Canadian National Railway Company (CNI)

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Canadian National Railway

Q1 2018 Earnings Conference Call

April 23, 2018 4:30 PM ET


Paul Butcher – Vice President-Investor Relations

J.J. Ruest – Interim President and Chief Executive Officer

Mike Cory – Executive Vice President and Chief Operating Officer

Ghislain Houle – Executive Vice President and Chief Financial Officer


Brian Ossenbeck – JPMorgan

Cherilyn Radbourne – TD Securities

Brandon Oglenski – Barclays

Fadi Chamoun – BMO Capital Markets

Jason Seidl – Cowen

Chris Wetherbee – Citigroup

Walter Spracklin – RBC

Scott Group – Wolfe Research

Turan Quettawala – Scotiabank

David Vernon – Bernstein

Ravi Shanker – Morgan Stanley

Benoit Poirier – Desjardins Capital Markets

Ken Hoexter – Bank of America Merrill Lynch

Tom Wadewitz – UBS

Kevin Chiang – CIBC



Welcome to the CN First quarter 2018 Financial Results Conference Call. I would now like to turn the meeting over to 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 First Quarter 2018 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements.

With me today is J.J. Ruest, our Interim President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. [Operator Instructions]

The IR team will be available after the call for any follow-up question. It is now my pleasure to turn the call over to CN’s Interim President and Chief Executive Officer, J.J. Ruest.

J.J. Ruest

Thank you, Paul, and good afternoon, everyone. And welcome to our first quarter result. You’re joining us here in Toronto where CN is going to be holding our Annual Shareholders Meeting tomorrow morning. It’s a beautiful week in the north and the winter is finally over. But before we get started on the earnings call, we would like on behalf of the CN family, to take a moment to say our thoughts and prayers with all of those affected by the tragic event here in Toronto earlier this afternoon.

Returning to the earnings call, first off, I’m very honored to be here with my colleague, very experienced shareholders all of us having decades of building CN from the ground up. This is not our first test, this is not our first mission. Our service has been challenged since last fall, but I want to salute the huge personal efforts of our team of railroaders who have dealt with strong demand and with harsh winters.

Our Q1 results reflect those challenges. We delivered basically flat revenue and volume as expressed in RTM was down 4%. The March recovery was good but not quite enough to cover the warm weakness of January and February. On the cost side, a slower network, the cost of onboarding initial train crews and low network resiliency resulted in higher operating expense.

Adjusted diluted EPS was down 13% for the quarter, our operating ratio came in at 67.8%, which is 600 basis points higher than last year, but March showed definite progress. Today, we also are updating our guidance. Ghislain will provide those specific in a minutes. Our team of railroaders is definitely not throwing the towel on the year-end results.

I will now provide an update on our top line on the commercial side, followed by Mike’s review of operation and Ghislain will follow-up with the financial performance and our momentum going forward in the next few quarters. The first quarter revenue was in line with the available capacity. Demand was strong, remain strong and it looks also very broad based for the remaining of the year.

Volume as expressed in RTM was down 4%. Same-store price in the first quarter came in at 2.7% on the 2.4% that it was in the prior quarter. Core pricing from recent renewal concluded in the last 90 days averaged about 4.8%. You will recall that same-store price is backward-looking price – measure of price on the full book of business of executed in Q1. While core pricing on recent renewal is a forward-looking measure of price trend for the deal concluded in the last 90 days.

The strong Canadian dollar was negative headwind of $80 million on reported revenue, and the fuel surcharge program was a $70 million positive tailwind. We experienced significant increase in MT export containers volume in this quarter to the West Coast, which is the main driver of our mix, expanding the major gap between our carloads and our RTM.

CN’s port of fluid with normal ground count inventory and the dwell time being back at the target range. Our 2018 outlook is to operate at near port capacity on the West Coast of Canada. Prince Rupert revenue was up double-digit and continue to grow ahead of schedule. Montreal was up double-digit as well and Vancouver was up mid-single-digit. Tracks center revenue stayed solid. Refined petroleum product was up, mostly from the new northwest upgraders around Edmonton.

Coal revenue grew by 13%. The winter operation limited our ability to move more Canadian export in the last year. However, the outlook for coal export for 2018 is quite positive on both the Gulf Coast and the Canadian West Coast. Canadian grain volume was down 10% from last year as the prolonged extreme cold weather reduced our train length in the prairies and expected export. In the last seven weeks, we made quite significant progress and we are now running permit with weekly car orders as played on us by the grain companies.

CN’s spot that’s 5,700 grain hopper cars per week in March, up from 40% from the run rate of February. The export season of grain will extend into the second quarter. In light of our capacity challenge, we’ve reduced our crude by rail business to last two quarters. Crude carload was reduced 25% versus last year and in Q1. Since our progressive replenishment of network capacity, meaning the construction work we’ll been doing this summer, we will ramp up volume in the second half and we will reenter – have reenter that market for the second half.

Concluding on the commercial review, pricing trend is up at renewal and as well as for new deal, reflecting tighter supply and reflecting the value of our fresh investment capital of this year. On volume, growth have progressively returns and it will be in line with our new siding and double track investment as these things will become online. And this will pursue the capacity required for us to do the year-end results on RTM.

I will turn it to Mike. Mike, if you want to take it away.

Mike Cory

Thanks very much, J.J. And first, I want to thank all the railroaders of CN for their efforts in the challenging first quarter. From an operational perspective, results were combination of two things. We had lower resiliency in some high volume areas going into winter. This made maintaining fluidity very challenging. Fluidity is the most important thing. This lower resiliency, coupled with extreme the harsh winter conditions in those same areas, resulted in a decline in the service levels and an increase in cost per for operation as evidenced in our operating metrics.

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