Core Natural Resources, Inc. Q4 FY2021 Earnings Call

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. I would like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

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 Ruest, outgoing President and CEO; Rob Reilly, Executive Vice President and COO; Ghislain Houle, 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 Quirke, 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 laws. These statements 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. So before we begin, Board Chair, Mr. Robert Pace, would like to say a few words. Robert?

Thank you, Paul. Our Board today is pleased to announce the appointment of Tracy Robinson as President and CEO of CN. Tracy brings 35 years of operational management and 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, Canadian Natural Gas Pipelines and President of Coastal GasLink. She's been there for approximately 8 years. And prior to that, she 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 Shauneen 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 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.

Thank you, Robert. And congratulations on all of these excellent news. And good evening, everyone. Let's start with the fourth quarter highlights on Page 5, a quarter that demonstrated CN's resiliency and profitability. The strategic plan we introduced in September is already showing tangible results in Q4. All in, the business produced adjusted diluted EPS 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 records 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 the fourth quarter at CN. The EPS growth came from both pricing and cost initiatives. Incremental margin was solid, and labor costs and productivity were also very solid. Volume was softer, mainly because of the BC line washout and a lower level of Canadian grain. As a reminder, the BC washout took out our mainline to Vancouver for 3 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 towards our 2022 guidance of 15% return on investment capital. Ghislain will go into this detail later. Regarding pricing and upscaling, James will provide evidence of the continued momentum on all aspects of how we're pricing upscale, that is priority segment premium, weekly auction, same-store pricing, demurrage, and storage. Regarding labor costs, we ended the quarter with 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 this 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 discussions 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 a 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 CAD 5 billion from February 1, 2022, to January 31, 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 strategic plan released back in September is progressing very well, and we are confident in our ability to deliver industry-leading returns for our shareholders over the long term. And with that, I will turn it over to Rob, who will cover the operations.

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 go 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 17. The results of those efforts began to take hold in Q4, giving us momentum heading into 2022 and 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 services and materials showed significant reductions year-over-year. Moving to Page 8. Despite the weather impacts on 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 and 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 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 9, as announced on December 14, 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 the transition of key infrastructure and applications to the cloud, which will allow us to improve IT operating costs and better support 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.

Thank you, Rob. A 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 into the value of our capacity. Threshold pricing and seasonal pricing are additional tools used 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.

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. Frac sand 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, Saint John, New York, New Jersey, Philadelphia, New Orleans, and Mobile to set an all-time record. Domestic revenues were up 12%. The TransX business, which just posted their best ever quarter, along with our retail volumes, Canadian wholesalers volumes, and the port transload business were all solid before and after the BC 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 Teck 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 a start-up 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 3 new CN-served renewable fuels facilities ramping up this year in the Gulf. Longer term, we see new carloads 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 ratable business. With regard to intermodal and automotive, we continue to drive business to our CN-served 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 trains being introduced to the CN-served 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 Ghislain for the financial perspective.

Yes. 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. Labor 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. Purchased services and material expense was down by 10% versus last year, mostly due to lower repairs and maintenance, trucking, 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 continued to see improvement in equipment rents with a 13% decrease versus last year, driven by lower car hire 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 5 weeks this year. Now moving to cash on Page 17. We generated free cash flow of $3.3 billion for 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 17. 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 efficiencies.

Well, 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 Q4 results, we are on track to deliver on that strategic plan. Entering 2022, supply chain continued 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 our 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 work 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 returns for our shareholders over the long term. And now operator, we'll turn it back to you for the questions.

The first question comes from Cherilyn Radbourne from TD Securities.

JJ, I want to start by wishing you the very best in your retirement. 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 the earnings impact of that weather incident and how much of a traffic backlog there might be to move as we enter Q1.

So thank you for the question. Obviously, a very important question. Ghislain can help quantify a bit, and James can talk to us about what might be still around that business.

Yes, Cherilyn, thanks for the question. Listen, as JJ mentioned, we did lose our mainline from the 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 million to $130 million of revenue that we could not move. We thought we were going to be able to catch some of that back up in December. However, we got hit by a cold snap mid-December to the end of December. So we did not catch up any of this in December. And I'll let you, James, jump in, in terms of the business that's still out there to move from that flooding.

Yes. We're not going to get it all back, of course, Cherilyn, but 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. 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 here in the first quarter. Thanks for the question, Cherilyn.

Your next question comes from the line of Konark Gupta from Scotiabank.

I share Cherilyn's sentiments and wish you well, JJ. My question is about the current supply chain and labor issues in the industry. With the ongoing situation in the trucking market due to vaccine mandates, I'm interested in your hiring outlook for employees, especially since you have undergone significant restructuring. The demand environment appears strong this year. Do you foresee a need for substantial hiring at any point this year?

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 chain on our business, I think Keith will do that after that. Rob?

Yes. Konark, in terms of our labor, we're rightsized 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 and early January. We've seen that come down quite a bit. As you look out to 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.

And Keith, the truck drivers' disruption, how do we leverage these supply disruptions?

Yes. It's not just truck drivers. Our customers are moving away from just-in-time inventory programs to a just-in-case model due to supply chain disruptions causing stock-outs. Just-in-time models depend more on trucks than intermodal options, presenting opportunities for intermodal as this model evolves. Additionally, the driver shortages and limited truck capacity are factors contributing to these supply chain shifts. Our intermodal products are well-positioned for truck drivers, and despite some initial technical difficulties, we recognize the favorable conditions for increasing volume. Recently, discussions with our retail, TransX, and wholesale customers have intensified regarding driver vaccine mandates and the ongoing driver shortage. There are definitely opportunities available, and while it's difficult to quantify them at this time, we are committed to collaborating with our customers to provide the necessary services. We have the capacity on our trains and are moving forward.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

JJ, congratulations on your retirement. I wanted to check in about the slow start to the year regarding volumes, as it's not unusual in this industry. Could you provide more insights on the anticipated recovery in the second half of the year? Clearly, Canadian grain will play a significant role in that. You mentioned some other opportunities, but could you elaborate on those and discuss any factors that give you more confidence and visibility as we approach the latter half of the year?

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, all of Canada if you call it quarter to date. But the second half looks bright. 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.

Yes, it has been a challenging start to winter, but we are accustomed to tough winters. We are confident in our ability to meet our full-year guidance. The demand is present, and the early winter snowfall in the Prairies is creating difficult operating conditions; however, we require that snowpack for a successful crop recovery in the next crop year. All signs indicate that this will occur. Looking at the second half of the year, when grain returns, it will be significant. The poor crop is expected to cost us about $300 million in the first half, but with a fair or normal crop, we should recover that in the second half. We are excited about how we will conclude 2022. As mentioned earlier, there remains substantial demand that needs to be fulfilled in the first half of the year, so we will be busy. Rob and his team will have a lot on their plates.

The expansion of the DP World at the Port of Prince Rupert is scheduled for this summer, likely around July. This will increase capacity to 1.8 million TEU, which aligns perfectly with the fall peak and may coincide with significant negotiations at Long Beach. We aim to take advantage of both developments.

Your next question comes from the line of Jason Seidl from Cowen.

JJ, let me join everyone in wishing you all the best. It's certainly been a pleasure. 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 '22 here?

Well, James can talk to that. Definitely, the fourth quarter story was about price and cost. So, James...

Yes. When I look at my crystal ball, I really don't see it slowing down. I mean we price to the market, and we do it very effectively. And I think the market demand is out there. There is value for capacity, and capacity is something we have. And as we continue to have ongoing discussions with our customers, everyone is kind of settled in and realized that there's going to be a higher price for rail service moving forward as there are as many goods. So I fully expect that strong pricing environment to continue through well into '22 and beyond. So thank you for your question.

Your next question comes from the line of David Vernon from Bernstein.

I just actually had a question for the Chairman Pace if he is on the line taking questions today.

I don't know if he is still on the line, but ask the question.

Sure. The question really is that the numbers are obviously very strong. However, the market's perception may be that the operational focus at CN has possibly diminished. The numbers are clear, but I was curious if the Chairman would like to comment on why the choice to bring someone from outside the industry, who may not have as much direct experience with PSR, is considered the right move for CN over the next several years.

Thank you for your question. The numbers clearly show our strong performance. We achieved an impressive operating ratio in Q4, building on our progress from Q3. Our goals for this year are ambitious yet balanced. While reaching a 57% operating ratio is commendable, it does not signify a limit, especially with our projected 20% EPS growth. Regarding Tracy, many of us are familiar with her background at CP. She is not an outsider; like me, she has extensive experience both in rail and in the energy sector, including time with TransCanada. Tracy has held various roles within CP, covering operations, customer service, and treasury. Early in my career, I occasionally competed with her. She possesses a solid understanding of the railroad, the network, and the competition, and she is genuinely passionate about the industry. Although she did spend around 6 to 8 years with a network company in energy, I consider her a true railroader. Additionally, CN has significant opportunities in the energy sector, particularly concerning blue hydrogen and the potential in Edmonton, along with the petrochemical plants aimed at exporting to Asia through Rupert. I believe Tracy will quickly recognize what needs to be done to capitalize on this promising future for the western part of our network.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

JJ, 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 again. 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? If inflation comes down, that pricing kind of comes down as well?

So we're using many, many different levers in our pricing. That's why we call it forward price. And James can expand on that. And we are above rail inflation. Rail inflation has really picked up. But what was the latest number, James?

I think the latest was just shy of 7%.

And you want to talk about pricing going forward?

Yes. Ravi, I think the marketplace there is very favorable to increase pricing. When you say 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 on the marketplace. So that's been very successful. 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 timing 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 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 lean out a little bit more value for this capacity that we have to offer in the marketplace, so excited about that.

Next question comes from the line of Jon Chappell from Evercore ISI.

Rob, maybe, you pointed out on the cost side, the headcount is obvious, and the fuel prices, the higher price, but offset by lower volumes. Was there any impact to maybe purchase services, equipment rents, anything else on the cost side from the actual lack of volumes in Q4 because of the mainline washout? But 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 than we may be seeing the trough of the cost side and these volumes influx, you need to see a little bit of cost push as well?

Rob, you want to start and...

Yes. So really, none of the impact from the floods was in that area. The benefit was primarily from some of our older locomotives. We were able to take some of our older, least reliable, and very expensive to maintain units out of service. That contributed significantly. We have also benefited from our capital investment in grain cars, which allowed us to return some leased grain cars. This was also a factor we observed in Q4.

I could add to that as well is 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 cost-saving initiatives that were 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 all 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 PNSM, in our strategic plan, we had to deliver $250 million, and we're continuing to progress on that. So very proud of that progress.

Your next question comes from the line of Brandon Oglenski from Barclays.

JJ, it's been a pleasure. Congrats on getting the deal done tonight. So I guess in light of that, can you just talk a little bit about maybe what happened in 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 maybe more importantly, from your perspective, as you exit CN, what's the biggest opportunity that you see going forward as you leave the company?

Thank you for the question, Brandon. Complacency is not part of our culture at CN. Last year, we put in significant effort to explore a transaction in Kansas City. During that period, we were already planning how to integrate and potentially streamline our workforce. When the transaction didn’t materialize, we actually accelerated our efforts to improve efficiency on the labor front. The sales team has been focused on pricing since the start of the year, and you can see the positive results from that. Additionally, Rob has made progress on our operating metrics. It's important to remember that we lost our mainline to Vancouver twice last year, which affected us significantly. We were without that line for two weeks in July due to a bridge fire that required rebuilding. This was a major challenge for us, similar to a Western Railroad losing access to Long Beach. Vancouver is crucial for our operations, and we experienced another loss in November. However, each year presents different challenges, and last year was particularly unique in that respect. Our team is looking forward rather than backward. We have a solid plan for this year, especially with Tracy joining us. We're going into the year with strong labor costs and pricing. Once the weather permits regular train operations, meaning temperatures can go above minus 25, we will be able to deliver on our goals. I am confident that all these elements will align, and our team is motivated to achieve success this year and in the future.

The next question comes from the line of Chris Wetherbee from Citigroup.

Best of luck, JJ. I have a couple of questions. Regarding the 57 OR for 2022, could you remind us about the discussions and process related to asset sales and what is included in the number versus what might not be? I'm also interested to hear if Tracy has any insights on those broader strategic decisions when she joins us next month. Additionally, regarding asset sales and capital allocation, could you share your thoughts on the buyback and how much of that can be accomplished in '22, as well as the potential timeline for it?

We have three key elements in our assumptions. First, a freight forwarding operation will be shut down this year, which has been completed. Second, we are planning to sell a vessel in the spring. Lastly, there are sales related to TransX. I believe Helen is managing this and can offer more details. These are the three items. Helen?

Yes. 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, the fleet of vessels is accretive to earnings but dilutive to operating ratio. And so we're working through the final details of a potential sale. But any transaction needs to be at a favorable value to us. Therefore, we are willing to continue to operate the vessels should a deal not be concluded at a favorable value to us. With regards to TransX, just a reminder, we are not actively selling TransX. We are exploring models to change the ownership structure potentially with a strategic partner. Again, TransX is accretive to earnings but dilutive to the operating ratio. As Keith highlighted, TransX has done a great job of helping to grow our business, and we are continuing to improve its performance. In fact, rail miles generated through TransX 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.

Ghislain, you want to add on the main capital?

We did announce a $5 billion share buyback, which aligns with what we communicated to the market on September 17. We plan to implement this as share buybacks represent the residual use of our capital. Our primary focus for capital expenditures will always be on the business. With our current plan, we are targeting 20% EPS growth, a 57% operating ratio, and we intend to finalize our leverage ratio, which is adjusted debt to adjusted EBITDA, to about 2x. For this year, we are currently at a leverage ratio of 1.82.

Yes, we are moving forward with the share buyback of $5 billion. That's right. That was on February 1.

Your next question comes from the line of Justin Long from Stephens.

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?

So that will come soon, Justin. In the April earnings results, she will be with the team, leading the team, and she will be participating in financial conferences definitely from March 1 and beyond. I think the Board has also been fairly clear since fairly early on about the strategy for CN and what they are looking for. I'm sure Tracy will provide her insights based on her perspective and the scale. However, I think I will defer that question until Tracy can address it herself in a couple of weeks. So I appreciate your patience.

Your next question comes from the line of Amit Mehrotra from Deutsche Bank.

JJ, congrats on a great career. I wish you the best. I wanted to follow up on that comment that you just mentioned. You said the Board has been clear about 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 this discussion about growth versus profitability, and we didn't get beyond 57 because we want to grow. And so can you just refresh us, like has there been an evolution in that philosophy around growth versus margin expansion? And when the Board is picking a new CEO, was that like to talk about the strategy in terms of growth versus margin? Because I think that was the biggest issue that people were confused about back in September.

Thank you for your question. Back in September, there were some inquiries regarding whether 57 is the endpoint. I want to clarify that 57 is a significant milestone for 2022, and we are making good progress towards it. However, that is not the endpoint. At this stage, I prefer not to speculate on what the ultimate endpoint might be that Tracy and the Board will consider. Our focus is to reach 57, achieve strong EPS growth this year, generate solid free cash flow, and improve our ROIC. Currently, the Canadian crop is down significantly; it's 35% below last year's yield and that's a major part of our business. Therefore, we need to focus on pricing and cost management. CN is a growth story that also emphasizes ESG, balance, and rewarding both shareholders and customers while supporting the economy. When you support the economy, you foster growth. Rob currently has the capacity to handle more freight than we are moving because we were set up last summer for a robust crop that didn't materialize. He is prepared for the upcoming fall crops. Keith frequently discusses the Rupert expansion, the strategic adjustments, and developments in Mobile, Halifax, and New Orleans. James has promising long-term projects lined up, including blue ammonia, petrochemicals in Edmonton, and biodiesel. In the short term, Canadian coal at CN over the next six months looks strong as we have two mines reopening and a new contract with Teck that is still being compared year-over-year. While it's a growth story, it's not immediate due to the grain crop not coming through and some supply chain disruptions. We plan to utilize our two key levers. Unfortunately, we have had to make workforce reductions, asking about 1,000 employees to leave earlier this fall. The sales team has a clear directive: when you move freight, it’s essential to be compensated appropriately, and current market prices are higher than before, not only at CN but throughout the transportation sector. So while we do not view 57 as the endpoint, it is the goal for this year. Following that, the team will determine how far we can progress utilizing these various levers, with growth expected to be a focus again in the latter half of next year and beyond.

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

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 57 OR this year? I would think that there could be some. And then 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 rightly or wrongly, I think people are going to look and say, hey, well, she was at CP during some of the tough years at CP. So maybe just curious, just to follow up to that, why you think she's the right railroader?

So Ghislain will talk about the OR and what's the potential for OR? And then I'll talk about Tracy after that.

Yes. Thank you, Scott. We are very proud of our operating ratio for Q4, which is 57.9, a record for us. The lowest we've recorded in Q4 was 58 back in 2015. The plan remains intact. For the full year, we concluded at 61.2, so moving from 61.2 to 57 is quite significant. We need to reach 57 to eventually aim for 56 and 55. Our plan is set, and we have the necessary support to achieve it. We are confident in our ability to deliver results, even though there will be fluctuations throughout the year, as we operate in an outdoor environment where unexpected events can occur. I hope investors recognize our resilience and capacity to adapt to rapidly changing conditions. As JJ mentioned, we lost our main line to Vancouver for five weeks, demonstrating our resilience. We believe we have a strong team, and our goal is to reach 57. Stay tuned, and if we can perform even better, that would be excellent, but our target remains 57. It is indeed a considerable decline from 61.2 to 57.

Yes, it's a solid goal, and while 57 is our target for 2022, it's not necessarily the final number. We're still in the early part of the year, so please allow us some time to see if we can enhance our guidance. Regarding Tracy, you'll have the opportunity to meet her soon, and I believe you'll be impressed. She is a strong leader with significant support from her team. To be an effective CEO, it's essential to have people who want to work with that leader. Tracy has a clear vision and a deep connection to the rail industry, having held various positions at CP. While she was part of a team, she contributed significantly, and I believe what she brings to CN is crucial for our future. Sometimes in the rail industry, we wonder if it’s right to revert to past practices. Instead, we should focus on our potential for growth, improve fuel efficiency, and enhance our efforts in inclusion, diversity, ESG, and technology—areas that weren't as prioritized a decade ago. We aspire to grow based on what we utilized successfully in the past, combined with advancements in technology and a commitment to customer relations and business development. It's important to leverage all our resources, not just the precision scheduled railroading approach, even though PSR is critical. We are at a crossroads in our industry, where we must find ways to grow and connect more with customers to drive business, especially given our competitive cost advantages over other transport modes. Achieving 57 while attracting more business will improve our return on invested capital and earnings per share. Leadership is key in integrating all these factors, and I believe that represents the future of our industry. Once you meet Tracy, I think you will appreciate what she has to offer.

Your next question comes from the line of Tom Wadewitz from UBS.

Yes, JJ, I want to express my gratitude for the opportunity to work with you over the years and for your valuable insights into the markets and customers. I wish you all the best. You mentioned the previous question regarding the Board's criteria and its focus on growth versus margin. Can you elaborate on how you view the growth focus moving forward and what the Board is seeking? Additionally, when Claude took over, he indicated a shift toward volume growth, and your team had significant success in that area. Do you believe CN can return to that trajectory? How should we assess the growth potential considering the Board's perspective and overall strategy?

Thank you. Tracy will soon share more about our vision. Reflecting on the time when Claude became CEO and I took on the role of Chief Marketing Officer, we had made significant operational progress that required us to better utilize the network, resulting in solid growth in RTM and volume. Rupert changed from being a lesser-known fishing port to a bustling business hub for both bulk and container operations. The future of CN is looking diverse. We aim to leverage technology to enhance safety on our railroads, as demonstrated by our progress thus far, while also lowering operating costs and improving customer relationships, making our services more appealing to attract additional freight. This aligns with our agreement with Google, focusing on deeper engagement in the supply chain. Customers today expect more than just basic rail service; they desire a more user-friendly experience. Maintaining a strong operating margin is crucial given the capital-intensive nature of our industry, and we're very focused on that, as discussed in our quarterly updates. Our long-term strategy encompasses growth, cost management, technological advancements, and ensuring our relevance in addressing ESG emissions while attracting and retaining top talent. Reflecting on our history, there remains significant potential in regions like Edmonton and Calgary, particularly with a new wave of capital investment aimed at petrochemical plants for export rather than refineries or oil sands. It's essential for landlocked facilities such as those in mining and petrochemicals in the Canadian Prairies to access world markets efficiently, which can only be accomplished through rail. CN boasts an excellent network, especially through our connections to the three coasts, including Rupert and Vancouver. I see ample opportunities for CN's success. As the largest shareholder among the management team, I'm committed to supporting the team and Tracy. Thank you for your question, Tom.

Your last question comes from the line of Steve Hansen from Raymond James.

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 grain gap, so to speak, I think you've referenced several already, but 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 might play out here through the first half until we get some better grain volume.

Definitely, we'll do that. James will pick that one.

Thank you for the question, Steve. I've been eager to address this throughout the call. I'm very optimistic about our coal prospects, especially in the first half of the year, including the first quarter. We'll benefit significantly from the Teck deal for the entire year, and we also have two mines restarting, providing us with considerable tonnage. If we look at carloads alone, we will more than make up for the loss of grain carloads with new coal carloads, which is significant. This aligns perfectly since we have available capacity due to the reduced movement of grain. Current prices for metallurgical and thermal coal are nearing record highs, indicating strong market demand. We are prepared to transport this coal, whether it's heading to Vancouver or Prince Rupert. I'm truly excited about what the first half of the year holds, despite facing tough comparisons from an all-time record in grain in 2021. Moving into the second quarter, those challenging comparisons will disappear, and we'll continue to solidify our strong coal story. Additionally, we've seen substantial growth in our frac sand operations. As we look to the future and anticipate increased activity in Western Canada, drilling activity serves as a key indicator, with frac sand volume being critical for railroads. There’s also exciting news regarding our renewable initiatives, with three new facilities launching in the U.S. Gulf Coast to produce renewable fuels. We are in discussions with multiple parties to establish new crush plants on CN in both Canada and the U.S. Recently, we concluded a deal for a soybean crush plant with Platinum Crush, and more are in the pipeline. As I reflect on the opportunities ahead, I believe we are laying the groundwork in 2022 for extraordinary growth over the next five years. The second half of 2022 is looking exceptionally promising, and I know Rob and his team are eager to start moving those carloads for our customers.

I think you also have the undiluted crude facility that's ramping up right now.

Yes. Thank you. About the same size as kind of the Hardisty facility. It's a new, heavy undiluted, that's the safe product, moving down to the Gulf Coast, got started up 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. We, for a long time, we've been the leader when it comes to moving heavy crudes. And we're still going to be the leader moving heavy crudes. 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 carloads are heavy, safe, undiluted crude. So exciting times.

And that's the location in Saskatchewan.

Yes, JJ, yes.

Our last question comes from the line of Jeff Kauffman from Vertical Research.

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 advertised. So that's a reduction of a couple of hundred million. Yet you have a number of new projects coming along. 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?

Rob, you want to talk about how we're going to allocate capital this year?

Yes, 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 is in really, really good shape. So when it comes to the ties and the undercutting and the ballasts 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 for 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.

I guess the dividend of DSR, are you implying then that this is a sustainable level with some of the advances in technology, for example, the autonomous inspection?

Yes. 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 is in really good shape. And we're not ever 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.

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

Thank you for joining us today. It's a bittersweet moment for me. Leading this remarkable company for the past four years has been a great honor, and I am very proud of our accomplishments over the last 26 years, working alongside more than 20,000 talented individuals in the industry. I would like to extend a special thanks to all the sell-side analysts I have spoken with during these quarterly calls since 2010, as well as for your strong interest in CN as a leading company and in the rail industry as a whole. I have full confidence that our new CEO, Tracy Robinson, is the right leader with the right vision at the right time. I am also very confident that the team gathered here will deliver solid results in 2022 and beyond.

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