Q4 2021 Canadian National Railway Co Earnings Call
Good afternoon, My name is Sarah and I'll be your operator today welcome to Cn's fourth quarter, and full year, 'twenty or 'twenty, one financial and operating results conference call. All participants are now in a listen only mode. After the Speakers' remarks, there'll be a question and answer session.
I would now like to turn the call over to Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Butcher.
So good afternoon, everyone and thank you for joining us today to discuss <unk> fourth quarter, and 2021 and full year results as we continued to make progress on our strategic plan redefining railroading for the 21st century.
We are joined today by Mr. Robert Pace chair of the CN board, we'd like to kick things off this afternoon with a few words about our new CEO .
Then we will turn the call over to J, J, who it outgoing president and CEO , Rob Reilly Executive Vice President and C. O just languishes executive Vice President and CFO , James Cairns, Our senior Vice President rail centric supply chain, Keith Reardon, our senior Vice President.
Consumer products supply chain, and Helen Cork, our senior Vice President and Chief strategy Officer.
They will talk about the results in the fourth quarter and full year of 2021. We will then hold a question and answer period and I would like to remind you to please limit yourself to one question now.
Now before we get started we'd like to draw your attention to the forward looking statements and additional legal information, which are available at the beginning of the presentation.
As a reminder, today's presentation contains certain projections and other forward looking statements within the meaning of the U S and Canadian Securities Law.
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 statements regarding forward looking statements in our presentation.
Before we begin board chair, Mr. Robert pace, we'd like to say a few words Robert.
Thank you Paul.
Our board today is pleased to announce the appointment of Tracey Robertson as president and CEO of CN.
Tracy brings 35 years of operational management strategy development expertise, which will help drive growth for CN operational improvements and long term shareholder and stakeholder returns and ensure we continue to continue to attract a worry.
World Class workforce.
She comes to us from Tc energy.
Where she holds the title of executive Vice President and President Canadian Natural natural gas pipelines and president of coastal links she has been there for approximately eight years and prior to that she has had a career of 27 years that CP, where she held positions in operations finance.
<unk> and commercial.
Today, we are also pleased to welcome our New Board member Josh array as a member of our board.
Josh array has a distinguished public service career for over 30 years in Canada, including serving as the 29th Premier of Quebec.
Under his leadership, Quebec experienced a sustained period of economic prosperity and improve significantly major infrastructure.
Our board will benefit from his knowledge of Canada and as global network.
And finally.
We're excited to announce that shiny bruder.
A director of CN will become the Vice chair of our board and I want to thank on behalf of all our board the outstanding job that she did is chairing the search committee for our new CEO , along with Justin how Kevin Lynch, and Bob Phillips, and I know she'll have a distinguish.
Career at CN in the future.
No not note I'd just like to highlight the fact that Tracy will not be joining us on the call today.
Because we wanted to focus on the fourth quarter and year end results. So on that note J J I will turn the meeting over to you.
Thank you Robert and congratulations on all of these excellent news.
Good evening everyone.
Let's start with our fourth quarter highlights on page five.
A quarter that demonstrated CN resiliency and profitability.
The strategic plan, we introduced in September is already showing tangible results in Q4.
All in the business produced adjusted diluted EPS growth of 20% and adjusted operating ratio of 57, 9% and free cash flow for the full year of $3 $3 billion at the upper end of our guidance.
We also achieved a number of noteworthy all time record in 2021, including an all time best safety performance on personal injuries and all time best performance on fuel efficiency at an all time best <unk> for the fourth quarter at CN.
The EPS growth came from both pricing and cost initiatives and incremental margin was solid and labor costs and productivity. We're also very solid.
Volume was softer mainly because of the BC line washout.
Lower level of Canadian grain.
As a reminder, the BC washout took out all the mainline to Vancouver for three weeks from November 14th of December for this major segment of our rail network normally sees about 21% to 23% of our total revenue running over these two acts on any given date, but.
But in spite of this condition the CN team performed.
The ROIC for the year was 14, 1% and sequentially improving toward our 2022 guidance of 15% return on investment capital.
<unk> will go into these detail later rigs.
Regarding pricing and upscaling.
James will provide evidence of the continued momentum on all aspects of how we price enough scale that that is priority segment premium weekly auction weekly auction same store pricing demurrage and storage.
Regarding labor costs.
We ended the quarter about 1800 fewer people that last year and sequentially about 1150 fewer than at the end of Q3 of this year.
Recall that we took action right. After we announced the September 17 strategic plan.
So we will benefit from these head count reduction throughout 2022.
Regarding the strategic review of non rail business the shutdown of the freight forwarding business is basically completed.
We are in negotiations regarding the divestiture of the great lakes vessel and strategic discussion around option for <unk> ongoing.
Regarding our ESG agenda, CN was recognized for our leadership and corporate sustainability by CDP, securing a place on its prestigious a list for tackling climate change.
<unk> was also recognized for the 10th year in a row in the Dow Jones sustainability World Index.
The CN Board security first place ranking in Canada for governance by the Globe and mail.
I am pleased to announce that the board of director.
<unk> today is 19% dividend increase for 2022 hour 26 got ticketing yearly dividend increase.
The board also approved a new share buyback program.
The amount in the range of $5 billion Canadian dollars from <unk>, One 2022 to January 31 2023.
Together these actions demonstrate <unk> commitment to a balanced capital allocation program that puts a priority on returning excess capital to shareholders.
Strategy plan was released back in September is progressing very well and we are confident in our ability to deliver industry, leading return for our shareholders over the long term and with that I will turn it over to Rob who will cover the operation Alright. Thank you J J in Q4 seeing once again showed its resiliency by restore.
Our network and meeting the needs of our customers safely and efficiently after the catastrophic weather events in British Columbia.
The credit in the thanks goes to the dedicated men and women of CN, who worked around the clock to return our tracks to service in November and December restoring over 50 outages caused by the significant rains.
As JJ indicated we've made considerable progress against the goals set out in our strategic plan on September 17th.
The results of those efforts began to take hold in Q4, giving us momentum heading into 2022 and the confidence in our ability to make gains and create additional shareholder value in 2022 and beyond.
The sequential head count reduction of 1100 50 exceeded the target we set in September and was completed in Q4 or.
Our other efforts and cost containment and purchasing service and materials showed significant reductions year over year.
Moving to page eight despite the weather impacts to our core operating metrics in the last half of the quarter. The CN team improved in every operating metric again in 2021 versus last year in 2019.
The exception was train lengths, which was flat year over year and remains an opportunity for us going forward.
From a safety standpoint, as J J mentioned C and employee performance improved nearly 20% in 2021 to an all time best for fewest injuries, while the number of accidents improved as well, reducing our cost by $40 million.
Our leadership position in sustainability was further enhanced by our all time record and industry best fuel efficiency.
Our efforts, reducing carbon emissions in 2021 also saved us an additional $30 million a.
Our railroad is in great shape, and we're very well prepared to capitalize on future growth.
On page nine as announced on December 14th we signed a long term strategic partnership with Google to transform seeing supply chain as part of digital scheduled railroading to deliver new customer experiences and modernize our technology infrastructure in the cloud.
First part of the partnership as it modernization. This will involve transition of key infrastructure and applications to the cloud, which will allow us to improve <unk> operating costs.
<unk> support the operations the second part of the partnership will drive our innovation agenda and will employ an intuitive digital platform powered by Google clouds, AI and machine learning tools, which will ultimately give customers and supply chain partners more visibility.
Our partnership with Google Cloud is central to our strategic plan and reinforces our industry leadership and commitment to digital scheduled railroading or DSR.
With that I'll pass it onto James and Keith to provide some insights on the efforts of our marketing.
Thank you Rob disciplined approach to pricing ahead of railway cost inflation has been a core competence for the CN team for many years.
We've been an industry leader in consistently pricing ahead of railway cost inflation in terms of timing and scale.
Our customers understand that in order for us to continue to invest in capacity to support their growth we need to maintain price discipline.
Throughout 2021, we saw the real effects of many of our yield and pricing initiatives delivering an all time record same store price of five 4% for the year.
This momentum is expected to continue through 2022.
The mix of our business sequentially improved through the year with a balance of carload and intermodal coming more in line with pre pandemic levels in Q4.
The <unk> sales marketing and operations team again delivered double digit intermodal and automotive contribution margin improvement over Q4, 2020 and sequentially versus Q3.
Train density velocity enhancements single destination train packages productivity <unk> in our terminals and in our first mile service all contributed greatly to the margin improvements.
Capacity has value, we don't wait for annual renewals to test the market.
We utilized key tools, such as guaranteed equipment pricing premium priority port trains and equipment auctions to allocate incremental capacity when demand exceeds supply.
This multifaceted approach allows for real price discovery and provides insight to the value of our capacity.
Threshold pricing and seasonal pricing or additional tools, we use to price incremental capacity at the market rate when an existing contract is in place.
We are always careful to match price to capacity when a market is hot and more capacity is needed.
We use price to allocate scarce capacity.
The pricing and yield story for <unk> is strong and we continue to focus on balanced profitable growth.
With that I'll turn it to Keith to talk about the <unk> growth story Keith.
Thank you James.
In Q4, we saw revenue growth in all carload segments with the exception of Canadian grain West Coast coal was up close to 50% in the quarter, while refined petroleum products and propane on the back of new and growing export capacity in Prince Rupert both continued to set new Q4 revenue records.
Frac sand revenue was up 30% in the quarter and finished the year.
Over 20% better than 2020.
While worldwide supply chain disruptions and the BC flooding adversely affected our Q4 intermodal and automotive volumes, we did experienced 30% growth versus 2020, and our international intermodal business through the ports of Halifax, Saint John New York, New Jersey, Philadelphia, New Orleans and mobile.
To set an all time record domestic.
Revenues were up 12% the.
Transact business, which just posted their best ever quarter, along with our retail volumes, our Canadian wholesalers volumes in the port Trans load business, we're all solid before and after the BC flooding.
We continue to see sequential improvements in our automotive segment, which positions us well for 2022.
Our carload franchise is unique as we have a strong coal growth story on the back of tech volumes to Rupert.
Neptune as well as the restart of the CST and coal Valley mines in Western Canada.
This is expected to offset the weak Canadian grain volumes expected for <unk> 2022.
We're adding new trans load capacity in the greater Toronto area for refined fuels that would have otherwise moved on the TN PL pipeline.
We are further solidifying our position as the dominant carrier for ion diluted heavy crude with the startup late last year of a new undiluted bitumen unit train facility in Saskatchewan capable of handling volumes in the range of 40000 barrels per day.
The increasing demand for renewable fuels is expected to be as transformational to the grain business. This decade as ethanol was in the early two thousands we have three new CN served renewable fuels facilities ramping up this year in the Gulf.
Longer term, we see new car loads coming from the emerging hydrogen market. This market could be of the scale of crude by rail at its peak, but unlike crude this will be long term ratable business.
With regard to intermodal and automotive we continue to drive business to our CN served ports in line with our partner Ocean terminal operators, bringing on import and export capacity over the next several years on.
On the east and Gulf Coast, we see the 2022 volumes continuing to remain strong with new strains being introduced to the CN served ports as solutions to reach U S Midwest markets.
Auto franchise is well positioned to drive growth for our customers as we continue to innovate and support their industry's evolution.
The pricing yield and profitable growth story for CN is strong and well balanced I'll now pass it on to just laugh for the financial perspective, yes.
Thank you Keith My comments will start on page 14 of the presentation, which will provide more visibility on our outstanding fourth quarter performance.
Revenues for the quarter were up 3% to $3 75 billion.
Despite volume on an RPM basis being down 11% due in large part to the washout NBC.
Lower Canadian grain volumes and a sustained cold snap during the second half of December .
We delivered solid pricing above rail inflation and delivered on yield optimizing cn's precious network.
Our adjusted results exclude advisory costs related to shareholder matters.
We delivered a record Q4 adjusted operating ratio of 57, 9%, which was 350 basis points lower than last year.
Q4, adjusted net income was slightly over $1 2 billion.
With adjusted diluted EPS of $1 71 up 20% versus last year.
Turning to page 15, let me highlight a few of our key expense categories expressed on a constant currency basis.
Many of which are driven by our initiatives under the strategic plan.
Labor and fringe benefit expense was 10% lower versus last year.
This was mostly driven by a lower average head count and higher capital credits for more capital work in the quarter.
Purchased services and material expense was down by 10% versus last year, mostly due to lower repairs and maintenance trucking and trans load material expense and material expense.
Fuel expense was up by over 40% driven by a 62% increase in price, partly offset by lower volumes in terms of gross ton miles.
This quarter. We also continued to see improvement in equipment rents with a 13% decrease versus last year, driven by lower car hire expense.
Turning to our full year results on page 16, I am very proud of our adjusted EPS growth of 12% versus last year, demonstrating our risk resiliency and capacity to adapt to quickly changing conditions.
These great results were achieved despite the loss of our Vancouver mainline for a total of over five weeks this year.
Now moving to cash on page 17, we generated free cash flow of $3 3 billion for the year at the high end of our guidance.
Finally onto page 18, let me provide an update on our 2022 targets we introduced back on September 17th.
I'm pleased to report that with the solid progress we have made in Q4, we remain confident of delivering on our 2022 financial outlook of 20% EPS growth around $4 billion of free cash flow, 15% ROIC.
Resulting in a full year operating ratio of 57%.
Our capital envelope for the year will be at 17% of revenues.
Excluding the impact of the significantly weaker Canadian grain crop the volume environment remains positive as outlined by Keith where.
We are continuing to focus on yield management and cost efficiencies I will now turn the call back to you J J for some closing remarks.
Well. Thank you just play and just to close it before we go to Q&A.
Under on September 17, we announced the next step of our strategy to redefine railroading for the next generation and as you saw during the Q3 into Q4 result, we are on track to deliver on our strategic plan.
Entering 2022 supply chain continue to be disrupted and we expect volume growth would be mostly a second half of the year story with the return of Canadian grain at that time.
As you saw in our result, we operate with nimbleness and our network is resilient.
We already have the capacity to respond to demand when did materialize and the team is running a solid price and cost action plan I am very pleased with the solid progress. We've made since last summer. The team also responded very decisively to use network disruption that we had back in July and more recently in November in British Columbia, So kudos.
To all of our engineering and operating people out there who work very hard.
<unk> has a bright future of leveraging technology combined with operational excellence, enabling us to build the Premier Railroad. The 20, <unk> century, and delivering industry, leading return for our shareholders over the long term and now operator, we will turn it back for questions.
Thank you we will now begin the question and answer session. As a reminder to ask a question you will need to press star one on your telephone to withdraw your question Brad.
As previously mentioned, we ask that you signed and limit yourselves to one question.
The first question comes from the line of Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks, very much and good afternoon.
JJ I wanted to start by wishing you our very best in your retirement.
Thank you.
It's hard to detect.
Severe flooding in the results in Q4. So I was just wondering if there's any way you could help us frame the revenue and earnings impact of that whether incident and how much of a traffic backlog there might be new.
As we enter Q1.
So I. Thank you for the questions. So obviously, a very important question just link and help quantify a bit and James can talk to us about what might be still around business that show and thanks for the question listen as JJ mentioned, we did lose our mainline.
From Middle of November to early December .
And.
And this is the mainline going to Vancouver, So we did quantify it and I would tell you that it has an impact of around $120 million to $130 million of revenue.
That we could not move we thought we were going to be able to catch some of that back up in December however.
We got hit by a cold snap mid December to the end of December So we did not catch.
Up any of this in December and I'll, let I'll, let to you James jump in in terms of the.
<unk> business, that's still out there to move from from that flooding, yes, we're not going to get it all back of course cherilyn, but.
Theres a lot of business, that's still there to move we're going to have a very very busy first quarter here once we get some some good weather behind us. If you think about the grain you think about the call you think about the international imports, they're all they're ready to move in.
Rob and his team are excited to get after here in the first quarter. Thanks for the question Sheryl. Thank you.
Your next question comes from the line of Connor <unk> from.
From Scotiabank. Please go ahead.
Thanks, and thanks for taking my question and Echo My investments just like.
So my question is on the supply chain issue than the B.
The labor issues going on in the industry right now so in light of what's happening in the trucking market, but the vaccine mandates.
Curious as to what kind of hiring outlook you have for employees not given you have.
We restructured a lot of employees here the demand environment seems pretty strong this year.
Do you see do you anticipate any need for significant hiring at some point this year.
So on the the CN part of how we're doing with labor Rob is very well equipped to do that and as it comes to the impact of supply chain to a business I think Keith will do that after that Rob, Yes Con Ark in terms of our labor, we're right sized to the volumes that are out there right now really in terms of the the virus itself, we did see a spike.
In terms of positive cases here over the holidays in early January we've seen that come down quite a bit.
As you look out to the year, our second half is really where the growth is going to be as we look forward to.
A more robust Canadian harvest. So we will do some hiring here in the first half of the year in preparation for that but also further attrition won't be on a one to one basis, because what productivity in there as well, but we will do some hiring.
As this first half evolves.
The truck drivers disruption how do we leverage this these are supply disruption.
Yes.
Thank you.
Yes.
Yeah.
Our customers they are executing.
Justin.
Graham.
More like just in case.
By chain disruptions.
Yes.
Yes.
Sure.
And term.
Just in time models rely more heavily on trucks than intermodal. So there is opportunities for intermodal as those as that.
As that model has changed.
In addition, <unk>.
In addition to that the driver shortage in the lab.
<unk> of truck capacity are in part reasons further shifts of the customers.
For these supply chain shifts excuse me I.
I understand you Couldnt hear me, we've got Michael and I apologize for that our intermodal products are right in place for the.
For the.
Truck drivers to be able to or excuse me got it.
Flustrated because that was offline there sorry.
The driver shortages and lack of truck capacity.
Are things that are boding, well for us to pick up some volume.
As JJ mentioned.
Vaccine mandates and.
The cross border demand has more recently developed with driver vaccines and overall driver shortage issues. Just this past week, we saw a big uptick in those discussions with our retail customers are <unk> customers and our wholesale customers. So the opportunities are definitely there just not sure how to quantify that but the opportunities are there and we are.
To work with our customers to offer them. The services, we have the capacity on their trains and.
We're moving forward on that I apologize for that.
Thank you so much thank you Connor.
Your next question comes from the line of Brian Ashton back from Jpmorgan. Please go ahead.
Yes, hi, good evening, thanks for taking.
A question and Jay Congrats on the retirement.
Hey, Brian of disease.
It's not uncommon for the industry here, but.
After a slow start to begin the year for volume. So just wanted to see if maybe you can put a little more color around the back half recovery clearly Canadian green is going to be a big part of that you walked through some of the other opportunities, but I wonder if you could maybe drill down a bit on that and maybe put some.
Frozen cons around what you have more confidence more visibility in.
As you look into the back half and start to prepare for that.
Yeah.
Okay. Thank you. It's a good question and I was just maybe starting with the current environment.
Has been still very challenging operation, especially in Western Canada.
Quarter to date for the second half looks bright James you may want to talk about the bulk and merchandise actually has been the solid story, all along and there is scrape out there for us to move yes, I mean, it's been a tough start to the winter, but winter, we're not no strangers to tough winters here.
We're very confident we're going to meet our full year guidance the demand is there.
I think about the early winter snowfall, we're having here in the prairie, it's creating tough operating conditions, but I will tell you we need that that snowpack. So we can have a good a good.
Good crop recovery here for for next crop year, and all indications are that's going to happen. So if you think about the second half of this year when grain comes back that's significant.
The grain this poor crop is going to hit us in the first half to the tune of about $300 million.
A fair crop normal crop, we get all that back in the second half so we're pretty pretty excited about that.
How are we going to finish out 2022, and like we said earlier, we still got a lot of demand there to move in the first first quarter first half of this year. So we're going to be busy Rob and his team are going to be real busy here.
I'm going to wrap this up we have.
The <unk> will have it as expansion coming this summer I think it's around July .
If you have 1 million Teu that would be just in time for the fall peak at a time, where 80 long beach might be.
Heavy negotiation with their with their long short person. So we will want to exploit these two thing as well. Thank you for the question Brian .
Thanks JJ.
Your next question comes from the line of Jason Seidl from Cowen. Your line is open thank.
Thank you operator, JJ, let me join everyone and wishing you all the best has certainly been a pleasure.
Thank you I wanted to wanted to talk a little bit about the pricing side you guys, obviously called that out we've seen that with the other two rail operators that have reported given some of the ongoing supply chain constraints, especially in the cross border or that might be developing with the with the vaccine mandates do you think that that pricing environment is only getting.
For you as we as we're installing two here.
Well James can talk to the definitely fourth quarter story was about price and costs. So James.
Yeah, when I look at my Crystal ball, I really don't see it slowing down I mean.
We price to the market and we do it very effectively and I think the market demand is out there there is value for capacity and capacity is something we have and as we continue to have ongoing discussions with our customers everyone's kind of settled in and realize that there is going to be a higher price for for rail service moving forward as there is many goods so.
Fully expect that Trump strong pricing environment.
<unk>, two well into 'twenty, two and beyond so thank you for your question. Thank you guys.
Thank you Jason.
Your next question comes from the line of David Vernon from Bernstein. Please go ahead.
Hey, good afternoon, everyone.
Actually I had a question for the chairman paints if he's on the line taking question today.
I don't know if he's still on the line, but ask the question.
Sure the question really JV I mean.
They are obviously very strong, but the question was going to be.
Rightly or wrongly the market's perception is that the operational discipline and focus around seeing maybe has lapsed obviously the numbers speak for themselves, but I was just wondering if that's determined by the wanted to comment as to why a decision to maybe go outside the industry from someone who doesn't have is maybe not as much hands on experience with <unk> is the right solution for <unk> for the next three to five seven years.
Whatever it may be.
Well thanks for the question and I think to your point the numbers speak for themselves. We have a very solid operating ratio in Q4.
We were tracking.
From Q3 to Q4 and the ambition we have for this year.
Our view a balance but theyre also ambition it doesn't mean that 57% at the end of what we could do but it's definitely to be solid with a 20% EPS as it relates to Tracy many of US know Tracy she's been a CPU for a long time I wouldn't define it as an outsider I think she would be more like myself, where she has basically two carrier one.
In their case, mostly in the rail and partly in the energy sector heading Transcanada portion of Trust me. The pipeline. She was on the board of a Frac sand company in other words at CP. She did a number of jobs in operation customer service Treasury.
And therefore time early days in my career was competing with her for the on some of the segments. So she knows the railroads.
The network.
She knows the competitions.
She is passionate about railroading and I think you will find that for sure.
Her love is very much into a passion is in the railroads. So I think in my view.
She is a railroader and she's not ready from outside but she did work for a number of years I think what six Sigma about eight years.
Network Company in Asia.
Energy space and by the way just on that point CN has a huge potential in the energy space. When you talk about the blue origin.
Prospect around Edmonton, and the petrochemical plant which are for.
Which are promoted out there.
Export product to Asia, Rupert I think that will be one of the thing thats. So she will grasp if I made as Ed and understanding very quickly what is it that we need to do to exploit the bright future of the western part of the network.
Alright, thanks for the commentary and congratulations and good luck on the next chapter.
Thank you David.
Your next question comes from the line of Rabies Schenker from Morgan Stanley . Please go ahead.
Thank you Judy again, congrats and good luck for the next phase.
I wanted to follow up on the on the pricing commentary.
Again, just wanted to dig a little bit deeper James I know you get a little bit of color, but has something changed with your go to market strategy on pricing and also how do we think about that pricing level going forward is it going to be like mid single digits pushing high single digits on an absolute basis or are we still kind of pricing very much relative to inflation.
<unk> comes down that pricing kind of comes down as well.
So we are using many many different levers in our pricing that's why we call it total price.
James can expand on that and we are above rail inflation rate of inflation has really picked up but what was the latest number James.
<unk> latest was just shy of 7%.
And you want to talk about pricing going forward, yes, Ravi I think the marketplace. There is.
Is very favorable to increase pricing when you say what kind of changed if you look at what happened as we developed through 2020 21.
Demand really picked up and capacity really began to have value and we are pretty smart at CN getting the right price for the capacity we have available in the marketplace. So that's been very successful. If you think about just this December we renewed almost.
In the range of 15% of our total book of business with an average rate of five 5%.
Just in December So you think about that carrying through all the way in 2022 first half of 2022, we got about another 25% of our book of business. That's up for renewal. So this is a big opportunity for us and I think the timing is exactly right and we've got the capacity and the ability to move our customers freight and help them win in their end markets. So.
I'm very very excited about prospects for 2022 and price and not just same store price, but total price. All these things, we do to try and lean out a little bit more value for this this capacity that we have to offer in the marketplace.
Im excited about that.
Yeah, Thanks, James and well understood.
Thanks, Brad and thank you Ravi.
Your next question comes from the line of John Chappell from Evercore ISI. Please go ahead.
Thank you good afternoon everybody.
Linda.
Rob maybe.
You pointed out on the cost side.
Head Count's hobbyists.
And the fuel prices, the higher prices, but offset by lower volumes was there any impact to maybe purchase services equipment rents anything else on the cost side from the actual lack of volumes in <unk> because of the mainline washout that as things start to accelerate in the first half of the year, maybe you need to add a few more.
As mentioned due to attrition a little bit more equipment that we've maybe seen the trough on the cost side and as volumes and you need to see a little bit of cost push as well.
Rob you want you want to start off.
Yes, so really.
None of the impact from the floods was in that PSM really where we saw the benefit was.
Some of our older locomotives, we were able to lay up some of our older least reliable very expensive to maintain that was a big part of that we have seen the benefit of our.
Capital investment with grain cars, that's allowed us to turn back some grain leased cars as well that's also been a part of this.
That we saw here in Q4.
Thank you.
I could add to that as well as if you remember at the end of Q3, when we were talking about our strategic plan on purchasing services and material. We said, we had identified $100 million of cost saving initiatives.
That was already secured I think right now we're still making good progress on this and I would tell you that we're about $150 million identified as we speak so again a lot of different things.
Coming together in terms of reducing contractors laying up of locomotives as Rob just mentioned.
Consolidating facilities and done the projects that we have very very detailed accountability on and we're very confident that we will deliver on our target. If you remember on PSM in our strategic plan, we have to deliver $250 million and we're continuing to progress on that so we're very proud of that.
Yes.
Thanks for the question. Thank you just one thank.
Thank you John .
Next question comes from the line of Brandon I'll Glinski from Barclays. Please go ahead.
Hey, good afternoon, and JJ, it's been a pleasure.
Congrats on getting the deal done Tonight. So I guess in light of that can you just talk a little bit about maybe what happened. The last few years did you guys just get maybe a little bit complacent on cost.
Not enough focus on the non rail businesses and then maybe more importantly from your perspective as you exit CN whats the biggest opportunity that you see going forward as it leaves the company. Thank you.
Thank you. Thank you for the question Brandon No CN is complacency is not part of this year and culture.
Worked very hard last here on.
Potentially doing a transaction with the folks in Kansas City during that time, we were already working on how we would then take rate, which is code for how we would potentially streamline workforce.
When the transaction cannot come together, we didn't actually had the plan to accelerate how we would become more efficient on the labor side and the sales team has been very focused on price since the beginning of the year you see the result, and you also saw the traction that to that Rob is driving on the operating matrix. You also have to put in perspective, we lost the mainline.
Hoover twice last year, we lost it for two weeks back in July .
When we lost the Bridgeville far and we have to rebuild it.
It has an impact it's real it's a major line for us it would be like Western railroad, losing their access to a part of a long beach to Vancouver is key to US and then we lost it again in November .
But putting that aside every year there is different things last year was kind of a special thing from that point of view, but the team is set we look forward, we don't look backwards and the plan that we have for this year for the team with Tracey coming onboard is a solid plan. We're also entering the year with solid labour costs, all the pricing.
As soon as the weather allows us to operate at.
Regular train speed regular train weight, meaning temperature warmer than minus 25, which hasnt quite been quite the case. So far this year on the Canadian network, we will be able to.
Produce etfs, so I'm very confident all of these things will come together and this team is energized to deliver this year and that used to come.
Thank you.
The next question comes from the line of Chris Wetherbee from Citigroup.
Please go ahead.
Hey, Thanks, Good afternoon, and best of luck J J. Thank you Chris.
I guess, maybe a couple of questions here, just when I think about the 57 or for 2022 could you just remind us sort of where you are with the asset sale sort of discussion and process and what's sort of in the number versus what may be not be in the number and I guess I'm curious to see if Tracy wants to weigh in on some of those bigger picture strategic decisions.
She arrives.
Next month, and then I guess and then also maybe as asset sales pertains to capital allocation just.
<unk>, maybe some thoughts on the buyback and how much if all of that can you get done in 'twenty, two maybe what the cadence of that might be.
So we have three things baked into our assumption is the freight forwarding to be shut down this year, which it has done and then we have a vessel sale that we are looking to do with the spring and then things on the transit. So I think alan's because this in and she can provide you with some more color.
These are the three items, Kevin yes, thanks, very much for the question Chris regarding the Great Lakes pleated vessels sale a potential vessel sale process is progressing with some active it is and as Youll recall. This fleet of vessels is accretive to earnings, but dilutive to operating ratio and so we're working through the final details of a potential.
Sale.
Any transaction needs to be at a favorable value to us.
Therefore, we are willing to continue to operate the vessels should a deal not be concluded at a favorable value to us with.
With regards to transact just a reminder, we are not actively selling transit we're exploring models to change the ownership structure potentially with a strategic partner again transit becomes accretive to earnings dilutive to the operating ratio.
As Keith highlighted trends X has done a great job of helping to grow our business and we are continuing to improve the performance of it and in fact rail miles generated III transit are up nearly 10% year on year, an improved margin.
Therefore, we are continuing to explore models to reduce our ownership interest, but retain the ability to drive for it to rail conversion, which is good for <unk> good for customers and good for the environment and I am sure Traci will have a view on that as she comes into the room. So stay tuned. Thank you.
Capital well maybe yeah.
So as as JJ mentioned, we.
We did we did announce a $5 billion share buyback, Chris that's exactly in line with what we signaled to the market on September 17th so.
Will we plan on deploying this actually as you know share buyback is the residual use of our capital. The first use of Capex will always be towards the business, but we.
We have announced it and with the plan that we have in front of us delivering 20% EPS growth 57, or with the share buyback of five $1 billion. We we plan on finishing our leverage ratio, which is adjusted debt to adjusted EBITDA to about two times and if you look at this year in 2020.
One because I'm still this year because.
I have not closed the books yet this year, we finished at 182 so that's.
That's what we're planning on doing.
We are moving forward with the share buyback of $5 billion.
That's right it was tough February one.
Okay. Thanks for the questions they have.
Chris.
Your next question comes from the line of Justin Long from Stephens. Please go ahead.
Thanks, and good afternoon, I know Tracey isn't on the call today, but is there anything from a high level that you could speak to about her initial vision for the company things that she could potentially tweak relative to the strategic plan that you've laid out and youre executing on today and at what point do.
You feel like we will get to hear more details around her plan and how she sees the business going forward.
So that will that will come soon that Justin.
In the April the earnings result.
She will be with the team leading the team and the CBD, but speeding and financial conference definitely for much person beyond.
I think the board has also been fairly clear since fairly early beginning of what is just whether you foresee and what theyre looking for and I am sure Traci will add in.
For color based on who's scale in general view, but I think I would defer that question to <unk> you can actually do that yourself in a couple of weeks. So if you could be a stroke patient.
Understood. Thank you.
Thank you.
The next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.
Thanks, Operator, Hi, Jay Jay Congrats on a great career wish you the best.
I wanted to follow up on that comment that you. Just mentioned you said the board has been clear after the strategy.
<unk>.
That may be the case, but I'm still a little bit uncertain about it.
Because I think back in September .
Something got lost in translation.
Just discussion about growth versus profitability, and we didn't need to do to get beyond 57.
Because we want to grow and so can you just refresh us.
And evolution and that philosophy around growth versus margin expansion.
When the board is picking a new CEO .
Was that.
Talk about the strategy in terms of growth versus margin expansion.
That was the biggest issue that people were confused about back in September .
Yeah. Thanks for the question. So yes. It is back in September at some of the comment. We got back was is 57, the endpoint and I. Just wanted to clarify 60 57 is in every important milestone and that milestone is for 2022 and I think we're tracking well to that is that the endpoint no thats nothing the endpoint just don't want to speculate at this point for us too.
What would be the endpoint that Tracy on the board we wanted to do but definitely we have to get into 57 generate very good EPS growth. This year will generate good free cash flow and an improvement in ROIC.
Because right now the Canadian crop is down remember in September it.
It was difficult to talk about solid RPM growth because supply chain are disrupted and on the Canadian side Theres no crop. This year that crop is 35% below last year and it's a huge part of our business. So we had to do with everything on price and cost, but CN is a growth story is a story also about ESG about balance.
Rewarding shareholders, but also our customers and making sure that we're there for the economy and if you're definitely calling me there I mean you grow.
<unk> now has the capacity to move more freight and what we do today because we were basically set up late last year early last summer for a solid crop that never showed up so he's got capacity for when their crop coming into fall.
You often hear Keith talk about Rupert expansion in Rupert to tweak or strategy. The work, we're doing in mobile and all the facts and the.
In New Orleans, and James got Great stories long term about.
Blue ammonia petrochemical and Edmonton about biodiesel and short term Canadian coal that CN over the next six months could be solid because we have two main reopening and we have this new contract with tech, which started still lapping year over year. So it is a growth story, but it's not they're short term.
Because the grain crop.
Doesn't materialize this time in the supply chain all disrupted.
But we want to use really the two lever and in the meantime, we're really reward cargo lever of cost labor cost.
Less of us at CN. Unfortunately for those that I have to ask.
To leave the company about 1000 of them back early in the fall and the sales team has got one specific mandate. When you move freight you need to be paid for it and you have to be paid at market price and market price today is up from where it was.
Just SCN, but across the board the transportation industry.
So that's we never met that 57 is the endpoint, but 57 is the goal for this year not too that the team will decide the how far it can go using all these levers and grow will be a lever again.
Second half of this year in 'twenty three and beyond.
Okay. Thank you very much.
Amy.
Your next question comes from the line of Scott Group.
From Wolfe Research. Please go ahead.
Hey, Thanks, Good afternoon, and best of luck J J so.
You guys did a 58 or in Q4 with weak volumes and Youre talking about bad weather in the pricing environment. There is still more pricing to go.
Why isn't there upside to the 57 or this year I would think that there could be some and then.
JJ I also just wanted to follow up on one of your comments you had a comment about Tracy saying that.
She is a railroader and.
Rightly or wrongly I think people are going to look and say well. She was at CP. During some of the tough years at CP. So maybe just curious just a follow up to that why do you think she is the right railroader.
So.
Just say you want to talk about the or and what's the potential for ore and then I'll talk about <unk>, yes. So thanks, Scott listen yes, we are very proud of our of Ror for for Q4 dollars 57, nine is actually a record.
The lowest we've ever done on or in Q4 was 58 and I think that was back in 2015.
Listen the plan is there I mean remember for the full year. We finished at $61. Two so it's quite a drop going from 61, 2% to 57.
And you need to get to 57% do we eventually go to 56% and $55. So our plan is there I think we've got all the all the.
The backup to deliberate we're confident we're going to deliver it there's going to be ups and downs during the year. As you know, we're an outside sport and things happen and I hope investors can see our resiliency and our ability.
To adapt and quickly changing conditions when J J mentioned, we lost our main line to go to Vancouver for five weeks overall so.
We're resilient I think we're a good team and <unk>.
57 is the goal and stay tuned and hopefully if we if we do have a better great. But the 57 is the goal and I think it's quite a drop going from 61, 2% to 50, yes. It's a good goal to Golar. Because this result doesn't mean 50 Savannah SDN, but 57 is definitely the goal for 2022.
We only in the third week of the year, So give us some time to see whether or not we can improve on the on the guidance, but the guidance or the guidance going back to your question about Tracy.
You will have the chance to meet her very shortly.
She will impress us he is a very solid leader. She has a very solid followership I think to be a CEO of the company.
You want people, who want to work for these leader just southern Division she has railroading in our blood.
She has she did a number of different position Etsy piece. There was part of the team but was not the only player on that team and I think what she brings to see and what she brings to CN is what we need for the future I mean its sometime.
In the rail industry and its becoming almost a bit of a you've got to ask yourself, whether it's right or wrong that we want to go back to the past and I think in fact, what you want you want to skate to where the puck is going to go next so what is what will make a company like CN is the <unk> network huge potential for growth.
The leader in fuel efficiency, making huge amount of effort on inclusion diversity, the ESG and technology things that weren't necessarily rather than 510 years ago. So we wanted to go back to where we were 510 years ago, what we want to use what we had 510 years ago and had a solid operating scale that Rob and his team are.
And then the hands that with technology with ESG with a focus on growth with a focus on customers' business development and ability to really lever all the lever that we have and not just the.
Precision scheduled railroading lever now that <unk> is an important obviously very important and we're all operating companies, but I think we reached a point in our industry.
I think Scott you hear that also for the railroad we need to find a way to grow we need to find a way to relate more to customers. So they can buy more use more of our business because we have such low cost versus other mode of transportation. There has to be a way for us to attract more business and remain a cost leader a 57% British.
Solid if you bring more business at 57 definitely you're producing an ROIC EPS growth, but it has to be and the leadership that put all these things together.
And not dependent only on the one thing and I think thats really where the industry's future is all about but when you have the chance to meet the Tracy Youll get to know her discover her and I think youll find that.
There's a lot there.
Yes, I think Thats fair that we'll all get to meet her soon enough and we should be open minded. Thank you guys I appreciate it. Thank you Scott. Thank you.
Your next question comes from the line of Tom <unk>.
<unk> from UBS. Please go ahead.
Tom.
Yes, Hi, JJ.
Also wanted to say I really appreciate working with you over the years.
Appreciate your great insights on the markets and customers and so it's wish you the best.
<unk>.
Wanted to you talked a little bit about there was a prior question on kind of the board criteria and focus and kind of growth versus margin I don't know if you can.
Offer a little more on just kind of how you think about that that growth focus and.
Going forward and what the board was looking for and then I guess I think CN over.
I guess, if I go back to when <unk> took over you said you know we're going to pivot to.
To volume growth and you guys had a great run for volume do you think CN kind of goes back to that like can you grow.
<unk> like you did for that period of time or how do we think about the.
The level of growth potential.
If we look at the way the board's viewing things in kind of the strategy.
Thank you.
Thank you again.
Tracy will have to.
We share with you very soon some of our vision, but I'll go back to when <unk> became CEO at that time, it became chief marketing officer and at that time, we had we.
We hadn't made enough progress on the operation that we had to find a way to make better use of the network and we grew the RPM and the volume very solidly and this is where Rupert went from.
Fishing port.
Known by anybody to becoming a place where we do business for both bulk and container I think.
The future of CN, though is really diverse.
At this point, we really wanted to leverage technology to reduce that make our railroad safer as you saw in progress we've done so far and we want to use technology to make the railroad in a lower operating costs. We also want to use the technology to improve our customer's relationship make the business more sticky and attract more freight and thats what the.
Agreement with Google is all about is to go deeper into the supply chain today, some peak customers, while something more than just the raw rail service.
One of these things to be friendly.
And then.
Operating margin will always be key.
Industry, which is very capital intensive and operating ratios were key where refocus on that you heard a lot about operating ratio in the third quarter and the quarter. Today. So I think there's a combination of these different thing that says between growth between good cost between technology between making sure that we are relevant to society and owned.
<unk> emission and also attracting the right title and keeping the right talent. All of these things are part of this year and long term strategy.
Remember I think the first time I met you I was handing to the chemical and you asked me another question about Dow chemical and whatnot, but I guess, what 25 years later.
Still huge potential lot of potential in Edmonton and Calgary.
Another wave of capital investment not refinery all sand this time, but theyre more about petrochemical plants that will be export and thats.
As part of the <unk> future again is how these these are <unk>.
<unk> facility like <unk>.
We'll mine like products mind, like petrochemical mind like big fast growing area for the Canadian prairies, how do they access the world market and there's only one good way to do that is with rail and CNN has a fantastic network to make that happen with the <unk> and especially Rupert and Vancouver.
<unk>.
Theres a lot out there for CN to be successful.
I'm actually the biggest shareholder of CN I was on the management team and I intend to remain a shareholder.
Voting going strong for the team at for Tracy.
Thank you for the question Tom.
Thank you JJ.
Your next question comes from the line of Steve Hansen from Raymond James. Please go ahead.
Yes, good afternoon.
Congrats on these pretty outstanding results in the face of some tough conditions.
Looking at the buckets of traffic here that can plug green gap so to speak I think you've referenced several already but I just wanted to get some degree of color or cadence around the coal ramp that you described but the new coal mines. Just curious if you have any visibility around the ramp of those two mines I think in the past you had suggested.
Met coal could probably about half of the gap, but just trying to understand how that cadence might play out here through the first half until we get some better Greenbrier.
Okay.
We will do that James will pick that one yes. Thanks for the question, Steve I've been itching to give that answer I'll call here I'm extremely excited about our prospects for coal, particularly in each one but that first quarter as well we get the full year effect of that tech of that tech deal and Thats Big but also two mines restarting with significant tonnage available to us.
So if you think about just from a car load basis, not a revenue base, but a carload basis, we are going to more than replace the lost carloads of grain with new carloads of coal and it's a big deal and of course, it's coming right. When we have that available capacity.
At <unk>, because we're not moving that great. So the timing is perfect you look at the pricing for our met coal and thermal coal theyre close to record highs I mean, the market is there the demand is there and we're going to be able to move that be there to move that call whether its going to Vancouver, our Prince Rupert we've got the capacity and desire and I got to tell you a very very excited about.
It's going to happen in the first half year, even though we're lapping on the grain side, an all time record in 2000, 22021 tough tough comps get into the second quarter that tough comp goes away and we still have the solid solid core story to lean on also has some significant growth on the frac sand side of our business.
You think about the future and how things are going to ramp up in western Canada, as a leading indicator as drilling activity in leading indicator for for railroads is that frac sand volume that's going to be part of that also a great story as JJ talked about around our renewable fuel re new facility starting up in the U S Gulf coast on CN to producing <unk>.
<unk> fuels, we are in talks with several parties about.
How we can position new crush plants at CN, both in Canada, and the U S. A matter of fact, we just connect included a new deal on a soybean crush plant with our friends at platinum crush more of those coming so when I look at the drumbeat and the opportunities in front of us.
Sowing the seeds in 2022 for the next five years to be just incredible incredible growth story for CN in 2022.
Boy, Oh boy hold on that second half is going to be real exciting and I know, Rob and his team just can't wait to get in there and move those carloads for our customers. So I think you also have the undiluted crude.
Crude facility, that's ramping up right now yeah. Thank you about the same size as kind of the hardesty facility. It's a new heavy undiluted thats the safe product moving down to the Gulf Coast. It started up late Q4 of last year, but Theres 40000 barrels a day of potential coming out of that facility and we expect it to be full.
We've for a long time, we've been the leader when it comes to moving heavy crudes, and we're still going to be the leader moving heavy crudes.
We expect our run rate for crude is going to be in the range of 95 to 100000 barrels a day going into 2022, we haven't seen numbers like that for a long time. We finished in Q4 about 75000 barrels a day for four crews and I remember at CN, we're very very weighted towards that heavy crude about 65% to 75% of our carloads are.
Safe undiluted crude so exciting times and Thats facilities located in Saskatchewan in Saskatchewan, Yes, JJ. Thank you Steve.
Thanks, guys.
Yes.
Our last question comes from the line of Jeff Kauffman from vertical research. Please go ahead. Thank you very much J J, congratulations and best of luck in your new endeavors.
A lot of my questions have been answered so I'm going to focus on Capex youre going to be spending about 17% of revenue as you advertise so that's a reduction of a couple of hundred million dollars.
Yes, you have a.
A number of new projects coming on so I was just wondering.
What's not in the capital budget that has been in the last year or two and how are we kind of reshaping.
Capital allocation in lieu of the new program.
Rob do you want to talk about how we how are we going to allocate capital. This year, Jeff the big difference in terms of year over year really is around basic cap and that is a credit to technology.
The use of the autonomous track inspection cars, we have 10 of those now running from coast to coast to coast across our network is giving us real time information in terms of the condition of our network and what we do what we do know is our networks and really really good shape. So when it comes to.
The ties and the undercutting in the ballast that we that we plan each year, we can be much more prescriptive with that real time information, that's really where we're seeing the benefit we think thats a sustainable model going forward, but we'll check it.
Year evolves and make sure we're doing the right thing that's really the biggest difference we are investing in capacity as we go forward.
We will extend for signings between Winnipeg, and Edmonton, which will help.
During this year to help enhance running longer trains and we will also break ground on a new intermodal facility in the Toronto area. Milton So we're continuing to invest in the future and I think youll see that going forward is.
As the business is there, we'll invest and be ready to handle it.
Appreciate your questions. Thank.
I guess the dividend of DSR are you implying them that this is a sustainable.
Level with some of the advances in technology for example, the <unk>.
Thomas inspection.
Yes, that's what I tried to say, we do believe that sustainable, but we're going to review it each year and make sure we're making the right decisions. We know the railroads in really good shape and we're never going to sacrifice safety as we go forward. So we'll make those decisions on an annual basis, but we're certainly reaping the benefits of technology. Okay.
Okay. Thank you for your answer.
Thank you Jeff.
Thank you. This concludes the question and answer session I would like to turn the call back over to Mr. JJ to them.
Well, thank you and thank you for joining US here, it's kind of a bittersweet for me.
Been a privilege to lead this incredible company over the past four years.
I'm very proud of what we've been able to accomplish for the last 26 years in order to have the serve alongside over 20000 of defined as people in the industry, but to all of you the sell side analyst with whom I have interacted over these quality calls since 2010, a special thanks to you and.
Special Thanks to your key interest in CN is a great company and you're keen interest in the rail industry.
I'm confident our new CEO Tracy Robinson is the right leader.
The right vision at the right time, and I'm very confident this team which is around me around this table here, we'll pause just followed the result in 2022 and beyond so on that note, although guar IBM two thank you.
Welcome to conference call has now ended thank you for your participation you may now.
Connect your line at this time.
[music].