Canadian National Railway Company (CNI)

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Canadian National Railway Co (CNI)

Q2 2018 Earnings Conference Call

July 24, 2018, 16:30 ET


Paul Butcher - VP, IR

Jean-Jacques Ruest - Interim President, CEO, Executive VP & CMO

Michael Cory - EVP & COO

Ghislain Houle - EVP & CFO


Kenneth Hoexter - Bank of America Merrill Lynch

Cherilyn Radbourne - TD Securities

Allison Landry - Crédit Suisse

Fadi Chamoun - BMO Capital Markets

Jason Seidl - Cowen and Company

Brandon Oglenski - Barclays Bank

Christian Wetherbee - Citigroup

Walter Spracklin - RBC Capital Markets

Scott Group - Wolfe Research

Turan Quettawala - Scotiabank

David Vernon - Sanford C. Bernstein & Co.

Ravi Shanker - Morgan Stanley

Benoit Poirier - Desjardins Securities

Seldon Clarke - Deutsche Bank

Thomas Wadewitz - UBS Investment Bank

Brian Ossenbeck - JPMorgan Chase & Co.



Welcome to CN Second 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 Second Quarter 2018 Earnings Call.

I would like to remind you about the comments already made regarding forward-looking statements. Before I introduce the speakers on the call today, I would first like to congratulate J.J. Ruest on his nomination as President and CEO of CN. I have known J.J. for over 20 years, and I'm very honored to work under his leadership. Accompanying J.J. on the call today is Mike Cory, our Executive Vice President and Chief Operating Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. [Operator Instructions].

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

Jean-Jacques Ruest

Thank you, Paul. Thank you, and good afternoon, everyone. Welcome to our earnings call. First off, I wanted to say that I'm very honored to be here today with my colleague railroaders, all of us having each 2 decades of building CN from the ground up. Back in March, the Board asked me to act with a sense of urgency, and the team really delivered as one. We produced adjusted EPS growth of 13%, a best-in-class operating ratio of 58.2; revenue growth of 9%, which was from solid same-store price of 4%; and revenue ton mile volume of 7%. We generated nearly $1.3 billion of fresh cash after the first 2 quarters, and we also made good progress on our midterm agenda of development of talent, safety culture and strategic growth to outperform the economy. And it is -- therefore, it is this confidence in our business and confidence in our railroading acumen of the team that we are raising the 2018 guidance. Ghislain will provide the specifics in a few minutes.

Despite a very challenging first quarter, our team of railroaders is definitely not giving up on delivering solid year-end results.

I will now provide an update on our top line followed by Mike's overview of our operations, and Ghislain will follow with financials in our updated guidance.

Demand is currently strong, and the demand outlook for the remainder of this year is strong as well and broad-based. This is why we are working diligently on adding capacity and resiliency to our network. Volume is -- as expressed in revenue ton mile in the last quarter, was up 7%. Same-store price for Q2 was up a solid 4.0%. Sequentially, remember in the last quarter, it was up 2.7%. Core pricing from recent renewal concluded in the last 90 days averaged about 4.4%.

You will recall that same-store price is a backward-looking measure of price on our full book of business as executed in the last quarter. Core pricing from recent renewal is a forward-looking measure of price trend from only the deal concluded in the last 90 days.

On revenue by commodities, coal revenue grew 39%, mainly from Canadian export coal of met coal to Asia and U.S. export coal of thermal coal to Europe.

Grain and fertilizer revenue was up by 12%. Our grain volume was up in both Canada and United States. This year's Canadian crop and carryover looked fairly promising. Our frac sand segment executed in the previous quarter -- exceeded, I'm sorry, our previous quarter record and was driven mostly by strong demand in Western Canada. We see the same outlook in the short term with regard to the frac sand business.

We are constructive about continued volume growth in lumber and in base aluminum volume. Our steel -- on steel, our largest steelmaking account is in the United States.

Crude by rail, the revenue was up compared to last year because of better pricing. In the second half, we will have more capacity. Therefore, we will also be able to execute a bigger book of business of crude. We are taking delivery of 16 new G horsepower locomotive, and that will be helpful to our crude business.

Lastly, on intermodal segment, the revenue grew by 6%. The increase last quarter was mainly traffic related to the Port of Prince Rupert and the Port of Montreal and on domestic revenue, which was also up -- it was especially up on the ramp-to-ramp business with our wholesale account. We did add new shipping line customers at the Port of Vancouver as well as a new shipping line customers at the Port of Prince Rupert.

Concluding on the commercial overview, price trend is up from renewal and also from new business, reflecting tighter supply of transportation capacity. On volume, our growth will follow the completion of our new sidings and new section of double-track capacity.

I will now turn it over to Mike. Mike gives you an update on our operation. Mike?

Michael Cory

Thank you, J.J. And even though Butcher beat me to it, I just want to congratulate you on a well-deserved promotion.

Jean-Jacques Ruest

Thank you.

Michael Cory

We're all very proud and we're honored to work for you and with you. So hello, everyone. I want to first of all, thank the railroaders of CN for their efforts in delivering these results. And it's been in an environment that really is still lacking resiliency when you think about our operation. While we still have work to do, these results show the commitment of this operating team to both our model and especially to our customers. As we stated on our Q1 call, this quarter was centered on catching up on the volume, gaining back the confidence of the customers and sequentially improving our operating metrics in line with reducing cost.

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