Canadian National Railway Company Q4 FY2024 earnings call

Key Points - 2024 Overview: Faced one-off challenges like labor disputes, rail shutdowns, and port strikes, leading to unmet growth expectations. However, team agility was strong, car velocity was solid, customer service was top-tier, and accident/injury performances were second-best. - 2025 Plans: Iowa Northern transaction extends network reach, integration starts soon. Labor issues behind us with tentative agreements with unions. Winter operations have seen improved car velocity and yard fluidity. Productivity initiatives in engineering and mechanical to mitigate inflation and support operating leverage. - Operational Highlights: Fourth quarter had two halves with port labor disruptions and cold weather affecting key statistics, but recovery was seen. Safety was a significant achievement with second-best injury/accident ratios, but work continues. Crewing managed headcount adjustments, and capital deployment focused on locomotive modification, engineering improvements, and capacity expansion projects like double track in Chicago and Vancouver corridors.

In the fourth quarter, grain had a strong fourth quarter with record shipments on both sides of the border but was offset by potash from 2023 opportunistic gains. Refined fuels and NGLs in the P&C business grew due to projects like the Greater Toronto Area fuel terminal but were offset by crude shipments lost to new pipeline capacity. Sand volumes finished flat. International intermodal is expected to be a key growth driver. Revenue fell by 3% due to disruptions from port labor and winter operating restrictions. Grain RTMs were 15% higher in Q4 but potash gave back gains. Refined fuels and NGLs saw growth but crude shipments were lost. Sand volumes were flat. Absolute figures: adjusted EPS Q4 $1.82, full-year $7.10; operating ratio Q4 62.6%, full-year 62.9%. Revenue down 3% year-over-year for the quarter.

Guidance - Expect 10% to 15% EPS growth for 2025. - Reaffirm 2024 to 2026 outlook for compound annual high single-digit EPS growth. - CapEx program of $3.4 billion for 2025 to ensure safe and efficient operation and support growth. - Board approved 5% dividend increase for 2025 and a new share buyback program of up to 20 million shares from February 4, 2025, to February 3, 2026.

Risks - Labor issues, while mostly behind, arbitration processes ongoing. - Tariffs initiated by the new US administration could impact results. - Weather disruptions, such as severe cold, can affect operating statistics and volumes. - Fuel price fluctuations can impact operating expenses. - Competition in various product segments can affect market share and revenues.

Q: With respect to the volume outlook for 2025, could you drill down on regaining volumes lost due to labor disruption in 2024, especially market share recovery on the Canadian West Coast year-to-date?

A: Remi Lalonde stated that recovery was hindered by port strikes in November, but they are off to a good start in January and expect most recovery after the first quarter post-Chinese Lunar New Year.

Q: Chris Wetherbee asked about OR perspective and incremental margin on growth. Tracy Robinson responded that they have a clear path on labor, the railroad runs well, focused on margin improvement, resized resources, and productivity efforts to offset inflation, with margin improvement depending on volume.

Q: Fadi Chamoun asked about embedded pricing and disruption offset. Tracy Robinson and Remi Lalonde responded that they have provisions for disruptions, Remi focuses on pricing ahead of rail cost inflation.

Q: Scott Group asked about building blocks of earnings guidance, FX, pension, and cushion. Tracy Robinson said guidance reflects volume, fuel, FX variability, and built-in provisions for operating conditions, with volume being key driver.

Q: Walter Spracklin asked about buyback and leverage. Ghislain Houle stated they manage balance sheet to 2.5 times leverage, purposefully not providing budget, and comfortable with current management.

Q: Ken Hoexter asked about drivers of outlook, first quarter comp, and economic growth. Tracy Robinson said guidance assumes modest economic growth, most growth from labor recovery and CN-specific initiatives, with volumes driving top end of outlook.

Q: Steven Hansen asked about labor headcount and scaling. Derek Taylor and Patrick Whitehead responded that 800 people are furloughed, with ability to recall and hire as needed in growth areas.

Q: David Vernon asked about CN-specific growth initiatives like nat gas liquids and Jansen potash. Remi Lalonde said nat gas liquids growth incremental, Jansen potash construction continues but details pending.

Q: Thomas Wadewitz asked about headcount, comp, and benefits. Derek Taylor and Ghislain Houle responded that 800 furloughed, hiring targeted, and comp assumptions at 3% growth.

Q: Konark Gupta asked about customer return and tariff noise. Remi Lalonde said rebuilding credibility after 2024 disruptions, focusing on service reliability to attract customers.

Q: Brandon Oglenski asked about operating plan and engineering in 2025. Derek Taylor said strength in scheduled operating model, quick rebound from disruptions, and engineering team standardizing work gangs for productivity.

Q: Benoit Poirier asked about FX and debt leverage. Ghislain Houle and Remi Lalonde responded that FX has small impact on leverage, and service reliability key for attracting traffic, not solely FX.

Q: Jonathan Chappell asked about purchase services and resource matching. Patrick Whitehead and Tracy Robinson responded that resources managed tightly, with plan to flex up as volume grows.

Q: Daniel Imbro asked about revenue mix and market share. Remi Lalonde said petroleum/chemicals and grain have tailwinds/headwinds, international intermodal key growth but lower margin per RTM.

Q: Ariel Rosa asked about seasonality and OR. Ghislain Houle said Q1 typically has higher OR, 2025 expected to return to more normal seasonality.

Q: Joe Hafen asked about Falcon Premium service. Remi Lalonde said product works well but faces competitive market, expected incremental growth over the year