Canadian National Railway Company (CNI)

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Canadian National Railway Co (CNI)

Q4 2017 Earnings Conference Call

January 23, 2018, 16:30 ET


Paul Butcher - Vice-President, IR

Luc Jobin - CEO, President and Director

Michael Cory - COO and Executive Vice-President

Jean-Jacques Ruest - CMO and Executive Vice-President

Ghislain Houle - CFO and EVP


Van Kegel - Barclays PLC

Fadi Chamoun - BMO Capital Markets

Christian Wetherbee - Citigroup

Benoit Poirier - Desjardins Securities

Matthew Reustle - Goldman Sachs Group

Turan Quettawala - Scotiabank Global Banking and Markets

Kenneth Hoexter - Bank of America Merrill Lynch

Walter Spracklin - RBC Capital Markets

Cherilyn Radbourne - TD Securities

Ravi Shanker - Morgan Stanley

Seldon Clarke - Deutsche Bank AG

Steven Hansen - Raymond James Ltd.

Justin Long - Stephens Inc.

Brian Ossenbeck - JPMorgan Chase & Co.



Welcome to CN's Fourth Quarter and Full Year 2017 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul Butcher

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's Fourth Quarter and Full Year 2017 Earnings Call. I would like to remind you about 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; J.J. Ruest, our Executive Vice President and Chief Marketing Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. [Operator Instructions].

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

Thanks, Paul, and welcome, everyone, to our fourth quarter and full year 2017 earnings call. Well, we faced in the fourth quarter some very challenging operating conditions. On top of record workload levels, specifically in key segments such as Western Canada and the U.S. Midwest, we encountered in the quarter a series of outages on our main line and very cold December weather across the entire network. These conditions, while largely outside of our control, nevertheless, resulted in disruptions and put our network resiliency to the test as our operating team worked hard to maintain the best level of service possible for our customer in these circumstances. I'm extremely proud of what our dedicated team of railroaders at CN have been able to accomplish in the face of such adversity. In fact, when you look at our operating ratio in the fourth quarter at 60.4%, it is -- when you look at the previous record in terms of volume, it is lower than the previous record in terms of volume, going back to 2014, where we had an OR of 60.7%.

In any event, to deliver this kind of environment -- and this kind environment implies, however, an exponential level of resources, higher cost and less efficiency as trains are shortened, delayed and/or detoured. Many of our partners in the supply chain also faced weather-related issues and some other own capacity issues in the fourth quarter, also compounding that challenge.

Mike will give you more color in a minute on how we've been ramping up resources, and that's people, mode of power and infrastructure, in the last quarter, but more importantly, how our 2018 operating plans are addressing this situation as we move through winter and then build momentum in service and efficiency throughout the year.

That being said, the fourth quarter capped an impressive year for CN in 2017, a year where we delivered strong all-around results as we onboarded significant volume, adding over $1 billion of revenues while growing adjusted diluted EPS by 9% to $4.99. We also generated solid free cash flow. With this strong performance and good prospects for the future, we announced today that our board has approved a 10% dividend increase for 2018.

In essence, we have witnessed strong growth across a broad range of business segments in '17, and J.J. will recap our fourth quarter and full year performance. He'll also give you our perspective on key markets as we look ahead in 2018.

Turning to financials, Ghislain will give you more flavor -- -- a flavor for the quarter and the full year results. He'll also share with you our outlook for 2018.

All right. So on that note, let me turn it over to Mike and the team for their more detailed comments. Mike?

Michael Cory

Thank you very much, Luc. Our 2017 saw a record volume and workload handled. To put the growth story in perspective, volume growth in 2017 has been, by far, the biggest increase I have experienced in my time as an operating executive at this company. Our ability to handle it and the complexities that come with the demand of our customers and changing operating environment is a testament to the talented group of railroaders I'm proud to lead.

Our traffic workload or GTMs continue to climb in the fourth quarter, up 3% from Q4 2016 and 7% versus Q4 of 2015. For the full year, overall workload was up 11% over 2016 and 6% compared to 2015. The real story that always that in segments of our network, volume was up by as much as 20% compared to 2016 and 18% compared to 2015. As I've explained before, our standard approach is to accommodate growth through increased trainload.

Over time, our investment in the network-related components like sidings and double track has allowed us to safely and efficiently increase our train links and tonnage at a rate to accommodate growth at a low incremental cost by not necessarily introducing additional trains.

As you can see, even in the tougher operating conditions, we've continued to respond to growth by increasing train size by 8% in the last 2 years. This has been accomplished with minimal network investment. The growth we experienced in 2017 came on quickly and concentrated. This concentration placed resiliency pressure in certain geographic areas and has had an effect on fluidity and resource availability as portions of our network have seen substantial volume increases. This rate of growth has required additional train starts. And as a result, we have not been able to maintain the speed of trains in segments of our network.

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