thanks for the perspective.
Thank you Tom.
Your next question comes from the line of Brandon and Glenn with Barclays. Your line is open.
Hey, good afternoon, everyone and thanks for taking my question. 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 markets. I think we saw another large contract and 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.
Just not to correct for you, but the large customer that youre talking about.
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. We have been working very hard on.
On that contract, it's not complete yet, but we will book.
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.
There is a reason why you saw our growth in Q4, and why you see the growth in Q1 being our industry, leading so we're satisfied with our products or services and.
And we love our network Thanks, Brian.
Thanks for the credit.
Yes.
Your next question comes from the line of Allison Landry with Credit Suisse. Your line is open.
Good afternoon that listen to me and good afternoon.
So I just wanted to ask about the potential for M&A and the short line space, We've obviously seen some activity and our recently and historically.
And it's been relatively active.
If you could maybe speak to any opportunities that might be and strategic fit first and that you've seen and then sort of typically.
As we think about the growth potential at Halifax, and and eastern Canada and and and.
Perhaps if you could comment on CSI for the acquisition of Panam and Thats, our DNA commercial operating needs there.
Benefit from thank you.
You want to talk about M&A activities or joint ventures.
Can talk overall, Alison 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 and Thats not our game for whatever can add to our network either extending our reach.
Or.
And that we can put more business on our network, we're always on the lookout and.
And I mean, we have.
And Liz that we're following up and nothing nothing really 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.
And Thats, where following up on that for sure and it and if it allows us to get to markets that 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.
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 then obviously, we can move very quickly on it.
So we have a small team that looks at that all the time and we don't wait for phone calls to come in we also make some outbound call and.
And we'll see what the future holds thank you Allison.
Thank you.
Your next question comes from the line of <unk> majors.
And <unk> with Susquehanna Your line is open.
Hello, VESCO and thanks for good.
Good afternoon, and thanks for taking my question.
And extend sort of 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 every other class one rail has been on in a steady state of running their version of the Hunter here.
For some operating principles that underpin what you do at CN and operating ratios that reflects that.
And the industry pivots from this operational realignment to maybe a broader and more consistent growth strategy does this open up some modal share opportunities for seeing and industry as a whole for say the next three years versus the last three just strategically how do you think about that thanks.
Thank you so very good question and it's certainly does so.
And Thats one of the reason when we look on our Capex and when we look 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 automate 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 in the supply chain like port operators or shipping line.
And for a little company so it definitely.
The CN story long term is one of growth profitable growth profitable growth from an existing accounts and profitable growth from new accounts and some of those new accounts My company for competition, but they might very well also come from supply chain that wind up part of it today, but the reality is at CN and at least at CN, we believe that investing and <unk>.
RG that relates to the supply chain experience people will be able to track their product for me. This is Ed and.
And not just at CN, but when theyre on the coming to us or buy a port or going back to report is very much part of hall.
The long term future of the company is so if we do joint venture on acquisition some of them might be technology related for some of them might be.
Partners like port operators and whatnot, so the evolution of <unk> gets into.
Digitizing the scheduled railroading, but also into bringing an element of service and the scheduled railroading. That's also a closer to what the customers expect which means that its visibility and control to their freight beyond the rail before the rail and after the rail as well.
We actually have a group that's what he's working on that very actively.
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 on.
Automation of rail rail operation and you've got on one is very strong and turbo, but automating the supply chain and the supply chain services that we offer to our customer.
So quick question bathroom, because it really talks about the future of CN and the future of the industry. Thank you.
Thank you.
And we have time for question and Paul.
Slide <unk>.
Thank you this and Simon I would like to turn the meeting back over to yourself.
Thank you. Thank you for all of you to joining us today and as usual we wanted to we wanted to have as many of you to ask questions and then making good use of your time. So thank you for your time and then 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.
Your participation. Thank you and have a great day.
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