Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Canadian National Railway Co (CNI, Financial) reported a 7% increase in revenues for Q2 2024, driven by stronger pricing, higher volume, and favorable foreign exchange.
- The company saw a 22% improvement in the accident frequency ratio, indicating better safety performance.
- The Southern and Eastern regions posted strong operational performance, with car velocity trending towards 220 miles per day in July.
- Canadian grain shipments increased by 24%, contributing to a 7% rise in grain and fertilizer revenues.
- The company is making progress with CN-specific growth initiatives, including the growth of the sand franchise and the rebuild of the international portfolio.
Negative Points
- The Vancouver corridor experienced significant disruptions due to planned and unplanned maintenance work, impacting overall velocity and labor productivity.
- International intermodal volumes were negatively affected by concerns over potential labor disruptions, leading to rerouting of vessels to U.S. ports.
- The company revised its full-year guidance to mid to high single-digit EPS growth due to ongoing labor uncertainties and traffic diversions.
- Fuel expenses increased by 11% year-over-year, driven by higher gross ton miles and increased fuel prices.
- The duty and rest period rules in Canada have created crew scheduling challenges, leading to higher unproductive labor costs.
Q & A Highlights
Q: How much of the cost and congestion around maintenance in Q2 will carry over into Q3 and Q4?
A: Tracy Robinson, President and CEO, explained that the work blocks and maintenance issues in the Vancouver corridor largely occurred at the tail end of Q2. The railroad is now operating at normal levels, with car miles per day improving. Ghislain Houle, CFO, added that costs related to recrews, deadheading, and held away were significantly higher in Q2 but are expected to normalize in Q3.
Q: Should investors feel comfortable that the Vancouver-Edmonton corridor has enough capacity to handle record volumes?
A: Derek Taylor, SVP of Transportation, confirmed that the corridor has sufficient capacity, noting that the railroad has seen improvements in speed and velocity post-maintenance. Tracy Robinson added that CN does not oversell its capacity and has turned away business that wouldn't fit the network.
Q: Does the guidance assume continued diversions but no strike? And why aren't we seeing better yield growth despite inflation-plus pricing?
A: Tracy Robinson confirmed that the guidance assumes no labor outage and continued diversions at current levels. Remi Lalonde, EVP, explained that the mix of business has changed, favoring bulk commodities, which has diluted yield due to a longer average length of haul.
Q: How is CN preparing for the new grain harvest given the constraints in the Vancouver corridor?
A: Tracy Robinson stated that CN is ready for a potentially large grain harvest and will utilize multiple ports, including Rupert, Thunder Bay, and Eastern Canada, to manage the volumes effectively.
Q: What are the upside and downside risks to the revised earnings guidance?
A: Tracy Robinson mentioned that unproductive labor costs are being addressed through hiring freezes and voluntary furloughs. Ghislain Houle noted that fuel prices could be a headwind in the second half of the year, particularly in Q4.
Q: What drove the increase in unplanned work blocks during Q2, and where is the planned work being performed now?
A: Derek Taylor explained that unplanned work blocks were due to emergent rail issues and were necessary to maintain safety. Planned work is now being performed east of Edmonton, with a return cycle to the West planned before the fall rush.
Q: What wage inflation is assumed in the new guidance related to the pending TCRC deal?
A: Tracy Robinson indicated that while it's inappropriate to comment directly due to ongoing negotiations, a pattern of around 3% wage increases has been seen in other agreements settled this year.
Q: How does CN plan to handle the structural bottlenecks in the Vancouver-Edmonton corridor over the medium term?
A: Tracy Robinson mentioned that CN continues to invest in the corridor to improve capacity and productivity. Additionally, CN is leveraging the Rupert corridor and other ports to manage growth effectively.
Q: Are customers pulling forward peak season demand due to labor uncertainties, and is there a risk of missing out on volumes later in the year?
A: Remi Lalonde acknowledged some pull-forward of volumes, particularly in international intermodal. However, he expects that once labor issues are resolved, volumes will return quickly, especially given the congestion at U.S. West Coast ports.
Q: How does CN plan to achieve the 10-15% CAGR target despite the revised 2024 guidance?
A: Tracy Robinson emphasized that CN-specific growth initiatives are on track, and the economic recovery, although slower than expected, will eventually contribute. Operational efficiency through improved velocity will also drive growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
