Canadian National Railway Co. Q4 FY2023 earnings call

• Safety: In Q4, injury frequency ratio was down 14% and accident rate down 29%; full-year injury frequency ratio improved 13% and accident rate improved 17%.
• Operations: Q4 car velocity averaged 215 miles per day (up 4% vs last year), origin train performance ~90%, destination train performance 70% with room for improvement in train meet delays and crew swaps. Network and field teams managed Canadian Work/Rest Rules.
• Network Investments: Closed CBNS to densify eastern network, purchased Iowa Northern for Midwest network expansion. Capital projects in 2024 for operating efficiency and growth from West Coast to Chicago.
• Growth Initiatives: CN-specific initiatives like Falcon and EMP delivering volumes, expected gradual recovery in intermodal, forest products, and other segments as economy improves.

In the fourth quarter, revenues were down 2% versus last year on lower intermodal storage fees and a lower applicable fuel surcharge, partially offset by volumes and solid same-store pricing. RTMs (railcar tonnage miles) were up 2% year-over-year. For segments: Intermodal - international was down 11% mainly due to port strike, domestic down 3%; Bulk - fertilizers RTMs up 85%, coal up 1% (Canadian coal up 5%, US coal down 9% due to operational issue), grain RTMs down 13% as weaker global commodity pricing led to holdback; Automotive - RTMs up 22%; Merchandise - forest products volumes down 5%; Metals and Minerals - RTMs up 3% across segments except iron ore where RTMs were down due to short-haul domestic shipments.

• EPS guidance: Approximately 10% growth over 2023.
• Volumes: Expect mid-single-digit RTM growth in 2024.
• CapEx: ~$3.5 billion net of customer contributions in 2024.
• Dividend: Board approved 7% increase for 2024, 28th consecutive year of increase.
• Share Buyback: New program up to 32 million shares for ~$4 billion from Feb 1, 2024, to Jan 31, 2025.

• Economic and geopolitical volatility: Continued uncertainty in economy and geopolitical factors.
• Weather impacts: Extreme winter temperatures in Q1 2024 affected operations.
• Port Strike Effects: Lingering impact of past port strikes on intermodal volumes.

Q: Chris Wetherbee from Citi asked about unpacking the '24 guide, RTM guide mid-single-digits and cost headwinds.

A: Tracy Robinson said forecast assumes economic recovery and customer-specific growth initiatives, operating leverage to drive EPS growth despite headwinds.

Q: Cherilyn Radbourne from TD Cowen inquired about international intermodal and market share post-strike.

A: Doug MacDonald said seeing inquiries due to Red Sea and Panama Canal issues, expecting volumes to gradually ramp up but maintaining pre-COVID levels.

Q: Ken Hoexter from Bank of America asked about EPS target, hiring, and cost implications.

A: Tracy Robinson said hiring to offset attrition and ramp up with volume recovery, workforce managed via hiring relative to attrition.

Q: Scott Group from Wolfe Research asked about price above inflation, weather impact in Q1, and labor front.

A: Tracy Robinson and Patrick Whitehead said pricing above inflation expected to continue, weather impact in Q1 factored in, and labor focused on managing work rule changes.

Q: Fadi Chamoun from BMO asked about volume back to 2019 level and revenue mix.

A: Doug MacDonald said mid-single-digit RTM growth expected to carry through, revenue mix dependent on product segments and pricing.

Q: Ravi Shanker from Morgan Stanley asked about Falcon service rollout.

A: Derek Taylor said Falcon service with partners is delivering on transit time, expecting growth in 2024.

Q: Walter Spracklin from RBC Capital Markets asked about Q1 growth and 10% EPS guidance.

A: Ghislain Houle said Q1 was tough comp but factored into 10% EPS growth for the year.

Q: Konark Gupta from Scotiabank asked about destination performance target and interchange partners.

A: Patrick Whitehead said aiming to reduce train meet delays and improve launch and land performance by managing train schedules and crew swaps.

Q: Brandon Oglenski from Barclays asked about dividend change and share buyback leverage.

A: Ghislain Houle said dividends grown in line with earnings, share buyback part of long-term view with targeted leverage of 2.5.

Q: Thomas Wadewitz from UBS asked about train lengths and margin upside.

A: Derek Taylor said scheduled operation allows growth at low incremental cost, intermodal growth to help train length.

Q: Amit Mehrotra from Deutsche Bank asked about yield, fuel, and mix.

A: Ghislain Houle and Doug MacDonald said fuel impact factored in, yield affected by mix and pricing, with container storage fees stable moving forward.

Q: Brian Ossenbeck from JPMorgan asked about CN-specific projects and 2024 shape.

A: Doug MacDonald said projects like Toronto fuel facility, LPG export, and Northern BC projects moving forward, some back-ended but on target.

Q: Justin Long from Stephens asked about $200 million cost headwinds and OR improvement.

A: Doug MacDonald and Tracy Robinson said cost headwinds from depreciation, incentive compensation, pension, but expected OR improvement with volume recovery.

Q: Jonathan Chappell from Evercore ISI asked about Rupert terminal capacity and international intermodal growth.

A: Doug MacDonald said Rupert terminal has capacity to grow to over 1 million TEUs, seeing interest due to Red Sea and canal issues, working to fill it efficiently.

Q: Michael Kypreos from Desjardins Capital Markets asked about grain volumes and carryover.

A: Doug MacDonald said Canadian grain farmers holding back due to lower prices, expected carryover and recovery in Q1 and Q2.