Canadian National Railway Company (CNI) on Q3 2021 Results - Earnings Call Transcript

Operator: Good afternoon. My name is Charlie and I will be your Operator today. Welcome to CN 's Third Quarter 2021 Financial and Operating Results Conference Call. All participants are now in a listen-only mode. After the speakers remarks, there will be a question-and-answer session. I'd now like to turn the call over to Paul Butcher, Vice President Investor Relations. Ladies and gentlemen, Mr. Butcher. Paul Butcher : Well, thank you, Charlie. And good afternoon, everyone. And thank you for joining us for CN 's Third Quarter 2021 Financial and Operating Results Conference Call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian Securities law. These things are subject to risks and uncertainties that may cause actual results to differ materially, from those expressed or implied in these statements, and are more fully described in our cautionary statements regarding forward-looking statements in our presentation. After the prepared remarks, we will conduct the Q&A session. I do want to remind you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are JJ Ruest, our President and Chief Executive Officer, Ghislain Houle, our Executive Vice President and Chief Financial Officer, Rob Reilly, our Executive Vice President and Chief Operating Officer, James Cairns, our Senior Vice President, Rail Centric Supply Chain, Helen Quirke, our Senior Vice President and Chief Strategy Officer, and finally, Keith Reardon, our Senior Vice President, Consumer Product Supply Chain. It is now my pleasure to turn the call over to JJ Ruest. JJ Ruest: Thank you, Paul. And good evening everyone. Today we will do our prepared statement in two-parts. Ghislain and I will cover the highlight of the third quarter, will keep that section tight, and then the team will cover the progress on our September 17 action plan. Well, let's first start with the highlights of Q3 and I'm on Page 5. All in, on an adjusted basis, the base business produced an adjusted diluted EPS growth of 10% and adjusted operating ratio of 59.0%, and free cash flow for the first nine months of just over $2 billion. The operating ratio started high in July, resulting from the 2-week loss of our CN mainlines in the Port of Vancouver, but improved afterwards in August and September to an adjusted 59.0 OR as the average for the quarter. Regarding pricing trend, James Cairns will provide evidence of solid pricing at CN in the last couple of quarters. Regarding headcount of the 1050 that we mentioned in our September 17 conference call, about 70%-75% are completed. At CN, we have a long-term strategy and we railroad for all key stakeholders. We make sure the railroad has enough infrastructure to support the economy. We railroad to reduce carbon emission. We railroad to support our customers so they succeed and grow in their market. We railroad to produce good return for our shareholders and we're railroad to create an engaging and safe workplace for our employees. I will now turn it over to Ghislain, who will walk us through the quarter. Ghislain Houle: Well, thank you. JJ. My comments will start on Page 7 of the presentation, which will provide more visibility on our solid third quarter performance. Revenues for the quarter were up 5% to $3.6 billion despite volumes on an RTM basis being down 1% which were impacted by forest fires in July and supply chain constraints throughout the quarter. We delivered pricing well above rail inflation and continued to focus on yield management, optimizing CN's precious network. Adjusted net income was a 1.080 billion, with adjusted diluted EPS of $1.52, both up 10% versus last year. Other income was down by around $30 million versus last year due to a mark-to-market loss on an equity investment in autonomous driving technology. Our adjusted results exclude various non-recurring items related to the KCS transaction costs, including the $700 million U.S., the break free from KCS. Our adjusted results also exclude a workforce reduction provision, as well as advisory costs related to shareholder matters. Turning to page 8, let me highlight a few of our key expense categories expressed on a constant currency basis. Labor and fringe benefit expense was up 12% versus last year. This was mostly driven by increased wages due to a 5% higher average headcount and a workforce reduction provision, partly offset by higher capital credits from more capital work in the quarter. Excluding the workforce reduction provision, labor and fringe benefits was up only 6%, on a sequential basis, the end of quarter headcount was down 3% compared to the end of Q2. Fuel expense was up 40%, driven by a nearly 50% increase in price, partly offset by continued improvement in fuel efficiency. This quarter saw a significant improvement in equipment rents with a 31% decrease versus last year, driven by lower car hire expense, mostly due to improved online productivity and lower volumes. Now, moving to cash on page 9, we generated free cash flow of over CAD$2 billion through the end of September, around CAD$50 million lower than 2020, mainly from lower net cash from operating activities, due to higher cash taxes. We have resumed our share buybacks and plan to complete our CAD$1.5 billion program by the end of January 2022. Moving on to page 10, we are reaffirming our full-year financial outlook and expect to deliver about 10% adjusted diluted EPS growth versus 2020. While we are now assuming volume growth in terms of RTMs to be in the low single-digit range for the year, we are executing on our strategic plan that has started delivering benefits in Q4. We still expect to deliver free cash flow in the range of $3 billion to $3.3 billion, which will drive further improvement in free cash flow conversion. I will now turn the call back to you, JJ. JJ Ruest: Oh, thank you Ghislain. And before I get into the progress of our September 17 action plan, as you already read from the press release, I am retiring effective as of the end of January 2022 or such later time as a successor has been appointed to ensure flawless transition. I am not going anywhere, and I will deliberate with the team here today around me on the fourth quarter results, and to be sure that we have a successful setup for the 2022 business plan. The Board has also, as you read in the press release, has appointed a search committee for a world-class CEO. The detail on the Board committee that will do so is also in the press release. Back to the business, on September 17, we announced the next step in our strategy to redefine railroading for the next-generation. CN will execute on our plan, deliver high-quality service to customers, and generate enhanced and sustainable return for all shareholders. Our long-term goal remains to consistently deliver double-digit EPS growth. I would like to begin by recapping our 2022 objective. We are targeting CAD$700 million of additional operating income for next year. We intend to use a balanced approach, including optimizing railroad productivities, and labor costs. We also expect to adjust our capital spend to 17% of revenue. We can do this without compromising our absolute commitment to safety and customer service because of the current good condition of our network and by putting to good use the technology investment we made in recent years. Another major component of our plan is lowering our operating ratio, starting with 57% in 2022. Achieving 57% next year, will unlock significant near-term value while maintaining and balancing our commitment to customer service and safety. We will achieve it with operational excellence rationalizing our cost structure, price, and finally volume, when grain returns late next year. We are assessing opportunities to go lower beyond 2022, but responsibly, and we will -- -- say more to that in the new year. We are targeting EPS growth in the range of 20%, return on investment capital range of 15%, and about $4 billion of free cash flow for 2022. I am pleased with the quick progress thus far and the initial positive feedback received from shareholders and stakeholders, both. I will now turn it back to the team who will provide an update on how we start to implement the key initiatives that will deliver result in Q4 and in 2022. Ghislain? Ghislain Houle: Okay. On page 13, we have already made considerable progress on our total operating income improvement of $700 million for 2022. For the $250 million in labor, we have already completed around 75% of the reductions identified on our September 17th call. We will be substantially complete by the end of the year, which will provide a full-year impact of these reductions in 2022 for the $300 million in purchase services and material and other items, we have already secured around a $100 million of initiatives in the past month of which a few examples include the reduction of contractors through the entire Company, both in in the field and at headquarters. A reduction of IT applications, aggressively storing and retiring older locomotives, which will reduce purchased services and material costs associated with their maintenance. Finally, we'll deliver a CAD$150 million in additional price initiatives as we continue to enhance our yield management strategy. I will now turn it over to Rob. Rob Reilly: All right, thank you Ghislain. As stated on September 17th, operational excellence, our commitment to safety and service to our customers have been and will continue to be cornerstones in our strategy. All of our core operating and safety metrics have improved over the past couple of years leading to greater efficiencies and improved customer service. We continue to build on our positive momentum through our strategic initiatives. A big part of our operational excellence is in operating the railroad sustainably. Our fuel efficiency for Q3 was an all-time record. Our position as the industry leader from a fuel efficiency perspective, underscores our commitment, and enhances our operating performance and profitability. CN's industry leadership in sustainability and success in operational excellence, have been achieved through a continuous and concerted effort by the team. We are on track to deliver all-time best in productivity in our operations, fuel efficiency, and, most importantly, the safety of our employees. We are running a safe, efficient, and sustainable operation that consistently meets the needs of our customers. I'll now turn it over to Keith and James to outline CN's growth vision. Keith? Keith Reardon: Thanks, Rob. Current worldwide port congestion, especially on the U.S. West Coast, highlights the CN network Intermodal advantage. Three coasts, 13 proven uncongested port gateways, several that are meaningfully expanding their capacity. Single line, single-owner access from each coast to the U.S. Midwest links the efficient gateways to where the markets are and where they will be. Our inland terminal network is well established, yet continually improving. State-of-the-art terminal and container asset technology-backed investments are creating capacity and efficiency, improving safety, and improving the customer experience. The Intermodal story for CN is strong with decades of opportunities ahead. James, I believe you also have some great long-term carload markets that are developing? James Cairns: Yeah. Thanks, Keith. I've never been more excited about our long-term carload growth potential than I am today. Our unique geographic reach and exclusive access to the Port of Prince Rupert will help us be a leader in carload growth over the next several years. Canadian grain recovery in Q4 2022 will be followed by emerging new renewable fuels and refined petroleum products projects that will propel our growth through 2023. What I am most enthusiastic about, our new green energy carloads, related to Alberta 's massive growth in hydrogen energy projects, evidenced by the slew of recent announcements around the Alberta's Industrial Heartland. Hydrogen-related carloads have the potential to be up the scale of crude-by-rail at its peak, but with long-term rate ability. Our end-to-end supply chain model that helped us create new export capabilities for propane is easily replicated for blue ammonia, and other hydrogen drive energy carloads. We move to the next slide. We routinely get asked questions about revenue for RTM. Our view is that this measure is a better proxy for mix than it is for price. That said, since December 2018, when we started our customer - centric journey under JJ's leadership, CN has seen the fastest growth in revenue per RTM for all class 1s to the end of Q2 this year. We believe a better proxy for price, is wealth price. As you've heard us say before, we consistently priced ahead of roadway cost inflation. In the last 5 years, our corporate same-store price has been on average nearly 2% greater than rail cost inflation. We have been preparing for accelerating railway cost inflation by sequentially increasing our price each quarter, since Q4, 2020, our various incremental capacity auction programs provide real insight into the market rate for our valuable capacity, allowing us to smartly price to meet the market, without undue volume risk. I'll turn it back to JJ. JJ Ruest: Thank you. Thank you, James. Thank you, Keith. Thank you, Rob and Ghislain. Looking to 2023 and beyond, the CN team is focused on delivering solid results and see the opportunity to further improve our operating ratio. As we continue to prioritize safety, railroading for customers, railroading to reduce carbon emission, a balanced approach. Our leadership team has a clear vision. We are focused to be a growth Company, and produce financial value over the short and long term. CN's future is bright. Our network is great. Our ambition is to build a premium railway of the 21st Century, investing in technology, investing in capacity, delivering service that attract more customers to the rail network, improve safety, reduce carbon emission, create the essential capacity for the economy, and reduce our costs. Just as CN pioneered the industry, focused on efficiency, we are on our way -- well on our path to now be well-positioned to lead the industry to the next transformation of a modern digital scheduled railroad. To conclude, CN is taking a balanced approach. We are investing in the success of our customers, success of our workforce and communities, and as well as return for our shareholders. We will now turn it back to the question, Charlie? Operator: Thank you. We'll now begin with the question-and-answer session. The first question comes from the line of Ken Hoexter with Bank of America. Please go ahead. JJ Ruest: Good afternoon, Ken. Ken Hoexter: Hey, good afternoon. JJ, maybe I can start with 1 question. But I guess you're announcing your retirement, maybe your thoughts on the outlook here. You talked about decelerating growth and maybe talk about -- I know Keith and James talked about the leaders of that. But talk about your outlook on the economy here and then your thoughts as you step away. JJ Ruest: Yes, so where we're at, I think it can. Where we're at right now, I think we're in a world of increasing inflation, that's why we're driving price. We're in a world where volume is sort of -- it's positive in some places, not so positive in other places. Therefore, we have to adapt to that. And I think we're also in a world where it's time for us to be ready, setting for the future, that's why there's such a focus on the railroad of the future, we call that VSR. Leveraging technology, using talent, making sure we're relevant to our customers, all of them big and small, and creating value. I think the rail industry has a huge opportunity is to be more relevant to the supply chain, working with ecosystem of the Port, making the best mousetrap to attract more vessel, it also an opportunity to attract more freight on the highway,
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Canadian National Railway Company (NYSE:CNI) Overview and Analyst Insights

  • The consensus price target for NYSE:CNI has decreased by 6.4% over the past year, indicating a more conservative outlook from analysts.
  • Despite a predicted decline in earnings, the stock's 19% decline in New York is seen as a potential long-term buying opportunity.
  • CNI reported mixed results in the third quarter, with challenges in the intermodal and automotive sectors, yet operational efficiency and cash returns remain strong.

The Canadian National Railway Company (NYSE:CNI) is a key player in the rail and transportation industry, operating an extensive network of 19,500 route miles across North America. The company serves various sectors, including petroleum, chemicals, and automotive products, and offers logistics and transportation management services. CNI competes with other major rail companies like Canadian Pacific Railway and Union Pacific.

The consensus price target for NYSE:CNI has seen a downward trend over the past year. Last year, analysts set the average price target at $128.23, but it has since decreased to $120 in the last quarter and last month. This 6.4% decline suggests a more conservative outlook from analysts, possibly due to recent earnings reports and economic conditions.

Analysts predict a decline in CNI's earnings in the upcoming financial report, as highlighted by Wells Fargo's price target of $130. Despite this, the stock's 19% decline in New York presents a potential long-term buying opportunity for investors. Concerns over currency risks and tariffs have contributed to the stock dip, but CNI's capital-intensive nature remains attractive for strong returns.

In the third quarter, CNI reported mixed results, with a slight earnings per share (EPS) beat and revenue growth. However, challenges in the intermodal and automotive sectors affected performance. Despite these hurdles, railroads like CNI can achieve strong returns through operational efficiency, fuel efficiency, and cash returns via buybacks and dividends.

Canadian National Railway Company (NYSE:CNI) Overview and Analyst Insights

  • The consensus price target for NYSE:CNI has decreased by 6.4% over the past year, indicating a more conservative outlook from analysts.
  • Despite a predicted decline in earnings, the stock's 19% decline in New York is seen as a potential long-term buying opportunity.
  • CNI reported mixed results in the third quarter, with challenges in the intermodal and automotive sectors, yet operational efficiency and cash returns remain strong.

The Canadian National Railway Company (NYSE:CNI) is a key player in the rail and transportation industry, operating an extensive network of 19,500 route miles across North America. The company serves various sectors, including petroleum, chemicals, and automotive products, and offers logistics and transportation management services. CNI competes with other major rail companies like Canadian Pacific Railway and Union Pacific.

The consensus price target for NYSE:CNI has seen a downward trend over the past year. Last year, analysts set the average price target at $128.23, but it has since decreased to $120 in the last quarter and last month. This 6.4% decline suggests a more conservative outlook from analysts, possibly due to recent earnings reports and economic conditions.

Analysts predict a decline in CNI's earnings in the upcoming financial report, as highlighted by Wells Fargo's price target of $130. Despite this, the stock's 19% decline in New York presents a potential long-term buying opportunity for investors. Concerns over currency risks and tariffs have contributed to the stock dip, but CNI's capital-intensive nature remains attractive for strong returns.

In the third quarter, CNI reported mixed results, with a slight earnings per share (EPS) beat and revenue growth. However, challenges in the intermodal and automotive sectors affected performance. Despite these hurdles, railroads like CNI can achieve strong returns through operational efficiency, fuel efficiency, and cash returns via buybacks and dividends.