Q4 2024 Canadian National Railway Co Earnings Call
Krista: Good afternoon. My name is Krista and I will be your conference operator today.
Krista: All lines have been placed on mute to prevent any background noise.
Krista: And all participants are now in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session, during which we ask that you kindly limit yourself to one question.
Krista: At this time, I would like to turn the call over to Stacy Alderson, CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson.
Stacy Alderson: Thank you Krista. Welcome everyone. Thank you for joining us for CN's fourth quarter Financial and Operating Results conference call.
Stacy Alderson: As of note, we have forward-looking statements and non-GAAP definitions for your review on page 2 of our presentation. These forward-looking statements include estimates, goals, and predictions about the future based on our current information and educated assumptions.
Stacy Alderson: These come with risks and uncertainties, and with that, there is always the possibility that the outcomes may differ from expectations.
Stacy Alderson: That being said, forward-looking statements aren't guaranteed, and factors like economic conditions, competition, fuel prices, and regulatory changes could affect actual results.
Speaker Change: Now, joining us on the call today are Tracy Robinson, our President and CEO, Derek Taylor, our Chief Field Operations Officer.
Speaker Change: Pat Whitehead, our Chief Network Operations Officer, Remi Lalonde, our Chief Commercial Officer, and Gislain Houle, our Chief Financial Officer.
Speaker Change: It is now my pleasure to turn the call over to CMU's President and Chief Executive Officer, Tracy Robinson.
Tracy Robinson: Merci Stacy and Bienvenue à tous. Thanks everyone for joining our call.
Tracy Robinson: Today, I'll spend a few minutes on 2024 and then turn to our clients for 2025.
Tracy Robinson: Now 2024 was clearly not what we expected and certainly not what we planned. We are happy to have it behind us.
Tracy Robinson: We experienced a number of one-off challenges that had some outsized impacts on our results, including an unprecedented referral to the Canadian Industrial Relations Board by the Canadian government of what was otherwise a normal labour dispute.
Tracy Robinson: caused three months of uncertainty and the diversion of container volumes for a longer period of time. And that was followed by a rail shutdown and then strikes at the ports of Prince Rupert, Vancouver and Montreal.
Tracy Robinson: Long story short, we were resourced for more volumes than we handled, and we didn't deliver growth to the bottom line. We're not happy with that.
Tracy Robinson: Now, there were a number of things that I am pleased with.
and the
Tracy Robinson: The team's agility in managing through the year with solid execution was very strong. Our operation recovered from each shock quickly and effectively.
Tracy Robinson: Car velocity for the year was solid at almost 210 miles per day, despite the challenges.
Tracy Robinson: and Drew Dwell, an indicator of yard fluidity, is on par with 2023 at 7 hours. Now this wouldn't have been the case a few years ago and I'm proud of the discipline of this team and their adherence to our operating model.
Tracy Robinson: We also delivered on our SAM-specific initiative and grew volumes by more than 1%.
We moved record amounts of Canadian grain.
We had solid same-store pricing above real cost inflation.
Tracy Robinson: Our customer service remained top tier, and we had the second best accident and injury performances in the company's history.
So we have a strong foundation.
Tracy Robinson: From a financial perspective, we delivered Q4 adjusted EPS of $1.82 and an operating ratio of 62.6%.
Tracy Robinson: For the full year, our adjusted EPS was $7.10, and the OR landed at 62.9%.
Tracy Robinson: I'm going to ask the team to give some more color on the quarter's performance in a few minutes.
Tracy Robinson: Turning to 2025, it's a new year, the labor issues are behind us, and I feel really good about our setup for this year.
Tracy Robinson: Now a side benefit of the deal is that we're bringing on a team with a strong entrepreneurial spirit And that's something that we want to lean into as an organization
Tracy Robinson: We'll start the integration in a few weeks, and I expect to realize operational and commercial synergies in the coming months.
Tracy Robinson: Now in the operation, we're well into winter and the network has been fluid despite the cold. As we've rounded into January, we've had shorter bouts of severe cold, which has allowed us to pick up velocity. Months to date, car velocity is nearly 200 miles per day, right in that sweet spot for winter operations.
This railroad continues to run well.
Tracy Robinson: Now a tight operation is table 6 for both customer service and margin expansion.
Tracy Robinson: And over the past number of quarters, we've taken actions to realign resources.
Tracy Robinson: with people and assets, and this will flow through in our results moving forward, and we'll continue to refine the operating plan and resourcing as necessary.
Tracy Robinson: We're also continuing to focus on our productivity initiatives, including in engineering and mechanical. It will help us mitigate the impact of inflation and support operating leverage.
Tracy Robinson: On the labor front we're in a stable position this year. We reached a tentative agreement with the IBEW this week. This is the union representing our signals and communications employees. Positive progress for both parties.
Tracy Robinson: We're also pleased that we reached a four-year agreement with Unifor in December. Unifor represents our employees that work in mechanical, clerical, and intermodal functions.
Tracy Robinson: With respect to the Teamsters Union, which represents our conductors and locomotive engineers, the arbitration process is proceeding as expected and on track to be wrapped up by the end of the second quarter.
These unions represent the bulk of our Canadian unionized workforce.
We're also progressing well with negotiations in the U.S.
Tracy Robinson: And ports on the West Coast and in Montreal are proceeding with their own arbitration process.
Tracy Robinson: So we're in good shape on labor stability across the supply chain in 2025.
Tracy Robinson: And finally, when we think of the broader economy, the most significant driver could be what happens with tariffs initiated by the new U.S. administration.
Tracy Robinson: We all want growth in the North American economy and we want consumers to be strong. And we're hopeful that the conditions that will support this will be in place.
Tracy Robinson: Now clearly we can't predict how this will unfold but we can control how we respond and how we partner with customers to adjust.
Tracy Robinson: And we've considered a full range of options and have a plan for various scenarios.
Tracy Robinson: The key for us will be to be nimble and adjust quickly as the situation unfolds.
Thanks for tuning in.
Tracy Robinson: Returning to our 2025 outlook, we've provided an earnings guidance which accounts for multiple scenarios related to volume, to energy prices, and to currency.
Tracy Robinson: Significantly, our underlying assumption, as it relates to tariffs and a potential retaliatory measure, is that while there may be some impact, it won't be so significant or prolonged as to cause a recession in Canada or significant inflationary impacts in the U.S.
Tracy Robinson: With this in mind, we expect to deliver 10-15% EPS growth for 2025, and we are reaffirming our 2024-26 outlook for compound annual high single-digit EPS growth.
Tracy Robinson: While the business environment has evolved from our investor day timeframe, the investment thesis we presented has not.
Tracy Robinson: We remain in growth mode, and we are executing our strategy this year, including year-over-year margin improvement.
Tracy Robinson: So we're aiming for growth in volume, as well as earnings and margins.
Tracy Robinson: And to give you a sense of the margin improvement quantum, altogether, the 2024 one-offs, including fuel, impacted operating ratio by roughly 200 basis points.
Tracy Robinson: Remi will give you more details on the volume outlook, which all in assumes low to mid-single digit RTM growth. More than 50% of it is expected to come from CM-specific initiatives.
Tracy Robinson: About a third is related to the recovery of volumes lost from last year's labor disruptions.
Tracy Robinson: And the remaining assumes a bit of a lift in the economy. We do expect the shape of the volume growth through the year to be more backhand weighted as we lap last year's disruptions.
Tracy Robinson: We're guiding for a CapEx program of $3.4 billion for 2025.
Tracy Robinson: to ensure a safe and efficient operation, as well as to support growth.
Tracy Robinson: As Pat will discuss, we're doing the work to improve the efficiency with which we manage our engineering program, and we're very focused on locomotive availability and reliability.
Tracy Robinson: The year's off to a positive start, as we expected. We have the momentum we need to demonstrate the strength of this network and franchise. And Derek, you're up first on the condition of the operation.
Thanks, Tracy, and good afternoon, everyone. Turn to slide 7.
Tracy Robinson: From an operating perspective, the fourth quarter was really a story of two halves.
Tracy Robinson: During the first half of the quarter we had ideal operating conditions in terms of weather.
Tracy Robinson: The team handled strong demand very efficiently, we kept pace with customer orders, and did not have any backlogs.
Tracy Robinson: Unfortunately, we began November with two weeks of port labor disruptions, both on the West Coast affecting Vancouver and Prince Rupert, as well as in Eastern Canada at Montreal.
Tracy Robinson: This was impactful to our intermodal network due to the staging of trains and balancing of equipment, but the rest of the railway continued to run well.
Tracy Robinson: Now, during the second half of the quarter, just as we started to see volumes ramp up after the poor labor stoppage, we started a long stretch of really cold weather across much of the western region, our busiest.
Tracy Robinson: As we have said in the past, we are the Rarity of the North when compared to our fellow Class Ones and no strangers to cold weather at CN.
Therefore, we activated our Winter Operating Plan.
which is our blueprint for how we manage extreme cold.
Tracy Robinson: That said, I would just remind you that winter came late the prior year, as we had zero days operating under tier restrictions in November and December of 2023.
Tracy Robinson: That was compared to 28 days of tier restrictions to close out those same two months in 2024.
Tracy Robinson: When coupled with the mainline disruptions that occurred in the western region, you can certainly see the impact on our key statistics when we look at them monthly.
Tracy Robinson: Car velocity dropped from around 220 to 191 miles per day for the month of December.
Tracy Robinson: True Dwell increased from a very strong October at 6.5 hours to 7.8 hours going into the holidays.
Tracy Robinson: 32-hour cars also spiked to around 8,500 during the December time period.
Tracy Robinson: When the weather finally broke after operating under 14 consecutive days of tear restrictions to essentially end the year, the railroad recovered nicely.
Tracy Robinson: We cut our 32-hour count by more than half, down to 4,000 cars in early January, quickly restoring yard fluidity.
Tracy Robinson: Through the end of January, car velocity was approaching 200 miles per day, with many around 210, which is not bad for winter railroading.
You all also averaged just over seven hours.
Tracy Robinson: And we did all this while doing over 15% more daily GTMs than we did last year.
Tracy Robinson: Closing with customer service, we continue to serve our customers extremely well and achieve a slight increase in our local service commitment measure.
[inaudible]
Tracy Robinson: The West Coast ports had some supply chain challenges at the end of December with vessel bunching and the port holiday shutdown, along with our tier restrictions limiting train length due to the cold weather.
Now, the ports are in good shape.
Tracy Robinson: Rupert is fluid and we've got inbound vessels on the way.
Tracy Robinson: Vancouver inventories and dwell times have also improved to more normalized levels.
Speaker Change: I'll end by thanking the entire operating team for their dedication and efforts through 2024. It was a hell of a dynamic year with lots of things thrown at this railway, which proved the resiliency of this network and this team. Pat, over to you.
Pat Whitehead: Thanks, Derek. I want to begin with safety. Our injury and accident ratios for the year were the second best in our history, which is a significant achievement. That said, we know there's still work to be done.
Pat Whitehead: We are not satisfied with how both quarterly measures ended below last year's levels, and we are committed to making improvements in the months ahead.
Speaker Change: Further to Tracy's comments, I want to emphasize that our plan is sacred.
Speaker Change: We strategically deploy resources to power the network, allowing us to quickly get back on track and serve our customers with predictability.
Speaker Change: This is evident in our Origin train performance, which came in at 90% for the full year, 1% better than 2023, even in the face of disruptions.
Speaker Change: Next, let's turn to crewing. We've remained disciplined in managing headcount, adjusting to the economic and political uncertainties that shape our workforce needs.
Speaker Change: These adjustments are already underway, ensuring we align with demand in a volatile environment.
Speaker Change: Where volumes are growing, mainly in the West, we continue to hire, with furloughed trainees on standby to quickly respond to demand.
Speaker Change: This approach has enabled us to improve crew costs per GTM by 4% compared to Q3.
despite a 3% increase in GTAs.
Speaker Change: Having covered our most recent performance, I now want to highlight how we're deploying capital to achieve sustained, predictable service and cost performance going forward.
for both our maintenance and capacity expansion initiatives.
Speaker Change: Starting with locomotives, we've made significant progress in our DC to AC modification program.
Speaker Change: To date, we have converted 160 older DC units to modern AC propulsion units.
Speaker Change: Just to put it into perspective, two modernized units deliver the pulling power of three of our older DC units across most of our network.
Speaker Change: This enhances fleet reliability, fuel efficiency, and improves availability with fewer failures.
Looking ahead, we're also exploring emerging locomotive technologies.
Speaker Change: Earlier this month we launched a small pilot in partnership with Knoxville Locomotive Works for a medium horsepower hybrid unit.
Speaker Change: This will be tested over the next six months in yard and branch line service, allowing us to prepare for future innovations in a cost-effective, low-risk manner.
Speaker Change: We've also partnered with OEMs more broadly on alternative propulsion methods and we are staying close with our peers with the objective to maintain interoperability down the road.
Speaker Change: Turning to engineering, 2024 saw improvements in how we plan and execute our work. We streamlined the material deliveries and standardized our production gains, reducing our reliance on third-party contractors.
Speaker Change: These efforts led to a 10% improvement in tie game productivity compared to the first half of the year and a 6% improvement year over year.
Speaker Change: On inventory management, we've made substantial strides. By reducing both engineering and mechanical inventory quantities by 35 million, we've improved asset utilization and reduced our carrying costs.
Lastly, on the capacity front,
Speaker Change: We've advanced our multi-year capital plan, bringing on key projects in the Chicago and Vancouver corridors.
Speaker Change: In December, we successfully delivered a new section of double track on the former EJ&E property in Chicago, which will improve fluidity and increase capacity by roughly 20% in the area.
Speaker Change: Similarly, the Gilleslie Siding, which came online in May, provides about 30% more capacity in the B.C. South between Kamloops and Vancouver.
Speaker Change: Later this year, we're looking forward to completing two additional sections of double track on the Edson Sub west of Edmonton, increasing capacity by 25% through this critical link, supporting our growth to the West Coast.
Speaker Change: With that, I'll pass it on to Remi and he will tell you how he plans to fill up that capacity. Thank you, Pat. We're working on it, buddy. Bon après-midi à tous. C'est un plaisir pour moi d'être avec vous aujourd'hui.
Remi Lalonde: We marked this quarter with strong volume in grain and refined petroleum, and we kept the momentum with our expanding franchise for crack fans and NGLs in Northeast British Columbia.
Remi Lalonde: But as my colleagues indicated, we faced disruptions from extended port labor disruptions and significant operating restrictions with the early onset of Canadian winter.
Remi Lalonde: Combined with lower potash shipments against an opportunistic record call and softer demand for forest products, overall volume and revenue fell by 3%.
Remi Lalonde: This also reflects the considerable headwind from fuel and the slight tailwind from FX.
Remi Lalonde: Let me hit a few of the Q4 segment highlights before turning to our Outlook.
Remi Lalonde: Despite the slightly smaller crop, we capped a record year for grain shipments with a strong fourth quarter on both sides of the border, reflecting robust Canadian canola and wheat exports from our draw territory, higher U.S. corn and soybean export and domestic volumes.
and Chris Walliams from a new facility in Iowa.
Remi Lalonde: While grain RTMs were 15% higher in Q4, the impact was more than offset by giving back some potash from the 2023 opportunistic gains from the Portland terminal outage.
Remi Lalonde: We saw a continued growth in refined fuels and NGLs in the PNC business thanks to projects like the Greater Toronto Area Fuel Terminal and propane exports through Prince Rupert.
Remi Lalonde: But that impact was offset by crude shipments, loss to new pipeline capacity, and two chemical plant closures.
Remi Lalonde: Sand volumes finished flat, which was better than expected and caps an excellent year of growth, surpassing $500 million in revenue.
Remi Lalonde: Some of the commodities we serve face a bit more of a headwind, including soft market conditions for lumber and export iron ore.
Remi Lalonde: and the impact to autos from two CN-served plant closures for retooling earlier in the year and a tough comp against dealer re-stocking.
Remi Lalonde: So I'd say that the quarter would have played out largely as we expected, but for the impact of the unexpected western port strike.
Remi Lalonde: which, among other things, hindered our ability to regain intermodal share following the Teamsters' work stoppage this summer and the late-quarter operational restrictions with the early onset of Canadian winter, which means that we ran out of track to catch up.
Let me pivot to 2025.
Remi Lalonde: While we expect modest North American industrial production growth in 2025, there's considerable uncertainty around the impact of potential tariffs.
Remi Lalonde: You will stay very close to customers to support them as best we can through this challenging period.
Remi Lalonde: We're forecasting RTM growth in the low to mid-single digits range to provide for volume variability and for more than half of it to come from our specific growth initiatives.
Remi Lalonde: We expect that the single biggest contributor will be international intermodal as we normalize for 2024 disruptions and fight to regain U.S. mix through Western gateways.
Remi Lalonde: We aim to capture the full year benefit of key 24 customer wins and grow our customer base by selling end-to-end supply chain efficiency.
Remi Lalonde: We're also very excited about new Frankfin terminals in Northeast DC to support the robust exploration and production forecasts for the year, U.S. grain on renewable and crush, and the ramp-up of Western Canadian met coal, to name only those.
Remi Lalonde: And with the Iowa Northern Acquisition, we have incremental opportunities in grain and ethanol.
Let me briefly speak to our view by business unit.
Remi Lalonde: We expect momentum to build in international intermodal after the first quarter and Chinese Lunar New Year, which we otherwise expect to be slightly up from last year.
Remi Lalonde: Similarly for domestic, we expect the first quarter to be flattened slightly down but to show benefit in age true from joint line services, tightening truck capacity, and improving market conditions.
Remi Lalonde: For now, we expect lower automotive volumes in Q1 and the year due to lower production forecasts amid market uncertainty.
Remi Lalonde: We're optimistic around all grades of petroleum and chemicals for the year and for Q1, supported by share gains in projects like propane exports through Prince Rupert and the Greater Toronto Area Fuel Terminal.
Remi Lalonde: In fact, the GTA terminal is performing very well, and we're excited to see excellent progress on its Phase 2, which should receive its first shipments by September.
Although we see strong demand for frac sand,
Remi Lalonde: were more cautious on metals with uncertain North American demand and unfavorable iron ore export markets.
Remi Lalonde: And all were assuming just a slight uptick in metals and minerals in both Q1 and the year.
Remi Lalonde: Difficult to see any significant improvement in forest products this year, particularly as lumber continues to struggle with a sluggish market, plus the threat of additional tariffs.
Remi Lalonde: But we expect to see better panel and OSB demand and an increase in pulp and paper volume after Q1.
Remi Lalonde: We're expecting growth in Canadian Metcoal with the now-operational Quintet line, but the sector will be somewhat tempered by a weaker U.S. exports and utility demand for an overall slight uptick.
Remi Lalonde: For Canadian grain, we see a stronger Q1, but softer Q2 and Q3 on a tougher comet, even with a slightly larger crop.
Remi Lalonde: We will face a Q1 headwind in potash due to a customer's terminal outage against a strong comp, but we should grow thereafter.
Remi Lalonde: The U.S. program, on the other hand, should benefit from stronger domestic and export corn demand and new crush projects, particularly in the first half of the year.
Remi Lalonde: Let me close by underscoring that we delivered more than 1% RTM growth in 2024, despite a very uneven macro environment and numerous external disruptions.
Speaker Change: And with these disruptions now in the rearview mirror, the resiliency that Pat and Derek talked about, together with our commitment to efficient and reliable service, clearly resonated with our customers.
Speaker Change: We delivered record on-time performance to yards, and they rewarded us with our best-yet-loyalty scores, measured through our comprehensive Net Promoter Survey, all while earning same-store price ahead of rail inflation.
Gislain Houle: That's what it's all about. And with that, I'll pass it over to Gislain.
Gislain Houle: Merci beaucoup, Remi. J'ai le plaisir de parler de nos résultats du quatrième semestre.
Speaker Change: Turning to slide 14, like Derek said, the quarter began with ideal operating conditions which allowed the team to execute on solid demand.
Speaker Change: Obviously, volumes and costs were negatively impacted by the West Coast and Montreal ports labor-related outages.
Speaker Change: As we began working through the backlog following these outages in late November, winter weather came early in Western Canada and lasted for most of the rest of the quarter.
Speaker Change: The long-tier restrictions hampered our ability to clear the backlog at the West Coast terminals.
Speaker Change: Some of that on-the-ground inventory, as well as grain orders, carried into the beginning of January.
Speaker Change: For the quarter, we reported the adjusted EPS down 10% versus last year.
Speaker Change: The operating ratio increased by 330 basis points to 62.6% and revenues were down 3% year-over-year.
Speaker Change: Let me provide you more details on some of the operating expense categories in the quarter, which I'll speak to on an exchange-adjusted basis.
Speaker Change: Labor was 7% higher than last year, mostly on account of general wage increases and higher payroll taxes.
Speaker Change: We also saw the impact of less capital credits, as well as higher short-term unproductive costs year-over-year due to the earlier onset of winter versus 2023.
Speaker Change: Fuel expense decreased 17% versus the same period last year due to a 15% decrease in price per gallon and a 4% lower gross on miles.
Speaker Change: that in impact of fuel prices was about 10 cents unfavorable to EPS and 80 basis point to the OR in the quarter.
Speaker Change: Purchase services and materials increase 6% driven by higher material, repairs and maintenance, and winter-related costs like snow clearing.
Speaker Change: Other expenses rose 17% mainly as a result of the annual true-up of our legal claims provision.
Speaker Change: Turning to our full-year results on slide 15, we delivered an adjusted EPS of 2% lower than last year on a 1% revenue increase.
Thank you.
Speaker Change: On an exchange-adjusted basis, labor rose 8% for the full year on account of general wage increases, higher average headcount, and higher pension expense.
Speaker Change: Purchase services and material increased by 2% versus last year, mostly due to higher material and repair costs, as well as higher incident-related expenses.
Speaker Change: Four-year fuel expense was down 3%, mainly on lower fuel prices.
Speaker Change: I want to remind you that the all-in impact of fuel crisis for 2024 was unfavorable. Around 100 bases went to the OR and about 35 cents of EPS.
Thank you.
Speaker Change: We generated close to $3.1 billion of free cash flow for the full year, which is about $800 million lower than last year, mainly due to higher capital expenditures and lower net cash from operating activities.
Speaker Change: Under our current share repurchase program, which runs from February 1st, 2024 through January 31st, 2025, we have purchased over 13 million shares for just over $2.3 billion as of the end of December.
Speaker Change: Moving to slide 16 let me provide some visibility to 2025. We believe the economy for the year will slightly be better than last year assuming approximately 1% growth in North American industrial production.
Having said this, we're monitoring the terrorist situation closely.
Speaker Change: Fortunately, there is labor stability for us and our core partners, which will support international intermodal growth, particularly through Western Canadian gateways.
Speaker Change: With this in mind, and along with our CM-specific growth initiatives, we expect volumes in terms of RTMs to be in the range of low to mid-single digits.
Thank you.
Speaker Change: We maintain much of our magnetist train package, and we have room on our current intermodal trains.
Speaker Change: This gives us opportunities to improve operating leverage as volumes pick up through 2025.
Speaker Change: We have a sold foreign exchange for the year of around 70 cents and WTI of 70 to 80 US dollars a barrel.
Speaker Change: In this environment, we expect to deliver 10 to 15% EPS growth in 2025 versus 2024.
Speaker Change: We are reaffirming our 2024-2026 guidance of high single-digit EPS KGAR.
Speaker Change: We have intentionally built a level of resiliency for extreme weather and traffic volume volatility into our guidance.
Speaker Change: Specifically on terrorists and our guidance, we've accounted for a range of scenarios. However, we assume terrorists would not cause a recession.
Thank you. Thank you.
Speaker Change: Our effective tax rate is expected to continue to be in the range of 24 to 25 percent.
Speaker Change: Our CapEx for 2025 will be around $3.4 billion net of customer contributions.
Speaker Change: In terms of shareholder distributions, we are pleased to announce that our Board of Directors approved a 5% dividend increase for 2025. This represents the 29th consecutive year of dividend increase since the 1995 IPO.
Speaker Change: The board also approved a new share buyback program of up to 20 million shares through a normal course issuer bid from February 4th, 2025 to February 3rd, 2026.
Speaker Change: We will continue to execute our shared buybacks to manage for a 2.5 times adjusted debt to adjusted EBITDA leveraged target.
and others. Thank you for joining us. Thank you.
In conclusion, let me reiterate a few points.
Speaker Change: We're well into winter, but the network is very fluid. With labor issues behind us, we expect volume growth to pick up from last year.
Tracy Robinson: We have aligned our resources and have capacity to accommodate growth at low incremental costs. We are committed to creating long-term value for our shareholders. Let me pass it back to Tracy. Thanks, Gislain. Christa, we'll go to questions.
Thank you.
Speaker Change: Thank you. We will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourselves to one question. The first question comes from Sherilyn Rodbourne with TD Cowan. Please go ahead.
Thanks very much and good afternoon.
Speaker Change: With respect to the volume outlook for 2025, thank you for the breakdown provided in the prepared remarks.
Speaker Change: I was hoping we could drill down a bit more on the one-third that relates to regaining volumes lost due to labor disruption in 2024, which, as Remi, you indicated, would naturally skew towards U.S.-bound international intermodal traffic.
Speaker Change: To what extent have you seen market share recovery on the Canadian West Coast year-to-date and what visibility do you have to further recovery as we move through the March-April maritime contracting period?
Thanks for the question, Sherilyn.
Speaker Change: Part of the challenge that we faced heading into the year was that the path of recovery following the work stoppage in the summer was hindered by the two-week...
port strike in the West in November.
Speaker Change: We are talking to customers to encourage them to to come back and to grow.
Speaker Change: But we think we're going to see most of it after the first quarter, after we get through Chinese Lunar New Year, and then we can build from there. I will point out on the normalization that, you know, if you look at what we did in the first half of last year, we were doing really, really well.
Speaker Change: And so that's what we mean by normalizing out for the year. You compare sort of how we did in the second half of the year versus the first. I think when you fill that hole, that's the path that we see going forward to build on.
Thanks, Sherilyn. Next question, please.
Speaker Change: Your next question comes from the line of Chris Weatherby with Wells Fargo. Please go ahead.
Speaker Change: discreet headwinds I think to 2024. So I guess maybe as we look at 2025 and you think about the guidance that you laid out.
Speaker Change: Can you talk a little bit about what you think you can do from an OR perspective, and I guess maybe if there's any help that you can kind of help us with in terms of shaping that first half, second half, or maybe even first quarter. I just want to get a sense of what sort of comes back quickly to the network from an OR perspective, and maybe what you can get from an incremental margin perspective on the growth.
Speaker Change: Okay Chris, thanks. Stacy's glaring at me across the table. I'm going to try and do this in a way that we're not providing guidance on OR as we go forward. So if you look backward, as I said, you look back to last year, we've quantified the impact of the one-off. Now that's including fuel.
Speaker Change: the impact of fuel last year on the operating ratio on our margins. So as we look forward this year, we've got a clear path on labor. The railroad has and continues to run very well. We're looking to drive margin improvement. We've got the right conditions in place.
Speaker Change: The railroad is returning back to the natural operating cadence that we would have had without labor disruptions, and that's going to restore a level of margin. We have resized the resource base.
Speaker Change: and are focused on driving the growth at a low incremental margin. We have, as you heard Pat say, some productivity efforts in place that will offset some of the inflationary impacts.
Speaker Change: Since the 200 basis points is out there, you can see us recapture that. How far we can get with the rest of it is really going to depend on volume. We get more leverage at high volume levels, we get less leverage at lower volume levels. And so that's the way I'd kind of lay it out for you. I hope that helps.
It does. Thank you. Okay, thanks Chris. Next question?
Speaker Change: Your next question comes from the line of Asadi Shamalan with BMO Capital Markets. Please go ahead.
Sadie, your line is open.
Thank you. Good afternoon, everyone.
I wanted to ask about
the embedded pricing in the guidance and to what degree
It incorporates kind of the higher level of
Speaker Change: disruption that we've seen in the last several years in terms of, you know, fires and other acts of God and kind of, you know, disruption because of weather. I think your network is kind of prone more than maybe others to these kind of things.
Speaker Change: And I wonder to what degree you really look at that and ultimately...
you know, contemplate a pricing scenario that offsets us.
Thank you.
So what do we think? Ultimately challenging.
Speaker Change: Okay Fadi, let me let me take a first run at that then I'm going to ask Remi for some comments.
Speaker Change: So we have made some provisions in our plan for the kinds of things that you've seen happen over the last few years, whether it be fire, whether it be other kind of natural occurrences.
Speaker Change: You know, the fundamentals as we look forward would suggest that...
Remi Lalonde: These kinds of things are going to happen, so we've embedded it in our plan. When we think about our pricing in general, you know, Remi's mandate is to price to market, and that needs to be ahead of the rail cost inflation.
Thank you. Bye.
Remi Lalonde: And so, when we, as we think about the natural disasters that have happened...
Speaker Change: their ability to continue to operate. It's really not relative to, you know, the pricing that Remi puts in the marketplace, if I'm understanding your question. But Remi, do you have anything to add to that? I think just to echo Tracy, we did well in 2024 to price ahead of rail inflation.
Gislain Houle: And that's the mission going forward for this year. Maybe, Gislain, you want to comment on inflation?
Gislain Houle: Yeah, I mean, when you look at inflation, Fatty, when you look at labor, which is our biggest cost, is about 3%, and I would say that, therefore, you know, here at CN, our real inflation is in the 3-ish percent.
Gislain Houle: is what we have. And that will incorporate, of course, any of the costs associated with, you know, fires or the other things. I hope that answers your question. We'll go to the next one.
Speaker Change: Your next question comes from the line of Scott Group with Wolf Research. Please go ahead.
Thank you.
Speaker Change: Hey, thanks. Afternoon, guys. So I want to try to understand sort of maybe the...
Speaker Change: building blocks of the of the earnings guidance so if we just take some of like the discrete things like FX and maybe lapping some of the headwinds from last year maybe pension like how much is like sort of
Speaker Change: for lack of a better word sort of like in the bag from like an earnings growth standpoint like is there any way to quantify that and then you know I would assume after last year last couple years maybe you've added in some cushion but like is there any way to think about like how much
Speaker Change: cushion or assumption of like hey some of the bad things from last year repeating again and I just I want to try to get confidence in this earnings guidance after the last couple of years.
Speaker Change: So the guidance reflects, as we've outlined, a range in volume, Scott, as well as the variability that we think we could see in fuel and FX outcomes. So we've built that in, we've built in some provision for the kinds of operating conditions we can find ourselves in over different seasons as well.
Speaker Change: So, as far as cushion, I think what's really going to drive it up or down is, at the end of the day, it's going to be volume, right? All kinds of things that can impact the volumes, but what we've...
Speaker Change: giving you as a view into how we made up our
Remi Lalonde: Our low- to mid-single-digit volume growth expectation, 50% of it is our CN-specific, 50% I guess, Remi, or a little bit more, is our CN-specific initiatives.
Remi Lalonde: We have about a third of it, as we said, that's the makeup from the labor disruptions last year. And then we are assuming, at this point in time, a very modest lift in the economy. Now, if the fundamentals are there, such that we get a stronger economy, stronger consumer sentiment, you could see that be a little bit stronger. But as we built the guidance, those were the factors that we built into it.
Thank you.
Next question.
Remi Lalonde: Your next question comes from the line of Walter Sprachlin with RBC Capital Markets. Please go ahead. Thanks very much, operator. Good afternoon, everyone. So, Gislain, this one's for you. I'm just curious, with the buyback,
Remi Lalonde: You've been a bit variable with it in terms of ranting it up and holding it back.
Remi Lalonde: Curious now, you indicated that you're going to use the buyback to manage the two and a half times leverage. Is there any avenue, are you budgeting a certain amount therefore that we can plug in in terms of dollars?
Remi Lalonde: targeted for your buyback this year? And is there any avenue where you would consider, because I know a number of your peers are now moving more in the 2.75 range or even higher,
Remi Lalonde: Is there any avenue where you would consider using a little bit more of your leverage?
Remi Lalonde: given the resiliency that the railroads have exhibited here to go with a higher leverage and a higher buyback while still maintaining your current ratings. Any consideration there?
Yeah, thanks Walter. Listen the
Speaker Change: The use of the balance sheet is something that we debate. We debate internally. We debate with our board. I think at this point we have decided to be prudent, so that's why we're going to continue to manage our balance sheet to the 2.5 times leverage.
Speaker Change: We think that this is the right place to be. We purposely did not provide a budget, so I think you can do the math yourself and get to a number. And we like buybacks, as you know, Walter, because this is something that we can step it up.
Thank you, Mr. Clark. Thanks. Thanks, Walter. Next question?
Speaker Change: Your next question comes from the line of Ken Hexter with Bank of America. Please go ahead.
Speaker Change: Hey, great. Maybe if I could follow up on Scott's question a little earlier. You know, you talked about the driver. Maybe can you talk about the drivers to the top and bottom end of the Outlook list? Just laying through in there some tariff comments. Is that...
Speaker Change: Powerful related some of the the ups and downs is it Tracy you mentioned volumes Just trying to decipher what what are the drivers there and then thoughts on on first quarter comp maybe
Speaker Change: Just given all the comments on weather that we heard today is that does that make
Speaker Change: You know, first quarter, maybe a bit more aggressive than normal seasonality. Do you expect
Speaker Change: normal seasonality given what is traditionally a tough quarter, maybe just how we should think about maybe some of the near-term stuff. And it's just what's the advantage of throwing in the economic growth in there at this point, just given.
Speaker Change: You know what we went through last year What was Tracy maybe just your thoughts on why you felt you wanted to add that in as opposed to maybe being more conservative?
Speaker Change: Thanks Ken. So let me just start with the last one, the economic growth. We are assuming a very modest economic growth.
Most of the growth that we are...
Speaker Change: projecting comes from the recovery from last year's labor, it comes from CIM specific initiatives and so there's an upside if there is economic growth but we're not assuming that at this point in our guidance. And then what's going to drive the guidance to the top hand is generally going to be volume.
And the tariffs are relevant, as Jude said.
primarily, and that it will drive volumes.
Speaker Change: And so, that's the way that we're thinking about it. Did you have any comments on that? Yeah, and as I said, Ken, in our remarks, I think that, you know, we, our guidance is, you know, assumes a different range of scenarios, including various scenarios on tariffs.
Speaker Change: but, as we said, does not assume that Canada would go on a recession.
Speaker Change: I think to help you out a little bit on, you know, as we're assuming an FX of 70 cents, which is the spot rate as we have it.
Speaker Change: I think Scott had a question on pension. Pension, you know, if you look at this year, in 2024 was a headwind of about $30 million. Pension this year, in 2025, will be a tailwind of about $50 million, mostly all below the line.
Tracy Robinson: And then as Tracy said, you know, a lot of it will be related to volumes.
Great. Appreciate it. Thank you. Next question.
Speaker Change: Your next question comes from the line of Steve Hansen with Raymond James. Please go ahead.
Steve Hansen: Question on the labor picture for you today. I think you described some of the actions you've been taking, but just trying to get a sense for where you're at from the context of earlier quarters, referencing some imbalances that you had in the system and sense of too many people in the East, not enough in the West. It sounds like you're still hiring. How far along are you in that process?
Steve Hansen: Are you scaling back in all verticals right now or just maybe it's a broader sense for that labor picture today And and how much more work you need to have to do
Steve Hansen: Yeah, no, good afternoon Steve. What I'll say is right now we have 800 people furloughed across the network. That's mostly T&E folks, but there is some McCannell folks in there that past teams that worked hard on some efficiency point of view.
Steve Hansen: You know, we're watching that hiring very carefully, and we took very decisive action last fall when we saw the volumes not coming where they needed to be when we got that intelligence with it. And then I'll maybe let Pat talk about the east-to-west.
Pat Whitehead: A group of furloughed employees in the West to draw from if we see ourselves in a deficit for people, and we do have the ability to move folks around within our Western region.
Pat Whitehead: We'll continue to hire towards the needs and recall as we see needed but we feel like we're in position well to take on the growth in the West.
Speaker Change: Your next question comes from the line of David Vernon with Bernstein, please go ahead.
David Vernon: Hey, good afternoon, guys. So, Remi, I wanted to maybe dig into a couple of the CN-specific growth initiatives to try to see if we can bracket some numbers on two specific sets of projects. As you're thinking about the nat gas liquids opportunity off the West Coast, there's been a lot of investment there. Can you help us refresh our thinking on what kind of incremental volume that should look like? And same question on the Janssen potash
David Vernon: 526, but I think it does start up in the three-year window, so if you can kind of help us bracket what kind of incremental volume we're talking about there, that'd be helpful.
Remi Lalonde: Thanks for the question. For NatGas, a big chunk of the growth that will come, obviously it's incremental. The demand for sand is very strong. We saw a late pickup in the fourth quarter that helped us to do a little bit better than we expected. First quarter also looks strong. The drillers are building terminals, so they're excited about the E&P programs that they have for the year. The big lift...
Remi Lalonde: for exports through Rupert is going to come when the AltaGas Vopak project comes to market. And so they FID'd that last year. So that's not a 2025 item. It'll be later into 26. So what we expect for growth in that gas for this year is going to be incremental, and the big lift will come a little bit later. As far as the Jensen Potash mine, construction continues. I was actually in Saskatoon a couple of weeks ago. Construction continues.
Speaker Change: but we're still waiting for details and announcements on that. That doesn't start until, I believe, it's Q3 of 26, if memory serves, so more on that. But that also will depend on a market share announcement, which hasn't been quite made yet.
Speaker Change: Can I get you to put a number on the big step up with AltaGas?
Stacy Alderson: I don't have it in front of me, but I'd have to double check. Why don't we follow it up? Stacy can follow it up with you after the fact. Is that okay?
Thanks very much. Thanks. Next question?
Speaker Change: Your next question comes from the line of Tom Watowicz with UBS. Please go ahead.
and the other one.
All right, yeah, good afternoon. Wanted to ask...
Speaker Change: A labor question. I know, I think you had one on kind of like where the labor is located and where, you know, moving it around a bit, but should we think about headcount being kind of flat?
As you absorb some of this volume, if you're...
Speaker Change: you know, maybe at the lower end of the volume spectrum, and also contemplating that you mentioned you've got, you know, quite a bit of capacity, at least some capacity available in the existing train network.
Speaker Change: And then also, I guess, just thinking about comp and benefits, you know, worker per worker. So, you know, kind of how do we think about the two primary pieces of comp and benefits expense overall?
Speaker Change: Derek, why don't you take the first half, and you take the second half. Yeah, good afternoon, Tom. And like we said, with 800 people flowed across the network, obviously it's more tilted to the east and the south.
Speaker Change: So, in those two cases, you know, we're all really watching the hiring, we don't need to do that, we don't see line of sight to have to do that, because we can recall those current people. You know, as Pat said in the West, we're ready to handle that growth, we can recall some of those folks that are there, but we are looking at some targeted hiring in those places that growth may come.
Speaker Change: So, you know, I feel we're well-positioned on the train package, to your point. We can grow at a low incremental cost with the manifest package and even with the intermodal package if some of that comes back, and I'll turn it to Jiz on the comp question. Yeah, Tom, on the comp side, I mean, I'm happy to report that we did...
Speaker Change: have a tentative agreement with our signals and communication people, and again, the pattern in Canada is 3%, so that's what we continue to assume.
Okay, thanks Tom.
Speaker Change: Your next question comes from the line of Karnak Gupta with Scotiabank. Please go ahead.
Karnak Gupta: Thanks for taking my question. I just want to come back to the customers, Remi. You mentioned, you know, you're trying to kind of bring them back. How difficult is it to bring them back to the network, especially with all the tariff noise and even potentially change of government in Canada? I mean, how are shippers thinking about this year?
Speaker Change: Yeah, the challenge, Conor, thanks for the question. The challenge is that if you look back over the course of 2024,
Speaker Change: There's been a number of disruptions, labor disruptions in particular, and so the issue is making sure that we make Canadian gateways attractive.
Speaker Change: And so that's an ongoing process. As I say, we're working with the shipping lines, talking to the BCOs as well, so that we can establish and sell the reliability of the gateways. But the advantage that we have is, you know, we sell service.
Speaker Change: and we're excited to be able to sell that. You look at a place like Rupert, you know, we like to say it's the fastest way from Shanghai to Chicago. And for customers who are looking to grow and need a reliable product, we think that sells very well. So I think it goes hand in hand. It's a process. It's about being with customers and rebuilding that credibility following a pretty bumpy 2024 from a labor perspective.
Thank you.
Speaker Change: Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead.
Speaker Change: Hey good afternoon everyone and thanks for taking my question. Maybe I'll direct this at Derek or Pat or maybe both. I mean you guys had so much start and stop on the labor side last year and some disruption I think.
Speaker Change: Even with some of your partners in Canada, you know, how do you think about the operating plan and maybe even like engineer planning in? 2025 relative to maybe what was a more challenging environment in 24
Please see the complete disclaimer at https://sites.google.com
Speaker Change: Lay down the network in an organized manner so that startup is very fast. We know exactly how to plan the resources against it, and we start up very quickly. As you can see, in our performance, when we had those disruptions, we rebounded very quickly. The network velocity returns, the car miles.
Speaker Change: The car velocity returns quickly and that's a credit to all the hard work we've done around the plan.
Speaker Change: The composition of work gangs and really becoming disciplined around our work blocks, so we expect
Speaker Change: Those gangs, they are already making better use of the time that they get, they are starting on time, and we expect to bring the unit cost down for the work that they do. So with fewer disruptions expected, we do anticipate seeing our productivity continue to improve, particularly with the engineering department.
Okay, Brenna, thanks for that. Next question.
Thank you.
Speaker Change: Your next question comes from the line of Ravi Shankar with Morgan Stanley. Please go ahead.
Ravi Shankar: Are you hearing from customers that are changing their long-term plans, are they putting stuff on hold, or how do we think that builds out?
Ravi Shankar: Well, one of the things that we know for sure as we look at the environment around us is that there will be a high premium placed on...
being nimble.
Remi Lalonde: and how we would respond to it. We're pretty confident in our plan, but Remi, do you have other comments? What I'd say is that in both the cases that you pointed out, in Halifax and Rupert, there's plenty of room to grow.
Remi Lalonde: so investing further in the gateways for the railways is we're already investing pretty significantly actually in Rupert so we're adding bridge capacity to improve the flow and there's a lot of additional investments that our customers are making in Rupert so you know there is room to grow both Rupert and Halifax. Halifax had a bit of a tough year because of the the Red Sea.
Remi Lalonde: But from our perspective, those assets fit very well into the network and they help support service reliability to customers, and that's what's really important.
and the
Thank you. Bye.
Remi Lalonde: Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Please go ahead.
Speaker Change: Given the further effects of depreciation, just wondering, in terms of leverage, how we should be thinking in Q1, given the U.S. debt? And also, given the attractive Canadian dollar, just curious if you have received more inbound calls from shipping lines?
Speaker Change: that are interested to engage in discussion, especially that labor issues are behind. Just wondering if it could attract some traffic north of the border for VFX. Thanks.
Remi Lalonde: Maybe, Benoit, I'll start and then I'll turn it over to you, Remi, on the second piece. So, on the effects, you're right, I mean, it has an impact on the debt because a lot of our debt is in U.S. dollar denominated, and therefore it has an impact on the leverage.
But the sensitivity is very small.
Speaker Change: If I recollect, I think every cent has an impact of 0.02 on the debt, so it's...
Speaker Change: to continue to remain at 2.5 times. Now, sometimes we can move up a little bit. As you know, we finished a year, we are 2.6, but we will manage our balance sheet and we will take that into consideration, but it has a very small sensitivity.
Speaker Change: to the leverage. Maybe, Remi, on the second piece? Yeah, I think what I'd say, Benoit-Benoit Kerenzi, is obviously the geopolitical environment is a little bit volatile throughout and currencies are obviously reflecting the strength of the U.S. dollar. I don't necessarily tie inbounds to FX as far as shipping line interests go. I tie it to service reliability.
Speaker Change: And the other sort of thing that's changing is that there are reshaping alliances in the OSM world, and so, you know, that is opening up some opportunities for us as well.
Thank you very much for the time.
Next question please.
Speaker Change: Your next question comes from the line of John Chappell with Evercore ISI. Please go ahead.
Thank you.
John Chappell: Thank you. Good afternoon. Derek and Pat, I think we've covered the labor resources ad nauseam at this point, but there's other line items like purchase services, equipment rent, no casualty, no other, etc. You know, you've had this big pulldown in volume. You had this anticipation of a second half recovery, a lot of uncertainty. How do you thread the needle on matching the resources to kind of your exit rate, 24, and then also your ambitions for the second half of 25 while making sure you still have the right capacity?
John Chappell: I'm starting to get some you know incremental margin from that in the back half of the year.
Thank you.
John Chappell: I'll take that, it's Pat. So I would say this, that we made the decisions that we had to make as it relates to resources the last few quarters.
John Chappell: We had ramped up to take on the volume that we expected, and that didn't materialize. We had our labor disruptions and clearly other factors. I would say this, that as we look at...
John Chappell: As we look at the assets from cars, locomotives, and people, as Derek pointed out, we have the 720 plus furloughs.
John Chappell: In transportation, we have almost 100 in mechanical furloughed. We have well over 120 locomotives in storage. And our car fleet is very productive. We are, year over year, as productive from a car-miles-per-car-day standpoint with the car fleet. So we have laid up cars as needed.
John Chappell: So as to not congest the network, so we'll feel really good about where we are from a resourcing standpoint to continue to pick up the volume that's out there that we see that, you know, thus far in the quarter, in the year, is solid.
Speaker Change: John, let me just come in over the top of that. You guys are doing a great job, but we're managing our expenses very tightly as we come into this year.
Speaker Change: And but we do have a plan as well of how we would flex up as the volume grows if and when that happens And and so they've been working very hard at that and I think we're we're in a good position But very tight as we start the year loosen up if the volume arrives as the year unfolds
Great, thanks Tracy. Next question.
Speaker Change: Your next question comes from the line of Daniel Imbro with Stevens. Please go ahead.
Thanks. Good evening, everybody. Thanks for taking our questions.
Speaker Change: I know we've talked through the volume outlook a lot, but maybe one more on the revenue side. Just on the mix, the International Intermodal, I think you mentioned, will be the fastest-growing volume piece. I would think that's going to be a negative for revenue per RTM this year, but when you look through the volume outlook on slide 12,
Speaker Change: Can you just talk through the other puts and takes on Mixed and then maybe Mixed within Mixed as you see the business developing this year, the visibility you have into market share wins. Just what are the headwinds and tailwinds?
Speaker Change: We should be thinking about as we move through the year.
Specifically on Intermodal or across the business?
across the business.
Speaker Change: we see ahead of us here for the year. I think that on a revenue per IPM,
I mean, it's...
Yeah, I mean...
Speaker Change: There are some sectors that are doing sort of better than others where I see good tailwind is
Speaker Change: We're doing well on grain, as I said, petroleum and chemicals as well, where there's probably a bit more headwinds in the sectors where there is lower demand, so like forest products is probably a little bit more under pressure, and metals and minerals, I would say.
Speaker Change: Thanks for coming, Dan. Let me just add something to that. You mentioned the growth that we're expecting in international intermodal.
You know, we built a portfolio.
Speaker Change: Our book of business that fits our network and that we know that we can run efficiently and can drive value to the bottom line, so we like that international business.
Speaker Change: It's not our highest margin business, as you said, but it leverages our network and our asset base in the right way, and it's a really important part of our business and our growth strategy, and in Remi's plan, it will be the biggest
and Keith Ferguson.
and the
Thanks for that question. Next question.
Speaker Change: Your next question comes from the line of Ariel Rosa with Citigroup. Please go ahead.
Normal seasonality over the last 10 years is averaged.
Speaker Change: a deterioration or an increase in OR of 400 basis points on average from 4Q to 1Q. Should we expect that or maybe at a lower range more akin to 200 to 300 bps of a step up given the tougher 4Q OR of
62.6%.
So thanks for the question. I think.
Speaker Change: We were positioned from a volume perspective for a strong second quarter, and then we started to have.
Speaker Change: The Labor Issues after that. This quarter is going to depend a little bit on how the winter plays out, but I would expect you would see a more normalized Q1 and Q2 versus what you, if you look backwards.
Q1 has always had a DOR that's slightly higher.
Q4 typically it depends on when the winter hits.
Speaker Change: And then the best OR quarters are typically Q2 and Q3. So obviously, 2024 was not normal with all of the noise that we encountered, but this noise we feel is behind us, so 2025 should come back more to normal.
Thanks, Ari. Next question?
Speaker Change: Our final question comes from the line of Stephanie Moore with Jefferies. Please go ahead.
Speaker Change: Thanks so much for squeezing us in. This is Joe Hafling on for Stephanie Moore. A lot has been asked. I guess I maybe wanted to ask on the Falcon Premium service.
Speaker Change: Could you talk about customer acceptance for that product, is adoption where you would have expected it is, or is customer demand for that slower than what you would have thought? Maybe just some thoughts on Falcon Premium and what you're seeing on that.
Speaker Change: Yeah, I guess I'd start by saying that the product works really well. Derek and team and our partners are delivering the service offering that we sold. The challenge that we have is that it's a very competitive market, especially northbound out of Mexico. The truck lanes to the major destinations are fairly well established, and that's what we're fighting against.
Speaker Change: So we continue to work on it with our partners at UP and Ferromex to continue to grow it And so I expect that we'll keep growing that incrementally over the course of the year, but there's opportunity and upside there It's just a really it's a tough market
Speaker Change: Okay, thanks Remi and thanks Krista. Thanks to everyone on the call for joining us.
Speaker Change: I think as Derek said, 2024 was a hell of a year, but we're turning into 2025 now at full speed to execute our growth plans and to drive that growth to the bottom line. So we will see you all very soon. Thank you.
Speaker Change: The conference call has now ended. Thank you for your participation and you may now disconnect.
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Krista: Good afternoon. My name is Krista and I will be your conference operator today.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Speaker Change: And all participants are now in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session, during which we ask that you kindly limit yourself to one question.
Speaker Change: At this time, I would like to turn the call over to Stacy Alderson, CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson.
Stacy Alderson: Thank you, Krista. Welcome, everyone. Thank you for joining us for CN's fourth quarter financial and operating results conference call.
Stacy Alderson: As of note, we have forward-looking statements and non-GAAP definitions for your review on page 2 of our presentation. These forward-looking statements include estimates, goals, and predictions about the future based on our current information and educated assumptions.
Stacy Alderson: These come with risks and uncertainties, and with that, there is always the possibility that the outcomes may differ from expectations.
Stacy Alderson: That being said, forward-looking statements aren't guaranteed, and factors like economic conditions, competition, fuel prices, and regulatory changes could affect actual results.
Tracy Robinson: Now, joining us on the call today are Tracy Robinson, our President and CEO, Derek Taylor, our Chief Field Operations Officer.
Speaker Change: Pat Whitehead, our Chief Network Operations Officer, Remi Lalonde, our Chief Commercial Officer, and Gislain Houle, our Chief Financial Officer.
Tracy Robinson: It is now my pleasure to turn the call over to CMU's President and Chief Executive Officer, Tracy Robinson.
Speaker Change: Merci Stacy and Bienvenue à tous. Thanks everyone for joining our call.
Speaker Change: Today, I'll spend a few minutes on 2024 and then turn to our plans for 2025.
Speaker Change: Now, 2024 was clearly not what we expected and certainly not what we planned. We are happy to have it behind us. We experienced a number of one-off challenges that had some outsized impacts on our results, including an unprecedented referral to the Canadian Industrial Relations Board by the Canadian government of what was otherwise a normal labor dispute.
Speaker Change: caused three months of uncertainty and the diversion of container volumes for a longer period of time. And that was followed by a rail shutdown and then strikes at the ports of Prince Rupert, Vancouver and Montreal.
Speaker Change: Long story short, we were resourced for more volumes than we handled, and we didn't deliver growth to the bottom line. We're not happy with that.
Speaker Change: Now there were a number of things that I am pleased with.
Speaker Change: The team's agility in managing through the year with solid execution was very strong. Our operation recovered from each shock quickly and effectively.
Speaker Change: Car velocity for the year was solid at almost 210 miles per day, despite the challenges.
Speaker Change: and Drew Dwell, an indicator of yard fluidity, is on par with 2023 at seven hours. Now this wouldn't have been the case a few years ago and I'm proud of the discipline of this team and their adherence to our operating model.
Speaker Change: We also delivered on our CN specific initiatives and grew volumes by more than 1%.
We moved record amounts of Canadian grain.
We had solid same-store pricing above real cost inflation.
Speaker Change: Our customer service remained top tier, and we had the second best accident and injury performances in the company's history.
So we have a strong foundation.
Speaker Change: From a financial perspective, we delivered Q4 adjusted EPS of $1.82 and an operating ratio of 62.6%.
Speaker Change: For the full year, our adjusted EPS was $7.10 and the OR landed at 62.9%.
Speaker Change: I'm going to ask the team to give some more color on the quarter's performance in a few minutes.
Speaker Change: Turning to 2025, it's a new year, the labor issues are behind us, and I feel really good about our setup for this year.
Speaker Change: I'll start with the good news from the SDB, who approved our Iowa Northern transaction. And I want to extend a warm welcome to our new colleagues. This transaction extends our network reach into the Iowa Greenbelt, and it provides extended single line access for customers to new markets.
Speaker Change: Now a side benefit of the deal is that we're bringing on a team with a strong entrepreneurial spirit And that's something that we want to lean into as an organization
Speaker Change: We'll start the integration in a few weeks, and I expect to realize operational and commercial synergies in the coming months.
Speaker Change: Now in the operation, we're well into winter and the network has been fluid despite the cold. As we've rounded into January, we've had shorter bouts of severe cold, which has allowed us to pick up velocity. Amongst today, car velocity is nearly 200 miles per day, right in that sweet spot for winter operations.
This railroad continues to run well.
Speaker Change: Now a tight operation is table 6 for both customer service and margin expansion.
Speaker Change: And over the past number of quarters, we've taken actions to realign resources.
Speaker Change: with people and assets, and this will flow through in our results moving forward, and we'll continue to refine the operating plan and resourcing as necessary.
Speaker Change: We're also continuing to focus on our productivity initiatives, including in engineering and mechanical. It will help us mitigate the impact of inflation and support operating leverage.
Speaker Change: On the labor front we're in a stable position this year. We reached a tentative agreement with the IBEW this week. This is the union representing our signals and communications employees. Positive progress for both parties.
Speaker Change: We're also pleased that we reached a four-year agreement with Unifor in December. Unifor represents our employees that work in mechanical, clerical, and the intermodal functions.
Speaker Change: With respect to the Teamsters Union, which represents our Conductors and Locomotive Engineers, the arbitration process is proceeding as expected and on track to be wrapped up by the end of the second quarter.
These unions represent the bulk of our Canadian unionized workforce.
We're also progressing well with negotiations in the U.S.
Speaker Change: And ports on the West Coast and in Montreal are proceeding with their own arbitration process.
Speaker Change: So we're in good shape on labor stability across the supply chain in 2025.
Speaker Change: Now finally, when we think of the broader economy, the most significant driver could be what happens with tariffs initiated by the new U.S. administration.
Speaker Change: We all want growth in the North American economy and we want consumers to be strong. And we're hopeful that the conditions that will support this will be in place.
Speaker Change: Now, clearly, we can't predict how this will unfold, but we can control how we respond and how we partner with customers to adjust.
Speaker Change: And we've considered a full range of options and have a plan for various scenarios.
Speaker Change: The key for us will be to be nimble and adjust quickly as the situation unfolds.
Thank you.
Speaker Change: Returning to our 2025 outlook, we've provided an earnings guidance which accounts for multiple scenarios related to volume, to energy prices, and to currency.
Speaker Change: Significantly, our underlying assumption as it relates to tariffs and a potential retaliatory measures is that while there may be some impact, it won't be so significant or prolonged as to cause a recession in Canada or significant inflationary impacts in the U.S.
Speaker Change: With this in mind, we expect to deliver 10-15% EPS growth for 2025, and we are reaffirming our 2024-26 outlook for compound annual high single-digit EPS growth.
Speaker Change: While the business environment has evolved from our investor day timeframe, the investment thesis we presented has not.
Speaker Change: We remain in growth mode, and we are executing our strategy this year, including year-over-year margin improvement.
Speaker Change: So we're aiming for growth in volume, as well as earnings and margins.
Speaker Change: And to give you a sense of the margin improvement quantum, altogether, the 2024 one-offs, including fuel, impacted operating ratio by roughly 200 basis points.
Remi Lalonde: Remi will give you more details on the volume outlook, which all in assumes low-to-mid single-digit RGM growth.
Remi Lalonde: More than 50% of it is expected to come from CM-specific initiatives.
Remi Lalonde: About a third is related to the recovery of volumes lost from last year's labor disruptions.
Remi Lalonde: And the remaining assumes a bit of a lift in the economy. We do expect the shape of the volume growth through the year to be more backhand weighted as we lap last year's disruptions.
Remi Lalonde: We're guiding for a CapEx program of $3.4 billion for 2025.
Remi Lalonde: to ensure a safe and efficient operation, as well as to support growth.
Pat Whitehead: As Pat will discuss, we're doing the work to improve the efficiency with which we manage our engineering programs, and we're very focused on locomotive availability and reliability.
Pat Whitehead: The year's off to a positive start, as we expected. We have the momentum we need to demonstrate the strength of this network and franchise. And Derek, you're up first on the condition of the operation.
Thanks, Tracy, and good afternoon, everyone. Turn to slide 7.
Derek Taylor: From an operating perspective, the fourth quarter was really a story of two halves.
Derek Taylor: During the first half of the quarter, we had ideal operating conditions in terms of weather.
Derek Taylor: The team handled strong demand very efficiently, we kept pace with customer orders, and did not have any backlogs.
Derek Taylor: Unfortunately, we began November with two weeks of port labor disruptions, both on the west coast affecting Vancouver and Prince Rupert, as well as in eastern Canada at Montreal.
Derek Taylor: This was impactful to our intermodal network due to the staging of trains and balancing of equipment, but the rest of the railway continued to run well.
Derek Taylor: Now, during the second half of the quarter, just as we started to see volumes ramp up after the poor labor stoppage, we started a long stretch of really cold weather across much of the western region, our busiest.
Derek Taylor: As we have said in the past, we are the Rarity of the North when compared to our fellow Class Ones and no strangers to cold weather at CN.
Therefore, we activated our winter operating plan.
which is our blueprint for how we manage extreme cold.
Derek Taylor: That said, I would just remind you that winter came late the prior year, as we had zero days operating under tier restrictions in November and December of 2023.
Derek Taylor: That was compared to 28 days of tier restrictions to close out those same two months in 2024.
Derek Taylor: When coupled with the mainline disruptions that occurred in the western region, you can certainly see the impact on our key statistics when we look at them monthly.
Derek Taylor: Car velocity dropped from around 220 to 191 miles per day for the month of December.
Derek Taylor: True Dwell increased from a very strong October at 6.5 hours to 7.8 hours going into the holidays.
Derek Taylor: 32-hour cars also spiked to around 8,500 during the December time period.
Derek Taylor: When the weather finally broke after operating under 14 consecutive days of tear restrictions to essentially end the year, the railroad recovered nicely.
Derek Taylor: We've cut our 32-hour count by more than half, down to 4,000 cars in early January, quickly restoring yard fluidity.
Derek Taylor: Through the end of January, car velocity was approaching 200 miles per day, with many around 210, which is not bad for winter railroading.
You all also averaged just over seven hours.
Derek Taylor: And we did all this while doing over 15% more daily GTMs than we did last year.
Derek Taylor: The West Coast ports had some supply chain challenges at the end of December with vessel bunching and the port holiday shutdown, along with our tier restrictions limiting train length due to the cold weather.
Now, the ports are in good shape.
Derek Taylor: Rupert is fluid and we've got inbound vessels on the way.
Derek Taylor: Vancouver inventories and dwell times have also improved to more normalized levels.
Pat Whitehead: I'll end by thanking the entire operating team for their dedication and efforts through 2024. It was a hell of a dynamic year with lots of things thrown at this railway, which proved the resiliency of this network and this team. Pat, over to you.
Pat Whitehead: Thanks Derek. I want to begin with safety. Our injury and accident ratios for the year were the second best in our history, which is a significant achievement.
That said, we know there's still work to be done.
Pat Whitehead: We are not satisfied with how both quarterly measures ended below last year's levels, and we are committed to making improvements in the months ahead.
Tracy Robinson: Further to Tracy's comments, I want to emphasize that our plan is sacred.
Pat Whitehead: We strategically deploy resources to power the network, allowing us to quickly get back on track and serve our customers with predictability.
Pat Whitehead: This is evident in our Origin train performance, which came in at 90% for the full year, 1% better than 2023, even in the face of disruption.
Pat Whitehead: Next, let's turn to CREWE. We've remained disciplined in managing headcount, adjusting to the economic and political uncertainties that shape our workforce needs.
Pat Whitehead: These adjustments are already underway, ensuring we align with demand in the volatile environment.
Pat Whitehead: Where volumes are growing, mainly in the West, we continue to hire, with furloughed trainees on standby to quickly respond to demand.
Pat Whitehead: This approach has enabled us to improve crew costs per GTM by 4% compared to Q3.
despite a 3% increase in GTMs.
Pat Whitehead: Additionally, our T&E productivity, measured by GTM per employee, grew by 7% compared to the previous quarter.
Pat Whitehead: Having covered our most recent performance, I now want to highlight how we're deploying capital to achieve sustained, predictable service and cost performance going forward.
for both our maintenance and capacity expansion initiatives.
Pat Whitehead: Starting with locomotives, we've made significant progress in our DC to AC modification program.
Pat Whitehead: To date, we have converted 160 older DC units to modern AC propulsion units.
Pat Whitehead: Just to put it into perspective, two modernized units deliver the pulling power of three of our older DC units across most of our network.
Pat Whitehead: This enhances fleet reliability, fuel efficiency, and improves availability with fewer failures.
Looking ahead, we're also exploring emerging locomotive technologies.
Pat Whitehead: Earlier this month we launched a small pilot in partnership with Knoxville Locomotive Works for a medium horsepower hybrid unit.
Pat Whitehead: This will be tested over the next six months in yard and branch line service, allowing us to prepare for future innovations in a cost-effective, low-risk manner.
Pat Whitehead: We've also partnered with OEMs more broadly on alternative propulsion methods and we are staying close with our peers with the objective to maintain interoperability down the road.
Pat Whitehead: Turning to engineering, 2024 saw improvements in how we plan and execute our work. We streamlined material deliveries and standardized our production gains, reducing our reliance on third-party contractors.
Pat Whitehead: These efforts led to a 10% improvement in high gain productivity compared to the first half of the year and a 6% improvement year over year.
Pat Whitehead: On inventory management, we've made substantial strides. By reducing both engineering and mechanical inventory quantities by 35 million, we've improved asset utilization and reduced our carrying costs.
Lastly, on the capacity front.
Pat Whitehead: We've advanced our multi-year capital plan, bringing on key projects in the Chicago and Vancouver corridors.
Pat Whitehead: In December, we successfully delivered a new section of double track on the former EJ&E property in Chicago, which will improve fluidity and increase capacity by roughly 20% in the area.
Pat Whitehead: Similarly, the Gilleslie Siding, which came online in May, provides about 30% more capacity in the B.C. South between Kamloops and Vancouver.
Pat Whitehead: Later this year we're looking forward to completing two additional sections of double track on the Edson sub west of Edmonton, increasing capacity by 25% through this critical link, supporting our growth to the west coast.
Remi Lalonde: With that, I'll pass it on to Remi and he will tell you how he plans to fill up that capacity. Thank you, Pat. We're working on it, buddy. Bon après-midi à tous. C'est un plaisir pour moi d'être avec vous aujourd'hui.
Speaker Change: We marked this quarter with strong volume in grain and refined petroleum, and we kept the momentum with our expanding franchise for crack sands and NGLs in Northeast British Columbia.
Speaker Change: But as my colleagues indicated, we faced disruptions from extended port labor disruptions and significant operating restrictions with the early onset of Canadian winter.
Speaker Change: Combined with lower potash shipments against an opportunistic record calm and softer demand for forest products, overall volume and revenue fell by 3%.
Speaker Change: This also reflects the considerable headwind from fuel and the slight tailwind from FX.
Speaker Change: Let me hit a few of the Q4 segment highlights before turning to our Outlook.
Speaker Change: Despite the slightly smaller crop, we capped a record year for grain shipments with a strong fourth quarter on both sides of the border, reflecting robust Canadian canola and wheat exports from our draw territory.
Speaker Change: hire U.S. corn and soybean export and domestic volumes and crush volumes from a new facility in Iowa.
Speaker Change: While drain RTMs were 15% higher in Q4, the impact was more than offset by giving back some potash from the 2023 opportunistic gains from the Portland terminal outage.
Speaker Change: We saw a continued growth in refined fuels and NGLs in the PNC business thanks to projects like the Greater Toronto Area Fuel Terminal and propane exports through Prince Rupert.
Speaker Change: But that impact was offset by crude shipments, loss to new pipeline capacity, and two chemical plant closures.
Speaker Change: Sand volumes finish flat, which was better than expected, and caps an excellent year of growth, surpassing $500 million in revenue.
Speaker Change: Some of the commodities we serve face a bit more of a headwind, including soft market conditions for lumber and export iron ore, and the impact to autos from two CN-served plant closures for retooling earlier this year, and a tough comp against dealer restocking.
Speaker Change: So I'd say that the quarter would have played out largely as we expected, but for the impact of the unexpected western poor strike.
Speaker Change: which, among other things, hindered our ability to regain intermodal share following the Teamsters' work stoppage this summer and the late-quarter operational restrictions with the early onset of Canadian winter, which means that we ran out of track to catch up.
Let me pivot to 2025.
Speaker Change: While we expect modest North American industrial production growth in 2025, there's considerable uncertainty around the impact of potential tariffs.
Speaker Change: You will stay very close to customers to support them as best we can through this challenging period.
Speaker Change: We're forecasting RTM growth in the low to mid-single digits range to provide for volume variability and for more than half of it to come from our specific growth initiatives.
Speaker Change: We expect that the single biggest contributor will be international intermodal as we normalize for 2024 disruptions and fight to regain U.S. mix through Western gateways.
Speaker Change: We aim to capture the full year benefit of key 24 customer wins and grow our customer base by selling end-to-end supply chain efficiency.
Speaker Change: We're also very excited about new Fraxan terminals in Northeast DC to support the robust exploration and production forecasts for the year, U.S. grain on renewable and crush, and the ramp-up of Western Canadian met coal, to name only those.
Speaker Change: And with the Iowa Northern Acquisition, we have incremental opportunities in grain and ethanol.
Let me briefly speak to our view by business unit.
Speaker Change: We expect momentum to build in international intermodal after the first quarter and Chinese Lunar New Year, which we otherwise expect to be slightly up from last year.
Speaker Change: Similarly for domestic, we expect the first quarter to be flattened slightly down but to show benefit in H2 from joint line services, tightening truck capacity, and improving market conditions.
Speaker Change: For now, we expect lower automotive volumes in Q1 and the year due to lower production forecasts amid market uncertainty.
Speaker Change: We're optimistic around all grades of petroleum and chemicals for the year and for Q1, supported by share gains in projects like propane exports through Prince Rupert and the Greater Toronto Area Fuel Terminal.
Speaker Change: In fact, the GTA terminal is performing very well, and we're excited to see excellent progress on its Phase 2, which should receive its first shipments by September.
Although we see strong demand for frac sand,
Speaker Change: were more cautious on metals with uncertain North American demand and unfavorable iron ore export markets.
Speaker Change: And all were assuming just a slight uptick in metals and minerals in both Q1 and the year.
Speaker Change: Difficult to see any significant improvement in forest products this year, particularly as lumber continues to struggle with a sluggish market, plus the threat of additional tariffs.
Speaker Change: But we expect to see better panel and OSB demand and an increase in pulp and paper volume after Q1.
Speaker Change: We're expecting growth in Canadian Metcoal with the now operational Quintet line, but the sector will be somewhat tempered by a weaker U.S. exports and utility demand for an overall slight uptick.
Speaker Change: For Canadian grain, we see a stronger Q1, but softer Q2 and Q3 on a tougher common, even with a slightly larger crop.
Speaker Change: We will face a Q1 headwind in potash due to a customer's terminal outage against a strong comp, but we should grow thereafter.
Speaker Change: The U.S. program, on the other hand, should benefit from stronger domestic and export corn demand and new crush projects, particularly in the first half of the year.
Speaker Change: We close by underscoring that we delivered more than 1% RTM growth in 2024, despite a very uneven macro environment and numerous external disruptions.
Pat Whitehead: And with these disruptions now in the rearview mirror, the resiliency that Pat and Derek talked about, together with our commitment to efficient and reliable service, clearly resonated with our customers.
Pat Whitehead: We delivered record on-time performance to yards, and they rewarded us with our best-yet-loyalty scores, measured through our comprehensive Net Promoter Survey, all while earning same-store price ahead of rail inflation.
Gislain Houle: That's what it's all about, and with that, I'll pass it over to Gislain.
Gislain Houle: Turning to slide 14, like Derek said, the quarter began with ideal operating conditions which allowed the team to execute on solid demand.