Q1 2022 Canadian National Railway Co Earnings Call
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Good afternoon. My name is Donna and I will be your operator today welcome to Cn's first quarter 2020 financial and operating results Conference call. All participants are now in listen only mode. After the Speakers' remarks, there will be a question and answer session I would now like to.
Ill turn the call over to Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Ritchie.
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Good afternoon, everybody and thank you for joining us for Cn's first quarter 2022 financial and operating results conference call.
Before I begin I'd like to draw your attention to the forward looking statements and additional legal information available at the beginning of the presentation.
As a reminder, today's conference call contains certain projections and other forward looking statements.
The meaning of the U S and Canadian Securities laws.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct a Q&A session.
Want to remind you to please limit yourself to one question.
IR team will be available after the call for any follow up questions.
Joining us on the call today are Tracy Robinson, our president and CEO , Rob Reilly, Our Chief operating Officer, Doug Macdonald, Our Chief Marketing Officer, and our Chief Financial Officer. It is now my pleasure to turn the call over to <unk>.
President and Chief Executive Officer, Tracy Robinson.
Thank you Paul and good afternoon.
Let me start by saying how honored I am to be here with you today and I'm excited to be back in this industry.
Actually to be sitting in this chair at CN alongside an outstanding group of railroad, who are working hard and excited about the future.
Now I want to take a moment as we start to just to acknowledge the difficult challenges being faced by the people of Ukraine. These last two months, we all want to find a way to help.
Anne has donated more than $1 million.
Support of Ukrainians displaced by the war.
So very proud of my fellow Sanders, who donated over $100000 of their own money towards this important call.
Our company will provide a match for these donations and our thoughts continue to be with the people of Ukraine at this time of unimaginable preference.
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So I know that you are interested in early thoughts on where we are as a company and where I see us going.
My priority is last two months has been to get out into the field and across the network getting to know our team and our operations are strengthen.
And our challenges.
You can't do something like that from the office.
We have also started to meet our customers and our stakeholders.
For the first time and some known for some time now.
To get their perspectives on us and how we can work better together in the future.
And I've spent some time with some of you and I've appreciated the feedback that you have offered to me as well.
So as I as I sit here 60 days in with all of that.
Can tell you that I'm more excited about our prospects than when I first arrived.
At CN, we have an incredible try coastal network best on the continent with the benefit of a diverse customer base across commodities and geographies.
The pipeline of growth opportunities across most sectors.
We have a healthy balance sheet provides us with financial flexibility.
And the ability to be nimble and driving our growth.
As a treasurer.
Especially in these times of rising interest rates and market volatility.
We're in the right spot as we continue our sustainability journey.
This team is deeply committed to safety as a core value.
And we have a team here of proud railroad or some with the right team everything is possible.
Now we all know what just keep this network is capable of delivering.
And we would all acknowledge that we haven't performed fully to our capabilities over the last number of years.
Putting that behind us.
And as we go forward here's what we're doing.
First we're running the scheduled railway with a laser focus on velocity.
This will help us to deliver more consistently to our customers and to get the most out of our assets.
Second we will curate our book of business to better fit our network and leverage our strengths now this means that we'll be more strategic about how we used our capacity to ensure that we can deliver effectively and that we position ourselves for the future non yesterday.
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We're going to work in a much more integrated basis between the way, we operate and the way we sell between the way, we invest and where we grow.
Fourth we will continue to invest for the long term in both our network and our capabilities to drive efficiency and.
And to position us for growth.
And with all of this will do is drive our topline growth to the bottom line in the near term and into the future. Now this is not all going to happen overnight.
No important effort with undertaking does.
But you have my full commitment that as a team.
We'll bring this company back to being best in class strategic.
Strategic goal and our daily focus.
Now I know that you're going to want more details on our plans we're working through those now.
Now.
I'll be in a position to.
To share a lot more as we advance our work and our plans become more definitive so stay tuned on that.
Now, let me say just a few things about the year.
We've updated our financial guidance for this year.
Harsh weather, mostly in western Canada, and supply chain disruptions impacted our ability to fully capitalize on the strong demand environment in Q1.
The uncertainty from the war in Ukraine, and the continuing pandemic disruptions in China and elsewhere, all suggest just a little bit of caution on the year.
I expect our EPS growth to be in the range of 15% to 20%.
And free cash flow in the range of three 7% to $4 billion.
We expect to have a full operating ratio our full year operating ratio.
With a five I'll note. This will be the first time, we've delivered that since 2017.
This will be a good year for seeing notwithstanding the global environment.
So im encouraged by our operating momentum since mid March and through April we are moving heavier volumes, even without the normal grain and our velocity and consistency is improving.
Demand continues to be strong we're expecting a more normal grain crop. This fall and we continue to monitor the situation in Europe , and the shutdowns in China, and how that could impact trade flows.
Our team is working closely with our customers to ensure that we understand demand and that we can prepare for their needs. We.
We will need to have the right resources people and power to respond to what we expect to be a busy year.
Recruiting running trades in particular is a challenge in certain parts of the network as we look into the latter part of the year.
So it's a tough start to the year.
But we will deliver to this financial outlook I am both excited and confident about the future that lies ahead for <unk>.
So I'm going to turn it to the team to discuss the quarter I have Robin design here with me both of whom you know I also have dug here today, our new Chief marketing Officer now many of you have had the privilege of meeting Doug over the years during Investor day, and the like he brings a wealth of experience in sales and marketing, but also in operation.
For he served as VP of our Eastern Division and in it where he was a senior VP of information and technology.
Markets and he knows our organization.
King to Doug towards closely with Robin just to bring immediate focus.
Our integrated plan and execution.
Rob over to you alright, Thanks, Tracy and first thanks to the dedicated team of CN railroad or to help get us through a very tough winter season, where we saw a tier two operating conditions in place for nearly 85% of the days in January and February .
And as a reminder, tier two is when conditions are minus 31 degree Celsius colder.
Forces us to reduce train size use more locomotives and crews and overall be able to move less freight through the very cold portions of our network with.
With the weather moderated and at the end of February we were able to regain fluidity on our network in the month of March.
We're working closely with our customers that are continuing to face supply chain challenges, particularly in the merchandise sector.
We saw all of our core metrics.
Rebound in March and continue to improve in April with our daily GTS up 24%, our car velocity up 35% train speed up 18% and our train length up 9% from the January lows, allowing us to get back to running as more scheduled railroad.
As we look forward to the remainder of the year, we're working to have the resources in place to accommodate the growth expected in the second half of the year.
And finally, while the extreme weather conditions in Q1 contributed a degradation in our accident ratio. Our team of Railroader has continued to reduce our injury frequency ratio with an 18% reduction year over year reinforcing that safety is a core value at CN.
So that I will turn it over to Doug.
Thank you Rob let me start by saying how excited I am the opportunity and leading the sales and marketing organization leveraging the best network in the industry and delivering value to our customers.
Let me provide you with an update on our top line performance in the quarter revenues were up a solid 5% to around $3 7 billion. Despite volumes on an <unk> basis being down 8%.
The volume drop did not come from demand, which remains strong but was mostly driven by extreme winter conditions in January and February as Rob just said.
<unk> supply chain challenges and a weaker Canadian grain crop, we did experienced significant volume increases in certain markets U S grain shipments to the Gulf coast for exports Canadian call from our new Tech business as well as two coal mines that reopened in late 2021.
Broad based growth in petroleum products and higher Frac sand shipments from our unique reach into western Canada, where drilling activity is strong.
As we look out for the balance of the year, we are still expecting volumes to be up in the low single digit range for 2022 with broad based growth across both segments. We are assuming a normalized Canadian grain crop starting in the fall.
Let me conclude with the following the current demand environment is strong and with improved network fluidity. Our focus is to improve our service to our customers and drive this growth to the bottom line.
Our yield management strategy is broad based and is backed by a solid pricing environment.
I'm working very closely with Rob's operating team. So that we are fully aligned to deliver the service required for our customers during the ongoing recovery.
With that I'll pass it on to just land.
Doug.
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Yes.
I will I will talk to page 12 of the presentation and provide more visibility on our first quarter performance.
As Doug mentioned, we experienced a solid topline performance despite volume in terms of our Tms being down 8%.
Our ability to hold the strong demand was in fact at the end of the quarter with very harsh winter conditions and continued supply chain challenges.
In addition, geopolitical political risk put significant pressure on fuel prices over the short term.
Despite these headwinds our team of railroad has delivered 7% growth in adjusted earnings per share year over year.
Let me provide you with more details on the quarter My comments will reflect adjusted results, which exclude advisory costs related to shareholder matters.
The conditions I, just referred to impacted the fluidity of the network leading to cost headwinds such as re crews that has had more snow clearing to name a few.
We continue to benefit from the non operating head count reduction that took.
Took place last fall as average head count was down 7% in Q1 versus last year.
Our fuel expense was up 44% as we saw fuel prices significantly rising in the quarter with Ww Ti touching around 125 U S. Dollar a barrel and on highway diesel prices spiking up in March up 27% versus February .
We have an efficient fuel surcharge program that deals with fuel price fluctuations like this but it does create some noise in the short term.
In the quarter, we were impacted with unfavorable fuel surcharge lag up seven tenths of EPS versus last year.
Our Q1 adjusted operating ratio came in at 66, 6%, which was 30 30 basis points higher than the same period last year and reflecting the headwinds I just highlighted.
We delivered adjusted net income of nearly $925 million in Q1, and then adjusted diluted EPS of $1 32 up 7% versus last year.
We generated free cash flow of $571 million for the quarter up $31 million from last year $32 million from last year.
The increase was mainly from proceeds on the sale of noncore branch lines, which was partially offset by lower net cash from operating activities.
During the quarter, we repurchased shares in excess of a simple dollar cost averaging approach as we clearly saw value in repurchasing at prices that prevailed in early Q1.
We have a strong balance sheet that provides us financial flexibility and we will allocate our capital in a manner that drives long term value for our shareholders.
In conclusion, let me reiterate a few points the current demand environment remains strong.
Which should translate and solid volume growth for the balance of the year I think a normalized Canadian grain crop.
Network fluidity definitely started to improve in the latter part of March and is continuing in April .
We are closely monitoring inflationary pressures with the continued uncertainty in the world.
With that.
22 financial outlook, including a 15% to 20% growth in adjusted diluted EPS versus 2021.
We have the best network in the industry and we know what this network can produce let me pass it back to Tracy for some closing comments 20 <unk> century. This is a great.
This company with significant potential.
Our focus is on <unk>.
Driving long term sustainable growth.
Should railroads focusing on delivery.
Great for our customers and we will invest for the long term and our talent.
The next generation of <unk>.
And our capacity.
Global growth opportunity. So our goal will deliver long term value for all of our stakeholders.
The best in the business now.
Now, we're happy to pause here and take your questions.
Thank you we will now begin the question and answer session.
To ask a question please pause previously.
Previously mentioned, we ask of Japan, and mainly to itself for one question.
To ask a question. Please press star one on your telephone keypad.
Your first question comes from the line of Jon Chapelle from Evercore ISI. Your line is now open.
Thank you good afternoon, everyone.
Tracy I know, you're only 60 days in and you've laid out some of your ambitions already you did step into a pretty widespread.
Widespread corporate strategic plan.
Just six months adopted just six months before you started so I'm just wondering given some of the uncontrollable headwinds that you're seeing in the market. Today are there any areas of that September plan that you think need adjusting whether thats the growth focused element of it the resource base or some of the strategic strategic initiatives.
Thanks, Jeff Thanks for the question.
Okay.
Yes.
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Employees.
Customer stakeholders.
Wonderful.
Great.
Three posts.
Great Optionality on each coast.
Strong carload bulk intermodal franchises.
Great customer relationships strong growth prospects and great team, there's a lot that's really strong here.
So as I look at it.
Well, we need to do.
Lean in on refocusing running that scheduled operation focused on velocity, making sure that we are intentional, but the business that we take on so that we can deliver to our customers and I think.
So thats the way, we are going to drive the growth in directly to the bottom line.
Get the team set up to work on a much more integrated manner Theres no doubt that all of what was laid out in September that peanuts without a doubt.
I'm excited about some chasing it it's going to take us a bit of time to get all of this organized but from 60 days in as you say I am optimistic.
Thanks for the question looking forward to it thank you Tracy.
Thank you. Your next question comes from the line of <unk> Gupta from Scotia Bank. Please go ahead.
Good afternoon, and thanks for taking my question Congratulations Doug on a neutral.
So Tracey maybe first.
Question for you you mentioned about.
Spending some time.
The operations and meeting stakeholders et cetera.
I just wanted to understand given what's going on in the U S right now with the STB.
I think there's so many obviously U S class one railroads regarding the performance and.
Deliverables basically and their focus on operating ratio.
What's your what's your biggest piece of it from talking to your customers.
Customers may be regulators and shareholders in terms of what needs to be done.
Yes, it's an interesting question listen the most important thing we all do every day is to make sure that we.
Provide the service that we've committed to our customers and we're all focused on that and the supply chain and the last.
Two years, two and a half years have been there's been a big shock to the supply chain.
And we're working very hard to.
Get our rhythm back in our operation back in to serve our customers well and each one of us and the industry will have different challenges on that.
And I'm going to ask Rob to make some specific comments around.
Some of the proceedings that are taking place in the U S. Rob kind of arc we.
We certainly understand the concerns of STB and we're working with the STB to.
Provide the potential solutions there.
And especially with our customers on any service issue that may or may arise at CN. We do have a very strong track record in terms of growth, particularly in the intermodal space and also the investment to help support that so customers are a big part of what we do and we're going to continue to stay partnered with them and working with the regulator.
In this case, the STB I'll be there tomorrow and look forward to the discussion. Thanks for the question. Thank.
Thank you.
Thank you. Your next question comes from the line of Ken <unk> from Bank of America. Please go ahead.
Hi, good afternoon.
Just a clarification question, but before I come to mind.
I think three times on the call. You said you are now forecasting an above average.
I'm, sorry, an average crop and I think in the in the fine print on your 2022 assumptions. It says you are looking for an above average crop for 'twenty two 'twenty three so I just wanted to Tracy the companies I'm talking about.
Focusing on the right freight for years I just want to understand what is the wrong phrase right. So you talked about is it just missed pricing on business is it maybe just talk about your.
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<unk> of what needs to be changed with the base of freight.
And the important thing thanks, Ken by the way, it's good to hear your voice.
We need to have the capability.
So part of this first understanding what our capacity and our capability of our operating plan is and then.
And selling into that so that we're capable of consistently delivering.
We've committed to our customers and joining once we do that that will really understand what our capacity is and then we will sell in sell in to that from there we lift our head and we take a look at that pipeline of great growth opportunities. That's in front of us. So that's the way I'm thinking about that as we go I'm going to ask.
Doug to comment on your first question around the grain crop assumptions hi, Ken just to clarify I said that the industry always talks about a three year average that would be the prior three years. What we're doing is we're talking more of a normalized so we've eliminated that drought year last year. So we just have a more realistic view of a normal Canadian crop that's all.
Okay. Thanks.
Congrats on that Jonathan and Tracy welcome and good luck. Thank you guys. Appreciate it thanks Ken.
Thanks, So much. Thank you. Your next question comes from the line of Brian Awesome back from Jpmorgan. Please go ahead.
Great. Good afternoon, thanks for taking the question.
If you can just clarify in terms of the investment.
How are you Brian isn't bad.
Certainly on the team.
In the quarter and then just a follow.
Follow up on that until you on technology application that probably still a little early but <unk> clearly been one of them.
A big proponents of applying technology and drilling along the DSO accounts in the past. Thank you.
Thanks, Brian listen I Wonder if you could repeat the first part of your question I caught the second part about technology, but what was your first for Steve.
I'm sorry.
You mentioned talking about being best in class returning the networks being best in class bet on the warrant perspective, NTS growth how would you measure that.
Well listen when I left the industry.
<unk> was the one that we're setting the pace and that everybody else is chasing and we all know what this network and what this team is capable of doing it is not a matter of visit operating ratio is the growth I think it's both.
In order to grow you need you need a tight.
<unk> operation that moves quickly delivers effectively to our customers and that's where we're going to get at our rail capacity and we're going to be able to grow. So it's it's a matter of both with company knows how to do it there is a lot of muscle memory here and I'm excited about stepping into that with them.
With regard to technology Youre right is this something that I haven't got deeply into yet, but I can say that it is one of the changes that I've seen is that come back into the industry and it's really exciting to see.
Some of the new thinking and the new capabilities that have been brought to bear.
I know this company has got a lot going on in that front as I sit here 60 days, then I havent got into a deeply yet but I'm excited about the potential that it has to offer. Thanks. So much for the question.
Thank you Jacob.
Thank you. Your next question comes from the line of Cherilyn Radbourne from TD Securities. Your line is now open.
Thanks, very much good afternoon.
<unk> got another one for you.
In terms of your objective to curate the book of business.
So early but I was hoping you could give us a bit of perspective on how you see intermodal.
In terms of the scale of that growth opportunity and how attractive that opportunity relative to the return on capital.
Thanks Sharon.
And most important part of our of our book and I think it is now and it will be in the future. The question for US we've got a.
A really strong pipeline of growth opportunities and I'll call upon different parts of our network differently. So it is not a single answer.
As we look at this is going to be being it's going to be about being intentional about.
Putting the right volume on the right parts of our network. So that we can deliver effectively when you can do that you can do that with some velocity than you can select the returns that you get on the capital that you invest so we're getting into that work now I can't tell you exactly where it's going to end up but as I said earlier and we're excited about.
How about the prospects here.
Thank you.
Thank you.
Thank you. Your next question comes from the line of police Wetherbee from Citi. Your line is now open.
Hey, great. Thanks, good afternoon.
Appreciate the answer to your first question was that weak a little muscles as far as I understand it earlier in the call. So I apologize, but I was hoping maybe you could kind of give us your perspective on what you think the strategy of the company should be relative to the operating ratio versus balancing that with sort of profitable growth, which I know was ultimately the.
I think for every railroad, but wanted to get a sense, obviously, leading up to the <unk> path and potentially defer.
Different folks who are interested in the job.
But one point, who had different opinions about that relative to where you where the company had been.
Two to your top line.
Volume growth. Thank you.
Previous one was muffled.
I'll go a little slower this time.
As I come in as the game has changed.
Our table stakes to operate.
Kind of operation and we're going to do that by focusing on the very balanced schedule.
Operation and model with a focus on velocity.
That I think is.
Is the thing thats going to allow us to do with Houston.
It's going to allow us to deliver consistently to our customers.
It's going to allow us to get the most out of our assets.
And it's going to allow us.
To be able to see more clearly where available capacity is now and to be able to decide how to sell into that operation in order to generate the top line growth.
And top line growth that growth is only interesting if you can find a way behind.
Going to the bottom line.
Yes.
And then to the schedule approach.
This focus on velocity, and then move our assets well and we're going to be intentional about our business hope that makes sense. Thank you. Okay. Thank you very much.
Thank you. Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Your line is now open. Thank.
Thank you operator, hi, everyone Tracy hearty congratulations on your appointment.
I'm trying to understand your philosophy.
Running the business, what a railroad needs to accomplish.
And so the question is three to four years from now.
We can fast forward to that point if.
If you look back.
What would be.
And I want to leave it open ended because I wanted to understand your philosophy.
But I would ask if you could to be.
Somewhat specific so we can understand how you are going to gain.
For years.
Thanks for the question Amit.
So look with 60 day events.
So.
Let me say this for now.
Three to four years from now exactly what we're talking about today, but focused on driving long term sustainable value. So the way, we're going to do that.
Good velocity duration and move our assets quickly.
We're going to sell into our network.
We're going to drive our topline growth to our bottom line.
And then we'll get out lift our heads and look at what is a very healthy and interesting pipeline of growth opportunities for us.
As I said, we're doing a little work on this right now.
And we'll be happy to share a lot more details on it.
Our plan Chris.
Crystallized and then.
We get all the specifics in place.
But it is operating ratio is the growth is it all of the above because.
The yard sticking with.
And a fixed cost business growth.
The margins are not mutually.
Exclusive which is what the message and C&I has been for the last many quarters. So I just want to understand your philosophy around three or four years is there an opportunity to P&I with its network with its velocity potential to be the best railroad in the industry is that an opportunity that you see and that's important to you.
Okay.
Having a successful outcome.
Well, if I think about the way I'm going to measure.
<unk> success as we go forward.
It's going to be around the long term growth bottom line.
But the metrics that we'll be looking at.
We do that.
We're going to look at once we get our plans set up we'll be looking at compliance to plan.
We'll be looking at velocity will.
We will be looking at growth.
And we'll be looking at margin. So yes operating ratio is important and I think we're all know what this network and this team is capable of driving on that front.
But the gift.
A very effective tight operation and a good operating ratio is the manner in which it allows you to grow.
So you can capitalize on the growth opportunities and drive that growth to the bottom line and that's the way I think about this.
Alright, Okay. Thank you very much I appreciate the answers. Thank you. Thank.
Thank you.
Your next question comes from the line of Walter <unk> from RBC capital markets. Please go ahead.
Good afternoon.
Hi, Tracy could hear from you again.
Sure.
Hey, Walter Nice to hear it's nice to hear your voice.
Just a question on I guess, the strategic direction of some of the non core items that had been highlighted previously and just your thoughts on those.
I am referring to trucking operations.
Do you view trucking as is.
Our growth enabler or is this a noncore.
Our non core are there any other similar types of of kind of.
Non core opportunities that you could see through divestiture.
Going forward.
It's an interesting question and what I can say now Walter is that we're going to continue to evaluate all of those pieces of our business I am aware that there has been some discussion in the past around what we should do with those is no change in direction. At this point, we're focused on ensuring that we've got the right business on our network for our.
Network and.
And making sure that topline goes to bottom line in the most effective way I wanted to be part of evaluating those options. So.
I've laid out with our first priorities are.
But as we lift our heads in a few months here and start looking at longer term growth in the choices, we're going to make I want to ensure that we look at all of these pieces through that lens. We have this great advantage network and a strong set of growth opportunities I can't tell you, yet, which one ones of them will factor in over the.
The long term, but I think we've got some great choices.
I'm pretty excited about getting into this.
In your current forecasts include those are not predicated on any any divestitures.
Thanks.
That's right.
Just a quick pause so that I can.
Make a decision with the team on them, but I'm going to ask us to just comment on that as well.
Yes, that's right.
Walter we're still we're still assuming that we.
I would stay tuned.
So what we decided to do but.
We're reviewing.
Thank you.
Thank you.
Your next question comes from the line of David Vernon from Bernstein. Your line is now open.
Hey, Thank you operator, and good afternoon, everyone.
I don't want to kind of stick with you for a second on the guidance when we take a look at the first quarter our team performance.
Look at the fine print there are expecting up low singles I think it implies sort of a mid <unk> mid to high singles.
<unk> growth in the back half of this year or next two quarters anyway.
How much have you sensitize that again.
What could happen as a result of the China Lockdowns in intermodal and <unk>.
And as you think about kind of the puts and takes from this year's guide to adding in sort of <unk> growth and the expansion of Lindbergh.
How good are you feeling about that 23% to 20 to RPM.
Not looking for guidance on 'twenty, three kind of in some sense of the puts and takes would be helpful. Thanks.
I'm, just kind of jumping on that one and then I'll hand, it over to Jay.
I would say that as we as we've crafted kind of <unk>.
An updated outlook on the year it takes into consideration all of that as we put this range of 15% to 20% of EPS growth.
Assuming that the as Doug said, the normalized kind of trough level from a green perspective.
It's going to be really important towards achieving.
Our goal from the year and we are watching very closely what's going on in China and some other places in truth around the pandemic.
That will kind of watch that as it goes forward then.
It is a risk, but as we look into 2023, we'll see things normalizing I think yes, and I think I think as you said I think that currently as Doug mentioned in his remarks, we we see the demand being very very strong, but as you know sometimes this can change quickly but at this point we see this.
Demand being quite strong in and actually what we're doing.
As we are hiring.
And Rob talked about this to make sure that we can deliver on good customer service in the fourth quarter. So we are hiring in all hands on deck, especially in Western Canada. There are some locations that are harder to to higher so at this point, we see the demand being quite strong, but we are.
<unk> the global.
Environment very closely because.
Things are volatile and things change, but at this point, we're quite bullish and we're quite comfortable about this 15% to 20% EPS guidance.
Thank you.
Thanks for the question David.
Thank you. Your next question comes from the line of Scott Group from Wolfe Research. Your line is now open.
Hey, Thanks afternoon. So.
The idea of being intentional with the.
Mrs.
When does that start is that reflected in the volume guidance for the year and then maybe Tracy your perspective on the balance sheet.
You guys have the lowest leverage ratios in the industry is that something that is important to maintain or do you think that there is potential there.
Kevin I'll start and then I'll hand, this over to Jay So.
From a volume perspective, maybe I'll hand that one over to Doug in a moment, but.
Our guidance as we look at it this year kind of thing incorporates all of what we've talked to you about around our assumptions demand is strong now, let's see where.
We've got a really strong balance sheet and the flex.
As we think about.
Capital allocation, we will always.
Prioritize.
We will look at it through the lens of long term value from our priority type building our business.
Always going to be our first priority and we want to maintain a strong balance sheet, but after those things you know.
We will consider incremental shareholder distributions.
As we've done in the past I think it's interesting time right now to think about the advantages of a strong balance sheet like ours is to be going to a period of higher inflation, but.
Just first and then maybe Doug.
No I think you've covered it well Tracey I think that.
The use of our balance sheet.
<unk> the same and it's the first use of cash is towards the business, we do debate.
On a quasi regular basis the leverage we do do that I think that for this year. We are committed to do our share buyback of $5 billion I think that we started executing on that since February .
<unk>.
And I think that at the end of the day to your point Tracy I think that the key is to use the balance sheet to create long term shareholder value I think thats the key and that's what we're focused on.
Thanks, Yes, and just to highlight are the plan does contain all of our current business. So it's great. It's fully into the plan. It's baked in there. We believe it's there to have but we also have is a very strong pipeline of other opportunities. So when we look at those we have to look at what fits into our network, how do we move it and all that and that's what we're talking about <unk>.
And the book of business, we have to be very select of how that fits in with our operating environment and Rob's team and what we can move and when we can move it. So we're pretty confident that we're going to be able to hit all of those numbers.
Just if I can clarify one thing about investing in the business that you guys had a long period of spending.
20% of revenue on Capex I think this year it was closer to 2017 any thoughts on where that trends in the future.
Thank you.
I think we're still at 17% Scott I think that.
And we do reassess we do reassess our investments on a regular basis and again like just rest assure that if there is a good project. That's got a great return, we're not going to turn it down just because we want to get to the number I mean, we'll do the right thing for the long term shareholder value that this will create so I think at this.
What I would tell you that we're still we're still in the 17% of revenue range.
Thank you.
Thanks Scott.
Thank you and our next question comes from the line of Steve Hansen from Raymond James. Please go ahead.
Good afternoon. Thank you.
Just a question on the service reliability and fluidity improves.
Improvements that youre, starting to see I think we all understand there's been a number of constraints for specific industries forestry fertilizer still come to mind recently across the broader north American platform, but.
Thanks.
How long do you think it takes to get back that fluidity and customer service that you had been known historically, so well for us.
Yes.
This is rob.
Okay.
Okay.
Understood.
Continents.
Okay.
So you're right.
Pre BC flooding does I mean, theres always room for improvements, we recognize where January and February just weather impacts itself.
The impacts on our customers and we continue to work with them and.
The particular payout where youre at in Colombia.
Colombia was.
Some of our cash.
And.
Okay got it thanks.
Thank you. Your next question comes from the line of Tom White of itself.
Yes, good afternoon.
I wanted to get a sense and.
Tracy and Doug Congratulations.
Okay.
I'm trying to kind of develop some intuition and what will you have in mind for.
Velocity, but.
Yes.
I think of you could change the schedule you could expand deciding and things like that that I.
Yes, if you change the schedule, maybe that can be a little bit quicker, but what Tracy what's your intuition in terms of are there some things from an operating perspective that can be changed fairly quickly.
Six to 12 months to really drive that network improvement or.
We're talking about reworking the book It makes me think this is more like kind of.
Two or three year type of play to really drive that network improvement. So I don't know if you have into it if you can lend some insight on what you are talking about and what the timeframe is.
You.
Thanks, Tom So this team has done a fantastic job over the last six months of working through some pretty significant.
Our fluidity as Rob said.
It gives us an opportunity to look at the business that we're moving.
And weather.
It's led to a balanced operation.
We've got some near term opportunity.
Goodbye.
About building some balance into our operational plan, and then selling and selling into that balance. So there'll be some near term we're going to work on that right now.
Between the balance.
And velocity and volume growth.
I don't know, Rob if you want to add anything to that no I.
I think you hit it.
The opportunity is ahead of us in the railroad has recovered quite nicely from the challenges in January and February and.
We look forward to preparing for the second half of this year in terms of the volume growth.
Okay.
Okay. Do you think there are some kind of quick things in terms of schedule and changing some of the operations that we would see over a couple of months.
Got it okay.
Thank you thanks, Nick Thank you.
Thank you and your next question comes from the line of Justin Long from Stephens. Your line is now open.
Thanks, and good afternoon.
I wanted to ask about the 2022 guidance how much of the trim and the EPS guidance was a function of the first quarter and some of the weather events and supply chain issues, you faced versus a change in the outlook for the remaining three quarters and then specifically.
Typically on the or I was wondering if you could unpack the change in the outlook there from 57% sub 60, how much of that is fuel versus other items.
Yes, Justin Thanks.
For the question. So obviously when you look at our guidance and.
Going from a 20% and up to a 15% to 20, obviously.
The growth that we had in the first quarter up 7%.
Has an impact for sure and then.
When you look at the <unk> I mean, we delivered a 66, 6% or in Q1, so obviously.
This.
Played into it.
The good news is I think that the demand is very strong as we've said I think the pricing environment is favorable I think to Rob's point, we're getting a cadence back in terms of our network fluidity and we can see that clearly.
The latter part of March and then in April and I think that we're not going to uncouple fuel.
On or in with them without I think that at the end of the day, we do consume fuel. It's included in there. It is included in our guidance that now.
We will have in or that starts with a five we did provide our assumption on fuel for the fuel for the full year and it's between 90 to 100 U S dollar a barrel.
So.
And as I said, we do have an effective fuel surcharge program.
But it does create it does create noise and it did create a seven seven.
<unk> EPS negative unfavorable lag in the first quarter, so, but when you put all of these pieces and I think that's where.
The team and Trust me, we looked at this quite hard we feel comfortable that we will deliver on that on that updated guidance.
Thanks for the question Justin Okay. Thanks. Thank you. Thank you. Your next question comes from the line of Brandon <unk> from Barclays. Please go ahead.
Hi, good afternoon, and congrats to Tracy and Doug.
Tracy obviously Canadian national used to be viewed really best in class with a really great.
Great culture.
But you did mention in your opening remarks about getting operations and marketing and sales efforts, maybe a bit more aligned.
I don't know if you want to hit that one or Doug.
How is this changing and maybe can you push the culture and a more favorable way to get better outcomes there.
Okay.
I'll, maybe take that and then Doug you can come in behind me and give you a perspective listen this is a great company. It's one of the iconic companies in Canada and as I said earlier, we all know what this network and this team can do as I've been out across the property.
And meeting our employees.
Am overwhelmed by the book of talent out there, but also the enthusiasm and the desire to kind of put a shoulder to that end and win.
Without a doubt I think that the first step is that we need to work more tightly together between what we sell and how we operate the network and we started that already also to work more tightly.
Together around where the opportunities are and get on top of the challenges.
A network like this.
Need you need to approach it on an integrated way.
So between finance between operations between commercial we need that kind of balance in that in a connectedness between what we're how we're.
Building, our operation and what we're selling into it can only do that together how to drive the growth to the bottom line. So I'm seeing some great energy in the company as we lean in.
And I'm I'm really optimistic fantastic network great opportunities.
Thanks, Tracy so listen the teams have always worked well together so the sales and marketing team has always been hand in hand, with the operating team, but a lot of it has always been hey, let's sell let's operate now, let's let's sell it off.
Operate together, so it's going to be Rob's team into the sales market came off the table, saying, here's where we have the assets, here's where we actually have the fluidity, here's where you have the actual capacity to handle them could you guys sell into that sure, let's turn to sales and marketing guys loose, let's do that versus here's where we are.
Have some sales opportunities Hey, Robyn guys can you guys build the capacity here. So it's going to be a lot more given take and working together to make sure we get the best value for the railway and drive all of that new business to the bottom line.
Thanks.
Thank you.
Thank you. Your next question comes from the line of Ravi Shanker from Morgan Stanley . Please go ahead.
Thank you Tracy welcome and thank you for all the thoughts today.
Right.
The line of questioning here correct me, if I'm wrong, but I think.
In your prior role.
A real customer.
It may have been a fee and customer.
Okay.
Site as well so I'm wondering if there's anything you're bringing to the table on day, one that you've been able to talk to yourself.
People at CN.
Their CEO do what I do on day one.
Thank you.
Again, maybe a general railroad versus shipper, a question or a specific question about the CN and your experience there, but where does the user experience of the shippers are going to bring to the table here.
Hey, Robert Ashley I wasn't a customer of the railways.
In some regards in the energy industry I guess, we kind of competed with the railways Iran.
The Canadian natural gas pipelines for TC energy and I spent a lot of my time.
Alright, running a big operation pipeline across Canada, and a lot of time building pipelines, but no. It wasn't a customer other railroads, but always been a fan of the railways and it's an honor to be here and particularly in this company.
Got it so yes.
Is there anything you're seeing from a.
From the other side.
But do you think you can implement them.
Well listen I think that.
I wasn't the oil side when I was in the energy industry as I said it was a natural gas.
But I will tell you this.
What I've learned over time is that there is absolutely a place and a need for both.
There is no better than past me doing big volume silver long periods pipelines play a great role there.
Railroads are very nimble and can come out.
The pipeline in Hardesty and you can get to any market North America on an existing rail network, so that kind of flexibility and the ability to be nimble as pretty critical to the energy industry right. Now so I think that the complement each other I think you've seen that happen pretty effectively over the past number of years and it will be important part of our.
Our collective ability to serve the energy industry going forward.
Got it I'll just follow up question on the.
Second half volume outlook.
Just wanted to clarify your comments on the kind of.
China Lockdown situation than maybe some of the risks or opportunities. There do you see potential for like a big International intermodal wave.
Once these lockdowns in China are lifted or do you think it's going to be fairly normalized in kind of a more of a overall macro view from this one forward.
Thanks, Ravi its Doug.
Looking at the way the Lockdown has progressed as just another supply chain disruption. So we've been dealing with them on and off obviously as to all the other railroads have supports have warehouses.
So this next wave will come out of China again, it will cause more over lake capacity at the coast. It will always come at flow and land at all cause bottlenecks again at the warehouses and guess what we'll all work through it again so.
So it's great we are actually getting some experience at it now and we're planning for it as best we can but there's only so much every part of the supply chain can do but we're all going to play our part and we're all going to work with our customers to get through it alright. Thanks for the question.
Thank you. Your next question comes from the line of Jason Seidl from Cowen. Your line is now open.
Thank you operator.
I appreciate you taking the time for the call here.
I wanted to ask a little bit about head count can you talk a little bit about.
Your projections for head count excluding attrition are you going to grow that.
This head count is really targeted and does CN and really the rail industry as a whole run the risk of.
Sort of hiring into a potential downturn, given all the sort of economic geopolitical and potential.
<unk> Black Swan events that we have ongoing.
And the Crystal ball that we have.
Yes, Jason this is Rob from an operating standpoint of course, I mentioned, we're resourcing up for the second half and Thats. The demand we see in front of US right now it is strong and we're preparing for that accordingly, obviously, there could be changes in that and we will but right now we're preparing for that more normalized grain crop in.
Western Canada and the opportunities are ahead of us I think from an overall.
For all standpoint, you will see.
Our head count down year over year because of the adjustments, we made and on the op side were hiring for volume and it won't be necessarily on a one to one basis, but on the projections that we see in front of us I hope that helps.
It does thank you.
Thank you.
And your next question comes from the line of.
<unk> from <unk>. Your line is now open.
Boswell gave yes, Montreal Tracy Thanks, that's helpful. Don Walsh.
Yes.
Sure.
Yes.
With the potential labor very shoes at long Beach.
<unk> seen a shift in market share from western ports to Gulf Coast Eastern Board. So could you provide some color about the market dynamics. These days and are fortunate. These you see with outlet Fox St. John and also Rupert.
So thanks for that I'll ask Doug I'll take that on actually so we have seen a shift that's gone more east I. Thank all of our always have CNS. So while we've seen some great business still in Vancouver, and Prince Rupert and they continue to be sold out for US we have seen a shift over our Halifax business is growing our Montreal busy.
Mrs.
Relatively in the east.
And we're able then to drive that to our bottom line.
So it's actually very good for us to have that balance. We're also seeing some growth at mobile as well.
And New Orleans, even so great opportunity to talk about our three coasts and the ability to move that right across our network. So we're very enthusiastic about the shifts and we hope to see more of it thanks very much.
Thank you very much.
Thank you and our last question comes from the line of Jeff Kauffman from vertical research. Your line is now open.
Thank you so much and thanks for sneaking me in Tracy, it's great to have you back and congratulations.
I guess all the really good questions have been answered at this point so.
So to think about the cure rate.
Decision that you outlined.
I think I understand what youre looking to do with that.
But I wanted to kind of shift beyond the downsizing in the cutting and the restructuring part to the growth part.
Think about businesses that may be CN doesn't do as much as you'd like it to today or businesses, where you see larger opportunity with the assets repurchased.
Just kind of give us an idea. This is obviously a multiyear process.
But for what kinds of business would you like to do more of than you do today and what types of assets or what types of capabilities does the railroad need to handle that but youre not in a position to do today.
Geoffrey Thank you for that question this.
This is one of the things that excites me. The most immuno question focusing right now about lifting out of some of our winter operations, but as we lift our head and look forward.
Im so impressed with the number and the range of opportunities that we have ahead of US we're doing a lot of work right now thinking about how trade flows may change of should asset of having.
Touching three different coasts and having optionality on all of those coast.
That positions us in a really unique way to think about how we step into some of the growth whether it's as you know we've had the questions on today some of the consumer products or container traffic, whether it's stepping in a different way with our partners in the industry. Some of the domestic traffic whether it's looking at.
The change in flows of some of the commodities as a result of what's going on in Europe , or what I think will be a pretty fundamental change in energy flows over time. So we're going to have some really cool choices and we've got the best.
<unk> network and the Optionality to step into it in the right way I don't have the answers yet, but it is going to be a lot of fun to take a look.
Thank you Vince.
I would now like to turn the call back.
That's over to Tracy Robinson.
Thank you. Thank you all for your time today and for your interest I am looking forward to meeting.
With you in person over the next few months and we'll talk.
Other than that on our Q2 call in July Merci Beaucoup, Thank you and stay safe.
The conference call has now ended thank you for your participation you may disconnect your lines at this time.
Okay.
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