Q3 2021 Canadian National Railway Co Earnings Call
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, everyone and thank you for joining us for <unk> third quarter 2021 financial and operating results.
Prince 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 certain projections and other forward looking statements within the meaning of the U S and Canadian Securities.
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 regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct a Q&A session.
We 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, who is our president and Chief Executive Officer, Legislate oil, our executive Vice President and Chief Financial Officer, Rob Reilly, Our executive Vice.
I didn't and Chief operating Officer, James Cairns, Our senior Vice President rail centric supply chain, Helen Clark, Our senior Vice President and Chief strategy Officer, and finally, Keith Reardon, our senior Vice President consumer products supply chain. It is now my pleasure to turn the call over to J J.
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 then the team will cover the progress on our September 17 action plan.
Let's first start with the highlights of Q3.
Spreads on page five.
All in on a adjusted basis, the base business, producing adjusted diluted EPS growth of 10% and adjusted operating ratio of 59.0% and free cash flow for the first nine months of just over $2 billion.
The operating ratio side.
And I'm not even July resulting from the two week loss of RCN main lines reported Vancouver, but improve afterwards in August and September to an adjusted 59.0 or as the average for the quarter.
Regarding pricing trend James Karen will provide evidence of solid pricing at CN.
The high in the last couple of quarters.
Regarding head count of 1050 that we mentioned in our September 17 conference calls about 70% 75% of that completed at.
At CN, we have a long term strategy and we railroads 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. So they succeed and grow in their market where railroad to produce good return for our shareholders and where railroads to create an engaging and safe workplace for our employees.
I will now turn it over to <unk>, who will.
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 were up 5% to $3 6 billion. Despite volumes on an <unk> basis being down 1%, which were impacted by.
Walker's fires in July and supply chain constraints throughout the quarter.
We delivered pricing well above rail inflation and continue to focus on yield management optimizing CMS precious network.
Adjusted net income was $1 billion <unk> with adjusted diluted EPS of $1 52, both up 10% versus last.
By fourth.
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 tcs transaction costs, including the $700 million.
Yes.
The break fee from Tcs.
Our 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 expense categories expressed on a constant currency basis.
Labor and fringe benefit expense was up 12% versus last year.
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.
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 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 through the end of September around $50 million lower than 2020, mainly from lower net cash from operating activities due.
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 our 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.
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.
Version.
I will now turn the call back to you J J. Thank you just name.
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.
Later time as his successor has been appointed to.
Hello can be flawless transition I am not going anywhere and I will deliver with the team here today around me on our fourth quarter results and to be sure that we have a successful set up for the 2022 business plan.
<unk> is also as you read the press release is appointed a search committee for a world class CEO the detail.
And short committee that 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>.
And we will execute on our plan delivery high quality service to customers and generate.
On the enhanced and sustainable return for all shareholders.
Our long term goal remains to consistently deliver double digit EPS growth.
I would like to begin by recapping, our 2022 objective.
We are targeting $700 million.
Of additional operating income for next year.
We intend to use a balanced approach, including optimizing railroad productivity and lower 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.
Here over our network.
Putting to good use the technology investment.
We made in recent years.
Another major component of our plan is lowering our operating ratio starting with 57% in 2022.
Shaving, 57% next year will unlock significant.
Can this 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.
And finally volume when grain returned late next year.
Our 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 capital range of 15% and about $4 billion of free cash flow for 2022.
I am pleased with that.
Lowered 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 initiatives that will deliver a result in Q4 and in 2022.
Disciplined.
Okay.
For 2014, 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 75% of the reductions identified on our September 17th call. We will be substantially complete by the end of the year, which will.
We'll 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 months of which a few examples include the reduction of contractors through the entire company both in the field and at headquarters.
On page a reduction of.
Applications aggressively storing and retiring older locomotives, which will reduce purchased services and material costs associated with their maintenance.
Finally, we will deliver $150 million in additional price initiatives as we continue to enhance our yield management strategy I will now.
<unk>, Rob Alright, Thank you just one as.
As stated on September 17th operational excellence, our commitment to safety and service to our customers have been and will continue to be cornerstones in our strategy all of our core operating and safety metrics have improved over the past couple of years, leading to greater efficiencies.
I'll turn it approved customer service.
We continue to build on our positive momentum through our strategic.
It's a big part of our operational excellence because in operating the railroad sustainably our fuel efficiency for Q3 was an all time record.
Our position as the industry leader from a fuel efficiency perspective.
And it 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 continuous and concerted effort by the team. We are on track to deliver all time best in productivity in our operations fuels.
Opex 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.
Now turn it over to Keith and James to outline CNS growth vision Keith.
Thanks, Rob.
Current worldwide Port congestion.
Fuel, especially on the U S West coast highlights the CN network intermodal advantage three coast 13 proven unconverted port gateways, several that are meaningfully expanding their capacity.
<unk> single owner access from East coast to the U S. Midwest link the efficient gateways to where the markets are.
It's been where they will be our inland terminal network is well established and container asset technology backed investments are creating capacity and efficiency improving safety and improve the intermodal story for CN.
Strong with decades of opportunities ahead.
James.
<unk>.
You also had some great long term carload markets that are developing okay. Thanks, Keith I've never been more excited about our long term carload growth potential and today, our unique geographic reach and exclusive access to the port of Prince Rupert.
US be a leader in carload growth over the next several years.
Canadian grain recovery in Q4.
I believe <unk> will be followed by emerging new renewable fuels and refined petroleum products projects that will propel our growth through 2023.
What im most enthusiastic about our new Green energy carloads related to Alberta is massive growth in hydrogen energy projects evidenced by the slew of recent announcements around.
<unk> industrial Heartland Hi.
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 model that helped us create new export capabilities for propane is easily replicated for blue ammonia and other hydrogen drive energy carloads, we moved.
<unk>.
We routinely get asked questions about revenue per RTA argue is that this measure is a better proxy for mix and it is for price that said since December 2018, when we started our customer centric journey under <unk> leadership.
It has seen the fastest growth and revenue per RPM.
To the next for all class one to the end of Q2 this year.
We believe a better proxy for price as well price.
As you've heard us say before we consistently price ahead of railway cost inflation.
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.
<unk> without undue volume risk.
Ill turn it back to J J.
Thank you. Thank you Jane Thank you Keith Thank you Robyn just link.
Looking to looking into 2023 and beyond.
<unk> team is focused on delivering solid results and achieved a fortunately seats refer to improve our operating operating ratio.
We continue to prioritize safety railroading for customers.
<unk> to reduce carbon emissions the balance approach.
Our leadership team has a clear vision, where our focus to be a growth company and produce financial value overnight.
Network is great our ambition is to build.
The Premier way away of the 20 <unk> century, three investing in technology investing in capacity.
We bring service that attract more customers to the rail network improve safety reduce carbon emission.
And reduce our cost.
Just at CN pioneer.
As we focus on efficiency.
Hello.
Fab two.
So the next transformation of a modern digital scheduled railroad.
To conclude CN is taking a balanced approach.
Our investing.
The success of our workforce and communities and as well as returns for our shareholders. We will now turn it back to the question Charlie.
Thank you we will now begin the question and answer session to ask a question you will need to press star one on your telephone and wait for you need to be announced.
While your question correct in turnkey.
We ask you to comment.
The first question comes from the line.
Ken <unk> with Bank of America. Please go ahead.
Good afternoon Kim.
J J, maybe I can start.
Two.
One question, but.
Amit maybe your thoughts on the outlook here.
Talk about.
And maybe talk about.
Talked about kind of the leaders of that book.
But talk about your outlook on the economy here and then your thoughts as you.
With Hawaii.
Yes, so where we are I think you can where we're at right now I.
People in the world of increasing as Blake.
So 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.
You spent a world where it's time for us to be really setting for their future Thats why there is such a focus on the.
The railroad a future we call that DSR leveraging technology using talent.
Making sure we are relevant to our customers all of them big and small and creating value. So I think the rail industry.
Also in the huge opportunity needs to be more relevant to the supply chain working with ecosystem of the port, making the best mousetrap to attract more vessel that also has unfortunately need to attract more create from the highway.
Elevating that sort of railroad it doesn't come in at the same operating ratio I think it's well.
So 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 whose freight.
They're the ones who decide what it is.
And their money.
<unk> really.
The radio 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.
Kent from the lineup voltage plant.
Please go ahead.
Thanks, very much good afternoon, everyone.
Good afternoon.
So I guess.
Yes.
Obviously, some big news here.
With the announcements and what not.
With your strategic plan.
Our level of management.
Okay.
It seems to be fairly close.
Sort of aligned to what.
Or I guess my question is.
Is there a room for an engagement here now.
Okay, Thats possible is that going to be something you're going to be looking forward.
It is.
For the independent approach that you plan on taking with regards to the to.
The CEO search and proceeding as planned with the March 22nd.
Meeting.
Thank you Walter and if I may say I think he is getting closer to a <unk>.
Well in terms of strategy.
This is.
Are there more comment about first of all when they ran out.
The press release earlier this week he was a bit of a vague presentation that Nokia target.
And in the press release is not it's not a planning itself. So I think what we're talking about things like long term.
<unk>.
Emission word customers came up more balance and I think regardless of.
But regarding proto engaged with PCI <unk> specialties, particularly for that lift.
The board engaged with with.
With the Actavis, but the strategy that we have here is very very clear right.
We want to balance for our railroad quality stakeholders, we want to be a growth company well 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 that we don't let the economy has trended.
And then <unk>.
We create an environment, where our industry.
Is the successful not because it's a duopoly or treat dropped do you win in North America, but say six successful because more and more customers wanting to do business with us and more and more customers want to use our port by choice and more and more customers.
Customers wants to leave to highway and enjoying the hour.
<unk> the virtual network. So I think that long term, that's where the future is and we talked about technology often.
It needs to happen, we need to have technology that make the railroad safer that's more about the maintenance side technology that create capacity without necessarily having to lay out more track and technology.
Our risk but also.
The service to our customers, who all by supply chain is owned by rail service they buy a combination of transportation malls.
And therefore, having technology that makes it easier for them to track and trace and maintain your inventory that they have.
It's maybe a little more sophisticated than outlook.
Jamie go on your operating ratio.
Appreciate the color. Thanks JJ.
Thank you thank you Walter.
Your next question comes from the line of Shirley <unk> with TD Securities. Please go ahead.
Hello Cherilyn.
Thanks, very much good afternoon.
In terms.
Look in pricing environment could you speak to what the spread versus inflation looks like.
And how much of the book of business.
In this type of rate environment, and how much is left to go through year end.
Early 2022.
Thank you James will cover that.
The other thing 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 because it was an uncertain environment, we've got a pretty big chunk of our business that's going to be available for replay.
Price deal 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. So we can reprice.
So we're pretty excited about that we will make sure that we're pricing well ahead of railway cost inflation and to date. This year, we have been just over.
<unk> percent 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 need the capacity that we have increasingly as we move into 2022 that capacity is going to have more value and creating that level of certainty for customers with a contract in hand with CN.
Fiber is worth something to our customers. So we will continue on that path will be pricing ahead of railway cost inflation I think a good market somewhere between $1 five 2% ahead of railway cost inflation as where we think we're going to be balance of this year and into 2022. Thanks for the question Cherilyn. Thank you.
Thank you.
And your next question comes from the line of David.
Jamie. Thank you Bernstein. Please go ahead.
Hey, good afternoon, guys. Thanks, a lot for taking the time.
Hey, Keith could you maybe talk a little bit more about what kind of tailwind we can expect on international intermodal pricing given where.
Take rates are headed over.
I 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 difference.
Aspect to it and I'll start off with our same store price and then I'll talk about some other things that we're doing but at the same store pricing.
The land we have had some contracts come up we will continue to have contracts come up it happens all the time.
And these last two contracts that came up big ones.
We had the opportunity to look at the book of business and actually.
Upscale our business.
Some business that we did not.
You're right <unk> was compensatory to the workload that we put into it. So we jettison some of that business and we didn't do at ni 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 those services to you. So.
We'll continue to do more of that we started in our.
And our upscaling as James mentioned.
But 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.
We're taking every opportunity to talk to our customers to figure out what they want to.
Upskilling and then we're creating value for them and were you surfing that value for <unk> as well.
Thank you David Thank you David Thanks, Thanks for the color J J, if I could sneak one more in here is there a timeline for the boards.
Search process.
So the board will.
The board is looking for the best of.
The bis 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 CN.
CN, so they're not on the clock.
Doesn't mean that they will go slowly done as I said in my opening.
I am staying till the end of June.
January or whenever it is required to do this.
And with the transition and at this point, we're looking for the quality.
Okay.
I would just add backs. Thank you refer you back to some of what you said in the press release.
Specifically.
Great. Thank you thank.
Thank you.
Your next question comes from the line of corn next.
Please go ahead.
Okay.
Good afternoon, and thanks for taking my question. So I just wanted to understand.
Given the global supply chain disruptions, we are seeing right now.
How that streamline and shifting customers you have.
But thinking about the whole dynamics here are they looking to incrementally.
Canadian West Coast Port, especially Prince Rupert are Theyre looking most of the east.
You can get a lift from non branch.
And Ali.
Talk to you.
So maybe for another can start in.
Keith.
Colors as to space, but one of the comment made earlier I'm not sure. If it was understood that some of the business we decided.
We knew some of delayed that created capacity at Rupert capacity Rupert was sold out that committed to the capacity at Rupert So now Keith and his team have been able to.
Do some new vessel.
You've heard about this pendulum vessel smaller vessel.
Some of the retailers in North America.
Now going out and chartered themselves. So they only pickup freight at a few ports in Asia.
And they drop it off at one point in North America, and they want to avoid at all cost any long beach or any places where vessel delete so for us to be able to do this.
Do this at 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.
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.
Keith and how many more months or quarters. This may last yes.
Just to point out.
Supply chain disruption.
<unk> 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 was the that was the.
Factors that got us.
Taking.
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 growth the Gulf Coast ports that we service, we're up 20% over last year and not only the not only the steamship lines, but the people that are in the box.
They're saying I want another gate.
And that's why the CN network is set up so great for that we've got.
It's why we're so happy.
That we have this network that's why we're so bullish on the future.
Thank you thank.
Thank you.
Your next question comes from the line, Jason <unk> with Cowen. Please go ahead.
Thank you operator wanted to talk a little bit.
So about the head count reductions.
You said, you're about 75% through that did all of those.
Coming for Q here early on and what's the what's the mix between the U S and Canada with those reductions.
So I was just.
Just saying we'll cover that exists today.
You know, we're extremely focused on executing on that Jason and we actually track this daily to a great detail. So.
Yes.
Yes, Jason I'll give you a bit of a color on the mix of head count as we said we have about 75% out of the $10 50 that we announced in September.
Timber 17th I would tell you close to 600.
As the management and close to 200 call. It 190 is union.
I would say.
The lion's share of it is in Canada.
And Thats, what I would tell you between Canada.
In the U S, but I'm, giving you the color here on on the management versus Union, Yes, no Jason that people typically tracking head count in the U S for class one railroad.
Most of what we've talked about is actually the Canadian side. So you'll see you won't see that.
And most of the reserve.
The reduction that we've done.
Arguing or you'll find them on the Canadian head count in the U S head count right.
Does that help.
No.
I'm, sorry, I might have missed it did you say they were most of that was done by the 2017.
Most of them.
But they were done Africa 17, right from the $17 seven.
And then after that we start to rollout and 70% to 75% of that is done as we speak.
As we speak this is as of today give or take its about 75% of the $2 50 that are done so that will impact our fourth quarter results.
No current results.
Gentlemen, I appreciate the time and color as always.
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 can thank you.
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 who 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.
And railroad in North America.
Well, Thank you Brandon joined <unk> back in the Bakken.
Back in the month of May of $19 96, which was about six months. After <unk> got the privatize I think the landmark of CN is to be innovative.
To lead the industry to take risk and to do things.
Maybe early days early years, that's about a lot of them they say or the time. It was not going to award. The IPO was a big Big Big thing that a lot of people at that time, especially Canadian investors thought it was not going to work.
And then where we're at today is we're looking to the future not the past CNS and Thats why it would be in.
That's a 25% what it was in 2010.
<unk> is looking to be <unk>.
But the future looks like so we're looking for a growth company I think we want somebody who is focused on growth.
I was focusing on bringing technology into.
So the company somebody who is focusing on.
Having a workforce that presents today society, so bringing talent from where it is.
Gender diversity inclusion.
A workplace that is fifth career attracted four et cetera et cetera, So I think the future.
In 'twenty next nuts.
We're the <unk> in 2010 of 2015 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.
Brandon.
Your next question comes from the line of Jon Chappell with Evercore. Please go ahead.
Thank you good afternoon.
Just like we've talked about the cost initiatives and the pricing strategy is.
Part of it.
2022.
Strategic plan no comments on the reviews of some of the noncore businesses and maybe the trucking unit specifically how are those reviews gone are you still on plan.
For the impact.
So John.
What are the specific issue will give you the color you need.
Broader great yeah. Thanks, Thanks, John on a non realized.
To review, we have commenced the sale Chris Thanks to the Great Lakes fleet of vessels and we have a number of interested buyers on that.
Okay.
And the profitable business that we believe that we do not need to own the vessels to protect the rail revenues and maintain.
Hello, and stable supply chain for our customers.
Whether it is almost doubled the intermodal business of transit since the acquisition.
The profitability of the core <unk> business is in line with best in class with similar types of assets.
We're still working through the options to <unk>.
<unk> reduced our ownership interest, while maintaining and growing the rail revenues there.
We will keep investors posted on this but our message remains that we are a growth company. You said numerous times today, and we will continue to find ways through acquisitions and partnerships. The question John Thank.
Thank you.
Hey, Joe.
Your next question comes from the line Luxor.
Deutsche Bank. Please go ahead.
Yes.
Hey, James.
Whatever next you do.
Okay.
Potentially I wanted to follow up on.
On the <unk> question and your commentary about the new CEO.
Okay.
Another world Classics.
Speak that GCI is bringing forward and I just wanted to make sure.
We're not reading the search these searches.
As long as it can be very expensive.
Have you guys already considered.
Alright, and you feel like Thats, not the right way.
<unk>, what's the strategy around doing in expenses.
So long search when.
You do have someone that's tried and tested.
Willing to take over the range so to speak.
So thanks for the question. This is an important question, but the board will consider all candidate.
We will be very thorough and there'll be sure that the next person who will replace me.
<unk> is the person that can really carry the <unk> strategy 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 will be led by is led by Sean <unk> Bruder shining.
Our chair of the governance Committee and with her we have Robert Phillips, who is the retired chief.
Chief Executive Officer.
Our chairman of the British show a PCR and then you also have Kevin Lynch and as well as as Justin Howell with wood.
We joined the board on the.
<unk> Cascade. So this grew.
We'll be doing.
Viewing what is what is 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.
For the committee has the recommendation to make to the board and the whole board of CN eventually.
As I said in the past will weigh in in the finals.
A decision so.
We know there is some candidate out there at least one.
But I think the world.
So it's bigger than that in before the board make a decision you want to do it to be very very total.
Okay. Okay that makes sense. Thank you very much.
Thank you. Thank you.
Your next question comes from the line of Brian Allison that Jpmorgan. Please go ahead.
Hey, good afternoon. Thanks for taking the question wanted to come back to technology, and what sort of benefits you think youre going to get from that across the network.
I appreciate it maybe some of the injury ratios for safety.
And the fuel efficiency capacity.
You 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.
Been able to generate some benefits that along those lines, maybe perhaps helping reduce the head count.
Just wanted to understand like what type of benefits for you.
We were expecting and 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're deploying.
As in this space of operation and mechanical Rob do you want to talk about.
Technology in your space are those that are running from coast to coast to coast.
From subdivisions or 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.
So that's based on using that technology, especially when it comes down to how we work.
Place ties and are undercutting that that's a big part of our basic maintenance. So we are seeing those those results when you're talking about fuel efficiency. We continue to raise the bar and we are the industry leader just in the last two years just from.
Part of that is alone we saved $75 million just from those initiatives, that's excluding fuel prices and consumption. So really really good work, we're continuing to see it 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.
And we we.
2% to $400 million I think that.
We slowed down a little bit in 2020 because.
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.
Its benefits and we're continuing to track those very very closely so quite bullish about technology.
Maybe technology also has a big part of our future on the commercial side I don't know.
<unk> wants to talk about some of the stuff that we do technology wise.
That is really aimed to attract more business will make business more sticky on the CN.
Start telling me, but.
We're actually deploying some technologies now at our intermodal terminals that are improving the efficiency of the terminal.
Capacity of the terminal and the safety of the terminal.
And that's going very.
Wise, it's enabling us to do more business through the terminal.
Creating a better customer experience for our trucks, they come in and out of the terminal, but how long you've got a few no okay.
Brian.
Well. Thank you. Thank you Brian I appreciate it and best of luck to JJ.
Very well thank you.
Your next question comes from the line of mini lap, Colombia, They take hunting Securities. Please go ahead.
Yes, good afternoon, everyone and best wishes J J on the next steps.
With respect to the supply chain issues.
J J and maybe provide some color on the business segments that are impacted the most and wetter.
It should become a tailwind.
Going into 2022.
Becomes better.
Maybe I can start but definitely when you look at the fourth business.
Business is somewhat down because.
On the auction are not working the way they should so we're turning this into a positive the way Keith described earlier, so now that we have some capacity of Rupert.
No that's on paper.
Not going to be available he can do so now it takes some spot business.
You've made a shuttle service pendulum service with only Rupert is the only part of the call on the on the North American side and on automotive I think everybody knows the story to hold as somewhat of an industry, you're struggling to get chips, which mean that.
You and I are probably going to be deferring a purchase of our new products and next year when we have.
Choice of brand and color and that's going to be a story for 2022.
You want to add James to what's happening in the Antelope carloads.
Weak outlier, we added Canadian grain I think everybody knows that story.
First 10 weeks of this current grain crop we're down over $1 5 million tonnes, that's bad news the good news.
More.
We're in a very unique position in that we have some strong tailwind with coal we got test potential of two coal plants reopening on our network. We got the full year effect of the tech 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.
This in grain crop and then of course on the <unk>.
Grain crop gets reset Q4 next year and we got some very high <unk>. So if you think about coming out of 2022, we've got some strong momentum with a recovery in grain through end of 2022% in 2023, and then we've got some significant carload growth projects related to.
New crush.
The Canadian new do.
New activity around renewable fuels carries us forward 2024, and beyond that's when we start seeing the significant growth and car loads 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 this scale.
Planned crude by rail isn't going to be long term ratable carload that move by rail not railways convenient but rail all the time, so it's a very exciting prospects for the future. So thank you very much Carlos from Alberta to the West coast by a roofer to Vancouver. There is also a positive story on iron ore export yen is doing iron ore exports.
Caleb.
The golf and then we have a trials over Rupert.
Great.
And a coaster at CN is all export either via the U S call or via the port of Prince Rupert. Thank you min.
Your next question.
Export underlying targeting Alegre led Goldman Goldman Sachs. Please go ahead.
Good afternoon Jordan.
Afternoon.
Yes, you got a lot of the focus on operating ratio to 57% target next year, but sort of thinking beyond that non operating ratio, but sort of.
Given the customer centric.
Is it that you had done what's the update and thoughts around the longer term revenue projection for you guys not necessarily next year, but.
But sort of beyond that.
Maybe we're at the optimal IRR, but how do you think about the revenue growth long term.
Thank you for.
And it's also find that it's a <unk>.
<unk> way to look at railroading operating ratio is a key TPI, but it's a byproduct.
Of the business. So we're focusing on growth. So CN is located to bring more volume on the railroad. It makes the railroad more profitable more viable when you have more freight on it as well.
<unk>.
Had a question right. So we are a growth company, we wanted to railroad for customers, who we need to have a customer centricity mindset and culture at <unk> to do that as well as in an area, where you can attract rate on the railroad port business is another area, where we compete with other railroad network to bring business on the CN.
Market James mentioned on the carload side now for us to attract companies like <unk> for example, who announced recently to more grain elevators.
Loops the loop track on 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.
Indeed, our that's the way of the future to use a network, but what are you really this is meant to be a net to switching as an example, so.
I think these are the things that really are.
But DSR is all about.
User network, because it's very fuel efficient.
<unk> carbon emission, it's safer and stuff on the highway.
Use it for all it has the potential to be.
It'd be a big enabler of the economy.
And participate in what's good here in North America.
Thank you.
Your.
Lawson comes from the line of Scott Group.
Wolfe Research your line.
Hey, Thanks afternoon guys.
J J you made some comments at the beginning of the call about Chile.
Fly versus September operating ratio and maybe if you can just get some color.
Next week, and then longer term it sounds like maybe there's a little bit of a change in from the September call. It as the business grows.
Past 'twenty two there should be further margin improvement, maybe just a little color there and how youre thinking about operating leverage longer term.
Okay.
There Scott so as I said in my comment and that's important to clarify that.
Lowering the operating ratio stock with 57% in 2022, and we're not saying, 57% at the end of it but we say <unk> 57 in 2022, and we're confident in where they can deliver against that is one way to railroad with.
<unk> is one way to.
To make sure that we create something in it for 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 tray specification, especially in China was going to surge back at some point in the future. So it's not about how low we are capable.
Capable to go and how fast we get to that it's more about how low should we go and over what period of time.
Starting with <unk> 57 in 2022, potentially as some prudent improvement beyond that.
Let us go back to the.
Battle here back in the early in the new year and volume obviously.
<unk> is an important point.
I mean as much as the Canadian 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.
Trade.
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 if grain was going to be normal we would have James how much GPM growth next year, 6%, 6%. So it's six.
But by the time you put in grain.
Fact that crops not there so definitely it's a growth story.
And definitely 57, we believe is where we should go next year.
As long as we keep on future earning calls.
Alright.
Thank you Scott.
Thank you.
<unk> sorry, Yes, you had a question about August and July we'd be better positioned to talk about sort of the movement in our overall kind of a month two months and what happened here.
<unk>, 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's no doubt that july's.
Performance impacted the quarter, but if you look at June to July Theres nearly.
10.
Swing in or and the same thing when you look at September to July. So hopefully that 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.
Yes.
Next question comes from the line of some latent TB.
Please go ahead.
Hi, Tom.
Yes, good afternoon.
T J I had one that's kind of a minor follow up on a prior question than that.
The other one.
Then if you will.
I guess on timing is the timing of your retirement at the end of January.
Intended to kind of coincide with when the board would be done with that decision is that why you said it accordingly or it seems almost implicit in that and then I guess the second question.
One if.
Your broader thoughts on supply chain and kind of we hear so much about labor constraints, but theres not a ton of visibility to that easing up depending on if you will want to offer some broader thoughts about rail capacity improvement.
And volume growth broadly in 'twenty, two whether that's pretty visible or.
I just would add is labor is significant risks to kind of.
Hi.
<unk> or North American railroad trend. Thank you.
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.
Under our fourth quarter to finish on a high and prove to our investors and our customers.
Our 2022 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.
For you guys and girls that sometime in January.
January and some of the timing I know the board is not on a specific timeline.
You bet.
They will find and determined the best candidate when they are ready.
Therefore, my mandate to the board is to be no.
<unk> two <unk> I've been here for 25 years and wants to wants to do what's right for the company and I will leave.
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 where the flexibility and the beauty of all this come together, but they are 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.
Till the time that the board has.
Now on to the person that will succeed me candidate from inside or outside the home anywhere around the world in North America are female.
Female and male or female so.
He had the disposal.
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 CN.
And regarding the supply chain I think maybe.
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 exception of our grain business back to say we are.
So lucky.
To have coal as the backfill for Green 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 and the.
'twenty three it's something really.
We are going to be excited about and it's going to.
Really create some opportunities for us.
As we move forward here.
And Rob on labor.
Availability of labor to move most of our railroad I know Theres. Some question on some of our some of the U S property around the.
<unk> space, but what about <unk>.
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.
Do you see the sporadic outages.
Impact our labor, but really its short lift in.
<unk>.
Good position here to to handle it from a labor standpoint.
Great. Thank you for the time, thanks for the perspective.
Thank you Tom.
Your next question comes from the line of Chris Wetherbee with Citi. Please go ahead.
Hi, Chris.
Hey, Thanks, and good afternoon.
And certainly best of luck in the next to Denver for Ya.
I wanted to 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 at September being certainly better and gaining some momentum, but when you think about that coupled with what you've.
Yes, now it's around head count reduction for $100 million of cost savings that you're capturing here in 2021, 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 take great lakes from the business.
<unk> already in order to get to that 57% of mixing DLR down by the loss of some of those higher or businesses.
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 in any railroad, including Northern Railroad Theres some seasonality in your.
December January February March.
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.
Said, we are going to take that into account.
Number one number two we have made progress during the course of the summer as Rob mentioned recovering from the loss of the fact that.
We have lost the mainline survey for two months two weeks I'm, sorry, and also the work we've done.
Months labor and on.
On September 17, so, we're making progress and I've said, we're really committed to enter 2022 on good footing to deliver against our commitment guidance, yes, I can add Chris that.
Based on what JJ is mentioning we are very confident to deliver our earnings guidance.
<unk> EPS growth. So I mean, we have essentially 10 months behind our belt. So we have two months left so we're very confident of that and.
<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.
As you.
But as you know <unk> been at this for a while the last two weeks of December some time are kind of a crap shoot meaning if we could have good weather bad weather, our customers might decide that they shut down because they are.
They wanted to.
Save a labor cost and sell the product they have.
The house it all depends how the view of the economy. So the last few weeks of the quarter and the fourth quarters, sometimes or demand spikes up sometime demand spikes down it all depends how everybody's reading the economy and all of their what do you want to do with some of the closing the year end book with less product on hand or will have nothing on hands.
And there will but.
We're working hard to do what we said, we would do and I think thats.
Hopefully you see that 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.
Your next question comes from the line Steve.
<unk> bin Kim Please go ahead.
Okay.
Oh, yes. Good afternoon. Thanks for squeezing me in here just I'll, just echo everyone else Jay Jay Congrats on a fantastic.
That's a career.
As it relates to my question.
And the new focus and the 'twenty two plan.
I'm just curious whether the board is contemplating any changes to the compensation structure of management.
To align around this new plan as.
As we're looking forward I guess beyond even 2022.
Yes, good question and it's a question that the board ask itself at all time.
Three years, there's a discussion around.
What kind of competition system should we have and whether or not we make some changes to the compensation system. So to Steve's comment about who we are today and what we want to be tomorrow.
Those discussions take place all the time, including in current funds, so I would say.
It's just an ongoing discussion whether or not we have.
<unk>.
And actavis or not it's a this is something that the board is always look at and they always look at the discussion in terms of the long term.
What is that it is fine to come to <unk> long term strategy to say about what it might be the future.
Any event.
No.
But it's.
So it's an ongoing discussion.
Ongoing discussions at all time, not just in Calvin Klein.
Thank you.
Today's session I would like to change.
I'll go back Keating Mr Tusa.
Thank you Charlie and thank you for joining us today.
We're into exciting times.
And 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.
Convinced allow us supporters convinced.
Florida, Tcs for a procurement network and a great network that we have in exploiting.
The best that we can and.
And then to that effect. We also early back in September 2017.
And that's where we're really focusing on.
Anywhere I'm here with the team to deliver a very solid fourth quarter results and make sure that we signed through 2020.
Me too that 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 and.
And 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.
Okay.
Yeah.
Okay.
No problem.
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