Q4 2021 Canadian National Railway Co Earnings Call
In periods of economic prosperity and improved 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.
Our directors 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 just in how Kevin Lynch and Bob Phillips and I know she'll have a distinguish.
<unk>.
Career at CN in the future.
Note I'd just like to highlight the fact that Tracy will not be joining us on the call today.
Because we want 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.
A quarter that demonstrated <unk> resiliency and productivity.
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% 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 and an all time best <unk> for the fourth quarter at CN.
The Aps 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 walk shop, a 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 tracks on any given day, but in spite of this condition.
The CN team perform.
The ROIC for the year was 14, 1% and sequentially improving towards our 2022 guidance of 15% return on investment capital.
Clay will go into these detail later.
<unk> 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 than 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 <unk> 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.
Also 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, a ticket to a yearly dividend increase.
The board also approved a new share buyback program.
The amount in the range of $5 billion Canadian 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.
A 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, given 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 JJ mentioned seen employee performance improved nearly 20% in 2021 to an all time best for fewer 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 railroad is in great shape, and we are 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.
The 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 operating costs and better support the operations.
Hi, and machine learning tools, which will ultimately give customers more visibility.
Our partnership with Google Cloud is central to our strategic plan and reinforces our industry leadership.
Chip 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 and if railway cost inflation has been a core competence for the CN team for many years.
We've been an industry leader and consistent 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.
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.
The mix of our business.
Sequentially improve 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 product activity <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 CN 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.
Thank you James.
In Q4, we saw revenue growth in all carloads 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.
And 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 <unk> of the 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.
So in 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 Kate 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 CNS 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 if.
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 condition.
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 am pleased to report that with the solid progress. We have made in Q4, we remain confident in 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 key.
We are continuing to focus on yield management and cost efficiency I will now turn the call back to you JJ for some closing remarks.
Well I think as you say and just to close it before we go to Q&A.
Minder on September 17, we announced the next step of our strategy to redefine railroad for the next generation and as you saw during their Q3 into Q4 result, we are on track to deliver on our strategic plan.
Entering 2022 supply chain continues to be disrupted and we expect volume growth will be mostly a second half of the year story with a 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 actions.
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 both Colombia, So kudos to all of our engineering and operating people out there who work very hard.
Art.
<unk> has a bright future of leveraging technology, combining what operational now our shareholders over the long term and now operator, we will turn it back to you for the question.
Thank you well now begin the question and answer session.
A reminder to ask a question you will need to press star one on your telephone to withdraw.
A question Brett Stefanki.
As previously mentioned, we ask thank you Brandon 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. Thank you JJ I wanted to start with.
Our very best in your retirement.
Thank you.
Government tied to detect Cindy.
Severe flooding in the results in Q4. So I was just wondering if there's any way you can help us frame revenue impacted that whether incident and how much of that traffic backlog there might be new.
Andrew Q1.
So I think the question is obviously a very important question just link in to help quantify a bit and James can talk to us about what might be still around that business.
Hello, and thanks for the question listen as JJ mentioned, we did lose our mainline.
From Middle of November to early December .
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 more we thought we were going to be able to catch some of that back up in December however.
<unk> 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.
Business, that's still out there to move from the 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'd think about the international imports, they're all they're ready to move in and.
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 Conor Flynn.
From Scotiabank. Please go ahead.
Thanks, and thanks for taking my question and Echo line best wishes.
So and the MB.
The labor issues going on in the industry right now so in light of what's happening in the trucking market for the vaccine mandates.
I'm curious as to what kind of hiring outlook you have for employees not given you have.
These structured a lot of employees here.
The demand environment was pretty strong this year.
Do you anticipate any better nucor significant hiring at some point this year.
So on the the CN part of how we're doing with labor Ravi is very well equipped to do that and as it comes to the impact of supply chain of our business I think Keith will do that after that Rob Eric on arc in terms of our labor rightsize to the volumes that are out there right now.
In terms of 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 for attrition won't be on a one to one basis, because well productivity in there as well, but we will do some hiring.
As this first half evolves.
In case, the truck drivers disruption how do we leverage this these are supply disruption.
Sure.
Sure.
Okay.
Alrighty.
Yes.
Great.
Okay.
Sure.
That's in term.
Just in time models rely more heavily on trucks than intermodal. So there is opportunities for intermodal as those.
As that model has changed.
In addition.
In addition to that the driver shortages and the lack of truck capacity.
Our in park reasons for the shift of the customers.
For these supply chain shifts excuse me I understand you Couldnt hear me, we've got the Michael and I apologize for that our intermodal products are right in place for the.
For the.
Truck drivers to be able to excuse me.
Got it.
Frustrated 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.
The cross border demand has more recently developed with driver vaccines.
An overall driver shortage issues just this past week, we saw a big uptick in those discussions with our retail customers our transit 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're going 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 Nelson back from JP Morgan. Please go ahead.
Yes, hi, good evening, thanks for taking.
Question, Jay Jay Congrats on the retirement.
Hey, Brian this 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 grain 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.
Rosen comes around what you have more confidence more visibility and as you look into the back half and start.
Okay. Thank you. It's a good question and just maybe starting with the current environment. It has been still very challenging operation, especially in Western Canada.
At quarter to date for the second half looks bright.
James You may want to talk about the bulk and merchandise actually has been a solid story all along and there is freight 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.
Very confident we're going to meet our full year guidance the demand is there.
Think about the early winter snowfall, we're having here in the priorities is creating tough operating conditions, but I'll tell you we need that that snow pack. So we can have a good good.
Good crop recovery here for for next crop year, and all indications are that that's going to happen. So if you think about the second half of this year.
Grain comes back that significant.
The green.
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.
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 half first quarter first half of this.
This year, so we're going to be busy Robyn his team are going to be real busy year Canadian we wrap this up we have.
The DP world.
We'll have it is expansion coming this summer I think it's around July .
Kind of in the heavy negotiation with their with their long short person. So we will.
Exploit these two thing as well.
Question Brian .
Thanks, Susan.
Your next question comes from the line of Jason Seidl from Goldman Your line is open.
Thank you operator, JJ, let me enjoying everyone and wishing you all the best.
Pleasure.
I wanted to wanted to talk a little bit about the pricing side, you guys, obviously called that out.
<unk> seen that with the other two rail operators that have reported given some of the ongoing.
Supply chain constraints, especially in the cross border that might be developing will be.
With a vaccine.
And talk to the definitely.
Fourth quarter story was about price and cost so James.
Yeah, when I look at my Crystal ball, I really don't see it slowing down.
We.
Price for the market and we do it very effectively and I think the market demand is out there there is value.
For capacity and capacity something we havent as we continue to have ongoing discussions with our customers everyone's kind of settled in and realize that there's going to be higher price for for rail service moving forward as there is many goods so.
Fully expect that Trump strong pricing environment to continue through 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.
Just actually I had a question for the chairman patient who's on the line taking questions. Please.
I don't know if he's still on the line, but ask the question.
Sure. The question really JV I mean, the numbers are obviously very strong, but the question was going to be.
Rightly or wrongly the market perception is that the operational discipline and focus around <unk>, maybe has labs, obviously the numbers speak for themselves, but I was just wondering if the chairman might have wanted to comment as to why the decision to maybe go outside the industry from someone who doesn't have is maybe not as much hands on experience with CSR is the right solution for <unk> for the next three to five seven years.
Whatever it maybe.
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.
Argue a balanced but theyre also ambition it doesn't mean that 57% at the end of what we could do but it's definitely a solid 20% EPS as it relates to Tracy many of US know Tracy she's been at <unk> for a long time I wouldn't define it as an outsider I think it'd be more like myself, but she has basically through carrier one.
In their case, mostly in the rail and partially in the energy sector heading transplant of a portion of trust in our pipeline. She was on the board of a Frac sand company in other words C piece, you did a number of jobs in operation and customer service Treasury and therefore time early days of my career was competing with her fifth early in some of the.
So she knows the railroads.
The network.
She knows the competitions CN. She is passionate about railroading and I think you will find it.
Sure.
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 at six Sigma about eight years.
In a network company in the energy space and by the way just on that point CNN has a huge potential in the energy space. When you talk about the blue origin.
Spec around Edmonton, and the petrochemical plants, which are preserved.
Promoted out there.
So to export product to Asia, Rupert I think that will be one of the thing Thats. So she will address with limited 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 that.
Thank you David.
Your next question comes from the line of Ravi Shanker from Morgan Stanley . Please go ahead.
Thank you Julian again, congrats and good luck for the next phase.
I wanted to follow up on the on the pricing commentary.
Just wanted to dig a little bit deeper and I get a 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 or inflation comes down that pricing that comes out 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 rail 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.
He is very favorable to increase pricing when you say what kind of changed if you look at what happened as we develop through <unk> 2000 2021.
Demand really picked up and capacity really gained to have value and where pretty soon so thats been very successful.
Think about just this December we renewed almost.
In the range of 15%.
Percent 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've got about another 25% of our book of business that's up for renewal so.
The 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 market. So.
Very very exciting price all of 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.
Excited about that.
Yeah, Thanks, James and well understood.
Thanks, Matt and thank you Ravi.
The next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.
Thank you good afternoon everybody.
Rob maybe.
You've pointed out on the cost side.
Headcount zombies.
And the fuel prices, the higher prices, but offset by lower volumes were there any.
Impact maybe purchase services equipment run anything else on the cost side when 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 had mentioned due to ensure the cop five new volumes and you need to see a little bit of cost plus as well.
Ravi.
I want to start off.
Yeah, 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 Thats allowed cars as well that's also been a part of this.
That we saw here in Q4.
Thank you.
After that 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 a 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 facility 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.
Part of that progress.
Thanks for the question.
Thank you John .
Next question comes from the line of Brandon Augments.
Steve from Barclays. Please go ahead.
Hey, good afternoon, and JJ, it's been a pleasure.
Okay.
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 last year. As did you guys just get maybe a little bit complacent on cost or maybe not enough focus on the non rail businesses and then maybe more importantly from your perspective as you exit CN.
What's the biggest opportunity that you see going forward as he leads 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.
Essentially doing a transaction with the folks in Kansas City. During that time, we were already working on how we would integrate with which a signal a quote for how we would potentially streamline workforce.
When the transaction cannot come together, we've exited the plan to accelerate how we.
We become more efficient on the labor side and the SaaS team has been very focused on price since the beginning of the year Youll see the results and you also saw the traction.
That Rob is driving on the operating matrix. You also have to put in perspective, we lost the mainline to Vancouver twice nice here will offset for two weeks back in July .
When we lost a grateful firing we had to rebuild it and all that has an impact that it's real it's a major line for us is to be like Western railroad, losing their access before very 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 specialty from that point of view, but the team is set we look forward with all look backward and the plan that we have for this year for the team with Tracey coming onboard is a solid plan, we're actually entering the year with solid labour costs solid pricing.
Soon as the weather allows us to operate at.
Regular train speed regular train weight, meaning temperature warmer than minus 25, which hasn't quite been quite the case. So far this year on the Canadian network, we will be able to produce.
Which was GCM so.
<unk> comes from the line of Craig.
<unk> from Citigroup.
Please go ahead.
Hey, Thanks, good afternoon.
And best of luck JJ.
Thank you Chris.
I guess, maybe a couple of questions here, just when I think about 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 or may not be in a number and I guess I'm curious to see if Tracy wants to weigh in on some of those bigger picture strategic decision.
When she arrives.
Next month, and then I guess and then also maybe as asset sales pertains to capital allocation.
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 of great quality to be shut down this year, which it has done and then we have a vessel sale.
Of that we are looking to do in 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.
But.
These are the three items, Kevin yes, thanks, very much for the question Chris.
Adding the great lakes pleated vessel sale, a potential vessel sale process is progressing with an active it is and as Youll recall. This fleet of vessels is accretive to earnings dilutive to operating ratio and so we're working through the final details of a potential sale, but 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 regards to transact just a reminder, we are not actively selling <unk>, we're exploring models to change the ownership structure potentially with a strategic partner again transits is accretive to earnings yet diluted to the operating ratio.
As Keith highlighted transits has done a great job is helping to grow our business and we are continuing to improve the performance of it and in fact rail miles generated three transit newly.
A 10% year on year, an improved margin.
Therefore, we are continuing to explore models to reduce our ownership interest, but retain the ability to transfer it to rail conversion, which is good for <unk> good for customers and good for the environment and I am sure Traci will have with you on that as she comes into the room. So stay tuned. Thank you.
The aggregate capital, while maybe yes, 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 a 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.
The $1 billion.
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 2021, because I'm still this year because we are.
We have not closed the books yet this year, we finished at 182 so thats.
That's what we're planning on doing.
We are moving forward with the share buyback of $5 billion.
That's right there was kind of February one.
Okay. Thanks for the question, Chris Thank you Chris.
Your next question comes from the line of Justin Long from Stephens. Please go ahead.
Thanks, and good afternoon, I know turning season on the call today, but is there anything from a high level you could speak to about our 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 earning results.
She will be with the team at least and beyond.
The board has also been fairly clear.
Is the strategy for <unk>, and what they're looking for and I'm sure Traci will add in.
Her color based on their scale and their it'll view, but I think.
I will defer that question to <unk> Tracy 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.
Aye.
I wanted to follow up on that comment that you. Just mentioned you said the board has been clear after the strategy and.
That may be the case, but I'm still a little bit uncertain translation.
Just just discussion about growth versus profitability, and we didn't need to need to get beyond 57.
Because we want to grow in and so.
And that philosophy around.
Hey, Shannon.
Florida speaking a new CEO .
Was that right.
Talk about the strategy in terms of growth versus margin.
I think that was the biggest issue that people were confused about back in September .
Yeah. Thanks for the question so back in September So the comment we got backwards is 57, the endpoint and I just wanted to clarify 60 57 is in a very important milestone and that milestone is for 2022 and I think we're tracking well to that is that the endpoint no nothing.
Again.
Just I want to speculate at this point for us to know what would be the endpoint that growth rates in 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.
Right now the Canadian crop is down remember in September .
It was difficult to talk.
Talk about solid RPM growth because supply chain are disrupted and on the Canadian side Theres no crop. This year. The crop is 35% below last year and that's a huge part of our business. So we have to do it everything on price and costs to be sure that we're there for the economy.
And if you're definitely economy that I mean, you grow.
Rob right now has the capacity to move more freight and what we do today.
Today, because we were basically set up late last year early last summer for a solid crop. They never showed up so he has got.
Capacity for when their crop come in in the fall.
You often hear Keith talk about Rupert expansion in Rupert to tweak our strategy. The work, we're doing in mobile and <unk> and the New Orleans, and James have great stories long term about the.
Blue ammonia petrochemical and inventors of our biodiesel and short term Canadian call at the end of the next six months can be solid because we got through mine reopening and we have this new contract with tech, which started the is 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 a little disruptive.
But we want to use related to lever and in the meantime, we're really reward cargo lever of cost labor cost.
Less of us at CN Unfortunately for those.
You asked to leave the company about 1000 of them back to 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 need to be paid at market price and market price today is up from where it was.
The team will decide that.
Sorry can go using all of these levers and grow will be a lever again.
Second half of this year in 'twenty three and beyond.
Thank you Amit.
Churn comes from the line of Scott Group.
From Wolfe Research. Please go ahead.
Okay.
And best of luck J J so.
You guys did a 58 along.
And Youre talking about bad weather.
The pricing environment, there is still more pricing to go.
Why isn't there upside.
To the 57 award this year I would think that there could be some and then J.
JJ I also just wanted to follow up on.
I'm one of your comments.
A comment about Tracy, saying that.
She is a railroader and.
Rightly or wrongly I think people are going to look and say hello.
Was it CP during some of the tough years at CP. So maybe just curious to just to follow up to that why do you think she is the right railroader.
So just.
As you say you are attacked by the or and what's the potential for ore and then I'll talk about <unk> yet for that.
Thanks, Scott listen, yes, we are very proud of our of Ror for for Q4 dollars 57, nine is actually a record I mean, the lowest we've ever done on or in Q4 was 58 and I think that was back in 2015. So listen the plan is there I mean remember for the full year. We finished at 61, two so it's quite a draw.
Rob going from 61, 2% to 57.
And you need to get to 57% to eventually go to 56% to $55. So our plan is there I think we've got all the all the.
The backup to deliberate we are confident we're going to deliver it there's going to be ups and downs during the year. As you know we are an outside sport and things happen and I hope investors can see our resiliency.
Our ability to adapt quickly to changing conditions when J J mentioned, we lost our mainline to go to Vancouver for five weeks overall so.
All were resilient I think we're a good team.
57 is the goal and stay tuned and hopefully if we we do have a better great, but the 57% the goal and I think it's quite a drop going from 61, 2% to 50.
Yes, it's a good goal to Golar <unk> results. It doesn't mean 50 Savannah SDN, but 57 is definitely the goal for 2022 and we're 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 it takes you will impress you see as a very solid leader she has a very solid followership.
To be a CEO of the company.
You want people, who want to work for these leader shaft Southern vision, she has railroading in our blood.
She has she did a number of different position at CP. So as part of the team, but was not the only player on that team and I think what she brings to CN, but she brings to <unk> is what we need for the future I mean, it's some time I've taken in the rail industry and its becoming almost a bit of a you've got to ask yourself with it.
Right or wrong that we want to go back to the past and I think in fact, what you want you want to escape the way that <unk> 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 werent necessarily prevalent 510 years ago. So we wanted to go back to where we were 10 years ago. What we wanted to use what we had 510 years ago and had a solid operating scale that Rob and his team are in.
Hence 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 <unk>.
Decision schedule railroading lever net at PSA has been reported is obviously very important and we're all operating companies, but I think we reached a point in our industry.
And I think 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 the 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 57.
Pretty solid if you bring more business at 57 definitely you're positioned ROIC.
<unk> 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 at the end of industry's future is all about but when you have the chance to meet that Tracy Youll get to know her discover 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>.
Blitz from UBS. Please go ahead Hello.
Hello, Tom.
Yes, Hi, JJ.
Also wanted to say I really appreciate working with you over the years and I. Appreciate your great insights on the markets and customers and so it's wish you the best.
Thank you.
Wanted to you talked a little bit about those prior question on kind of the board criteria and focus and kind of growth versus margin.
Don't know if you can.
Offer a little more on just kind of how you think about that growth focus and go.
Going forward and what the board was looking for and then I guess I think CN over I guess, if I could 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 rpms like you did for that period of time or how do we think about the the level of growth potential.
Look at the way the board's viewing things in kind of the strategy. Thank.
Thank you.
Well again.
Yeah.
Tracy will have to.
Sure.
Very soon some of our vision, but I'll go back to when <unk> became CEO at that time, they became chief marketing officer and at that time, we had.
We had very solidly and this is where Rupert went from.
A fishing port of known by anybody to becoming a place where we believe is really diverse.
At this point, we really wanted to leverage.
To make our railroad safer as you saw in progress we've done so far.
We want to use technology to make.
I think the railroads are lower operating costs. We also wanted to use <unk>.
<unk> two <unk>.
And Thats, what the agreement with Google is all about is to go deeper into the supply chain today, some key customers.
Rail service.
One just thing to be friendly.
And then.
Operating margin.
And we'll always be key.
An industry, which is very capital intensive and operating.
The ratio is very key we're very focused on that you heard allowable operating ratio in the third quarter in a quarter today. So I think there's a combination of these different thing.
On ESG emissions and also attracting the right title and keeping the right balance all these things are part of the CN long term strategy.
The amendment I think the first time.
I met you our pending chemical and you asked me another question about Dow chemical and whatnot, but I guess, what 25 years later, there's still huge potential lot of potential in Edmonton and Calgary.
There's another wave to end this time, but theyre more about.
Petrochemical plant that will be export.
And that's part of the <unk>.
Chemical mind Big Vas.
Growing area four four in the Canadian prairies, how do they access the world market and is only one good way to do that.
To make that happen with the tweaks.
And this 50 Rupert and Vancouver.
So I think so.
Theres a lot out there for CN to be successful.
I'm actually the biggest shareholder of CN is on the management team and I intend to remain a shareholder.
Voting boarding strong for the team in for Tracy.
Thank you for the question Tom.
Thank you JJ.
Yes.
Good afternoon.
Congrats on these pretty outstanding results in the face of some tough conditions.
Just looking at the back.
Okay for traffic here that could plug green gap so to speak I think you referenced several already but I just wanted to get some degree of color or cadence around the coal ramp.
Okay cool.
Probably about half of the gap, but youre correct.
I understand how that cadence might play out here through the first half until we get some better green blend.
Definitely we will do that James will take that one.
Yes, thanks for the question, Steve and it's going to give that answer ill call here.
I'm extremely excited about our prospects for call, particularly in each one but that first quarter as well we get the full year effect of that tech of that tech deal in that big but also.
Well to us. So if you think about just from a car load basis, not a revenue base, but a car load basis, we are going to more.
More than replace the lost carloads of grain with new carloads of coal and it's a big deal and of course that great. So the timing is perfect.
You look at the pricing for our met coal and thermal coal they are close to record highs I mean, the market is there the demand is.
Is there and we're going to be able to move that be there to move that call whether its going to Vancouver.
Prince Rupert.
We've got the capacity and desire and I got to tell you a very very excited about what's going to happen in the first half year, even though we're lapping on the grain side at all time record in tough comp goes away and we still have this solid solid coal story to lean on also had some significant growth on the frac sand side of our business.
As you think about that.
Canada, leading indicators drilling.
Activity in leading indicator for for our railroad is that Frac sand volume that's going to be part of that also a great story as J J talking.
Fuels were in talks with.
How we can position.
New crush plants on CN, both in Canada, and the U S. A matter of fact, we just concluded a new deal on a soybean crush plant with our friends.
Platinum pressure more of those coming so when I look at the drumbeat and the opportunities in front of us.
2022 for the next five years.
Just to be just incredible incredible growth story for CN and <unk>.
2022.
Oh boy hold on that second half is going to be real exciting and I know Rob. This team just can't wait to get in there and move those Carlos for our customers the crude facility.
About the same size as kind of the heart.
50 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 there is 40000 barrels a day.
And we expect it to be full.
<unk>.
We've for a long time.
So moving heavy crude and we're still going to be the leader moving heavy crudes.
You're going to be in the range of 95 to 100000.
In barrels a day going into 2022, we haven't seen numbers like that for a long time with 75000 barrels a day for us.
For crude and I remember at CES.
Towards that heavy crude about 65%.
Our heavy undiluted.
Diluted crude so exciting times.
Scotchman, Yes, JJ yep. Thank you.
Steve.
Thanks, guys.
Okay.
Our next 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.
Sure.
Lot of my questions have been answered so I'm going to focus on capex youre going to be spending about <unk>.
Because you advertise so that is a reduction of a couple hundred million dollars.
You have a.
Number of new projects coming on so I was just wondering.
What's not in the capital budget.
It 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.
Who knows our networks and really really.
Good shape, so when it comes to.
The ties and the undercutting and the balance that we that we planned.
And 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 as the 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 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 our new intermodal facility in the Toronto area. So.
So we're continuing to invest in the future and Chuck.
Thank you I guess.
You're implying them that this is a sustainable.
Level with some of the.
The advances in technology for example, the.
Economists inspection.
Yes, that's what I tried to say, we do believe that sustainable, but we're going to review it each year to 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 a on an annual basis, but we're certainly reaping the benefits of technology.
Okay. Thank you for your time.
Good answer.
Thank you Jeff.
This concludes the question and answer session I would like to turn the call back over to Mr. JJ to lead this incredible company over the past four years.
Very proud.
The last 26 years and honor to have served alongside over 20000 of define us.
Whom I have interacted over these quarters.
Ali calls since 2010, a special thanks to you and feeding.
<unk> and <unk> is a great company.
And you're keen interest in the red.
With our new CEO Tracy Robinson.
With the right vision at the right.
I'm and I'm very confident this team which is around me around this table here will persist.
Youre welcome.
Thank you for your participation.
At this time.
Okay.
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Okay.
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