Q3 2021 Canadian National Railway Co Earnings Call
Good afternoon, My name is Charlie and I will be your operator today welcome to Cn's third quarter.
2021 financial and operating results conference call. All participants are now in a listen only mode. After the Speakers' remarks, there will be a question and answer session I would now like to turn the call back to Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Butcher.
Well, thank you Charlie and good afternoon.
One and thank you for joining us for Cn's third quarter, 2021 financial and operating results conference call.
Before we begin I'd like to draw your attention to the forward looking statements and additional legal information available at the beginning of the presentation.
As a reminder, today's conference call contains.
Everyone projections and other forward looking statements within the meaning of the U S and Canadian Securities laws.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements.
And are more fully described in our cautionary statement.
And Sir regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct the Q&A session I do want to remind you to please limit yourself to one question. The IR team will be available after the call for any follow up questions.
Joining us on the call today are J J to it our president and chief.
They've been they've officer, just like all our executive Vice President and Chief Financial Officer, Rob Reilly, Our executive Vice President and Chief Operating Officer, James Cairns, Our senior Vice President rail centric supply chain, Helen pork, our senior Vice President and Chief strategy Officer, and finally, Keith Reardon.
Exactly our senior Vice President consumer products supply chain. It is now my pleasure to turn the call over to J J.
Well, thank you Paul and good evening everyone.
Today, we will do our prepared statement in two parts just lane I will cover the highlights of the third quarter, we will keep that section type and.
And then the team will cover the progress on our September 17 action plan.
Well, let's first start with the highlights of Q3 and I'm on page five.
All in on a adjusted basis, the base business, producing adjusted diluted EPS growth of 10%.
Adjusted operating ratio of 59.
In Europe, the Sep and free cash flow for the first nine months of just over $2 billion.
The operating ratio started the high in July resulting from the two week loss of our CN mainline reported Vancouver, but improve afterwards in August and September to an adjusted 59.0 or as the.
<unk> for the quarter.
Regarding pricing trend James Karen will provide evidence of solid pricing at CN in the last couple of quarters regarding head count of the 1050 that we mentioned in our September 17 conference call about 70% to 75% of that completed.
The average yen, we have a long term strategy and we railroad for all key stakeholders, we make sure. The railroad has enough infrastructure to support the economy, where railroad to reduce carbon emission where railroad to support our customers who they succeed in growing their market where railroad to produce good return for our shareholders.
Holders and we're railroad to create an engaging and safe workplace for our employees I will now turn it over to <unk>, who will walk us through the quarter.
Well. Thank you J J that my comments will start on page seven of the presentation, which will provide more visibility on our solid third quarter performance.
Revenues for the quarter.
At 5% to $3 $6 billion, despite volumes on an RPM basis being down, 1%, which were impacted by forest fires in July and supply chain constraints throughout the quarter we.
We delivered pricing well above rail inflation and continue to focus on yield management optimizing CMS precious network.
We're up adjusted.
Adjusted net income was 1 billion 80, with adjusted diluted EPS of $1 52, both up 10% versus last year.
Other income was down by around $30 million versus last year due to a mark to market loss on an equity investment in autonomous driving technology.
Our adjusted results exclude.
Various non recurring items related to the casey's transaction costs, including the $700 million U S. The break fee from Tcs are adjusted results also exclude a workforce reduction provision as well as advisory costs related to shareholder matters.
Turning to page eight let me highlight a few of our key.
<unk> expense categories expressed on a constant currency basis.
Labor and fringe benefit expense was up 12% versus last year.
This was mostly driven by increased wages due to a 5% higher average head count and a workforce reduction provision, partly offset by higher capital credits from more capital work in the quarter.
Excluding the workforce reduction provision labor and fringe benefits was up only 6%.
On a sequential basis at the end of quarter head count was down 3% compared to the end of Q2.
Fuel expense was up 40% driven by a nearly 50% increase in price, partly offset by continued improvement in fuel.
Full efficiency.
This quarter saw a significant improvement in equipment rents with a 31% decrease versus last year, driven by lower car hire expense, mostly due to improved online productivity and lower volumes.
Now moving to cash on page nine we generated free cash flow of over $2 billion.
<unk> September around $50 million lower than 2020, mainly from lower net cash from operating activities due to higher cash taxes.
We have resumed our share buybacks and plan to complete our $1 $5 billion program by the end of January 2022.
Moving on to page 10, we are reaffirming.
And full year financial outlook and expect to deliver about 10% adjusted diluted EPS growth versus 2020.
While we are now assuming volume growth in terms of our Tms to be in the low single digit range for the year. We are executing on our strategic plan that has started delivering benefits in Q4.
<unk> are we still expect to deliver free cash flow in the range of three to $3 3 billion, which will drive further improvement in free cash flow conversion.
I will now turn the call back to you J J. Thank you just sleep and before I get into the progress of our September 17 action plan as you already read from the press release.
Retiring effective as of the end of January 2022 charts later time as his successor has been appointed to ensure a flawless transition.
Im not going anywhere and I will deliver with the team here today around me on the fourth quarter results and to be sure that we have a successful set up to the 2022 business plan.
I am the board is also as you read the press release is appointed a search committee for a world class CEO the detail on the Board Committee that we will do so is also in the press release.
Back to the business.
On September 17, we announced the next step in our strategy to redefine railroading for the next generation.
<unk>.
CN will execute on our plan delivery high quality service to customers and generate enhanced and sustainable return for all shareholders.
Our long term goal remains to consistently deliver double digit EPS growth I.
I would like to begin by recapping our 2000.
<unk> two objective.
We are targeting $700 million of additional operating income for next year we.
We intend to use a balanced approach, including optimizing railroad productivity and labor costs.
We also expect to adjust our capital spend to 17% of revenue.
We can do this without compromising our absolute commitment to safety and customer service because of the current good condition of our network anybody putting to good use I think largely investment we made in recent years.
Another major component of our plan is lowering our operating ratio starting.
57% in 2022.
Shaving, 57% next year, we will unlock significant near term value, while maintaining and balancing our commitment to customer service and safety.
We will achieve it with operational excellence rationalizing our cost structure.
<unk> with ice and finally volume when grain returned late next year.
We are assessing opportunities to go lower beyond 2022, but responsibly and we will be let's say more to that in the new year.
We are targeting EPS growth in the range of 20% return on investment.
From a range of 15% and about $4 billion of free cash flow for 2022.
I am pleased with the quick progress, thus far and the initial positive feedback received from shareholders and stakeholders both.
I will now turn it back to the team who will provide an update on how we started to implement the key.
<unk> captive that will deliver a result in Q4 and in 2022.
Display.
Okay on page 13, we have already made considerable progress on our total operating income improvement of $700 million for 2022 for the $250 million in labor, we have already completed around 70.
Initially the extent of the reductions identified on our September 17th call, we will be substantially complete by the end of the year, which will provide a full year impact of these reductions in 2022.
For the $300 million in purchased services and materials and other items, we have already secured around $100 million of initiatives in the past month.
Of which a few examples include the reduction of contractors through the entire company both in the field and at headquarters a reduction of <unk>.
Applications aggressively storing and retiring older locomotives, which will reduce purchase services and material costs associated with their maintenance.
Finally, we will deliver.
<unk> five $150 million in additional price initiatives as we continue to enhance our yield management strategy.
I'll now turn it over to Rob Alright. Thank you just one as stated on September 17th operational excellence, our commitment to safety and service to our customers have been and will continue to be cornerstones.
<unk> energy.
All of our core operating and safety metrics have improved over the past couple of years, leading to greater efficiencies and improve customer service we.
We continue to build on our positive momentum through our strategic initiatives.
Big part of our operational excellence is an operating the railroad sustainably our.
Our sufficiency for Q3 was an all time record.
Our position as the industry leader from a fuel efficiency perspective, underscores our commitment and enhances our operating performance and profitability.
<unk> industry leadership in sustainability and success and operational excellence have been achieved through a continued.
Our fuel use and concerted effort by the team.
We are on track to deliver all time best in productivity in our operations fuel efficiency and most importantly, the safety of our employees, we are running a safe efficient and sustainable operation that consistently meets the needs of our customers.
I'll now turn it over to.
Contingent aims to outline <unk> growth vision Keith.
Thanks, Rob current worldwide port congestion, especially on the U S. West Coast highlights the CN network intermodal advantage three coast 13 proven on congested port gateways, several that are meaningfully expanding their capacity.
Keith and blind single owner access from East coast to the U S. Midwest links the efficient gateways to where the markets are and where they will be our inland terminal network is well established yet continually improving.
The art terminal and container asset technology backed investments are creating capacity and efficiency.
Single, improving safety and improving the customer experience. The intermodal story for CN is strong with decades of opportunities ahead.
James I believe you also have some great long term carload markets that are developing yes. Thanks, Keith I've never been more excited about our long term carload growth potential I am today, our unique geographic.
<unk>, an exclusive access to the port of Prince Rupert will help us be a leader in carload growth over the next several years.
Canadian grain recovery in Q4, 2022 will be followed by emerging new renewable fuels and refined petroleum products projects that will propel our growth through 2023.
What I am most enthusiastic.
<unk> <unk>, our new Green energy carloads related to Alberta is massive growth in hydrogen energy projects evidenced by the slew of recent announcements around the Alberta industrial Heartland.
Hydrogen related carloads have the potential to be of the scale of crude by rail at its peak, but with long term rate ability.
Our end to end supply chain.
<unk> that helped us create new export capabilities for propane is easily replicated for blue ammonia and other hydrogen derived energy carloads, we move to the next slide.
We routinely get asked questions about revenue per RPM. Our view is that this measure is a better proxy for mix than it is for price that.
Train model since December 2018, when we started our customer centric journey under <unk> leadership.
CN has seen the fastest growth and revenue per RPM for all class ones to the end of Q2 this year.
We believe a better proxy for price as well price.
As you've heard us say before.
That said <unk> price ahead of railway cost inflation and.
In the last five years, our corporate same store price has been on average nearly 2% greater than rail cost inflation.
We have been preparing for accelerating railway cost inflation by sequentially, increasing our price each quarter since Q4 2020.
Our various.
Incremental capacity auction programs provide real insight into the market rate for our valuable capacity, allowing us to smartly price to meet the market without undue volume risk.
Now ill turn it back to J J.
Thank you. Thank you James Thank you Keith Thank you Robyn just link.
Looking to looking into 2000.
Or we can try and beyond the CN team is focused on delivering solid results and cedar Fortunately seats referred to improve our operating operating ratio as.
As we continue to prioritize safety railroading for customers railroading to reduce carbon emission a balanced approach.
The leadership team is it clear.
101, where I'll focus to be a growth company and produce financial value over the short and long term <unk> future is bright our network is great.
Mission is to build the premier way away of the 20 <unk> century investing in technology investing in capacity delivering service that I track.
More customers to the rail network in Peru.
<unk> safety reduce carbon emission create the essential capacity for the economy and reduce our costs.
Just at CN pioneered the industry focus on efficiency.
We are on our way as well.
Path to now be well positioned to lead the industry.
<unk> X transformation of the modern digital scheduled railroad too.
To conclude CN is taking a balanced approach.
We are investing in the success of our customers' success of our workforce and communities and as well as returns for our shareholders. We will now turn it back to the question Charlie.
The name Keith We will now begin with the question and answer session to ask a question you will need to press star one on your telephone and wait for your name to be announced two rigs while your question right.
Yes.
Previously mentioned, we ask you to kindly limit your question to one.
The first question comes.
The line of Ken <unk> with Bank of America. Please go ahead.
Good afternoon, Ken Hey, good afternoon.
J J, maybe I can start with.
One question, but I guess youre announcing your retirement, maybe your thoughts on the outlook here.
You talk about decelerating growth.
Maybe talk about I know Keith and.
James talked about kind of the leaders of that but talk about your outlook on the economy here and then your thoughts as you step away.
Yes, so where we are I think you can where we're at right now I think when the world of increasing inflation, that's why we're driving price where in the world.
Volume is sort of.
It's positive in some places not so positive in other places.
So therefore, we have to adapt to that and I think we also in a world where it's time for us to be ready setting for the future Thats why there is such a focus on.
The railroad a future we call that DSO leveraging technology use.
<unk> wavelength.
And making sure we're relevant to our customers all of them big and small and creating value. So I think the rail industry.
Huge opportunity used to be more relevant to the supply chain working with ecosystem of the port, making the best mousetrap to attract more vessel.
And it also as unfortunately need to attract more freight from the highway.
That's what our railroad it doesn't come in at the same operating ratio I think it's well understood by all but it's very much part of the long term success of the rail industry is competing with other mode.
And doing so in a way that's relevant to customers.
So.
<unk> freight.
They're the ones, who decided where they spend their money.
So I think really.
The rail industry has a great future it just needs to remind that the basic.
You got to have as many customers as you work to make these rail asset as valuable as possible.
Thank.
Tumors. Thanks.
Okay.
Your next question comes from the line of Walter.
<unk> with RBC capital markets. Please go ahead.
Thanks, very much good afternoon, everyone.
Good afternoon.
So I guess.
Obviously, some big news here with the announcement.
And when I look at what.
What changes you're putting forward obviously with your strategic plan. These changes now.
At the board level the management it seems to be fairly we're closer aligned to.
What <unk> is asking for I guess my question is.
Is.
<unk> and room for an engagement here now following these announcements do you think that thats possible is that going to be something you're going to be looking for or is this is this more of an independent approach that you plan on taking with regards to the to the CEO search and proceeding as planned with the March 'twenty.
Is there.
Meeting.
Thank you Walter and if I may say I think it's maybe the other way around these may be PCI is getting closer to what <unk> long term strategy is.
Here more comment about first of all when they ran out.
Press release earlier this week it was a bit of a vague presentation, but Nokia.
I get.
In the press release is not it is not a plan in itself, but they were talking about the things like long term.
Emission word customers came up more balance and I think regardless of.
Regarding further engagement <unk> specialties, particularly for that I'll, let the.
The board engaged with with with.
The actavis, but the strategy that we have used very very clear right. We want to balance for our railroad stakeholders, we want to be a growth company, while it'd be a safe company, we want to be a company who has enough capacity. So that the wind demand surge of peak and we've seen this in the past.
We don't let the economy has trended.
We create an environment, where our industry is a successful nut because it's a duopoly or three drop if you win in North America, what's the second successful because more and more customers wanted to do business with us and more and more customers wants to use our port.
Choice.
More and more customers wants to leave the highway and enjoying our respective intermodal network. So I think that's long term.
The future is and we talked about technology often.
Needs to happen, we need to have technology that makes the railroad safer that's more about.
Buy side technology that create capacity without necessarily having to lay down more track and technology also.
Makes the service to our customers, who all by supply chain at all by rail service. They buy a combination of transportation mode, and therefore, having technology that makes it easier for them to.
To track and trace.
The maintenance maintain your inventory that they have.
It's maybe a little more sophisticated and how low can you go on your operating ratio.
Appreciate the color thanks, Peter Thank.
Thank you thank you Walter.
Your next question comes from the line Shirley <unk> with TD Securities. Please go ahead.
Sharon.
Thanks, very much good afternoon.
In terms of the pricing environment could you speak to what the spread versus inflation looks like.
Today, and how much of the book of business has been repriced in this tight freight environment and how much is left to go through year end.
Since early 2022.
Thank you James will cover that.
Pricing expert.
So thanks for the question Cherilyn, So very interesting we've been preparing for.
Wrapping up of inflation here since Q4 of 2020, so we've been very careful with a lot of our contract renewals not to go out too far.
In an uncertain environment, we've got a pretty big chunk of our business that's going to be available for repricing still Q4, this year and into next year.
I don't know the exact number but somewhere in the range of about 35% to 40% of our entire book of business that we can reprice. So.
Really excited about that and we'll make sure that we're pricing well.
Because it was a railway cost inflation and to date. This year, we have been just over 5% on our same store price. So it's bearing bearing out that we were able to secure these price increases because of the customers realize they they.
They need the capacity that we have increasingly as we move into 2022 that capacity is going to have.
<unk> value and creating that level of certainty for customers with a contract in hand with CN is worth something to our customers. So we'll continue on that path will be pricing ahead of railway cost inflation I think a good market somewhere between one five and 2% ahead of railway cost inflation as where we think we're going to be balance of this year and into 2020.
More thanks for the question Cherilyn.
Sure.
Thank you.
Your next question comes from the line of David Bain.
Bernstein. Please go ahead.
Hey, good afternoon, guys. Thanks, a lot for taking the time hey.
Hey, Keith could you maybe talk a little bit more about what kind of tailwind we can.
Two on international intermodal pricing, given where steamship rates that headed over the last sort of 12 to 18 months and the timing for when some of your international intermodal contracts may come up.
Go ahead Keith.
Thanks, David.
Price has a lot of different.
Aspects to it I'll start off.
Expense same store price and then I'll talk about some other things that we're doing but at the same store pricing you're right. We have had some contracts come up we will continue to have contracts come up it happens all the time.
In these last two contracts that came up big ones.
We had the opportunity to look at the book of business.
With our actually.
Scale our business. There is some business that we did not think was compensatory to the workload that we put into it. So we jettison some of that business and we didn't do it in a adverse adversarial manner, we worked with our customers and we said you know what we'd rather focus on these area and and we provide.
<unk> services to you so.
We will continue to do more of that we started in our upscale and our upscaling as James mentioned.
We also are looking at taking our latent capacity that's been created by some of these supply chain issues and we're selling that at premium rates.
Working with our customers so.
Did those seeking every opportunity to talk to our customers to figure out what they want to accomplish and then we're creating value for them and were you surfing that value for <unk> as well.
Thank you David.
So David Thanks, Thanks for the color J J, if I could sneak one more in here is there a timeline for the boards.
Each process.
We are taking.
So the board will.
The board is looking for the best of the best and they wanted to take the time to make sure that we find and determined the best of the best for the next generation of <unk>. So they are not on the clock. It doesn't mean that they will go slowly.
Work.
They want to.
So thats a very important task by the same time.
We're not going to put out a specific time that I wish. This is will be done as I said in my opening comments I think it's also in the press release.
I am staying till the end of January or whenever it's required to do the smooth transition and at this point, we're looking for the quality and sometime quality it takes.
All the time so.
Thank you.
You back some of what said in the press release it.
It was very specifically.
Great. Thank you thank.
Thank you.
Your next question comes from the line of core net.
With Scotiabank. Please go ahead.
Good afternoon, and thanks for taking my question. So I just wanted to understand.
The global supply chain disruptions, we are seeing right now.
How would the streamlined shipping customers you have.
They're thinking about the whole dynamics are they looking to incrementally look to Canadian West coast ports specialty brands.
Prince Rupert are theyre looking more sort of pieced together.
Ethan just away from long branch.
And Ali.
On top of it.
So maybe cannot I can start and Keith.
A lot of color that's his space, but one of the comment made earlier I'm not sure. If it was understood that as some of the business.
We decided to not renew some of delayed that created capacity at Rupert capacity Rupert was sold out that created the capacity at Rupert So now Keith and his team have been able to do some new vessel.
Have you ever heard about these pendulum vessel smaller vessel.
Some of the.
Retailers in North America, now going out and chartered himself. So the only pickup freight at a few ports in Asia and the drop it off at.
100, <unk> in North America, and they want to avoid at all cost any long beach or any places where vessel I believe so for us to be able to do this.
And do.
This had a premium price it has to be with other customers. When we're not on the contract and also do this at the Port Rupert, which now has some some latent capacity because some of the business.
We and the customer.
We do not see eye to eye on the yield of it we've actually let it go I don't know if you want to talk about.
The future yes.
Keith and how many more months or quarters. This may last yes.
Just to point out.
Supply chain disruptions and what's happening to these vessels strings are what's causing some of this transitory volume issues that you've seen for Rupert and Vancouver.
<unk> down for us so that.
That was the that was the.
A factor that got us.
Taking a page out of our playbook to go back to some of these customers as JJ pointed out I will also say that year over year, we've seen the east coast ports that we service as well as the goes the Gulf Coast.
Ports that we service, we're up 20% over last year and Thats the diversification approach by the by the by the customers not only the not only the steamship lines, but the people that are in the box, they're saying I want another gateway and that's why the CN network is set up so great for that we've got three coasts.
Post it three different ways that they can get in 13 different ports. So that's why we're so happy that we.
We have this network that's why we're so bullish on the future.
Thank you Cory.
Thank you.
Your next question comes from the line, Jason <unk> with Cowen.
Please go ahead.
Well. Thank you operator, I wanted to talk a little bit about the head count reductions you said, you're about 75% through that did all of those.
Come in for Q here early on and what's the what's the mix sort of between the U S and Canada.
Those reductions.
So I was.
Just saying we'll cover that just so that you know we're extremely focused on executing on that Jason and we actually track this daily to a great detail. So.
Yeah.
Yes, Jason I'll give you a bit of color on the mix of head count as.
We said, we we have about 75% out of the $10 50 that we announced on September 17th I would tell you close to 600.
Is the management and close to 200 call. It 190 is union.
I would say.
The.
Under within share of it is in Canada.
And that's what I would tell you between Canada, and the U S, but I'm, giving you the color here on on the management versus Union, Yes, I know, Jason that people that typically tracking head count in the U S for class one railroad.
Most of what we've talked about he is absolutely the Canadian side.
So you'll see you won't see that head count for our U S network, because most of our management position on the Canadian side and most of the.
The reduction that we've done.
Are doing are youll find them on the Canadian head count in the U S head count right.
Help.
No.
I'm, sorry, I might have missed it did you say they were most of that was done by the 2017.
Most have done what they were done after the 2017 based on the 17th we announced in Southern then and then after that we saw for rollout and 70% to 75% of that is done that as we speak as we speak this is as of today.
I'll take its about 75.
5% of the $10 50 that are done so that will impact our fourth quarter results.
Daniel current results.
Gentlemen, I appreciate the time and color as always thanks.
Thank you Jason.
Your next question comes from the line of Brandon <unk> with Barclays. Please go ahead.
Hey, good.
Afternoon, everyone and J J just wanted technologies quite an extensive career at CN. So best of luck on the other end, but I'll get in queue.
Would be great to get some perspective from you because obviously you were part of a team earlier when <unk> was viewed as really best in class and I guess what are you looking for your.
The person that takes over for you what do you think they need to get right here to get back into the driver's seat of being the best railroad or at least the best viewed railroad in North America.
Thank you Brandon, yes join CN back in.
Back in the month of May of 1996, which was about six months after <unk> got to privatize I think.
Bucket <unk> is to be innovative.
To lead the industry to take risk and to do things that maybe early days early years understood or accepted by others. But this is what scheduled railroading was all about a lot of them they say or the time. It was not going to work. The IPO was a big big Big.
The land a lot of people at that time, especially Canadian investors thought it was not going to work.
And then where we're at today as we're looking into the future not the past CN as nuts, while it would be in 2025, what it was in 2010.
<unk> is looking to be what 20.
But the future looked like so we.
Thing that will be a growth company I think we want somebody who is focused on growth somebody was focusing on.
Bringing technology into the company somebody who is focusing on.
Having a workforce that presents today society, so bringing talent from where it is.
Gender diversity inclusion.
Workplace is fit what the young people or the people in <unk> are attractive for et cetera, et cetera. So I think the future is where you want to be.
He said you want to go with your heart. The puck is going to be next what not where the puck was in 2010 of 2000.
We're looking at <unk>. So I think Thats really when you look fourth CEO in early 2022, you want if you want to have somebody who can actually get the company to where it needs to be in the 2025 I don't know if that helps.
It does J&J. Thank you. Thank you Brandon.
Sure.
Fishing comes from the line of Jon Chappell with Evercore. Please go ahead.
Thank you good afternoon.
Julien we've talked about the cost initiatives and the pricing strategy as part of the broader 2022.
Strategic plan no comments on the reviews of some of the noncore businesses.
Next going to be the trucking units specifically how are those reviews gone in or are you still on plan for.
The impact that those are expected to have on hitting the targets for next year.
So John the Helen Helen Cork is actually working there was five very specific issue will give you the color you need Illinois, yes. Thanks, Thanks, John on our non rail assets.
Citizen review, we've commenced a sale process for the Great Lakes fleet of vessels and we have a number of interested buyers on that.
This is a profitable business that we believe that we do not need to earn the vessels to protect the revenues and maintain a stable supply chain for our customers.
With regards to transit it is accretive to EPS and we've.
<unk> doubled the intermodal business of transit since the acquisition.
The profitability of the core <unk> business is in line with best in class for similar types of assets and we're still working through the options to potentially reduce our ownership interest while maintaining and growing the rail revenues there.
With that we will keep investors posted on this but our message remains that we are a great company you've heard it numerous times today and we will continue to find ways through acquisitions and partnerships that will drive more business to our network over time. Thanks for the question John Thank.
Thank you. Thank you Joe.
Yes.
Your next question comes from the lineup in <unk> with Deutsche Bank. Please go ahead.
Yes.
Thanks JJ.
Best wishes.
Remarkable and successful career, so wish you wish you the best.
Whatever next you do.
I wanted to follow up on Brandon's.
And your commentary about the new CEO.
There's obviously another.
Another world class executives on the sideline so to speak that GCI is bringing forward and I just want to make sure.
We're not reading the search these searches can be long it can be very expensive.
Next question have you guys already considered just other candidates that GCI is bringing forward and you feel like that's not the right thing.
<unk> wants to go what's the strategy around doing an expensive long search when you do have someone that's tried and tested.
Willing to take over the range so to speak.
Yeah. So thanks for the question. This is reported question, but the board will consider all candidates.
Inside the company outside the company male and female and there is a search meaning that we will be very total and be sure that the next person who will replace me as a person that can really carry the CNS.
<unk> on a go forward basis so.
That takes a little time and that takes a very specific process.
Committed to the process that the board has set up.
A CEO search committee, which is going to be led by is led by Sean <unk> Bruder shining as our chair of the governance Committee.
And with her we have Robert Phillips, who is the retired chief Executive Officer.
Our chairman of the British.
VCR and then you also have Kevin Lynch and as well as Justin Howell.
We joined the board from from Cascade. So this group will be doing reviewing what is.
<unk> got the profile for the purity of the peers are at CN. They will look for all candidate known and unknown.
The search will remain confidential, we won't talk about candidate before the committee has a recommendation to make to the board and the whole board of CN eventually.
As it did in the past will weigh in in a final.
Decisions so.
We know there is some candidate out there at least one.
But I think the world is bigger than that in before the board make a decision you want to do it has to be very very total.
Okay. Okay that makes sense. Thank you very much I appreciate it. Thank you. Thank you.
Your next question comes from the line.
What is Alison <unk> Jpmorgan. Please go ahead.
Hey, good afternoon, thanks for taking the question.
Come back to technology, and what sort of benefits you think youre going to get from that across the network.
Maybe some of the injury ratios the safety fuel efficiency capacity.
Lineup, we've heard about some of these initiatives for a number of years now so I don't know if were on the tipping point of them actually.
Being able to generate some benefits along those lines, maybe perhaps helping reduce the head count. So I just wanted to understand like what type of benefits you're expecting in that in the plan for 2022, specifically as it relates to some of these technology initiatives.
Yeah. So Rob is probably the closest to that most of the technology that we deploy right.
As in the space of operation Mechanical Rob you want to talk about technology, and Youll space, Yes, absolutely and thanks for the question. So probably the Best example, we have right now or is there Thomas track inspection cars. We now have 10 of those that are running from coast.
The coast covering our core main and some subdivisions you are covering 15 to 20 times the previous inspection, that's really given us real time information as we see it today and that's allowing us to make better decisions really when you look at our Capex for next year, a big part of that is based on using that technology.
Co, especially when it comes down to how we replace ties in our undercutting that that's a big part of our basic maintenance. So we are seeing those those results. When you talk about fuel efficiency. We continue to raise the bar and we are the industry leader just in the last two years just from our initiatives alone we saved $75 million just from those.
This creatives.
Excluding fuel price in consumption, so really really good work, we're continuing to see it just I don't know if you want to mention anything regarding the actual dollars for next year, but.
We are seeing the benefits.
No I think I think in terms of dollars as you remember Brian we.
We're shooting for a range of 2% to $400 million I think that we slowed down a little bit in 2020 because of Covid as you can imagine, but if you account for.
For 2022, and 2023, I think we will be in the high range of those benefits and we're continuing to track those.
And Asia closely so quite bullish about technology and maybe technology also has a big part of our future on the commercial side I don't know.
Helen or Keith wants to talk about some of the stuff that we do technology wise.
Is really aimed to attract more business will make business more sticky on the CN.
I'll start Helen but.
We're actually deploying some technologies now at our intermodal terminals that are improving the efficiency of the terminal the capacity of the terminal and the safety of the terminal.
And thats going very very well, it's enabling us to do more business through the terminals.
Creating a better customer experience for our trucks they come in.
The terminal.
And we have many more of those initiatives that are underway.
But how long you've got a few no okay.
Brian with that well. Thank you. Thank you Brian I. Appreciate it then best of luck T J J. Thank.
Thank you.
And Alex question comes from the line of <unk> with <unk> Securities. Please go ahead Sir.
Yes, yes, good afternoon, everyone and best wishes J J on the next steps.
With respect to the supply chain issues could you maybe provide some color on the business segments that are impacted.
Yes, the most and wetter.
It should become a tailwind.
Going into 2022.
This becomes better.
Maybe I can start but definitely when you look at the fourth business.
Business is somewhat down because.
Things on the Ocean are not.
Working the way they should so we're turning this into a positive that we keep described earlier so now that we have some capacity Rupert.
That on paper.
Now going to be available. He can do so now it takes some spud business Shuttle shuttle service pendulum service with only Rupert is the only protocol on the.
The North American side and on automotive I think everybody knows the story. The hold is somewhat of the industry is struggling to get chips, which mean that.
You and I are probably going to be deferring.
Purchase of a new car to next year, when we have more choice of brand in color and EM.
That's going to be a story for 2022.
<unk>.
Do you want to add James to what's happening in <unk>.
Carloads I would say the week out layer, we have as Canadian grain I think everybody knows that story.
10 weeks as current grain crop, we're down over one 5 million tonnes. That's bad news the good news is.
We're in a very unique position in that we have some strong tailwind with coal.
I know, we get potential of two coal plants reopening on our network, we get the full year effect of the.
Teck deal that's going to drive us through for at least the first half of about 2022.
All in we expect that coal is going to make up almost half of that gap, we have with the Canadian grain crop and then of course, the grain crop gets reset Q4 next year and we've got.
I hope so if you think about coming out of 2022, we've got some strong momentum with a recovery in grain through end of 2022 into 2023, and then we've got some significant carload growth projects related to.
New crush plants are new new.
New activity around renewable fuels.
Some various forward 2024 and beyond that's when we start seeing the <unk>.
<unk> growth in carloads related to the hydrogen economy, all around Alberta, and I got to tell you like I said in my prepared remarks. This could be big this could be of the scale of crude by rail, but this is going to be long term ratable carloads that move by rail.
<unk> non rail when it's convenient but rail all the time, so it's a very exciting prospects for the future. So thank you very much carloads from Alberta to the West coast by a roofer to Vancouver and there is also a positive story on iron ore export yen is doing iron ore exports.
The golf and then we have a trial over Rupert.
And our Costar with CN is all export either via the U S. Gulf of out of the Port of Prince Rupert. Thank you Ben.
Your next question comes from the line of targeting <unk>.
I agree with Golden Goldman Sachs. Please go ahead.
Good afternoon, Jordan afternoon.
Yes.
I know a lot of the focus always has an operating ratio of 57% target next year, but sort of thinking beyond that non operating ratio, but sort of.
Given the customer centric David that you had done.
Done.
What's the update and thoughts around the longer term revenue projections that you guys not necessarily next year, but sort of beyond that.
Yes.
Maybe we're at the optimal IRR, but how do you think about the revenue growth long term.
Thank you for the question it's also find it.
Refreshing way to look at railroading operating ratio is a key kpis, but so byproduct.
Of the business, so we're focusing on growth.
<unk> is looking to.
More volume on the railroad it makes the railroad more profitable more viable when you have more freight on it.
Most of the market freight so we're a growth company, we want to railroad for our customers. So we need to have a customer centricity mindset and culture at CN to do that as well as an area where you can attract freight on the railroad.
Bring board business is another area, where we compete with other railroad network to bring business on the CN.
And James mentioned on the carload side now for us to attract companies like <unk> for example, we announced recently to more grain elevators.
<unk> hundred 50 cars being built on our railroad.
Because they like the way we're railroad for them as much as we railroad for our shareholders. So all these things really are that's the wave the futures to to use a network, but what are you really this is meant to be to move a lot of rate and to be an enabler of the economy and retroact people like <unk> or Dow chemical.
To make major investments on our line or within our line.
With the Canadian Inter switching is an example, so I think these are the things that really are.
What DSR is all about.
User network, because it's very fuel efficient lower carbon emission.
Safer.
Nickel stuff on the highway.
And use it for all it has the potential to be has to be a big in the neighborhood of the economy.
And participate in what's good to here in North America.
Thank you.
Your next question comes from the line of Scott Group.
<unk> research your line.
Hey, Thanks afternoon guys.
J J you made some comments at the beginning of the call about July versus September operating ratio and maybe if you can just get some color there and then longer term it sounds like maybe there.
A little bit of a change in from the September call. It as the business grows.
Past 'twenty two that there should be further margin improvement, maybe just a little color there and how youre thinking about operating leverage longer term.
Okay. Thank you Scott so is that saying that you might come in and that's important to clarify.
Or is it.
Lowering the operating ratio start with 57% in 2022, and we're not seeing 57% at the end of it but we say 50 57 in 2022, and we're confident where they can deliver against that is one way through railroad with balance is one way to.
Make sure that we create something in.
That all stakeholders users and shareholders long term short term and making sure we don't leave the economy behind.
For whatever reason the demand for trade specification, especially in Canada was going to surge back at some point in the future. So it's not about how low we are capable to go and how fast we get to that it's more about harlow.
So should we go and over what period of time, but starting with 57 in 2022 potentially some premier improvement beyond that let US go back to the trade here back in the early in the new year and volume obviously is.
As a as an important point.
I mean as much as a Canadian.
For grain crop right now is a huge disappointment because we are all set up for it we have the capacity to move it but it's not at the rendezvous.
We are planning for an average crop.
For late next year.
And therefore growth revenue ton mile growth will be back at CN.
This year I think.
Canadian grain was going to be normal we would have James how much GPM growth next year, 6%, 6%, so at 6%, but by the time you put in grain the fact the crops not there so.
It's a growth story.
And definitely 57, we believe is where we should go next year.
One is large.
Capable of going but it's more about where we should go in it's tough with the 757 in 2022 and after that we will see more to come in the <unk>.
<unk>, earning call.
Okay.
Thank you Scott.
Thank you.
Oh, sorry, Yes, you had a question about August.
In July so maybe I think on that point, Rob we'd be in better position to talk about sort of the movement in our overall kind of a month to month and what happened here in July at CN, Yes, Scott, even though we don't talk about or in terms of months. If you just if we look at June and where we're at headed into July of course, we lost the bridge right at the.
Beginning of July for two weeks and then that was followed by a ministerial order. So there is no doubt that july's.
Performance impacted the quarter, but if you look at June to July Theres, nearly a 10 point swing in or and the same thing when you look at September to July so hopefully.
It gives you a little bit of color of what we're looking at there.
July was quite challenging.
Solid June.
And then we had we lost the mainline and all that goes on with it.
Thank you.
Your next question comes from the line of Tom Lately.
UBS. Please go ahead.
Hi, Todd.
Yes, good afternoon.
T J I had one that's kind of a minor follow up on a prior question and then another.
Another one if if you will.
I guess on timing is the timing of your your retirement.
January.
I intended to kind of coincide with when the board would be done with their decision is that why you said it.
Accordingly, our it seems.
Most implicit in that and then I guess the second question just would be your broader thoughts on supply chain and kind of.
So much about labor constraints, but theres not a.
At the end of a ton of visibility to that easing up I don't know if you want to offer some broader thoughts about you know rail capacity improvement.
And volume growth broadly in 'twenty, two whether that's pretty visible or you know is.
Is that a is labor has significant risk to kind of how.
How a CN rounds or or north American railroads run.
Thank you so on the first one I'm not going anywhere right. So if I announced my retirement, but at the same time my job and I said in my opening comments the whole team here on the table our job is to deliver a very solid results in the fourth quarter to finish on a high and prove to our investors and our customers.
Our.
22 business plan is real and to be really set up to and through 2022 on a very solid footing.
I want to be here to deliver those results.
Back to you guys and girls is sometime in January and some of the timing I know the board is not on a specific timeline.
Yeah.
They will find.
<unk> the best candidate when they are ready.
Therefore, my mandate to the board has to be.
My heart is to see and I've been here for 25 years and wants to wants to do what's right for the company and I will leave when the board needs me to leave that as when the board has.
The appropriate successor to be ready to step into the job. So that's.
That's why the flexibility and the beauty of all of this come together, but very committed to the fourth quarter committed to setting the company's strong for whoever the next CEO to have a very solid 2022 and committed to be here till the time that the board has.
Announce of the person that will succeed me, what it's a candidate from inside or outside.
Syed from anywhere around the world in North America.
Female and male or female so.
The disposal of.
The board and our shareholders and I've done this long enough.
My heart is to make sure that we do the right thing for the next step of <unk> and.
And regarding the supply chain I think maybe.
So James and Keith May have a better better view than me on that.
On that part of the question.
Yes, I would say.
If you look at our 2022 every single segment across the yen is going to be growing in 2022 with the exception of exception of our grain business and grain as we talked about at the big hit.
And I pivot back to say.
So lucky.
To have coal as the backfill for grain as we go into 2022, and then again just looking forward about all the growth prospects that start kicking in the second half of 2022% in 2023, it's something really.
We're going to be excited about and it's going to.
Create some opportunities for us.
As we move forward here.
And Rob on labor.
Availability of labor to move to more of a railroad I know Theres. Some question on some of the some of the U S property around the United States, but what about CN. So we're in good shape from a labor standpoint.
We do see the sporadic as we have over the last year and a half with the with the pandemic, we do see the sporadic outages that impact our labor, but really it's short lived in.
We're in good position here to to handle it from a labor standpoint.
Thank you for the time, thanks for the perspective.
Thank you Tom.
Your next question comes from the line of Queen Wetherbee. Please go ahead.
Hi, Chris.
Hi, Thanks, and good afternoon.
And certainly best of luck here JV and the next endeavor for you.
I wanted.
Maybe ask a little bit go back to that comment about September being sort of 10 points better than July and obviously, that's a function of both probably July not being particularly good in September being certainly better and gaining some momentum, but when you think about that coupled with what you've already announced around head count head count reduction for $100 million of cost savings that you're capturing here in 2021.
Wanted to I guess I'm curious how you guys think you are sort of running or maybe will be exiting 2021 in terms of that run rate towards the 57, I guess, it's always been our assumption that there are some benefits of removing say great lakes from the business in order to get to that 57% from mixing DLR down by the loss of some of those higher <unk>.
But I'm kind of curious what maybe the underlying business is running at today based on some of the progress you've been able to make so far.
Yes, maybe just without getting into.
No guidance by quarter by month, just so we said we have a target of operating ratio of 57% for 2022, and then any railroads, including.
But as both in railroad Theres some seasonality in your December January February March.
Tim Winter months, especially in Western Canada, where 50% of our businesses. So the operating ratio for these four months is higher than the other eight months, you've got to take that into account.
Number one number two we have.
<unk> progress during the course of the summer as Rob mentioned recovering from the loss of the fact that we have lost the mainline to Vancouver for two months for two weeks I'm, sorry, and also the work we've done here on labor.
September 17, so we're making progress and I've said, we're really committed to enter 2022 on good footing to.
Maybe for against our commitment.
If you want to add some other things.
Without getting into the.
Deep in the guidance, yes, I can add Chris that.
Based on what JJ is mentioning we are very confident to deliver our earnings guidance of 10% EPS growth.
The delivery.
Essentially 10 months behind our belt. So we have two months left so we're very confident of that and the <unk>.
<unk> will come with that guidance on EPS I mean, it will be the result of that EPS growth and also the result of the <unk>.
As you know <unk> been at this for a while the last two weeks of December.
So for some time are kind of a crap shoot meaning we could have good weather bad weather or customers might decide that they shut down because they wanted to.
Save a labor cost and sell the product they have in their warehouse. It all depends how the view of the economy. So the last few weeks of the quarter and the fourth quarter sometimes are.
December demand spike up sometime the men spiked down it all depends how everybody is reading the economy and all of the what do you want to do with some of the <unk>.
Closing the year end book with lots of product on hand or will have nothing on hand so.
But.
We're working hard to do what we said, we would do and I think thats.
Hopefully you see.
In our third quarter results and you'll see that we've been able to bounce back.
Since the challenge of the month of July which was after a fairly solid month of June.
Hopefully it upheld the color I appreciate it thank you.
Your next question comes from the line of Steve Hansen with Raymond James Please.
See that.
Oh, yes. Good afternoon. Thanks for squeezing me in here just I'll, just echo everyone else Jay Jay Congrats on a fantastic career.
But as it relates to my question.
And the new focus and the 'twenty two plan I'm just curious what the board is contemplating any changes to the compensation structure of management to.
To align.
This new plan as.
As we're looking forward I guess beyond even 2022.
Yes, it's a good question and it's a question that the board ask itself at all time.
Every year is a discussion around what.
What kind of compensation system should we have.
We're doing up we make some changes to the compensation system. So the states.
Around about who we are today and what we want to be tomorrow.
Those discussions take place all the time, including in carbon fund, so I would say.
It's just an ongoing discussion whether or not we have.
And actavis or not it's a this is something that the board is always look at and they always look at the discussions and turmoil.
Current rental term and what is that the decline in some of the CN long term strategy.
It needs to be aligned with that so.
I have nothing to say about what it might be the future.
Any event, that's enough, Florida management too.
To do that is for the board.
But it's.
It's an ongoing discussion, but it's an ongoing discussion that all time not just in current time.
Thank you.
We see the color.
This concludes the question and answer session I would like to turn the call.
<unk> excuse me <unk>.
Well. Thank you. Thank you Charlie and thank you for joining us today.
Today.
We're into exciting time at CN at all time.
We worked very hard this summer on closing a transaction, which was very strategic.
To us and very much part of our long term strategy of growing on network.
We convinced.
Borders convince the board of Tcs twice.
The regulators to be onsite. So now we're very focused on our current network and the great network that we have in exploiting that the best that we can and.
Add into that the fact, we also rolled out our 2022 business plan early back in September 2017, and that's where we're very focusing on.
As I said earlier I'm not going anywhere I'm here with the team to deliver a very solid fourth quarter result, and make sure that we signed through 2022.
With a year setup that we could be successful next year and producing the result that we talked about and I think today. We have also clarified some of those things that maybe are more clear to you at this point.
So between now intense then stay safe and we'll see you in January thank you.
Youre welcome to the conference call has now ended thank you for your participation you may now disconnect your lines at this time.
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Yes.
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