Canadian National Railway Co Q3 FY2021 Earnings Call

Good afternoon. My name is Charlie and I will be your Operator today. Welcome to CN's Third Quarter 2021 Financial and Operating Results Conference Call. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I'd now like to turn the call over to Paul Butcher, Vice President Investor Relations. Ladies and gentlemen, Mr. Butcher.

Well, thank you, Charlie. And good afternoon, everyone. Thank you for joining us for CN's Third Quarter 2021 Financial and Operating Results Conference Call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian Securities law. These things are subject to risks 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. After the prepared remarks, we will conduct the Q&A session. I do want to remind you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are JJ Ruest, our President and Chief Executive Officer, Ghislain Houle, our Executive Vice President and Chief Financial Officer, Rob Reilly, our Executive Vice President and Chief Operating Officer, James Cairns, our Senior Vice President, Rail Centric Supply Chain, Helen Quirke, our Senior Vice President and Chief Strategy Officer, and finally, Keith Reardon, our Senior Vice President, Consumer Product Supply Chain. It is now my pleasure to turn the call over to JJ Ruest.

Thank you, Paul. And good evening everyone. Today we will do our prepared statement in two parts. Ghislain and I will cover the highlights of the third quarter; we'll keep that section tight, and then the team will cover the progress on our September 17 action plan. Let's first start with the highlights of Q3, and I'm on Page 5. All in, on an adjusted basis, the base business produced an adjusted diluted EPS growth of 10% and an adjusted operating ratio of 59.0%, and free cash flow for the first nine months of just over $2 billion. The operating ratio started high in July, resulting from the two-week loss of our CN mainlines in the Port of Vancouver, but improved afterwards in August and September to an adjusted 59.0 OR as the average for the quarter. Regarding pricing trend, James Cairns will provide evidence of solid pricing at CN in the last couple of quarters. Regarding headcount of the 1050 that we mentioned in our September 17 conference call, about 70%-75% are completed. At CN, we have a long-term strategy, and we railroad for all key stakeholders. We make sure the railroad has enough infrastructure to support the economy. We railroad to reduce carbon emissions. We railroad to support our customers so they succeed and grow in their market. We railroad to produce a good return for our shareholders, and we're railroad to create an engaging and safe workplace for our employees. I will now turn it over to Ghislain, who will walk us through the quarter.

Well, thank you, JJ. My comments will start on Page 7 of the presentation, which will provide more visibility on our solid third quarter performance. Revenues for the quarter were up 5% to $3.6 billion despite volumes on an RTM basis being down 1%, which were impacted by forest fires in July and supply chain constraints throughout the quarter. We delivered pricing well above rail inflation and continued to focus on yield management, optimizing CN's precious network. Adjusted net income was $1.080 billion, with adjusted diluted EPS of $1.52, both up 10% versus last year. Other income was down by around $30 million versus last year due to a mark-to-market loss on an equity investment in autonomous driving technology. Our adjusted results exclude various non-recurring items related to the KCS transaction costs, including the $700 million U.S. break free from KCS. Our adjusted results also exclude a workforce reduction provision, as well as advisory costs related to shareholder matters. Turning to page 8, let me highlight a few of our key expense categories expressed on a constant currency basis. Labor and fringe benefit expense was up 12% versus last year. This was mostly driven by increased wages due to a 5% higher average headcount and a workforce reduction provision, partly offset by higher capital credits from more capital work in the quarter. Excluding the workforce reduction provision, labor and fringe benefits was up only 6%. On a sequential basis, the end of quarter headcount was down 3% compared to the end of Q2. Fuel expense was up 40%, driven by a nearly 50% increase in price, partly offset by continued improvement in fuel efficiency. This quarter saw a significant improvement in equipment rents with a 31% decrease versus last year, driven by lower car hire expense, mostly due to improved online productivity and lower volumes. Now, moving to cash on page 9, we generated free cash flow of over CAD $2 billion through the end of September, around CAD $50 million lower than 2020, mainly from lower net cash from operating activities due to higher cash taxes. We have resumed our share buybacks and plan to complete our CAD $1.5 billion program by the end of January 2022. Moving on to page 10, we are reaffirming our full-year financial outlook and expect to deliver about 10% adjusted diluted EPS growth versus 2020. While we are now assuming volume growth in terms of RTMs to be in the low single-digit range for the year, we are executing on our strategic plan that has started delivering benefits in Q4. We still expect to deliver free cash flow in the range of $3 billion to $3.3 billion, which will drive further improvement in free cash flow conversion. I will now turn the call back to you, JJ.

Oh, thank you, Ghislain. And before I get into the progress of our September 17 action plan, as you already read from the press release, I am retiring effective as of the end of January 2022 or such later time as a successor has been appointed to ensure flawless transition. I am not going anywhere, and I will deliberate with the team here today around me on the fourth quarter results, and to be sure that we have a successful setup for the 2022 business plan. The Board, as you read in the press release, has appointed a search committee for a world-class CEO. The details on the Board committee that will do so are also in the press release. Back to the business, on September 17, we announced the next step in our strategy to redefine railroading for the next generation. CN will execute on our plan, deliver high-quality service to customers, and generate enhanced and sustainable return for all shareholders. Our long-term goal remains to consistently deliver double-digit EPS growth. I would like to begin by recapping our 2022 objective. We are targeting CAD $700 million of additional operating income for next year. We intend to use a balanced approach, including optimizing railroad productivities and labor costs. We also expect to adjust our capital spend to 17% of revenue. We can do this without compromising our absolute commitment to safety and customer service because of the current good condition of our network and by putting to good use the technology investment we made in recent years. Another major component of our plan is lowering our operating ratio, starting with 57% in 2022. Achieving 57% next year will unlock significant near-term value while maintaining and balancing our commitment to customer service and safety. We will achieve it with operational excellence, rationalizing our cost structure, price, and finally volume, when grain returns late next year. We are assessing opportunities to go lower beyond 2022, but responsibly, and we will say more to that in the new year. We are targeting EPS growth in the range of 20%, return on investment capital range of 15%, and about $4 billion of free cash flow for 2022. I am pleased with the quick progress thus far and the initial positive feedback received from shareholders and stakeholders, both. I will now turn it back to the team who will provide an update on how we start to implement the key initiatives that will deliver results in Q4 and in 2022. Ghislain?

Okay. On page 13, we have already made considerable progress on our total operating income improvement of $700 million for 2022. For the $250 million in labor, we have already completed around 75% of the reductions identified on our September 17th call. We will be substantially complete by the end of the year, which will provide a full-year impact of these reductions in 2022 for the $300 million in purchase services and material and other items, we have already secured around $100 million of initiatives in the past month, of which a few examples include the reduction of contractors throughout the entire company, both in the field and at headquarters; a reduction of IT applications; aggressively storing and retiring older locomotives, which will reduce purchased services and material costs associated with their maintenance. Finally, we'll deliver a CAD $150 million in additional price initiatives as we continue to enhance our yield management strategy. I will now turn it over to Rob.

All right, thank you, Ghislain. As stated on September 17th, operational excellence, our commitment to safety, and service to our customers have been and will continue to be cornerstones in our strategy. All of our core operating and safety metrics have improved over the past couple of years leading to greater efficiencies and improved customer service. We continue to build on our positive momentum through our strategic initiatives. A big part of our operational excellence is in operating the railroad sustainably. Our fuel efficiency for Q3 was an all-time record. Our position as the industry leader from a fuel efficiency perspective underscores our commitment and enhances our operating performance and profitability. CN's industry leadership in sustainability and success in operational excellence have been achieved through a continuous and concerted effort by the team. We are on track to deliver all-time best in productivity in our operations, fuel efficiency, and, most importantly, the safety of our employees. We are running a safe, efficient, and sustainable operation that consistently meets the needs of our customers. I'll now turn it over to Keith and James to outline CN's growth vision. Keith?

Thanks, Rob. Current worldwide port congestion, especially on the U.S. West Coast, highlights the CN network intermodal advantage. Three coasts, 13 proven uncongested port gateways, several that are meaningfully expanding their capacity. Single line, single owner access from each coast to the U.S. Midwest links the efficient gateways to where the markets are and where they will be. Our inland terminal network is well established, yet continually improving. State-of-the-art terminal and container asset technology-backed investments are creating capacity and efficiency, improving safety, and improving the customer experience. The intermodal story for CN is strong with decades of opportunities ahead. James, I believe you also have some great long-term carload markets that are developing?

Yeah. Thanks, Keith. I've never been more excited about our long-term carload growth potential than I am today. Our unique geographic reach and exclusive access to the Port of Prince Rupert will help us be a leader in carload growth over the next several years. Canadian grain recovery in Q4 2022 will be followed by emerging new renewable fuels and refined petroleum products projects that will propel our growth through 2023. What I am most enthusiastic about are our new green energy carloads, related to Alberta's massive growth in hydrogen energy projects, evidenced by the slew of recent announcements around Alberta's Industrial Heartland. Hydrogen-related carloads have the potential to be of the scale of crude-by-rail at its peak, but with long-term rateability. Our end-to-end supply chain model that helped us create new export capabilities for propane is easily replicated for blue ammonia, and other hydrogen-driven energy carloads. We routinely get asked questions about revenue for RTM. Our view is that this measure is a better proxy for mix than it is for price. That said, since December 2018, when we started our customer-centric journey under JJ's leadership, CN has seen the fastest growth in revenue per RTM for all Class 1s to the end of Q2 this year. We believe a better proxy for price is wealth price. As you've heard us say before, we consistently priced ahead of roadway cost inflation. In the last 5 years, our corporate same-store price has been on average nearly 2% greater than rail cost inflation. We have been preparing for accelerating railway cost inflation by sequentially increasing our price each quarter since Q4, 2020; our various incremental capacity auction programs provide real insight into the market rate for our valuable capacity, allowing us to smartly price to meet the market without undue volume risk. I'll turn it back to JJ.

Thank you, James, Keith, Rob, and Ghislain. As we look toward 2023 and beyond, the CN team is dedicated to delivering strong results and identifies opportunities to enhance our operating ratio. We continue to emphasize safety, providing excellent service to our customers, and working to reduce carbon emissions with a balanced approach. Our leadership team has a clear vision focused on growth and delivering financial value both in the short and long term. The future of CN looks promising. Our network is robust, and we aim to build a premium railway for the 21st Century by investing in technology, expanding capacity, and offering services that attract more customers, enhance safety, lower carbon emissions, create essential economic capacity, and reduce costs. As CN has historically led the industry through efficiency, we are well-positioned to steer it toward the next evolution of a modern digital scheduled railroad. In conclusion, CN is taking a balanced approach by investing in the success of our customers, workforce, and communities, as well as providing returns to our shareholders. Now, I'll turn it back to you, Charlie.

Thank you. We'll now begin the question-and-answer session. The first question comes from Ken Hoexter with Bank of America. Please go ahead.

Good afternoon, Ken.

Hey, good afternoon. JJ, I’d like to start with a question. Given your upcoming retirement, what are your thoughts on the outlook? You mentioned decelerating growth, and although Keith and James discussed the leadership, could you share your views on the economy as you prepare to step away?

Yes, I believe we can navigate the current environment. Right now, we're facing rising inflation, which is why we are adjusting our prices. The volume trends are mixed; in some areas, it's positive and in others, it's not. We need to adapt accordingly. It's also important for us to prepare for the future, which is why we are focusing on what we refer to as the railroad of the future, or VSR. We are leveraging technology and talent to remain relevant to all our customers, big and small, and to create value. The rail industry has a significant opportunity to enhance its role in the supply chain, collaborating with the Port ecosystem to entice more vessels and increase highway freight that ultimately benefits the railroad. However, this doesn't translate into the same operating ratio. It's clear that for the long-term success of the rail industry, we must compete with other transport modes effectively, staying relevant to customers who control their spending. Overall, I see a bright future for the rail industry, but it must focus on the fundamentals. It's crucial to attract as many customers as possible to maximize the value of these rail assets. Thank you.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.

Good afternoon.

Thank you very much. Good afternoon, everyone. There’s some significant news with the recent announcements, and looking at the changes being proposed, particularly with your strategic plan, adjustments at both the Board and management levels appear to align more closely with what TCI has requested. My question is whether there’s an opportunity for engagement now that these announcements have been made. Do you believe this is feasible? Is it something you will be pursuing, or will you be taking a more independent route regarding the CEO search and moving forward with the March 22nd meeting?

Thank you, Walter. I think it might be the other way around; TCI could be getting closer to CN's long-term strategy. I've noticed comments about their recent press release, which was somewhat unclear and did not present specific targets. That press release alone does not constitute a plan. They mentioned long-term emissions, suggesting a more balanced approach towards customers. As for further engagement with TCI, I won’t speculate on that, as I believe the Board should handle discussions with the activists. Our strategy is straightforward: we aim to balance the interests of the railroad and all stakeholders. We want to be a growth-oriented company that prioritizes safety and has sufficient capacity to meet surges in demand, ensuring the economy is not hindered. We strive to foster an environment where our industry thrives, not due to a duopoly, but because more customers choose to engage with us and utilize our port services. We want them to transition from highways to our intermodal network, which is where the future lies. We often discuss technology because it’s essential for enhancing safety, improving maintenance, increasing capacity without the need for more tracks, and providing better service to our customers. They are not just purchasing rail services; they are interested in a mix of transportation modes. Thus, we need technology that simplifies tracking and inventory management for them. This approach is more nuanced than merely minimizing the operating ratio.

I appreciate the color. Thanks, JJ.

Thank you, Walter.

Your next question comes from the line of Cherilyn Radbourne with TD Securities. Please go ahead.

Hello, Cherilyn.

Thanks very much. Good afternoon. In terms of the pricing environment, could you speak to what the spread versus inflation looks like as we sit today and how much of the book of business has been re-priced in this type of rate environment? And how much is left to go through year-end and into early 2022?

Thank you. James will cover that. He is my pricing expert.

So, thanks for the question, Cherilyn. Very interesting. We've been preparing for the wrapping up of inflation here since Q4 of 2020. So, we've been very careful, a lot of our contract renewals not to go out too far because it was an uncertain environment. We've got a pretty big chunk of our business that's going to be available for re-pricing still Q4 this year and into next year. I don't know the exact number, but it's somewhere in the range of about 35% to 40% of our entire book of business, so we can re-price. So, we are pretty excited about that, and we'll make sure that we're pricing well ahead of railway cost inflation. And to date, this year, we've been just over 5% on our same-store price. So, it is varying out there. We're able to secure these price increases because the customers realize they need the capacity that we have. Increasingly, as we move into 2022, that capacity is going to have more value, and creating that level of certainty for customers with a contract in hand with CN is worth something to our customers. We'll continue on that path, we'll be pricing ahead of railway cost inflation. I think a good market somewhere between 1.5% and 2% ahead of railway cost inflation is where we think we are going to be, balance of this year and into 2022. Thanks for the question, Cherilyn.

Thank you.

Thank you.

Your next question comes from the line of David Vernon with Bernstein. Please go ahead.

Hello, David.

Good afternoon, guys. Thanks for taking the time. Hey, Keith, could you maybe talk a little bit more about what kind of tailwind we can expect on international intermodal pricing given where steamship rates have headed over the last 12 to 18 months? And the timing for when some of your international intermodal contracts may come up?

Go ahead, Keith.

Thank you, David. Pricing has many components. I'll begin with our same-store pricing and then discuss other initiatives. As you mentioned, we have had some contracts come due, and this will continue. Recently, we encountered significant contracts that allowed us to review our business portfolio and upgrade our operations. Some of the business we had did not align with the effort we were putting in, so we decided to let go of that business. We approached this collaboratively with our customers, expressing our preference to focus on specific areas and continue providing those services. We aim to do more of this as we upscale, as James highlighted. Additionally, we are leveraging the extra capacity created by supply chain challenges and selling that at premium prices while collaborating with our customers. We are seizing every chance to engage with our customers to understand their goals and create value for them, which also benefits CN. Thank you, David.

Thanks, David.

Thanks for the color. JJ, if I could squeak one more in here. Is there a timeline for the Board's search process?

The Board is searching for the best candidates to ensure we find the right individual for the next CEO of CN. They want to take their time with this important decision, but that does not mean they will proceed slowly. We are not setting a specific timeline for when this will be completed. As I mentioned earlier and is also stated in the press release, I will remain until the end of January or as long as needed to facilitate a smooth transition. At this stage, we are prioritizing quality, which can sometimes require a bit of extra time. I suggest referring back to the specific wording in the press release for more details.

Great. Thank you.

Thank you.

Your next question comes from the line of Konark Gupta with Scotiabank. Please go ahead.

Good afternoon and thanks for taking my question. So, I just wanted to understand, given the global supply chain disruptions we are seeing right now, how the steam line shipping customers you have, they're thinking about the whole dynamics here. Are they looking to incrementally look to Canadian west coast ports, especially Prince Rupert throughput, or they are looking more east to de-congest away from Long Branch and LA, any thoughts there please?

Maybe, Konark, I can start and Keith can add a little color; that's his space. But one of the comments I made earlier, not sure if it was understood that as some of the business we decided to renew some of delaying. That created capacity at Rupert. Rupert was sold out. That created the capacity at Rupert, so now Keith and his team have been able to do some new vessels. You've heard about these pendulum vessels, smaller vessels that some of the retailers in North America are now going out and chartering themselves. They only pick up freight at a few ports in Asia, and they drop it off at one port in North America, and they want to avoid at all costs, Long Beach or any places where vessels are delayed. For us to be able to do this, and do this at a premium price, it has to be with other customers when we're not under contract. Also, do this at the Port Rupert, which now has some latent capacity because some of the business that we and the customer would not see eye-to-eye on the yield of it, we've actually let it go. Don't know if you wanted me to talk about the future, Keith. And how many more months or quarters this may last?

Yes. Just to point out, the supply chain disruptions and what's happening to these vessel strings are what's causing some of this transitory volume issues that you've seen for Rupert and Vancouver down for us. That was the factor that got us taking a page out of our playbook to go back to some of these customers, as JJ pointed out. I will also say that year-over-year, we've seen the east coast ports that we service, as well as the Gulf Coast ports that we service, we're up 20% over last year, and that's a diversification approach by the customers, not only the steamship lines, but the people that are in the boxes. They're saying 'I want another gateway.' And that's why the CN network is set up so great for that. We've got 3 coasts, 3 different ways that they can get in, 13 different ports. So that's why we're so happy that we have this network; that's why we're so bullish on the future.

Thank you, Konark.

Thank you.

Your next question comes from the line of Jason Seidl with Cowen, please go ahead.

Thank you, Operator. I wanted to talk a little bit about the headcount reductions. You said you are about 75% through that. Did all those coming 4Q here early on? And what's the mix sort of between the U.S. and Canada with those reductions?

So, Ghislain will cover that. Just to let you know, we're extremely focused on executing on that, Jason. And we actually track this daily in great detail.

Yeah. Jason, I will give you a bit of color on the mix of headcount as we said. We have about 75% out of the 1050 that we announced on September 17th. I would tell you close to 600 is the management, and close to 200, call it 190 is Union. I would say the lion's share of it is in Canada. That’s what I would tell you between Canada and the U.S., but I'm giving you the color here on the management versus union.

I understand, Jason, that people generally monitor headcount in the U.S. for class 1 railroads. However, most of our discussion has focused on the Canadian aspect. Therefore, you won't see significant numbers in the U.S. headcount, as the majority of our management positions are in Canada. Most of the reductions we have made or are in the process of making are also reflected in the Canadian headcount, as well as in the U.S. headcount. I'm not sure if that answers your question.

I'm sorry, I might have missed it. Did you say most of that was done by the 17th?

Most of them were completed after the 17th, which amounted to 7. After that, we started to roll out and 70% to 75% of that is currently finished.

As we speak, this is as of today, give or take. It's about 75% of the 1,050 that are done.

So that will impact fourth-quarter results. Current result.

Gentlemen, I appreciate the time and color, as always.

Thank you, Jason.

Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead.

Hey, good afternoon, everyone. And JJ, I just want to acknowledge, it's quite an extensive career at CN, so best of luck on the other end.

Thank you.

But I guess it would be great to get some perspective from you because obviously you were part of a team earlier when CN was viewed as really best-in-class. And what are you looking for your, the person that takes over for you, what do you think they need to get right here, to get back into the driver's seat of being the best railroad, or at least the best viewed railroad in North America?

Thank you, Brandon. I joined CN in May 1996, about six months after it was privatized. A key aspect of CN has been its innovation, leadership in the industry, willingness to take risks, and pursuing ideas that were initially seen as unconventional. This approach is what defined scheduled railroading. Many doubted it would succeed, and the IPO was viewed skeptically by many, especially Canadian investors. Now, our focus is on the future rather than the past. CN is not the same company it was in 2025 as it was in 2010. We aim to represent what the future should be. We're striving to be a growth company, emphasizing the importance of technology and a workforce that reflects today's society. We want to attract diverse talent, ensuring our workplace is appealing to younger generations and those new to their careers. The future is where we need to concentrate our efforts. As someone mentioned, it's about what lies ahead rather than where we were in 2010 or 2015. Therefore, as we seek a CEO in early 2022, we need someone who can steer the company toward what it should become by 2025. I hope that clarifies things.

It does, JJ. Thank you.

Thank you, Brandon.

Next question comes from the line of Jon Chappell with Evercore, please go ahead.

Thank you. Good afternoon. We have discussed the cost initiatives and pricing strategy as part of the broader 2022 strategic plan. Can you provide an update on the reviews of some of the non-core businesses, particularly the trucking units? How are those reviews progressing, and are you still on track for the expected impact they will have on reaching next year's targets?

Jon, Helen Quirke is currently handling those details and she will provide you with the information you need. Helen.

Thanks, Jon. On our non-rail assets review, we've commenced the sale versus for the Great Lakes fleet of vessels, and we have a number of interested buyers on that. This is a profitable business, but we believe that we do not need to own the vessels to protect the rail revenues and maintain a stable supply chain for our customers. With regards to Transics, it is accretive to EPS, and we've almost doubled the intermodal business of Transics since the acquisition. The profitability of the core Transics business is in line with best-in-class for similar types of assets. And we're still working through the options to potentially reduce our ownership interest while maintaining and growing the rail revenues there. We will keep investors posted on this. But our message remains that we are a great Company. You've heard it numerous times today, and we will continue to find ways through acquisitions and partnerships that will drive more business to our network over time. Thanks for the question, Jon.

Thank you.

Thank you, Jon.

Your next question comes from the line of Amit Mehrotra with Deutsche Bank. Please go ahead.

Thank you. JJ, I wish you all the best. Your career has been remarkable and successful, and I hope for your success in whatever comes next. I wanted to follow up on Brandon's question regarding your comments about the new CEO. There is clearly another top executive that TCI is considering. I want to clarify that we are not misunderstanding the search process. These searches can take a long time and can be quite costly. Have you already thought about this other candidate that TCI is proposing, and do you believe that pursuing this route isn't the best approach for CSCM? What is the strategy behind investing in a lengthy and costly search when there is already someone experienced and willing to step in?

Thank you for your question; it's an important one. The board will evaluate all potential candidates, both from within and outside the company, regardless of gender. We are committed to a thorough search process to ensure that the individual who replaces me is the right person to advance the CN strategy moving forward. This process will take some time and will be very specific. The board has established a CEO search committee, which will be chaired by our governance committee chair. The committee includes Robert Philips, a retired CEO, as well as Kevin Lynch and Justin, who recently joined the board. This group will define the profile for the future CEO at CN and will consider all known and unknown candidates. The search will be kept confidential, and we will not discuss any candidates until the committee has made a recommendation to the full board, which will ultimately make the final decision. While we recognize that there are candidates out there, the search is broader than just one individual, and we intend to be very thorough.

Okay. Okay. That makes sense. Thank you very much. Appreciate it.

Thank you. Thank you.

Your next question comes from the line of Brian Ossenbeck with JPMorgan. Please go ahead.

Hey, good afternoon. Thanks for taking the question. Wanted to come back to technology and what benefits you think you're going to get from that across the network and maybe some of the injury ratios, the safety, the fuel efficiency, and capacity. We've heard about some of these initiatives for a number of years now, so I don't know if we're on the tipping point of them actually being able to generate some benefits along those lines? Maybe, perhaps, helping reduce the headcount. Just wanted to understand what type of benefits you're expecting in the plan for 2022 specifically as it relates to some of these technology initiatives?

Yes. So, Rob is probably the closest to that. Most of the technology that would apply right now is in the space of operation mechanics. Rob, you want to talk about technology in your space?

Yes, absolutely. Thank you for the question. A prime example is our Thomas track inspection cars. We currently have 10 of them operating across the country, significantly improving our core main inspections. In some subdivisions, they are conducting inspections 15 to 20 times more frequently than before. This has provided us with real-time data which is helping us make better decisions. A substantial portion of our capital expenditures for next year is predicated on this technology, particularly regarding tie replacements and undercutting as part of our basic maintenance. We are already seeing positive results. In terms of fuel efficiency, we continue to lead the industry. Over the past two years, our initiatives alone have saved CAD $75 million, not accounting for fuel prices or consumption, which is excellent progress. We are observing the benefits, and if you'd like to discuss the specific financial implications for next year, we can do that.

Now, in terms of dollars, as you remember, Brian, we were aiming for a range of CAD $200 million to CAD $400 million. We experienced some slowdown in 2020 due to COVID, as you can imagine. However, if we consider 2022 and 2023, I believe we will be in the high range of those benefits, and we are closely monitoring these developments, so I feel very optimistic about technology.

And maybe technology also has a big part of our future on the commercial side. I don't know if Helen or Keith wants to talk about some of the stuff that we do, technology-wise. That is where they aim to attract more business or make business stickier on the CN.

I'll start, Helen, but we're actually deploying some technologies now at our intermodal terminals that are improving the efficiency of the terminal, the capacity of the terminal, and the safety of the terminal. And that's going very, very well. It's enabling us to do more business through the terminals. It's creating a better customer experience for our trucks. They come in and out of the terminal, and we have many more of those initiatives that are underway. But Helen, you've got a few.

Okay, Brian, with that, we'll thank you.

Your next question comes from the line at Benoit Poirier with Desjardins Securities. Please go ahead.

Salut, Benoit.

Yes. Good afternoon, everyone, and best wishes, JJ, on the next steps. With respect to the supply chain issues, could you maybe provide some color on the business segments that are impacted the most and whether it should become a tailwind going into 2022 as this becomes better.

I can start by saying that the port business is currently down because things on the ocean are not functioning as expected. However, we are turning this into a positive opportunity that we discussed earlier. Now that we have some capacity at Rupert, which we previously thought would not be available, we are able to pursue some spot business and shuttle services with Rupert as the sole port of call on the North American side. Regarding locomotives, everyone is aware of the situation; more vendors are having difficulty with shipments, which likely means that we will be delaying our car purchases until next year when there will be more options in terms of brands and colors. This will be a trend to watch for in 2022. James, do you want to share what's happening with smaller carloads?

I would say the weak outliner we have is Canadian grain. I think everybody knows that story. The first 10 weeks of this current grain crop were down over 1.5 million tonnes; that's bad news. The good news is we're in a very unique position in that we have some strong tailwinds with coal. We got the potential of two coal plants reopening on our network. We got the full-year effect of the tech deal that's going to drive us through for at least the first half of 2022. All in, we expect that coal is going to make up almost half of that gap we have with the Canadian grain crop. And then of course, the grain crop gets reset Q4 next year, and we got some very high hopes. So, if you think about coming out of 2022, we've got strong momentum with a recovery in grain through end of 2022 and into 2023. Then we've got some significant carload growth projects related to new crush plants and new activity around renewable fuels, carrying us forward 2024 and beyond. And I got to tell you, like I said in my prepared remarks, this could be big, this could be at the scale of crude-by-rail. But this is going to be long-term, ratable carloads that move by rail. Not rail when it's convenient, but rail all the time, so it's very exciting prospects for the future. So, thank you very much.

Carloads, from Alberta to the West Coast via Rupert or Vancouver. There is also a positive story on our iron ore export. CN is doing our iron ore exports from the Gulf and then we have a trial over Rupert. Our coaster at CN is all export, either via the U.S. Gulf or via the Port of Prince Rupert. Thank you, Benoit.

Your next question comes from the line of Jordan Alliger with Goldman Sachs. Please go ahead.

Good afternoon, Jordan.

Good afternoon. While there's a lot of emphasis on the operating ratio and the 57% target for next year, I'm curious about the longer-term revenue projections beyond next year. Given your customer-centric approach, what updates do you have on this and how do you envision long-term revenue growth?

Thank you for the question. I find it refreshing to consider railroading in this way. The operating ratio is an important key performance indicator, but it's just a by-product of our business. We're concentrating on growth. CN aims to increase the volume on the railroad, as having more freight makes it more profitable and sustainable. Therefore, we are a growth-oriented company. We want to serve our customers effectively, which requires a customer-centric mindset and culture at CN. The port business is another area where we can enhance our pricing on the railroad. We often discuss the need for technology; it has to be implemented. We require technology to improve safety on the railroad, which pertains more to maintenance, as well as technology that allows us to increase capacity without the need to lay down additional track. Furthermore, we need technology that enhances the service for our customers, who purchase supply chain solutions rather than just rail services. They are interested in a mix of transportation modes, so it's essential to have technology that simplifies tracking, tracing, and managing their inventory. Ultimately, our focus is on being a growth company that prioritizes safety and earns our customers' respect. Thank you.

Your next question comes from the line of Scott Group of Wolfe Research. Your line is now open.

Hi, thanks. Good afternoon, everyone. JJ, you mentioned the operating ratio between July and September at the start of the call. Could you provide some insights on that? Also, it seems there might be a shift in perspective since the September call regarding how the business is expected to grow beyond 2022. Can you elaborate on the expected margin improvements and your thoughts on operating leverage over the long term?

Thank you, Scott. I want to clarify that lowering the operating ratio starts with 57 in 2022. We are not suggesting that 57 is the final target, but we are confident in what we can achieve from that point. Balancing the railroad means creating value for all stakeholders, including users and shareholders, both in the short and long term, while ensuring we don't neglect the economy if demand unexpectedly increases, especially in Canada. It's not just about how low we can go and how quickly we can get there; it's more about determining the appropriate level to target and the timeline for achieving it. To start with 57 in 2022, we are hopeful for some lasting improvements beyond that. We will revisit this topic in early January. Volume is definitely a key factor. Although the Canadian grain crop has been disappointing and we were prepared for it, we certainly have the capacity to handle it, but it's not available at the moment. We are anticipating an average crop for late next year, which will drive revenue growth and bring growth back to CN. If the grain situation were normal this year, we would have discussed GTM growth for next year.

6%.

It's 6% over the time you put in grain; the fact the crop's not there shows that it is definitely a growth story. We believe that 57 is where we should aim for next year. It's not as low as we are capable of going, but it's more about the direction we should take, starting with the 57 in 2022. After that, we'll see more developments in future earnings calls. Thank you, Scott.

Thank you.

Your next question comes from the line of Tom Wadewitz with UBS. Please go ahead.

Hi, Tom.

Yes. Good afternoon. JJ, I have a minor follow-up on a previous question and another question as well. Regarding the timing of your retirement at the end of January, is it intended to align with when the board will have made their decision? It seems almost implicit in what you said. The second question is about your broader thoughts on the supply chain. We hear a lot about labor constraints, but there isn't much visibility on that easing. If you could share some insights on rail capacity improvement and volume growth in 2022, whether that is clear or if labor remains a significant risk for how CN operates or for North American railroads in general.

Thank you. Regarding my retirement, I'm not going anywhere just yet. While I have announced my retirement, my focus remains on ensuring our team delivers strong results in the fourth quarter to demonstrate to our investors and customers that our 2022 business plan is credible. I aim to be here to report those results back to everyone in January. As for the timing of my departure, the board is not operating on a strict timeline and will identify the right candidate when they are ready. My intention is to stay with the company until the board finds a suitable successor, whether they're from within the company or outside, regardless of gender. I am fully committed to supporting the board and our shareholders, as I've been part of this organization for 25 years. It is crucial to me to do what is best for the future of CN. In terms of the supply chain, I believe James and Keith may provide more insight on that issue.

I would say that looking at 2022, every single segment will experience growth, except for our grain business, which has been significantly affected. Fortunately, we have coal to help offset the challenges in the grain sector as we head into 2022. Additionally, the growth opportunities that will begin in the second half of 2022 and extend into 2023 are very promising and will create significant opportunities for us as we progress.

And Rob on labor. Availability of labor to move the railroad. I know there's some question on some of the U.S. property around the U.S, but what about CN?

Yeah. So, we're in good shape from a labor standpoint. We do see the sporadic outages that impact our labor, but really, it's short-lived, and we're in good position here to handle it from a labor standpoint.

Great. Thank you for the time. Thanks for the perspective.

Thank you, Tom.

Your next question comes from the line of Chris Wetherbee with Citi, please go ahead.

Hi, Chris.

Hey, thanks and good afternoon. Certainly, best of luck, JJ, in the next endeavor for you. I wanted to maybe ask a little bit, go back to that comment about September being 10 points better than July. And obviously, that's a function of both, probably, July not being particularly good and September being certainly better and gaining some momentum. But when you think about that, coupled with what you've already announced around headcount reductions, a CAD100 million of cost savings that you're capturing here in 2021. I'm curious how you guys think you're running or will be exiting 2021, in terms of that run rate towards the 57th. It's always been our assumption that there are some benefits of removing, say, Great Lakes from the business in order to get to that 57, so mixing the OR down by the loss of some of those higher OR businesses. But I'm curious what maybe the underlying businesses are running up today based on some of the progress you've been able to make so far.

We’re not providing guidance by quarter or month, but we have set a target operating ratio of 57 for 2022. In any railroad, including Northern railroad, there is some seasonality in the operating ratio. The winter months of December, January, February, and March, particularly in Western Canada where 50% of our business is based, have a higher operating ratio compared to the other eight months, so that should be considered. Additionally, we have made progress over the summer, recovering from the impact of losing the mainline to Vancouver for two weeks and the work we've done on labor and the improvements as of September 17th. We are committed to entering 2022 on strong footing to meet our objectives.

Yes, I can add, Chris, that based on what JJ is mentioning, we are very confident to deliver our earnings guidance of 10% EPS growth. So, I mean we have essentially 10 months behind our belt. So, we have two months left, so we're very confident of that. And the OR will come with that guidance on EPS. It will be the result of that EPS growth.

The results can be unpredictable, especially during the last two weeks of December. Weather conditions can vary, and customers may decide to limit operations to save on labor costs or sell off existing inventory, depending on their outlook on the economy. During this time, our demand can fluctuate significantly, influenced by how businesses perceive the economy and their inventory levels at year-end. However, we are committed to our goals, and we hope to demonstrate progress in our third quarter results, reflecting our recovery since the challenges faced in July, following a strong June.

Thanks, JJ.

Your next question comes from the line of Steve Hansen with Raymond James please go ahead.

Yes. Good afternoon. Thanks for squeezing me in here. I'll just echo everyone else. JJ congrats on a fantastic career. But as it relates to my question, in the new focus in the '22 plan, I'm just curious whether the Board is contemplating any changes to the compensation structure of management to align around this new plan as we're looking forward, I guess, beyond even 2022?

That's a great question, and it's something the Board considers regularly. Each year, we discuss what type of compensation system we should implement and whether adjustments are needed to reflect who we are today and our future aspirations. These discussions happen continuously, including right now. So, it's an ongoing conversation for the Board, regardless of whether there is external pressure. They consistently evaluate long-term objectives and ensure our strategies align accordingly. We can't comment on what the future compensation system might entail, but it's primarily for the Board to determine, and it's a topic that is always under review, not just during current periods.

I appreciate the call.

This concludes the question-and-answer session. I would like to turn the call over back to Mr. JJ Ruest.

Well, thank you. Thank you, Charlie. And thank you for joining us today. We're into exciting times at CN at all time. We were very hard this summer on closing and transaction, which was very strategic to us and very much a part of the long-term strategy of growing our network. We convinced a lot of supporters and convinced a share of the board of PCS twice, could not get the regulators to be on side. Now we're very focused on our current network and the great network that we have, exploiting that the best that we can. To that effect, we also rolled out our 2022 business plan early back in September 17, and that's where we're very focused on. As I said earlier, I'm not going anywhere. I'm here with the team to deliver a very solid fourth quarter result and make sure that we sign through 2022 with the year setup that we could be successful next year in producing the results that we talked about. I think today we've also clarified some of those things that maybe are clearer to you at this point. So, between now and then, stay safe and we'll see you in January. Thank you.

You're welcome. The conference call has now ended. Thank you for your participation. You may now disconnect your lines at this time.