Canadian National Railway Company Q2 FY2024 earnings call

Macro Level: The economy is in line with expectations, with North American industrial production trending slightly positive, and bulk portfolios remaining strong. ### CN-Specific Growth Initiatives: Progress is being made with CN-specific growth initiatives such as the petroleum and fuels business, sand franchise growth, and international portfolio rebuild. ### Operations: The scheduled model is serving well. The East and South regions have better velocity and on-time numbers this year. The West had issues in Q2 but improved in Q3. Customer service levels are strong across the network. There is a labor situation in Canada with the CIRB expected to release a decision on the essential service designation on or about August 9th, impacting customers and business. Safety efforts include a 22% improvement in the accident frequency ratio, though a 13% deterioration in the injury frequency ratio, with efforts on behavior-based safety training and a hazard reporting app.

CN's revenues grew by 7% in the second quarter. Intermodal revenues grew by 6% with a 13% increase in overall RTMs, with international up by 19% but domestic down by 1%. Grain and fertilizer revenues and RTMs each rose by 7%. Petroleum and chemicals revenues were 14% higher in the quarter on a 12% increase in RTMs. Metals & Minerals revenues grew by 6% on 12% higher RTMs. Automotive revenues grew by 9% and RTMs by 12%. Forest product revenues improved by 4% in the quarter despite flat RTMs. The coal business lagged with revenues down by 8% on an 11% drop in RTMs.

Revised 2024 Guidance: The full year guidance is revised to mid to high single-digit EPS growth, assuming no labor disruptions and current traffic diversions do not increase. ### RTM Growth: RTM growth is expected in the range of 3% to 5% versus 2023. ### Long-Term Outlook: The 2024 to '26 financial outlook of 10% to 15% CAGR remains unchanged.

Labor Uncertainty: Uncertainty in Canada regarding the labor situation, with customers rerouting vessels and the prolonged process impacting business. ### Maintenance Impact: Maintenance work in the Vancouver corridor caused capacity issues and impacted operating metrics. ### Fuel Price: Fuel price is a headwind, impacting EPS and the operating ratio.

Q: Chris Wetherbee from Wells Fargo asked about cost carryover from maintenance in Q2 into Q3 and OR progression.

A: Tracy Robinson and Ghislain Houle responded that work blocks have moved off, the railroad is operating well, and expectations for OR progression.

Q: Cherilyn Radbourne from TD Cowen asked about capacity in the Vancouver corridor and management of disruption.

A: Derek Taylor and Tracy Robinson answered about planning, capacity, and changes to avoid unplanned work blocks.

Q: Scott Group from Wolfe Research asked about guidance assuming no strike and price yield.

A: Tracy Robinson and Remi Lalonde responded about guidance assumptions and mix impact on RTM.

Q: Steve Hansen from Raymond James asked about preparing for the new grain harvest.

A: Tracy Robinson responded about using multiple ports and focusing on the right volumes.

Q: Kenneth Hoexter from Bank of America asked about upside/downside risks in earnings target and unproductive costs.

A: Tracy Robinson and Ghislain Houle answered about unproductive costs and fuel impact.

Q: Konark Gupta from Scotiabank asked about unplanned work blocks and wage inflation in the TCRC deal.

A: Derek Taylor and Tracy Robinson responded about unplanned work blocks and wage expectations.

Q: David Vernon from Bernstein asked about the three-year guide and maintenance delays cost.

A: Tracy Robinson and Ghislain Houle answered about the three-year plan and duty rest period cost impact.

Q: Fadi Chamoun from BMO Capital Markets asked about the Western corridor bottleneck and pricing lever.

A: Tracy Robinson responded about capital investment and options for growth.

Q: Brian Ossenbeck from JPMorgan asked about East/South growth and work rest rules relief.

A: Remi Lalonde and Tracy Robinson answered about East/South initiatives and work rest rules compliance.

Q: Walter Spracklin from RBC Capital Markets asked about the three-year CAGR and growth in '25/'26.

A: Tracy Robinson responded about CN-specific initiatives and economic recovery impact.

Q: Ravi Shanker from Morgan Stanley asked about peak season demand pull forward and OR impact of network blockages.

A: Remi Lalonde and Ghislain Houle answered about demand pull forward and OR examples of recrew/deadhead costs.