Canadian National Railway Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 16 speakers on the call.

Operator

Good afternoon. My name is Julianne, and I will be your operator today. Welcome to CN's Third Quarter 2023 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.

Operator

During which we ask that you kindly limit yourself to one question. I would now like to turn the call over to Stacy Alderson, Assistant Vice President, Investor Relations. Ladies and gentlemen, Ms. Alderson.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Cian's Q3 2023 financial 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.

Speaker 1

And Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. They are more fully described in our cautionary statement regarding forward looking statements in our presentation. Joining us on the call today are Tracy Robinson, our President and CEO Doug MacDonald, our Chief Marketing Officer Ghislain Puul, our Chief Financial Officer and Ed Harris, our Chief Operating Officer. It is now my pleasure to turn the call over to Centimeters's President and Chief Executive Officer, Tracy Robinson.

Speaker 1

Thank you, Stacy. I want to start today by saying a few words about the evolution of our operations structure. We were very pleased last week to announce the appointment of Derek Taylor to Executive Vice President and Chief Field Operating Officer and Pat Whitehead to Executive Vice President and Chief Network Operating Officer. Now you've all met both Pat and Derek. They are both accomplished and experienced operating officers And they will both play prominent roles in CN's future and our success.

Speaker 1

Now this isn't splitting Ed's role into 2. We're making this bigger and we'll be focusing on work that we haven't done before. And the structure we're creating will strengthen the competencies that are core to our future of driving profitable growth. It recognizes the equal importance and the distinct nature of competencies around building the plan and running the plan. Now Derek and his field team will focused on continuing to improve the daily execution of our scheduled operating plan across our 3 operating regions and our intermodal terminal.

Speaker 1

They will drive on time performance along with continued improvement in dwell and in first mile, last mile delivery to our customers. Pat and his network team own the plan, and their focus will be on 2 things: continuing to refine the plan to Optimize to our volumes and to improve velocity and to drive a more focused longer term plan, including resourcing and the development and execution of the capital plan to both maintain our network on a lower cost per unit basis and expand it for growth where necessary in a more cost effective manner. Now this structure It splits the critical day to day focus of running the operation from the very specific work we need to do to ensure that we continue rather to operate well while we grow. And I'm looking forward to working with Pat and Derek As we continue to refine this model, I'm excited about the performance and the innovation that they will deliver in this next chapter. Now they're both in the room with us today.

Speaker 1

They don't have speaking roles and they're not mic'd up, but they are here with us. It's Ed, who of course will carry the operations dialogue on this call, You'll be hearing from him shortly. But before he gets to speak, let me just say how much Ed, I have appreciated your willingness to step back in. I've appreciated your partnership in creating our path forward and your leadership in ensuring that we've got the right kind of winning conditions in place with our operations team for this transition. You've made a real difference And I know that's exactly what you wanted to do.

Speaker 1

Now before I hand it over to you though, I have some comments on the business and on the quarter. Our railroad continues to run very well. It is the test of our operating plan that we can maintain our fluidity, Our velocity and our customer service levels through different and challenging conditions. We've demonstrated that over these past few quarters. Now through the forest fire season this spring summer, which was the worst in Canada's history, the flood conditions in the East and West In the West Coast Port Strikes, our operational performance remains strong and consistent, and we've demonstrated the ability to recover quickly.

Speaker 1

Our on track train performance and our velocity have remained steady. Now this is exactly what we're looking for. And our last mile service has improved. We've been consistently over 90% for the last two quarters versus about 80% last year. This is the performance And the resiliency that we're looking for is the foundation of our growth plan moving forward.

Speaker 1

Now in volumes, we have a tale of different market segments. You'll hear from Doug a little more on this. Our bulk business, so think grain, coal, potash, frac sand, it's been strong all year. Our merchandise business is continuing to firm up. For instance, we've seen an inflection in chemicals and plastics starting in August.

Speaker 1

In our consumer related business, particularly the intermodal business, continues to be murky. Our domestic intermodal volumes Destocking lower overall consumer consumption, which has impacted port volumes across the continent for everyone And then the West Coast Port Strike. Now coming out of the port strike, our Canadian Destin volumes have returned. Our U. S.

Speaker 1

Destin volumes moved to U. S. Ports during the strike and have not come back fully as yet. This is a temporary situation. We're confident in the value proposition that the Canadian ports offer in both service and cost, and we continue to work to get those volumes back to the Northern Gateways.

Speaker 1

And I believe we've seen the bottom on volumes. We've started a controlled ramp up of the operation to support growth. The growth plan we laid out earlier this year is continuing to progress. It's a mix of growth tied to economic strength and growth tied to specific customer initiatives. Now the volume growth tied to the economy will come as the economy lifts.

Speaker 1

The benefits of our customer specific initiatives are unfolding pretty much on plan. In both cases, we will see considerable margin leverage as volumes increase. I'm a big believer in the resiliency of the North American economy. This team has managed extremely well through the softer volumes and what we can control Continues to go very well, faster and better than planned, in fact. And we're ready as the volumes turn up.

Speaker 1

I've got a lot of confidence in this team, in this network and in this plan. Now turning to our 3rd quarter results, I'll keep it to just a few highlights. Our 3rd quarter EPS was 21% lower than last year and our operating ratio at 62% was higher than last year, but remains at or near best in the industry. I am extremely proud that our customer service and operational efficiency have been top tier for 6 quarters now. The team will take you through the details in the quarter.

Speaker 1

I'll turn it over to them now starting with Ed. Now Ed, I said a few nice things earlier, but I need now to mention that this is your last quarterly call with CN. Thank you and let's make it a good one.

Speaker 2

Thank you, Tracy. Thanks for the kind words I think. Before I jump into the quarter, I just want to take a minute to talk about these 2 guys, Derek and Pat. I've really gotten to know them over the past year and they are among the finest operators I have ever had the pleasure to work with. Investors got to see a bit of their great chemistry and relationship back in May at Investor Day and how they work together.

Speaker 2

The entire network benefits from how well these guys operate every day. I can't tell you how confident I am in the future The operation and the company with these 2 working as one, while expanding their responsibilities and pushing the team to be better every day. In fact, this quarter has been a great example of how well they work together, because it was a tough it was tough operating out there in quarter 3. We started out by dealing with a 2 week port strike on the West Coast and then faced constant disruptions from forest fires And flooding until September. Running to a plan makes all the difference.

Speaker 2

For instance, we had a 2 day outage on our mainline east of Edmonton in the quarter. In the past, it would have taken us up to a week or more to get operations back in sync. This one took 2 days. The team really took it up a notch in September though with improvements in car velocity, train speed, TrueDwell and Origin and Destination Train Performance. We told you how we decided not to furlough train crews earlier in the year.

Speaker 2

Now, With grain coming on strong, we're seeing the benefit of that decision. All in all, we're set up well for a strong 4th quarter. I'm very proud of the whole operating team this quarter and especially the leadership provided by Pat and Derek. So how did the quarter shape up? Car velocity averaged 2 0 9 miles per day, which was down 1% compared to last year.

Speaker 2

Some of the other metrics we look at every day like train speed and train length were also down slightly. But when I think about the disruptions this quarter, I don't think we went a single week in July or August Without a major network disruption, stats that good tell you a lot about the quality of the people operating the network and the resiliency of running to a plan. And as well as the network ran this quarter, our yards were in even better shape. Our origin train departure improved to 89% in quarter 3, which is right in the sweet spot that we targeted. This is one of the keys to delivering for our customers and as Tracy has already covered our great local performance.

Speaker 2

Finally, on safety, we had 6 more reportable injuries and 2 more reportable FRA accidents Then the Q3 of last year, which put some pressure on our quarterly metrics. But our year to date injury frequency ratio And our year to date accident ratio is also on track at 16% better than last year. Now, as Tracy Said it, this will be my last call as Chief Operating Officer. I'm going to hang around for the winter to give the team some support through the transition, But I officially hand over the reins to Derek and Pat on November 15. And like I said before, I have complete confidence in these guys And in this team.

Speaker 2

Tracy gave me 2 priorities when I came out of retirement last year, get this place running well again, Coach and mentor the next generation of operating talent. As I head off to my 5th retirement, I'll sleep well at night knowing we knocked it out of the park on both This place is running as well as I've ever seen it run and the next generation is ready. And finally, on a personal note to the team around the table here today, it's been an honor and pleasure to come back to where I started And finish a career that I started over 50 years ago. It certainly has been my honor

Speaker 3

to be

Speaker 2

able to make that happen. Thank you. Now it's Doug's turn to talk about top line performance and market outlook.

Speaker 4

Thanks, Ed, and all the best on your well deserved retirement. Also congratulations to Pat and Derek. I look forward to working even closer with you as we deliver for our customers together. We said it on the Q2 call that our commitment to our customers is to provide industry leading service They hit the bottom in July. We saw improvement in August September.

Speaker 4

Through the rest of the year, We expect this trend to continue and I'll give some more details in a moment. We continue to deliver core pricing ahead of CN Inflation. The pricing environment remains robust and our service levels are facilitating pricing conversations with our customers. We started the quarter in a bit of a hole with the port strike on the West Coast. This impacted International Intermodal More than any other business segment and as Tracy mentioned, we continue to see a hangover effect from cargo diversions to U.

Speaker 4

S. Gateways. We ended the quarter with UAW strike starting at the Detroit Big 3. Fortunately, this only had a limited impact on our volumes in Q3. Turning to Slide 9 now.

Speaker 4

3rd quarter revenues were nearly $4,000,000,000 down 12% versus last year On lower fuel surcharge rates, lower volumes, but partially offset by solid pricing. RTMs were down 5%, but excluding overseas were up 1% for the quarter as we see a continuing recovery across the other business lines. For merchandise, metals and minerals finished with the best quarter so far this year. Supported by increased drilling programs in Western Canada driving strong sand shipments. Demand for forest products remains below pre COVID levels due to a challenging macro environment.

Speaker 4

Lower petroleum volumes in the quarter were mostly due to spot crude train unit trains that we moved last year. We should lap that tougher comp in the 4th quarter. Plastics and Chemicals sequentially strengthened in the quarter, which is a leading Indicator of industrial production. Automotive continued to benefit from strong pent up demand with limited strike impact. Turning to Intermold, I will remind you that storage revenues were normalized this year following last year's supply chain issues, which represents an impact of about $100,000,000 in the quarter.

Speaker 4

In domestic intermodal, we saw the monthly year over year numbers turn positive in Q3, in part because of our Falcon service between Canada, Detroit and Mexico. International intermodal continues to be weak, But we were impacted and we were impacted by the West Coast port strike. We continue to see lighter U. S. Discharge at Rupert in Vancouver And we're working hard with our customers to get that volume back.

Speaker 4

Our bulk business has been outperforming since the start of the year. Starting with grain, we saw a strong weekly ramp up in Canadian grain in September with the crops coming off the field about 3 weeks earlier than last year. Building on our strong service from the last crop year, grain is now rolling and we expect strong volumes until at least next spring. We handled record potash volumes in the Q3 to export markets and the U. S.

Speaker 4

Market. The operating team is providing outstanding service to our customers for this incremental volume, but we are being careful not to oversell the network. Finally, the West Coast strike and subsequent terminal outage had a minor impact on met coal in the quarter, But commodity prices are still supportive of ongoing export volumes. Looking ahead to the balance of the year on Slide 10, We're seeing lots of momentum across almost all of our markets. With bulk leading the charge, Canadian grain is running full out.

Speaker 4

U. S. Grain will also be strong and similar to 2022 benefiting from record low water levels on the Mississippi and limited barge capacity, but tempered by demand in China. We expect solid potash demand in line with the Q3 run rate And there could be additional upside with our robust export market. Canadian met coal should be strong for the rest of the year And we have set an annual export record already with 1 of our largest customers.

Speaker 4

For overseas intermodal, We are seeing clear indicators of positive trends. Destocking appears to be nearing an end, but wholesale inventory to sales ratios remain elevated.

Speaker 5

We

Speaker 4

are forecasting a gradual improvement throughout 2024. On the domestic side, Both retail and wholesale are tracking favorably over last year. As Tracy said, domestic is also helped by some growth initiatives. Rounding out with merchandise, we have a strong outlook for drilling with frac sand demand, aided by our network capacity enhancements in Northern BC. We expect automotive to outperform with continued pent up demand contingent on how long the UAW strike goes on.

Speaker 4

And we expect a continued positive trend in chemicals, plastics and metals and stable forest products. October

Speaker 6

is off to

Speaker 4

a good start and in line with how we have been modeling the quarter. Before I hand it over to Ghislain, I want to review on some of the unique growth initiatives we laid out at Investor Day. We announced our new long term agreement with AltaGas yesterday, which will drive an increase in LPG export carloads through Prince Rupert and Ferndale, Washington. Centimeters along with our customers and supply chain partners Continue to invest and develop the Rupert Gateway, which we highlighted at our May Investor Day. On the Falcon product, We've been building up this service since its launch in May.

Speaker 4

It's now a solid and consistent product. In line with truck transits, We saw our first loads with STG Logistics a couple of weeks ago and we continue to actively pursue opportunities to build density to and from Mexico as major RFPs come up for bid. CN's Eastern Fuel strategy is progressing with terminal in Toronto ready to start receiving cars in December. In line with what we projected at Investor Day, we expect volumes to build over 2024. We continue to work with our customers on building up the electric vehicle supply chain.

Speaker 4

We now have 5 announced projects on our network in Eastern Canada. It's It's going to take a few years to fully develop this opportunity, but we're pleased to already see the first shipments of raw lithium moving on CN for export at Quebec City. Our Northern BC strategy is also progressing as we finish the 1st capacity project in the area this month. This will allow CN to add additional frac sand and propane shipments to the network. To finish, I'm really excited about the next year And I'll have more to report on these opportunities in January.

Speaker 4

Over to

Speaker 7

you, Ghislain. Merci beaucoup, Doug. But before I do that, I want to thank Ed for everything he has done this past year. I've known Ed a long time and I'd like to wish him and his family a long healthy retirement. And frankly, now I hope he stays in retirement.

Speaker 7

And the gross illustration to Derek and Pat on their appointments. Now I will talk to Slide 12 of the presentation, which will provide more visibility on our Q3 performance. Volumes in terms of RTMs were lower by 5% on a year over year basis, including the impact of the external disruptions that Ed talked about earlier. We delivered operating income of around $1,500,000,000 21 Our operating ratio came in at 62%, up 480 basis points versus the operating ratio for the same period last year, but is only slightly higher year to date on a year over year basis. EPS for the quarter finished at 21% lower than last year.

Speaker 7

The estimated impact of external disruptions on our network this In terms of expenses, labor was essentially flat versus last year, driven by 6% higher average headcount and general wage increases, Offset by the U. S. Wage accrual true up related to new labor agreements in 2022 and lower incentive compensation this year. We have slowed and in certain cases stopped the pace of new hires through the quarter. Fuel expense was more than $175,000,000 lower than in the same period last year, mostly due to a 20% decrease in price and a 6% lower workload in terms of GTMs.

Speaker 7

With rising fuel prices, we had an unfavorable fuel surcharge lag, which had a $0.10 impact on EPS in the quarter or $0.20 of EPS on a year over year basis. We generated close to $2,300,000,000 of free cash flow to the end of September. We are investing in our railcar fleet And continue to invest steadily in track maintenance as well as capacity expansions with a view to capital efficiency, so we can be ready for the rebound. Moving to Slide 13, let me provide some visibility to the full year. Despite uncertainty in sectors related to consumer consumption, Most other areas are demonstrating signs of strength.

Speaker 7

The bulk segment of our business continues to perform very well. We believe the worst is behind us and you should expect operating leverage to improve as volumes come back. We are still calling for a gradual recovery in consumer related freight demand in 2024. With this in mind, we are reaffirming our full year guidance of Flat to slightly negative EPS growth in 2023 versus 2022. We assume that for the balance of the year, foreign exchange will be in the range of 0.7 to $0.75 and WTI in the range of $0.80 to $0.90 per barrel.

Speaker 7

However, full year assumptions continue to be $0.75 for foreign Change and WTI at US80 dollars per barrel. We remain committed to shareholder distributions. We are confident in our long term growth story and have increased the budget of our current share repurchase program, which runs through January 31, 2024 to approximately $4,500,000,000

Speaker 8

up from

Speaker 7

the previous budget of approximately $4,000,000,000 Under this program, we have repurchased nearly 20,000,000 shares for just over $3,000,000,000 through the end of September. In conclusion, let me reiterate a few points. The team is committed to the scheduled railroad model, which provides reliable service for our customers. Apart from international intermodal, we are seeing strength in many segments And volumes continue to sequentially improve. With this in mind, we are reaffirming our full year 2023 guidance.

Speaker 7

We have a strong balance sheet that provides us financial flexibility and we will allocate our capital in a manner that drives long term value for our shareholders. Let me pass it back to Tracy.

Speaker 1

Thanks, Chitz. Operator, I think we're ready to take some questions.

Operator

Thank you. We will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourselves to one question. Our first question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.

Operator

Your line is open.

Speaker 9

Hey, this is James McGarrigle. I'm on for Walter, this morning. Thanks for taking my question. We've been tracking some TEU trends out of Prince Rupert and some of the weakness that occurred as a result of Port Strike in July looks to be extended into August and more recently September. And I guess my question relates to the extent This might be structural versus temporary.

Speaker 9

And I know you addressed this in your opening comments, but can you speak more specifically to some of the servicing cost benefits You have versus U. S. Alternatives and the confidence you have in that volume coming back? And any update on your conversations with the shipping lines? And how quickly you think we could see that come back?

Speaker 9

Thank you.

Speaker 1

Good afternoon, James. Yes, As we said earlier, we think this is a temporary issue. There are some real structural advantages to Rupert in particular, both, As you noted, economic and service, so we have set Prince Rupert up with a premium kind of container service into the U. S. Yes, Mark, and that kind of strategy has been working.

Speaker 1

And as you noted, when the strike occurred, it's that business that started to move to the U. S. Ports, but that structural advantage Continues and we're 2 days faster from China in Chicago than the other alternatives and there are some economic advantages based partly on the currency, the Canadian currency and other That we think they stand even as we look into the future. So we think that business is going to come back. We're working with our customers on it.

Speaker 1

Our call is that it will come back gradually. We've lost a little confidence in the West Coast ports. It will Come back gradually unless the volume really starts to pick up and then it will come back more quickly. In the meantime, up at Rupert, we're continuing to lean into An increasing structural advantage, if you think about the import transload is now under construction. The port Announced Ridley Island Export Logistics Park that's been approved and it's going forward.

Speaker 1

So all of that I think is very supportive on the container side. And even outside of containers, Doug mentioned our AltaGas deal. We very much appreciate the business and the partnership of AltaGas, but that new agreement is going to drive considerable growth in That quarter, so we are actually, if you think about the growth that we laid out for you at Investor Day on the Rupert Corridor, we are ahead of that So we're feeling pretty good about it and very strong about the structural advantage of Rupert.

Speaker 9

I appreciate it. And just a quick one on Bill C-forty seven and interest switching. I've seen some of the companies post about this on LinkedIn, but have you seen any customer uptick on inter switching and Any early commentary you can provide on the matter? And I'll turn it over. Thank you.

Speaker 1

Yes. I would say that what we are focused on is driving the highest performance out of our supply chains in the country and in the continent. And we are prepared to continue to invest in capacity in that performance. The inter switching provisions and the concept of it is not at all supportive of supply chains that perform at high level. It slows Cars down, slowed service down, and it is not supportive of continued investment.

Speaker 1

And so on that basis, we've objected to this. Having said that, we haven't we've seen a significant impact as of yet, but it's early days.

Operator

Our next question comes from Brandon Oglenski from Barclays. Please go ahead. Your line is open.

Speaker 3

Hey, good afternoon and thanks for taking my question. And sorry if this is a little bit near term focus, but just Lane, can you just walk us through some of the moving pieces on your implied 4Q guide? Because I think It suggests that OR should improve sequentially and obviously you had some issues in the Q3, but can you talk through the moving pieces here on how to get to the full year guide from where you are?

Speaker 7

Thanks, Brendan. Well, I think as we said in our opening remarks, I think there's we see definitely improvement in volumes on a sequential basis. I mean just when you look at our volumes sequentially in October versus September, we're up 7%. So I think You can expect volumes to improve sequentially. And as volumes come in, I think that we are very comfortable that we will deliver some operating leverage.

Speaker 7

And maybe I'll pass it on to Tracy. Do you want to add anything, Tracy?

Speaker 1

Sure. I think the other way to think about it, we are seeing the strength in volumes that Jiz is talking about. Our pricing is coming in exactly as the mandate that we gave Doug, and I am really pleased with the margins that this system is providing and this team is providing. I think we've had the best margins In the industry for the past, what, 5, 6 quarters and we've got we know that there's leverage there, particularly in the manifest business On the merchandise side, as the volume starts to lift again, we're eager for that to happen and it looks like it's starting to happen now.

Speaker 7

Thanks for the question, Brendon. Thank you.

Operator

Our next question comes from Cherilyn Radbourne from ATB Cowen. Please go ahead. Your line is open.

Speaker 1

Thanks very much. Good afternoon. I wanted to pick up on some of the new interchange relationships that you've negotiated with your rail peers. What do you think needs to happen to make these partnerships work better than they have in the past? And do you think that the willingness to cooperate will tend to include trickier situations where perhaps 1 of the 2 carriers have to accept a shorter length of haul.

Speaker 1

Yes, Cherilyn, thanks for the question. It is I think it is a change that we're seeing in the industry, right, for various reasons. As we have our discussion, I would tell you that we are open for business and very eager to work with our partners and the other carriers to provide and design and provide the services that make sense for our customers. And the one thing you've seen at least us step into most recently Are really targeting getting truck traffic off the road and things like the Falcon service, Doug's working As well on our new service with the NS, these are working with FXE in the case of Falcon and UP. We have a product in place now that's consistently delivering at very truck like transits and that's pretty remarkable.

Speaker 1

I think you're going to see more of this. And I would say that the nature of the dialogues that we've had so far With all of the carriers is that we'll conduct ourselves in a way as though we were a single carrier, right? And that may mean in some cases it's advantageous to 1 And in other cases, it's advantageous to the other. But that's a principle that I think needs to underscore these relationships as we go forward. Doug, do you have anything to add to that?

Speaker 4

Only thing I'll add in, Cherilyn, is that it's all about service. So this quickest transit times to compete against truck is really what the operating The teams between the railways are really focused on and we don't really care how long the haul is, right? It's all about we need to get it there as fast as truck. All the teams have been greatly focused on that. They've come up with some great products where we think we are truck competitive in all these quarters and there are major truck lanes.

Speaker 4

So I assume that we're going to take our time. We're going to start to build this as we build momentum. It's going to take a while to pull trucks off the road, but We're pretty happy with the product so far and we think we'll be successful.

Speaker 1

Thank you.

Operator

Our next question comes from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Speaker 10

Great job, everybody. Ed, congratulations and good luck with your retirement and congrats on new incoming team as well. Maybe one kind of parting question for you, kind of as you joined the team, Like was this transition kind of timing what you had planned when you joined? Or is it something that you brought forward just given Some of the traction that you've had with implementing the plan?

Speaker 2

We When I came on board, don't forget I consulted here for quite

Speaker 4

a few months before I

Speaker 2

came on board. And Our evaluation of both Derek and Pat was almost immediate. Tracy and I were in agreement and in lockstep with What the future of this operating department was going to look like and both of these individuals have stepped up to the plate. Quite frankly, they've been running Show for the last couple of months just getting ready. And I'm extremely, extremely proud of what they've been able to do.

Speaker 2

And if there's a testament to their Our Q3 was tough as I said in my speech. I mean it was rough operating out there and our metrics were only off a small percentage in Car velocity, train speed, cycles, I mean, we were doing everything right. And just to add on to what Doug just talked about Between the carriers, just think of what this industry can do. If we take a day out of the cycle, all carriers do that. We get the traffic off trucks And that's what it's about.

Speaker 2

So, thanks for the nice comments. I appreciate it. I'll miss all of you, maybe. It's been a lot of fun for me and I've enjoyed every minute of Robbie. Thanks.

Speaker 2

I don't know who else is and going forward.

Speaker 10

Great. Thanks for that. And then maybe as a follow-up, Tracy, can you share what The initial success has been like selling your Falcon service to your customers. Obviously, your peer has a bit of a speed advantage still, But kind of where your customers telling you in terms of their preference for speed versus value or kind of what they're looking for from that intermodal service?

Speaker 1

Well, I would tell you that, whether it's that intermodal service or any service, Table 6 is the consistency of the service that we provide. In the case of going after the truck traffic like the Falcon service does, we know that means we also have to be fast. And I'm really impressed The way the 3 organizations are working together to create a service and continually challenge it to where we can get time out And you've seen that happen. And then to that's one thing, but to deliver it consistently every day is another thing completely. And we're doing that.

Speaker 1

And so as Doug said, this is a proof of concept, a model that we've got to prove to our customers And it's going to grow over time. We expect it to start small, which it is, and it will grow over time. And Doug, I think we've said that we think this is a train of day both ways ultimately. Is that

Speaker 4

No, Trace, that's it. That's the market share that we see out there and it's going to take a while to get there and we're going to make some progress. Like I said in my remarks, we are lucky enough to see STG join up on the service and they started shipping their first loads a couple of weeks ago. That's our first Real new, I'll say, 3rd party person that's come on and that's great. We're looking forward to more.

Speaker 10

Very helpful. Thank you.

Operator

Our next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.

Speaker 6

Hey, thanks. Afternoon, guys, and best of luck to you. So just Lane, the $0.20 of headwinds in Q3 from fuel and external disruptions, should we just Assume that that those entirely go away and that's basically the bridge to your full year guide. And then as I think about next year, Where you stand today? Do you think the long term guide of 10% to 15% earnings growth is achievable next year?

Speaker 7

Yes. Thanks, Scott. I can answer the first part of your question and then I'll turn it over to Tracy for the second part. So you're right. So when you look at the fuel surcharge headwind that we had in the quarter, it's $0.20 year over year, it's $0.10 this year.

Speaker 7

And if you remember, Scott, last year, we had a favorable Fuel surcharge of $0.10 So year over year is $0.20 And then there's another $0.10 of year over year Disruptions that we quantified for you, so that's what we had to go through in the quarter. And despite all of this, we delivered a 62 OR, which we're quite proud and pleased about it. And then I'll turn it over to you, Tracy, for next year.

Speaker 1

Sure. As far as the guidance that we gave at Investor Day on the CAGR of 10% to 15% EPS, we are sticking To that, we see that without a doubt, this railroad is running very well, continues to do so through all the shocks that has gone through this year. A testament to the team. I'm impressed every day. We laid out a growth plan for you.

Speaker 1

Now that was based on kind of presumption of what is uncalled as supportive economy. We haven't seen that much this year, but we are starting to feel a comeback. And That growth plan was a combination of 2 things. It was a piece of growth that is we're going to capitalize on as the economy Coming from the strength of the economy. And then there's some very specific customer initiatives that we're working through That list is growing that we're progressing without they're not tied to the strength of the economy and those are coming On plan or in some cases Doug is bringing them in ahead of plan as is the case for the Prince Rupert Corridor.

Speaker 1

So we think that This plan stands and the risk to it would be that underlying strength in the economy, but we're feeling pretty good about it as we sit here today.

Speaker 6

Thank you.

Operator

Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is open.

Speaker 11

Hey, guys. Thanks. So Tracy, I just want to push on that a little bit. I mean, obviously, we're coming in a little bit weaker than we might have thought for 2023, as you think about that 3 year envelope of 10 to 15, with some of the growth initiatives starting to pay off, Should we maybe be doing a little bit better than the lower end of the range? Or how should we be thinking about the contouring of that 10 to 15 3 years, is it more back end loaded, middle loaded, front loaded?

Speaker 1

I think it is going to shift as far as in its timing. We're pretty Feeling pretty positive about the specific customer initiatives. What remains to be seen is exactly what the pace of the the strength of the economy returning. So we'll give you a little bit more color of that in January, exactly what we're seeing. But right now, we're feeling good about our guidance.

Speaker 11

And then just on maybe just real quickly the CapEx side of that, there's a lot of concern I think when you had your Investor Day around the level of spend. Are you thinking about regulating that spend still in line with the volume anticipation?

Speaker 7

We I mean thanks, Adit. Yes, I We have these customer initiatives. If these customer initiatives, some of them fall off the table or some of them happen later, then obviously we will regulate our CapEx Accordingly, I mean the capital envelope is a living thing. It's a dynamic thing. We look at it on a regular basis.

Speaker 7

So obviously, absolutely, we will look Our CapEx in light of those opportunities coming on board.

Speaker 8

All right.

Speaker 10

Thank you. Our

Operator

Our next question comes from Konark Gupta from Scotiabank. Please go ahead. Your line is open.

Speaker 8

Thanks for taking my question. Echo, congratulations To add Patrick and Derek, perhaps on international and the motor side, I want to figure out what's your visibility on Timing for when the container traffic fully returns back to Canada from the U. S. And then as a follow-up on domestic intermodal, can you talk about the RFPs

Speaker 4

So on the international side, our customers are telling us they see a gradual ramp up over the next year or so. So we're expecting that. That's what we're that's what's And our forecast and our outlook moving forward. And that's the best visibility we have

Speaker 3

in the

Speaker 4

market. So we're depending upon them and we think it's right. On the domestic side, outside of so on the domestic Canadian side, things are going very well. We're actually seeing Increases there year over year, which is fantastic. So that market has come back coming back nicely.

Speaker 4

We see some green shoots there. On the Falcon, we're seeing RFPs on a regular basis. Now customers have to be able to trust us and do it. So we're getting we're out there getting trials with them and things like that. It's going to take a while to build this off the road.

Speaker 4

At the same time, we know truck rates in the U. S. Have been depressed over the last year, and we're competing against those as we move forward. We do have a great product, We know we're going to win as time moves on. Thank you.

Operator

Our next question comes from Fadi Chamoun from BMO. Please go ahead. Your line is open.

Speaker 8

Thank you. Ed, Pat and Derek, congrats on your role. And Ed, if This is truly of last retirement. All the best and thanks for all the advice over the years. Maybe Doug on the Q4, if you can give us what are you assuming for volume In the Q4 in terms of growth year on year or sequentially, just to kind of help us track your progress on that front.

Speaker 8

And my question on The cost per headcount per employee, like how should we think about this sequentially into Q4? And I know you have some labor negotiations coming up here. And how do you think about kind of the best way for us to think about that cost per headcount in 2024?

Speaker 1

This is Patty. I'm going to take the first one and I'll hand it off to just the second one. So as we're looking at volumes Kind of week over week and month over month, we're seeing that sequential strength. And right now, we're looking at sequential growth In all but kind of the international even in the international volumes sequentially, but that we've seen real strength coming From most, if not all of our business lines, as you look at it sequentially over time. So we've mapped that out, Doug's pretty close to his customers and what Planning over the course of this year.

Speaker 1

So it's on that basis That our confidence remains on our guidance. And if you look at industrial production as well, we've said that we were going to do better than industrial production. Industrial Production is strengthening and I think that Doug what do you think you'll see us do that on everything maybe except the international lines. Would that be the case?

Speaker 4

No, I agree with that 100

Speaker 1

Okay. Thank you. Juss?

Speaker 7

Yes. So, Fadi, on the average comp per employee, when you look at it sequentially, it's up 2% in Q3 versus Q2 and that's mostly due to a 4% wage increase on our U. S. Employees that started in July 2023. And for next year, I mean, I again, I would continue to assume regular wage increases And we're just replacing employees for attrition and that's about it.

Speaker 7

So that's the answer to that question.

Speaker 8

Okay. Thank you. Thank you.

Operator

Our next question comes from Ken Hoexter from Bank of America. Please go ahead. Your line is open.

Speaker 4

Great. Good afternoon, Ed. I'll stick to it. Congrats on your last call and your attempt on the 5th retirement and congrats to Derek and Pat, which It is great. As Tracy said, they have no mic.

Speaker 4

So Tracy, you can really talk about them now.

Speaker 1

That's right, Ken. I can.

Speaker 4

I guess just a numbers question real quick and then a long term one. The casualty costs, they ramped up in the quarter. I just want to understand, is that sticky or is that just because I think it was mentioned there were a couple of extra accidents in the quarter. But long term, my question would be just on I know you've talked a little bit about the 10% to 15%. I know that's not linear.

Speaker 4

But how should we think about that as you start to rebound? And maybe give us upside downside. Is it just the volume? Because Doug sounds like he's got a lot of confidence that we pass So is that just moving past the storms in the U. S.

Speaker 4

Grain crop bouncing up? Maybe talk about the upside, downside on that range for next year.

Speaker 7

Yes. Ken, maybe the first your first question on the casualty costs, I mean, I'm looking at my notes here. I mean, C and O, casualty and other It's mostly flat on a year over year basis in the quarter. So I'm not sure what number you're looking at.

Speaker 4

I just looked at it was just up sequentially, right? So, I know year over year, is that just is that seasonal in terms of the actions that ramp up?

Speaker 7

Okay. Okay. On sequentially, it's again, it's just up about 6%, 7% And it's really lower horsepower high horsepower income. This is stuff to say for French guys. So it's just low mostly lower High horsepower income in Q3 versus Q2.

Speaker 7

Okay. Yes, if it's not

Speaker 4

a trend, that's fine. I just want to make sure if that was something that was sticky based on.

Speaker 7

We threw up on our horsepower every quarter. So you have some ups and downs depending on how we interchange our trains with other roads and so on and so forth.

Speaker 4

Okay, perfect.

Speaker 1

And on the volume question, so you're right. We don't see this as being linear. And what we did put together was kind of last was kind of a 10 year view on what our growth would look at. What we put in front of you guys in earlier this year was the 3 year view on that. And so a good chunk of that, as we've said, Our number of customer initiatives that Doug is working and that's not a static list, it moves around a lot.

Speaker 1

And I'm excited about some of the new ones that are coming out of that list. What remains uncertain is the other part of it, which is the volume growth that's going to come with our customers and our partners on just the economic strength. And so we're modeling in kind of what we've talked to you about next year and we'll give you a little bit No, it's related to industrial production. We'll give you a little bit more color on that in January when we talk to you next. But I would say that that would be the biggest risk for next year.

Speaker 7

It is the volume side?

Speaker 1

Yes. Okay. On the economic, That volume which is tied to economic strength as opposed to the specific customer initiatives that we're working.

Speaker 8

Okay. Thank you.

Operator

Next question comes from Benoit Poirier from Desjardins. Please go ahead. Your line is open.

Speaker 2

Yes.

Speaker 12

Happy retirement, Ed, and congrats to PatentDirect for their new roles. If we move to Eastern ports, there is a labor agreement up for renewal with the dock workers at the Port of Montreal. And there is also the potential strikes with the St. Lawrence Seaway. So just wondering if you have seen any Cargo diversion so far and kind of the actions that are taken so far to mitigate the potential impact of Those labor agreements?

Speaker 4

Okay. Thanks, Benoit. I'll take that. It's Doug. So on the St.

Speaker 4

Lawrence, so obviously it's brand new. The products that move on the St. Lawrence that really I'll say are complementary to the rail is really grain is the main one. So right now, there's enough elevation capacity in Thunder Bay for this week and probably most of next week. And if the strike last Host that then we have offered a train package to our customers to be able to move product into the East from Western Canada.

Speaker 4

So it would be we'd start Look at some business there. You also have the iron ore that tends to move export via Quebec City from the Minnesota area. So we may there may be some opportunities there as well, but most of that should just move to the dock like normal. So I don't see a lot of changes for us Overall, as this moves forward, when you look at the Port of Montreal, we have prepared for that. We have put a package together to actually move a lot of our customers' freight over the Port of Halifax.

Speaker 4

We're only in the process now of going out to the market with that, so that they know what's available and we're just starting that planning now, but we do have the operational plan already in place.

Speaker 12

Okay. And just to follow-up on Contracta, we've seen a great announcement over the last few weeks. What would be the next milestone

Speaker 4

So Conchocor, the next one will be really I think You will see a new RFP for a port operator. That will be the next big milestone from what they're telling us. They're going to Start work on the dock as it is today or the waterfront as they call it. So that's where that money is going Benoit. So they're going to start there without a port operator being And then the port operator will be the next big milestone.

Speaker 4

So we're looking forward to that as well.

Speaker 12

Thank you very much for that, Tom.

Speaker 7

Thanks, Tom.

Operator

Our next question comes from Chris Wetherbee from Citigroup. Please go ahead. Your line is open.

Speaker 5

Hey, thanks. Good afternoon, guys. I guess I wanted to ask about headcount and resources maybe in general as you think about kind of reaccelerating the growth and this line of sight that you have to volume growth as Move forward into 2024, where do you think you are in resources? I guess, maybe asked another way, do you think that there's a certain amount of volume growth that you can absorb with the headcount and sort of the overall resource base have today or do you think you'll need to be adding incrementally as we move forward?

Speaker 1

Thanks for that question, Chris. So let's think about it this way. We are resourced right now to move the volume that we have, but the resourcing decisions that we make are based on 6 or 9 months from now. So We're planning now for what we need out then. And as we think about it, think about the bulk business, that business is moving now.

Speaker 1

As that if and as that grows, that's new incremental train starts, we'll need kind of the resources for that. If you think about the merchandise business, however, that has some Quite significant room. Even in this quarter, our volumes were down, for example, 5%, our train starts are down 2%. So in running the scheduled operation, we're maintaining the integrity and the discipline of that schedule, which means Our trains are running a little short. So the first lift in volumes, particularly merchandise is going to go on to the end of those existing trains and there's a tremendous amount of leverage there.

Speaker 1

And of course, that's done with the existing crew base. On the international side, as that starts to ramp up, that also will be incremental I kind of train start. So we're doing this planning now for next year and we've got some hard to hire locations that we're still working on. But other than that, I think we're in great shape.

Speaker 5

Okay. And 4Q should be roughly flattish or slightly higher than where we are from a head's perspective?

Speaker 1

I think that's pretty much baked right now. So yes,

Operator

Our next question comes from Steve Hansen from Raymond James.

Speaker 13

I'll stick to one question as instructed. It seems like everyone on this call doesn't understand what that means. But in A question for Doug or Tracy. Grain has been one of your biggest tailwinds year to date, piggybacking off last year's harvest. At this juncture, I think it's fairly well known that this year's harvest was anything but superior.

Speaker 4

I understand you've got

Speaker 13

a couple of Tailwinds from an early harvest, but I'm surprised your comments on the outlook were more balanced or cautious. You see, you suggest it was quite bullish. And I'm just trying to square the 2, given the harvest backdrop. Thanks.

Speaker 1

Yes. So listen, the grain crop this year wasn't a bad I can tell you, but it was smaller without a doubt last year. Our lines in the north and the drought was a little bit we didn't have the same kind of drought conditions. And we're moving a lot of grain right now. What it does mean, as Doug has said in the past, is that it can move we can run out of grain to move a little bit earlier in the year next year.

Speaker 1

And that may be an issue in Q2, I guess, Doug. But we've got on the offsetting, we've got a number of customer initiatives That are starting to produce volume now that we think is going to be give us a it's going to be a good offset to that. Doug, anything else?

Speaker 4

No, you covered the Canadian grain really well. And On the U. S. Grain, we're seeing some strong volumes right now because of the Mississippi being so low, but a lot of that's going to be tempered by overall demand with China and other countries. So we're moving good volumes right now.

Speaker 4

The team is doing a great job at that. We're really sold out in the U. S. Market. We're going to see how the rest of the year plays out here.

Speaker 8

Appreciate the time.

Speaker 1

Thanks for the one question.

Operator

Hi, Mike. Our next question comes from Justin Long from Simmons. Please go ahead. Your line is open.

Speaker 14

Thanks and good afternoon. I was wondering if you could comment on your expectation for the sequential progression of yields on a cents Per RTM basis as we move into the Q4 and maybe along with that, give a little bit more color on the core pricing trends you're seeing. I heard you say that they remain above inflation, but I'm curious if pricing is getting better, worse or about the same on a year over year basis?

Speaker 1

Yes, let me start with that one and then I'll hand it over to Chip. But I would say that pricing can be difficult to see based on the revenue line. So the revenue line includes a bit of noise around Storage fees that were higher last year than this year. There's some fuel surcharge noise in there. There's currency noise in there and there's so there's a It's hard to see the pricing through it, but I can tell you this.

Speaker 1

We've given Doug a mandate, on the back of the service that the guys have been able to provide for our customers To come in above our inflation level and he's consistently doing that on the contract renewals and we have mechanisms in the multiyear contracts That are providing that for us as well. So the underlying pricing is doing well. And just I don't remember the first question, but

Speaker 7

You covered it. When you look at either cents per RTM or revenue per RTM, as we've always told you guys not to look at this As a proxy for yield because it's a lot of moving parts. There's FX in there. There's the accelerate charges that you talked about, Tracy. There's also the fuel surcharge.

Speaker 7

So, and I know that you're looking you're trying to find metrics for yield, but this has got a lot of noise. But we're very confident and Doug made the point That our pricing is above our rail inflation.

Speaker 1

Thank you for the question. I think one more question and then we're out of time.

Operator

Certainly, the last question comes from the line of Kevin Chiang from CIBC. Please go ahead. Your line is open.

Speaker 15

Thanks for squeezing me in here and congrats, Ed, Patrick and Derek. Maybe just turning to automotive. When I think back to your Jerday, you laid out a number of opportunities related to the EV supply chain. It does feel like that we might be Down here in terms of EV adoption, at least as we're hearing from the OEMs. Just wondering any changes to your long term potential growth opportunity there, the volume capture opportunity just given what some of the OEMs are doing as they adjust production around their EV portfolio?

Speaker 4

Thanks, Kevin. So that's a great question. So EV, it starts really back at the battery. So all the minerals that go into it, so we've started Listen, on our network, we're now up to well, it was 5, but it's just got to 6 Plants located on our network really all in Eastern Canada for construction either of the batteries themselves or for some of the parts Go into the batteries or for the refining of the raw lithium and other metals. So we're starting to build that supply chain up.

Speaker 4

We knew it wasn't going to be right away. These plants take a while to get built. In the interim, we're still seeing the EV production schedules moving forward at most of the big three. Now we know GM just came and pushed theirs back by about a year, But that's okay, right? There's still lots of other products to move in the automotive side and that will give us time to actually have all these It's constructed in Eastern Canada where we can actually haul those batteries down and the other parts of them.

Speaker 4

So it's moving along quite well.

Speaker 15

Perfect. Great color. Thank you.

Operator

Okay.

Speaker 1

Go ahead, operator.

Operator

This concludes the question and answer session. I would like to turn the call back over to Tracy Robinson.

Speaker 1

Thank you. I jumped the gun a little there. Listen, I just want to echo Ed's comments on the call today. Thank you for What you've done here and for ending the long very impressive run with us. It's a privilege and it's been a lot of fun working with you and watching you.

Speaker 1

And they're not mic'd up, but let me say this about Guys at the end of the table here, Derek and Pat, very much looking forward to working with you. But in truth, as we all know, this plan was implemented a number of months And so you have this place running really, really well. We're excited about where we're headed. This is all about executing our plan and the plan we laid out at Investor Day. The pieces are all in place.

Speaker 1

The core engine is performing well, and we're ready and really eager for that rebound. So thanks for joining us today, And we'll talk to you all early in the year. Thank you.

Operator

The conference call has now ended. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Canadian National Railway Q3 2023
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