Canadian National Railway Company Q3 FY2024 earnings call

Operations

• Implemented scheduled operating plan 30 months ago, which has proven effective, rebounding from fires in Northern Alberta and labor-related shutdown.

Macro

• Macro lighter than expected, impacting merchandise business, but CN-specific opportunities drive over half volume growth in coming years.

Adjustments

• Adjusting resource levels, stopped hiring in certain parts of the network earlier this year, furloughed in surplus areas.

Safety

• 30% improvement in accident frequency ratio and 4% improvement in injury frequency rate in Q3.

Resourcing

• Adjusting headcount, parking 140 locomotives, returning leased center beams, reducing intermodal platforms by 20%, improving asset utilization through maintenance scheduling and modernization.

Commercial

• Revenue up 3% Y/Y, volume up 2% RTM; CN-specific growth initiatives ongoing, including investments in Double-Track on the Edson Sub and projects like the Greater Toronto Area fuel terminal.

CN grew revenue by 3% in the quarter against last year and volume by 2% in RTM terms. Intermodal RTMs grew by 7% in the quarter against last year with revenue flat, reflecting an 18% increase in international RTMs offset by a 14% decrease in domestic. Automotive RTMs dropped by 5% and revenue by 10% year-over-year. Petroleum and Chemicals RTMs and revenues grew by 9% and 10% respectively. Metals and Minerals RTMs and revenues were down by 5% and 4% respectively. Forest Products RTMs fell by 7% and revenue by 1%. Coal RTMs and revenue fell by 9% and 6% respectively. Grain and Fertilizer RTMs improved by 4% and revenue by 8%.

2024

• Affirmed low-single-digit adjusted diluted EPS growth, volume growth in RTMs at lower end of 3%-5% range.

2024-2026

• Affirmed adjusted diluted EPS CAGR in the high-single-digit range.

Q4

• Expect margin improvement in Q4 as resources are aligned to volume outlook.

• Labor uncertainty at some Canadian ports and West Coast.
• Macro-economic softness impacting volumes.
• Geopolitical and environmental events affecting planning and resource allocation.

Q: Ken Hoexter asked about scale of sequential margin improvement from Q3 to Q4.

A: Tracy Robinson said margin will improve in Q4, driven by international volumes; Ghislain Houle added they're confident of better OR in Q4 than Q3.

Q: Fadi Chamoun asked about volume guide visibility and conviction in levers.

A: Remi Lalonde said tailwinds from strong grain, petroleum and chemicals projects, but macro headwinds exist, and they're focused on recovering US mix in Western Gateways.

Q: Chris Wetherbee asked about resource alignment and 2025 earnings growth.

A: Tracy Robinson and Patrick Whitehead discussed adjusting resource levels, reducing FTEs, parking locomotives, and returning leased assets, with focus on aligning resources to volume outlook.

Q: Cherilyn Radbourne asked about factoring geopolitical issues into planning.

A: Tracy Robinson said they're doing more consulting on geopolitical impacts, being responsive to changes, and guiding differently may be needed in future.

Q: Scott Group asked about Q4 margin improvement and pricing into 2025.

A: Tracy Robinson said sequential margin improvement in Q4, with focus on international volume; Remi Lalonde said pricing ahead of railroad inflation, service levels strong.

Q: Walter Spracklin asked about West Coast port activity and Prince Rupert opportunities.

A: Remi Lalonde said recovering US mix through Western Gateways is key, modeling recovery similar to last year's port strike, with service consistency and reliability important.

Q: Steve Hansen asked about frac sand seasonal slowdown.

A: Remi Lalonde said four strong quarters for frac sand, but early year-end seasonal slowdown, still optimistic into next year with customer terminal investments.

Q: Ravi Shanker asked about normalized run rate of new business.

A: Tracy Robinson said CN-specific initiatives drive growth, with line of sight to volumes for investment returns, more detail in January.

Q: Konark Gupta asked about extended interswitching rules in Canada.

A: Tracy Robinson said extended interswitching slows supply chain, no impact seen yet, Remi Lalonde underscored strong grain performance.

Q: Brian Ossenbeck asked about US destination share and staffing average comp.

A: Remi Lalonde said labor uncertainty in West Coast and Montreal ports is a headwind; Ghislain Houle said average comp per employee lower in Q3 vs Q2 due to lower incentive, expecting increase in Q4.

Q: David Vernon asked about buyback pullback.

A: Ghislain Houle said debating buyback vs leverage target of 2.5 times adjusted debt to adjusted EBITDA, will continue to manage to target.

Q: Benoit Poirier asked about Mexico and trucking operations.

A: Derek Taylor said Falcon service solid, consistent transit time; Remi Lalonde said TransX facing oversupply of truck capacity and consumer confidence challenges.

Q: Jonathan Chappell asked about resource management in softer demand.

A: Patrick Whitehead and Derek Taylor said adjusting resources to match volume, maintaining service reliability, with locomotive and car availability good.

Q: Stephanie Moore asked about balance between macro and CN-specific initiatives.

A: Tracy Robinson said 50% of volume growth from CN-specific initiatives, growing faster than economy, more detail in January.

Q: Daniel Imbro asked about 4Q volume outlook.

A: Ghislain Houle said focus on international intermodal volumes, strong grain, but potash comp and macro headwinds present.

Q: Thomas Wadewitz asked about carload business schedule and train length.

A: Tracy Robinson said scheduled operation primary, adjusting plan to refine train load and length while maintaining service.

Q: Benjamin Nolan asked about CapEx for 2025.

A: Tracy Robinson said CapEx based on volume levels, maintenance capital for network replenishment, growth capital with line of sight to customer initiatives.