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spk00: Good afternoon. My name is Sarah and I'll be your operator today. Welcome to CN's fourth quarter and full year 2021 financial and operating results conference call. All participants are now in a listen-only mode. After the speaker's remarks, there'll be a question and answer session. I would like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.
spk19: So good afternoon, everyone, and thank you for joining us today to discuss CN's fourth quarter and 2021 and full year results as we continue to make progress on our strategic plan, redefining railroading for the 21st century. We are joined today by Mr. Robert Pace, chair of the CN board, who would like to kick things off this afternoon with a few words about our new CEO. Then we will turn the call over to JJ Rue, outgoing president and CEO, Rob Riley, executive vice president and COO, Gislaine Houlle, executive vice president and CFO, James Cairns, our senior vice president, rail-centric supply chain, Keith Reardon, our senior vice president, consumer product supply chain, and Helen Quirk, our senior vice president and chief strategy officer. They will talk about the results in the fourth quarter and full year of 2021. We will then hold a question and answer period. And I would like to remind you to please limit yourself to one question. Now, before we get started, we'd like to draw your attention to the forward-looking statements and additional legal information, which are available at the beginning of the presentation. As a reminder, today's presentation contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian securities law. These statements are subject to risk and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statements regarding forward-looking statements in our presentation. So before we begin, Board Chair Mr. Robert Pace would like to say a few words. Robert?
spk05: Thank you, Paul. Our board today is pleased to announce the appointment of Tracy Robert as President and CEO of CN. Tracy brings 35 years of operational management, strategy development expertise, which will help drive growth for CN, operational improvements, and long-term shareholder and stakeholder returns, and ensure we continue to attract a world-class workforce. She comes to us from TC Energy, where she holds the title of Executive Vice President and President of Canadian Natural Gas Pipelines and President of Coastal Links. She's been there for approximately eight years. And prior to that, she's had a career of 27 years at CP, where she held positions in operations, finance, and commercial. Today, we are also pleased to welcome a new board member, Jean Charest, as a member of our board. Jean Charest has a distinguished public service career for over 30 years in Canada, including serving as the 29th Premier of Quebec. Under his leadership, Quebec experienced a sustained period of economic prosperity and improved significantly major infrastructure. Our board will benefit from his knowledge of Canada and his global network. And finally, we're excited to announce that Shawnee Bruder, a director of CN, will become the vice chair of our board. And I want to thank, on behalf of all our board, the outstanding job that she did as chairing the search committee for our new CEO, along with Justin Howell, Kevin Lynch, and Bob Phillips. And I know she'll have a distinguished career at CN in the future. And on that note, I'd just like to highlight the fact that Tracy will not be joining us on the call today because we want to focus on the fourth quarter and year-end results. So on that note, JJ, I'll turn the meeting over to you.
spk21: Thank you, Robert, and congratulations on all of these excellent news. And good evening, everyone. Let's start with the fourth quarter highlight on page five, a quarter that demonstrated CN resiliency and profitability. The strategic plan we introduced in September is already showing tangible results in Q4. All in, the business produced adjusted value to DPS growth of 20% and adjusted operating ratio of 57.9% and free cash flow for the full year of $3.3 billion at the upper end of our guidance. We also achieved a number of noteworthy all-time record in 2021, including an all-time best safety performance on personal injuries, an all-time best performance on fuel efficiency, and an all-time best OR for a fourth quarter at CN. The APS growth came from both pricing and cost initiative. Incremental margin was solid, and labor costs and productivities were also very solid. Volume was softer, mainly because of the BC line washout and lower level of Canadian grain. As a reminder, the BC washout took out our main line to Vancouver for three weeks, from November 14 to December 4. This major segment of our rail network normally sees about 21 to 23% of our total revenue running over these tracks on any given day. But in spite of this condition, the CN team performed. The ROIC for the year was 14.1% and sequentially improving toward our 2022 guidance of 15% return on investment capital. Ghislaine will go into these details later. Regarding pricing and upscaling, James will provide evidence of the continued momentum on all aspects of how we price and upscale, that is, priority segment premium, weekly auction, same-store pricing, demurrage and storage. Regarding labor costs, we ended the quarter about 1,800 fewer people than last year and sequentially about 1,150 fewer than at the end of Q3 of this year. Recall that we took action right after we announced the September 17 strategic plan. So we will benefit from these headcount reduction throughout 2022. Regarding the strategic review of non-rail business, the shutdown of the freight forwarding business is basically completed. We are in negotiations regarding the divestiture of the Great Lakes vessel and strategic discussion around options for TransX are ongoing. Regarding our ESG agenda, CN was recognized for leadership in corporate sustainability by CDP, securing a place on its prestigious A-list for tackling climate change. CN was also recognized for the 10th year in a row in the Dow Jones Sustainability World Index. The CN Board secured a first place ranking in Canada for governance by the Globe and Mail. I am pleased to announce that the Board of Directors approved today is 19% dividend increase for 2022. our 26th consecutive yearly dividend increase. The board also approved a new share buyback program for an amount in the range of $5 billion Canadian from February 1st, 2022 to January 31st, 2023. Together, these actions demonstrate CN's commitment to a balanced capital allocation program that puts a priority on returning excess capital to shareholders. The strategy plan was released back in September It's progressing very well. And we are confident in our ability to deliver industry-leading return for our shareholders over the long term. And with that, I will turn it over to Rob, who will cover the operation.
spk04: All right. Thank you, JJ. In Q4, CN once again showed its resiliency by restoring our network and meeting the needs of our customers safely and efficiently after the catastrophic weather events in British Columbia. The credit and the thanks goes to the dedicated men and women of CN who worked around the clock to return our tracks to service in November and December, restoring over 50 outages caused by the significant rains. As JJ indicated, we've made considerable progress against the goals set out in our strategic plan on September 17th. The results of those efforts began to take hold in Q4, giving us momentum heading into 2022 and the confidence in our ability to make gains and create additional shareholder value in 2022 and beyond. The sequential headcount reduction of 1,150 exceeded the target we set in September and was completed in Q4. Our other efforts in cost containment and purchasing service and materials showed significant reductions year over year. Moving to page eight, despite the weather impacts to our core operating metrics in the last half of the quarter, the CN team improved in every operating metric again in 2021 versus last year in 2019. The exception was train length, which was flat year over year and remains an opportunity for us going forward. From a safety standpoint, as JJ mentioned, CN employee performance improved nearly 20% in 2021 to an all-time best in for fewest injuries, while the number of accidents improved as well, reducing our costs by $40 million. Our leadership position in sustainability was further enhanced by our all-time record in industry-best fuel efficiency. Our efforts reducing carbon emissions in 2021 also saved us an additional $30 million. Our railroad is in great shape, and we are very well prepared to capitalize on future growth. On page nine, as announced on December 14th, we signed a long-term strategic partnership with Google to transform CN supply chain as part of digital scheduled railroading to deliver new customer experiences and modernize our technology infrastructure in the cloud. The first part of the partnership is IT modernization. This will involve transition of key infrastructure and applications to the cloud, which will allow us to improve IT operating costs and better support the operations. The second part of the partnership will drive our innovation agenda and will employ an intuitive digital platform powered by Google Cloud's AI and machine learning tools, which will ultimately give customers and supply chain partners more visibility. Our partnership with Google Cloud is central to our strategic plan and reinforces our industry leadership and commitment to digital scheduled railroading, or DSR. With that, I'll pass it on to James and Keith to provide some insights on the efforts of our marketing team.
spk09: Thank you, Rob. Disciplined approach to pricing ahead of railway cost inflation has been a core competence for the CN team for many years. We've been an industry leader in consistently pricing ahead of railway cost inflation in terms of timing and scale. Our customers understand that in order for us to continue to invest in capacity to support their growth, we need to maintain price discipline. Throughout 2021, we saw the real effects of many of our yield and pricing initiatives, delivering an all-time record same-store price of 5.4% for the year. This momentum is expected to continue through 2022. The mix of our business sequentially improved through the year, with the balance of carload and intermodal coming more in line with pre-pandemic levels in Q4. The CN sales, marketing, and operations team again delivered double-digit intermodal and automotive contribution margin improvement over Q4 2020 and sequentially versus Q3. Train density, velocity enhancements, single destination train packages, Productivity improvements in our terminals and in our first mile service all contributed greatly to the margin improvements. Capacity has value. We don't wait for annual renewals to test the market. We utilize key tools such as guaranteed equipment pricing, premium priority port trains and equipment auctions to allocate incremental capacity when demand exceeds supply. This multifaceted approach allows for real price discovery and provides insight to the value of our capacity. Threshold pricing and seasonal pricing are additional tools we use to price incremental capacity at the market rate when an existing contract is in place. We are always careful to match price to capacity. When a market is hot and more capacity is needed, we use price to allocate scarce capacity. The pricing and yield story for CN is strong, and we continue to focus on balanced, profitable growth. With that, I'll turn it to Keith to talk about the CN growth story.
spk06: Keith? Thank you, James. In Q4, we saw revenue growth in all carload segments with the exception of Canadian grain. West Coast coal was up close to 50% in the quarter, while refined petroleum products and propane on the back of new and growing export capacity in Prince Rupert both continued to set new Q4 revenue records. Frax stand revenue was up 30% in the quarter and finished the year over 20% better than 2020. While worldwide supply chain disruptions and the BC flooding adversely affected our Q4 intermodal and automotive volumes, we did experience 30% growth versus 2020 in our international intermodal business, through the ports of Halifax, St. John, New York, New Jersey, Philadelphia, New Orleans, and Mobile to set an all-time record. Domestic revenues were up 12%. The transects business, which just posted their best-ever quarter, along with our retail volumes, our Canadian wholesalers volumes, and the port transload business were all solid before and after the B.C. flooding. We continue to see sequential improvements in our automotive segment, which positions us well for 2022. Our carload franchise is unique, as we have a strong coal growth story on the back of tech volumes to Rupert and Neptune, as well as the restart of the CST and Coal Valley mines in Western Canada. This is expected to offset the weak Canadian grain volumes expected for H1 2022. We're adding new transload capacity in the greater Toronto area for refined fuels that would have otherwise moved on the TNPL pipeline. We are further solidifying our position as the dominant carrier for undiluted heavy crude with the startup late last year of a new undiluted bitumen unit train facility in Saskatchewan capable of handling volumes in the range of 40,000 barrels per day. The increasing demand for renewable fuels is expected to be as transformational to the grain business this decade as ethanol was in the early 2000s. We have three new CN-served renewable fuels facilities ramping up this year in the Gulf. Longer term, we see new car loads coming from the emerging hydrogen market. This market could be of the scale of crude by rail at its peak, but unlike crude, this will be long-term, rateable business. With regard to intermodal and automotive, we continue to drive business to our CNSERV ports in line with our partner, Ocean Terminal Operators, bringing on import and export capacity over the next several years. On the East and Gulf Coast, we see the 2022 volumes continuing to remain strong with new strings being introduced to the CNSERV ports as solutions to reach U.S. Midwest markets. CN's auto franchise is well-positioned to drive growth for our customers as we continue to innovate and support their industry's evolution. The pricing, yield, and profitable growth story for CN is strong and well-balanced. I'll now pass it on to Gislain for the financial perspective.
spk11: Yeah, thank you, Keith. My comments will start on page 14 of the presentation, which will provide more visibility on our outstanding fourth quarter performance. Revenues for the quarter were up 3% to $3.75 billion, despite volume on an RTM basis being down 11%, due in large part to the washout in BC, lower Canadian grain volumes, and a sustained cold snap during the second half of December. We delivered solid pricing above rail inflation and delivered on yield, optimizing CN's precious network. Our adjusted results exclude advisory costs related to shareholder matters. we delivered a record Q4 adjusted operating ratio of 57.9%, which was 350 basis points lower than last year. Q4 adjusted net income was slightly over $1.2 billion, with adjusted diluted EPS of $1.71, up 20% versus last year. Turning to page 15, let me highlight a few of our key expense categories expressed on a constant currency basis, many of which are driven by our initiatives under the strategic plan. Labour and fringe benefit expense was 10% lower versus last year. This was mostly driven by a lower average headcount and higher capital credits from more capital work in the quarter. Purchase services and material expense was down by 10% versus last year, mostly due to lower repairs and maintenance, trucking and transload, and material expense. Fuel expense was up by over 40%, driven by a 62% increase in price, partly offset by lower volumes in terms of gross ton miles. This quarter, we also continue to see improvement in equipment rents, with a 13% decrease versus last year, driven by lower car, higher expense. Turning to our full year results on page 16, I am very proud of our adjusted EPS growth of 12% versus last year, demonstrating our resiliency and capacity to adapt to quickly changing conditions. These great results were achieved despite the loss of our Vancouver mainline for a total of over five weeks this year. Now moving to cash on page 17, we generated free cash flow of $3.3 billion to the year at the high end of our guidance. Finally, on to page 18, let me provide an update on our 2022 targets we introduced back on September 17th. I'm pleased to report that with the solid progress we have made in Q4, we remain confident in delivering on our 2022 financial outlook of 20% EPS growth, around $4 billion of free cash flow, 15% ROIC, resulting in a full year operating ratio of 57%. Our capital envelope for the year will be at 17% of revenues. Excluding the impact of the significantly weaker Canadian grain crop, the volume environment remains positive, as outlined by Keith. We are continuing to focus on yield management and cost efficiency. I will now turn the call back to you, JJ, for some closing remarks.
spk21: Thank you, Ghislain. And just to close it before we go to Q&A, as a reminder, on September 17, we announced the next step of our strategy to redefine railroading for the next generation. And as you saw during the Q3 and the Q4 results, we are on track to deliver it on our strategic plan. Entering 2022, supply chain continues to be disrupted and we expect volume growth will be mostly a second half of the year story with the return of Canadian grain at that time. As you saw in our results, we operate with nimbleness and our network is resilient. We already have the capacity to respond to demand when it materializes and their team is running a solid price and cost action plan. I am very pleased with the solid progress we've made since last summer. The team also responded very decisively to the huge network disruption that we had back in July and more recently in November in British Columbia. So kudos to all of our engineering and operating people out there who worked very hard. CN has a bright future of leveraging technology, combining with operational excellence, enabling us to build the premier railroad of the 21st century and delivering industry-leading return for our shareholders over the long term. And now, operator, we'll turn it back to you for the question.
spk00: Thank you. We will now begin the question and answer session. As a reminder, to ask the question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. As previously mentioned, we ask that you kind of limit yourselves to one question. The first question comes from the line of Sherilyn Redburn from TD Securities. Please go ahead.
spk15: Thanks very much and good afternoon. And JJ, I want to start by wishing you our very best in your retirement. Thank you. It's almost hard to detect severe flooding in the results in Q4, so I was just wondering If there's any way you can help us frame the revenue and earnings impact of that, whether incidents and how much of a traffic backlog there might be to move as we enter Q1.
spk21: So I think the question is obviously a very important question. Ghislaine can help quantify a bit, and James can talk to us about what might be still around as business.
spk11: Yeah, Sherlyn, thanks for the question. Listen, as JJ mentioned, we did lose our main line. from middle of November to early December. And this is the main line going to Vancouver. So we did quantify it, and I would tell you that it had an impact of around $120 to $130 million of revenue. um that we could not move we thought we were going to be able to catch some of that back up in in december however uh we got hit by a coal snap mid-december to the end of december so we did not catch um off any of this in december and i'll let i'll let the you james jump in in terms of uh the business that's allowed there to move from from that flooding yeah we're not going to get it all back of course carolyn but
spk09: You know, there's a lot of business that's still there to move. We're going to have a very, very busy first quarter here once we get some good weather behind us. You know, if you think about the grain, you think about the coal, you think about the international imports, they're all there ready to move. And I know Rob and his team are excited to get after it here in the first quarter. Thanks for the question, Sherla. Thank you.
spk00: Your next question comes from the line of Conor Dupta from Scotiabank. Please go ahead.
spk01: Thanks for taking my question, and I call my best wishes for you, JJ. So my question is on the supply chain issues and the you know, the labor issues going on in the industry right now. So in light of what's happening in the trucking market with the vaccine mandates, I'm curious as to what kind of hiring outlook you have for employees given you have, you know, these structures, a lot of employees here, the demand environment seems pretty strong this year. Do you see or do you anticipate any kind of need for significant hiring at some point this year?
spk21: So on the CN part of how we're doing with labor, Rob is very well equipped to do that. And as it comes to the impact of supply chains for business, I think Keith will do that after that. Rob?
spk04: Yeah, Conarch, in terms of our labor, we're right-sized to the volumes that are out there right now. Really, in terms of the virus itself, we did see a spike in terms of positive cases here over the holidays in early January. We've seen that come down quite a bit. As you look out into the year, our second half is really where the growth is going to be as we look forward to a more robust Canadian harvest. So we will do some hiring here in the first half of the year in preparation for that, but also for attrition. It won't be on a one-to-one basis because we'll have productivity in there as well, but we will do some hiring as this first half evolves.
spk21: And, Keith, truck drivers, disruption, how do we leverage these supply disruptions?
spk07: Yeah, so the, you know, it's not like truck drivers, but as the commerce is saying, it's a lot of people in the supply chain. And, you know, our customers, they're actually pivoting away from just-in-time inventory programs, more like a just-in-case model. So as supply chain disruptions create those stock outs and loss sales for a lot more customers.
spk06: Just-in-time models rely more heavily on trucks than intermodal. So there is opportunities for intermodal as that model has changed. You know, in addition to that, the driver shortages and the lack of truck capacity are in part reasons for the shifts of the customers for these supply chain shifts. Excuse me. I understand you couldn't hear me. We've got the mic on now. I apologize for that. Our intermodal products are right in place for the – for the truck drivers to be able to, excuse me, got a little frustrated because I was offline there, sorry. The driver shortages and lack of truck capacity are things that are voting well for us to pick up some volume. As JJ mentioned, you know, vaccine mandates and the cross-border demand has more recently developed with driver vaccines. and overall driver shortage issues. Just this past week, we saw a big uptick in those discussions with our retail customers, our trans-ex customers, and our wholesale customers. So the opportunities are definitely there. Just not sure how to quantify that, but the opportunities are there, and we're going to work with our customers to offer them the services. We have the capacity on our trains, and we're moving forward on that. I apologize for that. Thank you, Keith.
spk01: Thank you so much. Thank you, Conor.
spk21: Thank you, Conor.
spk00: Your next question comes from the line of Brian Ossenbeck from J.P. Morgan. Please go ahead.
spk02: Yeah, hi. Good evening. Thanks for taking the question. And, J.J., congrats on the retirement. Thank you, Brian. I just wanted to see if it's not uncommon for the industry here, but off to a slow start to begin the year for volume. So I just wanted to see if maybe you can pull a little more color around the back half recovery, clearly, Canadian grain is going to be a big part of that. You walk through some of the other opportunities. But I wanted to see if you could maybe drill down a bit on that and maybe put some pros and cons around what you have more confidence, more visibility in as you look into the back half and start to prepare for that.
spk21: Okay, thank you. It's a good question. And just maybe starting with the current environment, it has been still a very challenging operation, especially in Western Canada. Southern Canada is quite a quarter to date. But the second half looks bright. You know, James, you may want to talk about the bulk. And the merchandise actually has been a solid story all along. And there is freight out there for us to move.
spk09: Yeah, I mean, it's been a tough start to the winter. But, you know, winter, we're not no strangers to tough winters here. We're very confident we're going to meet our full year guidance. The demand is there. I think about the early winter snowfall we're having here in the prairies. It's creating tough operating conditions. But I'll tell you, we need that snowpack now. So we can have a good crop recovery here for next crop year. And all indications are that's going to happen. So if you think about the second half of this year, when grain comes back, that's significant. You know, the grain, this poor crop is going to hit us in the first half of the two to about $300 million. A fair crop, normal crop, we get all that back in the second half. So we're pretty excited about how we're going to finish out 2022. And like we said earlier, we still got a lot of demand there to move in the first quarter, first half of this year. So, yeah, we're going to be busy. Rob and his team are going to be real busy here.
spk21: Thank you very much. To wrap this up, we have, you know, the DP World, the Port of Prince Rupert, will have his expansion coming this summer. I think it's around July. going to be at 1.8 billion tu that would be just in time for the fall peak at a time where any long beach might be you know kind of in the heavy negotiation with their with their longshore person so we will want to exploit these two things as well thank you for the question brian all right thanks jj your next question comes from the line of jason seo from colin your line is open thank you operator uh jj let me join everyone in wishing you all the best it's certainly been a pleasure
spk22: Thank you. I wanted to talk a little bit about the pricing side. You guys obviously called that out. We've seen that with the other two rail operators that have reported. Given some of the ongoing supply chain constraints, especially in the cross-border that might be developing with the vaccine mandate, do you think that that pricing environment is only getting better for you as we're in 2022 here?
spk21: Well, James can talk to that. Definitely, the fourth quarter story was about price and cost. So, James, you know what?
spk09: Yeah, when I look at my crystal ball, I really don't see it slowing down. I mean, we price for the market and we do it very effectively. And I think the market demand is out there. You know, there is value for capacity and capacity is something we have. And as we continue to have ongoing discussions with our customers, everyone's kind of settled in and realized that there's going to be a higher price for rail service moving forward as there is many goods. So, fully expect that strong pricing environment that can continue through well into 22 and beyond. So thank you for your question. Thank you, guys. Thank you, Jason.
spk00: Your next question comes from the line of David Vernon from Bernstein. Please go ahead.
spk13: Hey, good afternoon, everyone. I just actually had a question for the chairman, Pace, if he's on the line taking questions today.
spk21: I don't know if he's still on the line, but I have a question.
spk13: Sure. The question really, JJ, I mean, the numbers are obviously very strong. But the question was going to be, you know, rightly or wrongly, the market's perception is that the operational discipline or focus around CN maybe has lapsed. Obviously, the numbers speak for themselves. But I was just wondering if the chairman might have wanted to comment as to why a decision to maybe go outside the industry from someone who doesn't have maybe as much hands-on experience with PSR is the right solution for CN for the next three to five, seven years, whatever it may be.
spk21: Well, thanks for the question. And I think to your point, the numbers speak for themselves. We have a very solid operating ratio in Q4. And we were tracking it also from Q3 to Q4. And the ambition we have for this year, you know, in our view, are balanced, but they're also ambition. It doesn't mean that 57 is the end of what we could do, but it's definitely solid with a 20% EPS. As it relates to Tracy, you know, many of us know Tracy. She's been at CEP for a long time. I wouldn't define her as an outsider. I think she'd be more like myself, where she has basically two careers, one in her case mostly in the rail and partly in the energy sector, you know, heading transport, proportionate transport pipeline. She was on the board of a Fraxen company. In other words, you know, at CEP she did a number of jobs in operation, customer service, treasury, And for a time, early days in my career, I was competing with her peacefully on some of the segments. So she knows the railroad. She knows the network. She knows the competition. She knows CN. She's passionate about railroading. And I think you will find that her love is very much into passion is in the railroading. So I think, in my view, she's a railroader. And she's not really from outside. But she did work for a number of years, about six or about eight years, in a network company in an energy space. And by the way, just on that point, CN has a huge potential on the energy space. When you talk about the blue hydrogen, you know, and the prospect around Edmonton and the petrochemical plant, which are promoted out there, which to export Pollock to Asia via Rupert, I think that will be one of the things that she will grasp of the METAZ and understand it very quickly. what is it that we need to do to exploit, you know, that bright future on the western part of the network.
spk13: All right, JJ, thanks for the commentary and congratulations and good luck in the next chapter.
spk21: Thank you, David.
spk00: Your next question comes from the line of Ray B. Shankar from Morgan Stanley. Please go ahead.
spk17: Thank you, Gigi. Again, congrats and good luck for the next phase. I wanted to follow up on the pricing commentary. I just wanted to dig a little bit deeper, James, and I know you gave a little bit of color, but has something changed with your go-to-market strategy and pricing? And also, how do we think about that pricing level going forward? Is it going to be like mid-single digits pushing high single digits on an absolute basis? Or are we still kind of pricing very much relative to inflation? So if inflation comes down, that pricing kind of comes down as well.
spk21: So we're using many, many different levers in our pricing. That's why we call it total price. And, you know, James can expand on that. And we are above rail inflation. Rail inflation is really picked up. But what was the latest number, James?
spk09: Oh, I think the AAF latest was just shy of 7%.
spk21: And, you know, you want to talk about pricing going forward?
spk09: Yeah, you know, Ravi, I think, you know, the marketplace there is very favorable to increased pricing. When you say, you know, what kind of changed, if you look at what happened as we developed through 2021, demand really picked up and capacity really gained to have value. And we're pretty smart at CN getting the right price for the capacity we have available in the marketplace. So that's been very successful. You know, if you think about just this December, we renewed almost in the range of 15% of our total book of business with an average rate of 5.5% just in December. So you think about that carrying through all the way in 2022. First half of 2022, we got about another 25% of our book of business that's up for renewal. So this is a big opportunity for us, and I think the time is exactly right. And we've got the capacity and the ability to move our customers' freight and help them win in their end markets. So I'm very, very excited about prospects for 2022 and price. And not just same-store price, but total price. All these things we do to try and wean out a little bit more value for this capacity that we have to offer in the marketplace. So I'm excited about that.
spk17: Thanks, James.
spk09: Thanks, Ravi. Thank you, Ravi.
spk00: Okay, next question comes from the line of Sean Schapler from Evercar ISI. Please go ahead.
spk10: Thank you. Good afternoon, everybody. Just, Lynn, or Rob, maybe, you know, you pointed out on the cost side, you know, the headcount's obvious, and the fuel prices, you know, the higher price but offset by lower volumes. Were there any impact to maybe purchase services, equipment rents, Anything else on the cost side from the actual lack of volumes in 4Q because of the mainline washout that as things start to accelerate in the first half of the year, maybe you need to add a few more heads, as mentioned, due to attrition, a little bit more equipment that we've maybe seen the trough of the cost side with volumes. In fact, we need to see a little bit of cost push as well.
spk21: Rob, you want to start in there?
spk04: Yeah, so really not none of the impact from the floods was in that PSM. Really where we saw the benefit was some of our older locomotives were able to lay up some of our older, least reliable, very expensive to maintain. That was a big part of that. We have seen the benefit of our capital investment with grain cars that's allowed us to turn back some grain leased cars as well. That's also been a part of this that we saw here in Q4.
spk11: I could add to that as well. If you remember at the end of Q3, when we were talking about our strategic plan on purchasing services and material, we said we had identified $100 million of costs of saving initiatives. that was already secured. I think right now we're still making good progress on this, and I would tell you that we're about 150 million identified as we speak. So again, a lot of different things coming together in terms of reducing contractors, laying up old locomotives, as Rob just mentioned, consolidating facilities. and a ton of projects that we have very, very detailed accountability on, and we're very confident that we will deliver on our target. If you remember on P&SM in our strategic plan, we had to deliver $250 million, and we're continuing to progress on that. So very proud of that progress. Thanks for the question.
spk21: Thank you, John.
spk00: Next question comes from the line of Brandon Oginski from Barclays. Please go ahead.
spk03: Hey, good afternoon, and, JJ, it's been a pleasure. Thank you. Congrats on getting the deal done tonight. So I guess, you know, in light of that, can you just talk a little bit about maybe what happened the last few years? Did you guys just get maybe a little bit complacent on costs or maybe not enough focus on the non-rail businesses? And then maybe more importantly, you know, from your perspective, you know, as you exit CN, You know, what's the biggest opportunity that you see going forward as you leave the company? Thank you.
spk21: Thank you. Thank you for the question, Brandon. No, CN is – complacency is not part of the CN culture. We worked very hard last year on, you know, potentially doing a transaction with the folks in Kansas City. During that time, we were already working on how we would integrate, which, you know, code for, you know, how we would potentially streamline workforce transactions. When the transaction could not come together, we didn't execute the plan to accelerate how we would become more efficient on the labor side. And the sales team has been very focused on price since the beginning of the year. You see the result. And you also saw the traction that Rob is driving on the operating matrix. You also have to put it in perspective. We lost the main line to Vancouver twice last year. We lost it for two weeks back in July, you know, when we lost the bridge for fire and we had to rebuild it. You know, that has an impact that it's real. It's a major line for us. It'd be like Western Railroad losing their access to Port of Hailey-Long Beach. Vancouver is key to us. And then we lost it again in November. But putting that aside, every year there's different things. Last year was kind of a special thing from that point of view. But the team is set, you know, we look forward. We don't look backwards. And the plan that we have for this year for the team, with Tracy coming on board, is a solid plan. We're entering the year with solid labor costs, solid pricing. As soon as the weather allows us to operate at regular train speed, regular train weight, meaning temperature warmer than minus 25, which hasn't been quite the case so far this year on the Canadian network, we will be able to produce GTMs. So I'm very confident all these things will come together. And this team is energized to deliver this year and the years to come. Thank you.
spk00: The next question comes from the line of Chris Weatherby from Citigroup. Please go ahead.
spk09: Hey, thanks. Good afternoon and best of luck, JJ. Thank you, Chris. Um, I guess maybe a couple of questions here, just when I think about the 57 or for 2022, can you just remind us sort of where you are with the asset sales sort of discussion and process and what sort of in the number versus what may not be in the number. And I guess I'm curious to see if Tracy wants to weigh in on some of those bigger picture strategic decisions when she arrives, um, you know, next month. And then I guess, and then also maybe as asset sales pertain to capital allocation. Just laying maybe some thoughts on the buyback and how much, if all of that, can you get done in 2022, maybe what the cadence of that might be.
spk21: So we have three things baked in our assumption. There's a freight forwarding to be shut down this year, which it is done. And then we have a vessel sale that we are looking to do in the spring, and then things on the transect. So I think Helen's got this in hand. She can provide you with some more color. But these are the three items. Helen?
spk16: Yeah, thanks very much for the question, Chris. Regarding the Great Lakes fleet of vessels sale, a potential vessel sale process is progressing with some active bidders. And as you'll recall, this fleet of vessels is accretive to earnings but dilutive to operating ratio. And so we're working through the finer details of a potential sale. But any transaction needs to be at a favourable value to us. Therefore, we are willing to continue to operate the vessels should a deal not be concluded at a favourable value to us. With regards to Tranzex, just a reminder, we are not actively selling Tranzex. We are exploring models to change the ownership structure, potentially with a strategic partner. Again, Tranzex is accretive to earnings, yet dilutive to the operating ratio. As Keith highlighted, Tranzex has done a great job of helping to grow our business, and we are continuing to improve the performance of it. In fact, rail miles generated through Tranzex are up nearly 10% year-on-year on improved margins. So therefore, we're continuing to explore models to reduce our ownership interest, but retain the ability to drive road-to-rail conversion, which is good for CN, good for customers, and good for the environment. And I'm sure Tracy will have a view on that as she comes into the role. So stay tuned for further updates.
spk11: Thank you. Well, maybe, yeah, so as JJ mentioned, we – We did announce a $5 billion share buyback, Chris. That's exactly in line with what we signaled to the market on September 17th. So, you know, we plan on deploying this. Actually, as you know, share buyback is the residual use of our capital. The first use of CapEx will always be towards the business. But we have announced it. And with the plan that we have in front of us, delivering 20% EPS growth, 57 OR, with a share buyback of $5 billion, we plan on finishing our leverage ratio, which is adjusted debt to adjusted EBITDA, to about two times. And if you look at this year in 2021, because I'm still this year because I've not closed the books yet, this year we finished at 1.82. So that's what we're planning on doing.
spk21: Yeah, we are moving forward with the share buyback of $5 billion.
spk23: That's right.
spk21: Yeah, we'll start February 1st. Okay. Thank you very much. Thank you, Chris.
spk00: Okay, next question comes from the line of Justin Long from Stivens. Please go ahead.
spk08: Thanks, and good afternoon. I know Tracy isn't on the call today, but is there anything from a high level that you could speak to about her initial vision for the company, things that she could potentially tweak relative to the strategic plan that you've laid out and you're executing on today? And at what point do you feel like we'll get to hear more details around her plan and how she sees the business going forward?
spk21: So that will come soon, Justin. In the April earning result, she'll be with the team, leading the team, and she'll be participating in financial conference definitely from March 1st and beyond. I think the board has also been fairly clear since fairly early beginning as to what is the strategy for CN and what they're looking for, and I'm sure Tracy will add in based on her skill and her own view. But I think I would defer that question to when Tracy can actually do that herself in a couple of weeks, so if you could be so patient.
spk08: Understood. Thank you.
spk21: Thank you.
spk00: The next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.
spk20: Thanks, operator. Hi, JJ. Congrats on a great career. Wish you the best. I wanted to follow up on that comment that you just mentioned. You said the board has been clear as to the strategy. And that may be the case, but I'm still a little bit uncertain about it. Because I think back in September, something got lost in translation with, you know, this discussion about growth versus profitability. And, you know, we didn't need to get beyond 57% because we want to grow. And so can you just refresh us? Has there been an evolution in that philosophy around growth versus margin expansion? And when the board is picking a new CEO, talk about the strategy in terms of growth versus margin expansion, because I think that was the biggest issue that people were confused about back in September.
spk21: Thanks for the question. So, yeah, back in September, some of the comments we got back was, is 57 the endpoint? And I just want to clarify, 57 is a very important milestone, and that milestone is for 2022. And I think we're tracking well to that. Is that the endpoint? No, that's not the endpoint. Just don't want to speculate at this point as to, you know, what would be the endpoint that Tracy and the board would want to do. But definitely, we have to, you know, get it to 57, generate data, Very good EPS growth this year, which generates good free cash flow and an improvement in ROIC. Because right now the Canadian crop is down. Remember, in September, it was difficult to talk about solid RTM growth because supply chains are disrupted. And on the Canadian side, there's no crop this year. The crop is 35% below last year, and it's a huge part of our business. So we have to do everything on price and cost. But CN is a growth story. CN is a story also about ESG, about balance. about rewarding shareholders, but also customers, and making sure that we're there for the economy. And if you're there for the economy, that means you grow. Rob right now has the capacity to move more freight than what we do today, because we were basically set up early last summer for a solid crop that never showed up. So he's got capacity for when the crop comes in in the fall. And you often hear Keith talk about Rupert, the expansion in Rupert, the Treeco strategy, the work we're doing in Mobile and Halifax and New Orleans. And James got great stories long-term about blue ammonia petrochemical in Edmonton, about biodiesel, and short-term Canadian coal that's here over the next six months going to be solid because we've got two mine reopening, and we have this new contract with Tech which is still lapping year over year. So it's a growth story, but it's not there short-term because the grain crop hasn't materialized this time. and the supply chain a little disrupted. But we want to use really the two levers. And in the meantime, we're really worked hard on lever of cost, labor costs. We're less of us at CN, unfortunately, for those that I have to ask, you know, to leave the company, about a thousand of them back early in the fall. And the sales team has got one specific mandate. When you move freight, you need to be paid for it. And you need to be paid at market price And market price today is up from where it was, not just at CN, but across the board and transportation industry. So that's, you know, we never met at 57 at the end point, but 57 is the goal for this year. And after that, I think the team will decide how far it can go using all these levers. And growth will be a lever again, you know, second half of this year, 23 and beyond. Okay. Thank you very much. Thank you, Amit.
spk00: Your next question comes from the line of Scott Coop from Wolf Research. Please go ahead.
spk14: Hey, thanks. Good afternoon, and best of luck, JJ. So you guys did a 58 OR in Q4 with weak volumes, and you're talking about bad weather and the pricing environment. There's still more pricing to go. Why isn't there upside to the 570R this year? I would think that there could be some. And then, you know, JJ, I also just want to follow up on one of your comments. You had a comment about Tracy saying that she is a railroader. And, you know, rightly or wrongly, I think people are going to look and say, well, she was at CP during some of the tough years at CP. So maybe just curious just to follow up to that, why do you think she's the right railroader?
spk21: So just say you want to talk about the OR and what the potential for OR, and then I'll talk about Tracy after that. Yeah, so thanks, Scott.
spk11: Listen, yeah, we are very proud of our OR for Q4. 57.9 is actually a record. I mean, the lowest we've ever done on OR in Q4 was 58, and I think that was back in 2015. So listen, the plan is there. I mean, remember, for the full year, we finished at 61.2. So it's quite a drop going from 61.2 to 57. And you need to get to 57 to eventually go to 56 and 55. So our plan is there. I think we've got all the backup to deliver it. We're confident we're going to deliver it. There's going to be ups and downs during the year. As you know, we're an outside sport and things happen. And I hope investors can see our resiliency and our ability to adapt in quickly changing conditions. When JJ mentioned we lost... our main line to go to Vancouver for five weeks overall. So, you know, we're resilient. I think we're a good team. And 57 is the goal. And stay tuned. And hopefully, you know, if we do ever better, great. But the 57 is the goal. And I think it's quite a drop going from 61.2 to 57.
spk21: Yeah, it's a good goal. It's a goal that will produce results. It doesn't mean 57 is the end. But 57 is definitely the goal for 2022. And We're only in the third week of the year, so give us some time to see whether or not we can improve on the guidance. But the guidance of the guidance. Going back to your question about Tracy, you will have the chance to meet her very shortly. I think she will impress you. She's a very solid leader. She has a very solid followership. I think to be a CEO of the company, you want people who want to work for this leader. She has solid vision. She has railroading in her blood. She did a number of different positions at CP, so was part of the team, but was not the only player on that team. And I think what she brings to CN is what we need for the future. I mean, it's sometimes, you know, I think in the rail industry, and it's becoming almost a bit of a, you know, you've got to ask yourself whether it's right or wrong, that we want to go back to the past. And I think, in fact, you want to escape to where the fuck's going to go next. So what will make a company like CN, as a three-course network, huge potential for growth, the leader in fuel efficiency, making huge amount of effort on inclusion, diversity, ESG, and technology, things that weren't necessarily prevalent five, ten years ago. So we want to go back to where we were five, ten years ago. We want to use what we had five, ten years ago and have the solid operating skill that Rob and his team are and enhance that with technology, with ESG, with a focus on growth, with a focus on customers, business development, and ability to really lever all the lever that we have and not just the decision schedule railroading lever. Not that PSR is unimportant, obviously very important. We're all operating companies. But I think we reached a point in our industry, and I think, Scott, you hear that also on the railroad, we need to find a way to grow. We need to find a way to relate more to customers so they can use more of our business because we have such low costs versus other mode of transportation. There has to be a way for us to attract more business and remain a cost leader. You know, 57 is fairly solid. If you bring more business at 57, definitely you produce an ROIC, you have EPS growth. But it has to be, you know, in the leadership that put all these things together effectively. and not depend only on the one thing. And I think that's really where the industry's future is all about. But when you have the chance to meet Tracy, you'll get to know her, discover her, and I think you'll find that there's a lot there.
spk14: I think that's fair that we'll all get to meet her soon enough, and we should be open-minded. Thank you, guys. Appreciate it.
spk21: Thank you, Scott. Thank you.
spk00: The next question comes from the line of Todd Fladewitz from UBS. Please go ahead.
spk18: Hello, Tom. Yeah. Hi, JJ. I also wanted to say I really appreciate working with you over the years and appreciate your great insights on the markets and customers. So, anyways, wish you the best. Thank you. You talked a little bit about this prior question on kind of the board criteria and focus and kind of growth versus margin. I don't know if you can offer a little more on just kind of how you think about that growth-focused and going forward and what the board was looking for. And then I guess, you know, I think CN over, you know, I guess if I go back to when Claude took over, he said, you know, we're going to pivot to volume growth. And you guys had a great run for volume. Do you think CN kind of goes back to that, that, like, can you grow RTMs like you did for that period of time? Or how do we think about the, you know, the level of growth potential there? you know, if we look at the way the board's viewing things and kind of the strategy. Thank you.
spk21: Thank you. Well, again, you know, Tracy will have to, you know, share with you very soon some of our vision. But, you know, go back to when Claude became CEO at that time and became Chief Marketing Officer. And at that time, we had made enough progress on the operation that we had to find a way to make better use of the network. And we grew the RPM and the volume very solidly. And this is where Rupert went from a fishing port not known by anybody to becoming a place where we do business for both bulk and container. I think the future of CN, though, is really diverse. At this point, we really want to leverage technology. to make our railroad safer, as you saw in progress we've done so far. We want to use technology to make the railroad lower operating costs. We also want to use the technology to improve our customer's relationship, make the business more sticky, and attract more freight. And that's what the agreement with Google is all about, is to go deeper into the supply chain. Today, some customers want something more than just the raw rail service. They want this thing to be friendly. And then operating margin will always be key. We're an industry which is very capital-intensive, and operating ratio is very key. We're very focused on that. You heard a lot about operating ratio in the third quarter and the quarter today. So I think there's a combination of these different things that says between growth, between good costs, between technology, between making sure that we are relevant to society on ESG emission, and also attracting the right talent and keeping the right talent, All these things are part of the CN long-term strategy. And remember, I think the first time I met you, I was handling the chemical, and you asked me a lot of questions about Dow Chemical and whatnot. Well, guess what? 25 years later, there's still huge potential, a lot of potential in Edmonton, Calgary. There's another wave of capital investment, not refinery or all sand this time, but they're more about petrochemical plants that will be exported And that's part of the CN's future again, is how does these landlocked facility, like coal mine, like parlash mine, like petrochemical mine, like big, vast growing area in the communities and prairies, how do they access the world market? And there's only one good way to do that. It's with rail. And CN has a fantastic network to make that happen with the three coasts and especially Rupert and Vancouver. So I think there's a lot out there for CN to be successful. I'm actually the biggest shareholder of CN as on the management team, and I intend to remain a shareholder, and I'm voting strong for the team and for Tracy. Thank you for the question, Tom. Great. Thank you, JJ.
spk00: Your next question comes from the line of Steve Hansen from Raymond James. Please go ahead.
spk12: Yeah, go ahead. Congrats on these pretty outstanding results in the face of some tough conditions. Just looking at the buckets of traffic here that can plug the green gap, so to speak, I think you've referenced several already, but I just wanted to get some degree of color or cadence around the coal ramp that you described with the new coal mines. Just curious if you have any visibility around the ramp of those two mines. I think in the past you had suggested met coal could plug about half of the gap, but just trying to understand how that cadence might play out here through the first half until we get some better green volume. Thanks.
spk09: Yes. Definitely, we'll do that. James, we'll pick that one. Yeah, thanks for the question, Steve. I've been itching to give that answer all call here. I'm extremely excited about our prospects for coal, particularly in H1, but that first quarter as well. You know, we get the full year effect of that tech deal, and that's big, but also two mines restarting with significant tonnage available to us. So if you think about just from a car load basis, not a revenue base, but a car load basis, we are going to more than replace the lost carloads of grain with new carloads of coal. And it's a big deal. And of course, it's coming right when we have that available capacity to us because we're not moving that grain. So the timing is perfect. You look at the pricing for met coal and thermal coal, they're close to record highs. I mean, the market is there, the demand is there, and we're going to be able to move that, be there to move that coal, whether it's going to Vancouver or Prince Rupert. You know, we've got the capacity and desire and I got to tell you, I'm very, very excited about what's going to happen in the first half here, even though, you know, we're lapping on the grain side, an all-time record in 2021. Tough, tough comps. Get into the second quarter, that tough comp goes away, and we still have this solid, solid coal story to lean on. Also have some significant growth on the frac-sand side of our business. I mean, as you think about the future and how things are going to wrap up in Western Canada, the leading indicator is drilling activity, the leading indicator for for railroads is the frac sand volume that's going to be part of that. Also a great story as JJ talked about around our renewable fuel. Three new facilities starting up in the U.S. Gulf Coast on CN to produce renewable fuels. We're in talks with several parties about how we can position new crush plants on CN, both in Canada and the U.S. As a matter of fact, we just concluded a new deal on a soybean crush plant with our friends at Platinum Crush. More of those coming. So when I look at the drumbeat and the opportunities in front of us, we're sowing the seeds in 2022 for the next five years to be just incredible, incredible growth story for CN. In 2022, Boy, oh, boy, hold on. The second half is going to be real exciting. And I know Rob and his team just can't wait to get in there and move those Carlos for our customers. I think you also have the undiluted. crew facility that's ramping up right now? Yeah, thank you. About the same size as, you know, kind of the Hardesty facility. It's a new, heavy, undiluted, that's the safe product, moving down to the Gulf Coast. It started up, you know, late Q4 of last year, but there's 40,000 barrels a day of potential coming out of that facility, and we expect it to be full. You know, we've, for a long time, we've been the leader when it comes to moving heavy crews, and we're still going to be the leader moving heavy crews. You know, I fully expect our run rate for crude is going to be in the range of 95,000 to 100,000 barrels a day going into 2022. We haven't seen numbers like that for a long time. We finished in Q4 about 75,000 barrels a day for crudes. And remember, at CN, we're very weighted towards that heavy crude. About 65% to 75% of our car loads are heavy, safe, undiluted crude. So exciting times. And that's the sleepies located in Saskatchewan. In Saskatchewan, yes, JJ, yeah.
spk21: Thank you, Steve. Thank you.
spk00: Our last question comes from the line of Jeff Gottman from Vertical Research. Please go ahead.
spk23: Thank you very much. And JJ, congratulations and best of luck in your new endeavors. A lot of my questions have been answered, so I'm going to focus on CapEx. You're going to be spending about 17% of revenue as you advertise, so that's a reduction of a couple hundred million. Yet you have a number of new projects coming on, so I was just wondering what's not in the capital budget that has been in the last year or two, and how are we kind of reshaping capital allocation in lieu of the new program?
spk21: Bobby, you want to talk about how we allocate capital this year?
spk04: Yeah, Jeff, the big difference in terms of year over year really is around basic cap, and that is a credit to technology. The use of the autonomous track inspection cars, we have 10 of those now running from coast to coast to coast across our network, is giving us real-time information in terms of the condition of our network. And what we do know is our network's in really, really good shape. So when it comes to the ties and the undercutting and the ballast that we plan each year, we can be much more prescriptive with that real-time information. That's really where we're seeing the benefit. We think that's a sustainable model going forward, but we'll check it as the year evolves and make sure we're doing the right thing. That's really the biggest difference. We are investing in capacity as we go forward. We'll extend four sidings between Winnipeg and Edmonton, which will help during this year to help enhance running longer trains. And we'll also break ground on a new intermodal facility in the Toronto area at Milton. So we're continuing to invest in the future. And I think you'll see that going forward as the business is there, we'll invest and be ready to handle it.
spk23: Appreciate the question, Chuck. Thank you. I guess the dividend of DSR, are you implying then that this is a sustainable investment? level with some of the advances in technology, for example, the autonomous inspection?
spk04: Yeah, that's what I tried to say. We do believe that's sustainable, but we're going to review it each year and make sure we're making the right decisions. We know the railroad's in really good shape, and we're never going to sacrifice safety as we go forward. So we'll make those decisions on an annual basis, but we're certainly reaping the benefits of technology.
spk23: Okay, thank you for your answer.
spk04: Thank you, Jeff.
spk00: This concludes the question and answer session. I would like to turn the call back over to Mr. JJ Rubin.
spk21: Well, thank you, and thank you for joining us here. It's kind of bittersweet for me. It's been a privilege to lead this incredible company over the past four years. Very proud of what we've been able to accomplish for the last 26 years in order to have served alongside over 20,000 of the finest people in the industry. But to all of you, the Southside analysts with whom I have interacted over these quality calls since 2010, a special thank to you and a special thank to your keen interest in CN as a great company and your keen interest in the rail industry. I'm confident our new CEO, Tracy Robinson, is the right leader with the right vision at the right time, and I'm very confident this team, which is around me, around this table here, will produce followed results in 2022 and beyond. So on that note, au revoir et à bientôt. Thank you.
spk00: You're welcome. The conference call has now ended. Thank you for your participation. You may disconnect your line at this time.
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