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Canadian National Railway Company (CNI)

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Canadian National Railway Co. (CNI)

Q3 2016 Earnings Call

October 25, 2016 4:30 pm ET

Executives

Paul A. N. Butcher - Canadian National Railway Co.

Luc Jobin - Canadian National Railway Co.

Michael A. Cory - Canadian National Railway Co.

Jean-Jacques Ruest - Canadian National Railway Co.

Ghislain Houle - Canadian National Railway Co.

Analysts

Scott H. Group - Wolfe Research LLC

Walter Spracklin - RBC Dominion Securities, Inc.

Thomas Wadewitz - UBS Securities LLC

Fadi Chamoun - BMO Capital Markets (Canada)

Ravi Shanker - Morgan Stanley & Co. LLC

Cherilyn Radbourne - TD Securities, Inc.

Jason H. Seidl - Cowen & Co. LLC

Milan Posarac - Scotia Capital, Inc. (Broker)

Brandon Oglenski - Barclays Capital, Inc.

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker)

Bascome Majors - Susquehanna Financial Group LLLP

Danny C. Schuster - Credit Suisse Securities (USA) LLC (Broker)

Benoit Poirier - Desjardins Securities, Inc.

Brian P. Ossenbeck - JPMorgan Securities LLC

Kenneth S. Hoexter - Bank of America Merrill Lynch

Presentation

Operator

CN's Third Quarter 2016 Financial Results Conference Call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's Third Quarter 2016 Financial Results press release and Analyst Presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliation for any non-GAAP measures are also posted on CN's website at www.cn.ca.

Welcome to CN's Third Quarter 2016 Financial Results Conference Call. I'd now like to turn the meeting over to Mr. Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul A. N. Butcher - Canadian National Railway Co.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us on our Third Quarter 2016 Earnings Call. I would like to remind you of the comments already made regarding forward-looking statements.

With me today is Luc Jobin, our President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; JJ Ruest, our Executive Vice President and Chief Marketing Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer.

In order to be fair to all participants, I would ask you to please limit yourselves to one question. I will be available after the call for any follow-up questions.

It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Luc Jobin.

Luc Jobin - Canadian National Railway Co.

All right. Thank you very much, Paul, and let me in turn welcome all of you to CN's third quarter call. As Paul indicated, the whole team is here today, and we are very pleased to report another outstanding quarter, one that has seen us continuing to advance our performance in terms of safety, in terms of service, and in terms of productivity.

These results demonstrate how nimble we are at adapting to today's reality, seizing opportunities to deliver bottom-line results while positioning ourselves to meet tomorrow's prospects.

Our revenues were down 6% while RTM has declined by 3% in the quarter. These results were reached while we were still experiencing the lingering effects of corrections in major commodities sectors combined with sluggish economic growth and a delayed harvest of the Canadian grain crop.

JJ will give you more color on this in a minute. In terms of operating performance, we clocked in a record-breaking operating ratio of 53.3%. It's difficult to achieve this level of results and to do so without compromising our long-term goals, so kudos to the entire team.

Our steadfast focus on safety, combined with balancing operational and service excellence came through again in this quarter. Mike will give you details on how we fared across all our key metrics.

We continue to deliver superior service by leveraging our collaborative supply chain approach. This quarter, we earned an adjusted diluted EPS of CAD 1.25, only 1% lower than in the third quarter of last year. We also generated free cash flow of over CAD 1.7 billion year-to-date, which is in line with last year's results. Ghislain will expand on our financial results.

I will now turn it over to the team for their comments starting with you, Mike.

Michael A. Cory - Canadian National Railway Co.

Well, thank you very much Luc, and I'd like to thank the entire CN team for achieving outstanding results in the quarter. Our operating team of employees and leaders are top of class, and they strive each day to improve our service offering. So with that, let me turn over to the results.

As you can see, we had a solid quarter against some very tough comparables. Those comparables continue to get tougher when you look ahead and especially considering the exceptionally mild winter we had last year. Our mandate continues to be a strong focus on executing the operating plan. We take a strong position on maximizing use of our assets in line with ensuring our service offering is what our customers need.

I'd like to touch on three key core areas that remain our team's focus moving into Q4, and these are safety, service, and productivity.

Safety is fundamental to our success at CN, and our safety performance this year remains strong, but we're never comfortable to sit on that front. Year-to-date we've seen major improvements in both main track and non-main track accidents. Our FRA accident ratio has improved from 2.06 year-to-date 2015 to 1.32 year-to-date in 2016. As you can appreciate, this improvement in our FRA accident ratio has resulted in a corresponding reduction in the cost associated with train derailments.

However, our FRA injuries have been flat year-over-year, and that leads us to engage deeper in order to realize the improvement that we must have. Our balanced approach to investment from infrastructure and technology to people and assets, creates the platform our team uses to leverage innovation from the ground up.

Everyday we work to balance the core operating leverage you see on this slide, describes our operational and service excellence mandate. One metric I'd like to highlight is our train productivity. We were able to increase the GTMs per train mile by 6% while improving both our car velocity and our train speed. This illustrates our ability to run heavier, longer trains faster than the year before. This ensures we drive out cost, but not at the expense of speed or service to our customers.

Let me share a few examples of this with you. With a bumper grain crop coming off the field, we're able now to run 12,000-foot, 28,000-ton grain trains from country origins to port. This decreases overall labor cost while increasing fuel efficiency and reliability in moving the grain. We've also increased the number of long trains operating in the Northern Ontario segment, which is a 1,200-mile segment between Winnipeg and Toronto. We've done this by utilizing strategically placed long siding investments, adding distributive power to increase train size and adjusting train schedules for customers' needs and precision meets (06:52).

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