Canadian National Railway Company · TSX:CNR
Canadian National Railway — Investor Presentation (November 2019)
63 slides from Canadian National Railway's investor presentation, November 2019
Slide 1: A Leading North American Transportation and Logistics Company
A Leading North American Transportation and Logistics Company INVESTOR PRESENTATION NOVEMBER 2019 TSX: CNR NYSE: CNI
Slide 2: Forward-Looking Statements
Forward-Looking Statements Certain statements included in this presentation constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws, including but not limited to, statements with respect to CN
Slide 3: Non-GAAP Measures
Non-GAAP Measures CN reports its financial results in accordance with United States generally accepted accounting principles (GAAP). CN also uses non-GAAP measures in this presentation that do not have any standardized meaning prescribed by GAAP, including adjusted performance measures, free cash fl
Slide 4: North American Rail Industry Landscape
North American Rail Industry Landscape Seven Class 1 railways in North America • A backbone of the North American economy and an enabler of trade • US, Canada and Mexico represent ~500M in population and GDP of US$24.3 Trillion • Very high barriers to entry • Significant capital cost to replicate ra
Slide 5: CN at a Glance
CN at a Glance TSX: CNR NYSE: CNI • Backbone of the economy and enabler of trade $14B $85B transporting goods for a wide range of business sectors, ranging from resource Total revenues Latest market cap (1) products to manufactured products to consumer goods, across a rail network of approximately 2
Slide 6: CN's Strengths and Competitive Advantages
CN’s Strengths and Competitive Advantages • Unique franchise with 3-coast access • West Coast trade benefitting from Canada Transpacific partnership, East Coast trade from • Strategic and accretive acquisition track record Comprehensive Economic and Trade Agreement • Network fluidity advantage aroun
Slide 7: Executing our Strategic Game Plan
Executing our Strategic Game Plan To deliver long-term profitable growth and create shareholder value Driving shareholder value creation $ Consistent capital allocation strategy with financial discipline and flexibility to drive strong and sustainable ROIC Implementing advanced technologies to moder
Slide 8: Our Foundation
Our Foundation Building blocks of our success • Unparalleled three-coast network built through accretive acquisitions • Well diversified portfolio, customer base and geographic exposure • Pioneered Scheduled Railroading over 15 years ago • Optimizing network to move customer goods quicker – balancin
Slide 9: Unparalleled Network Built Through Acquisitions
Unparalleled Network Built Through Acquisitions Solid track record of accretive inorganic growth 2019 FURTHER EXPANDING OUR REACH TransX H&R (subject to closing conditions) Prince Rupert Massena rail line (subject to regulatory review) Prince George 2009 Edmonton Saskatoon STRUCTURAL ADVANTAGE IN CH
Slide 10: Well-Diversified Portfolio and Customer Base
Well-Diversified Portfolio and Customer Base Unique three coast network Global West 26% Domestic Canada 17% Well-diversified portfolio Other Revenues Coal Transborder 35% 5% Automotive 5% Southbound Northbound 24% 11% Global East 4% 6% Metals and Intermodal Minerals 25% Domestic U.S. 15% 11% Forest
Slide 11: Scheduled Railroading is Our Foundation
Scheduled Railroading is Our Foundation • CN pioneered Scheduled Railroading over 15 years ago • Optimizing the rail network to transport more freight with the same amount of railcars and locomotives • Moving customer goods more efficiently by increasing train lengths, speed and reducing dwell time
Slide 12: Balancing Operational and Service Excellence
Balancing Operational and Service Excellence Operational Excellence – Adding capacity by Service Excellence - Delivering superior service running heavier and longer trains by leveraging our supply chain approach • Starts with an unwavering commitment to • Customer-centric metrics safety • Level of s
Slide 13: Track Record of Profitable Growth Over the Years
Track Record of Profitable Growth Over the Years Industry Revenue Ton Miles (RTMs) (Index – 2012=100) RTM OR (2) 130 CAGR (1) 125 3.5% 56.1% 120 56.8% 115 2.2% 57.9% 110 1.8% 105 1.7% 59.5% 100 95 62.3% -1.5% 90 -1.6% 64.9% 85 80 2012 2013 2014 2015 2016 2017 2018 NSC KSU UP CP CSX CN Industry leadi
Slide 14: Delivering Responsibly for a Sustainable Future
Delivering Responsibly for a Sustainable Future CN supports the United Nations Sustainable Development Goals (SDGs), which align with our vision for a sustainable world. Our five sustainability pillars are aligned with the SDGs where we have the potential to make the greatest contribution. We are co
Slide 15: ESG Priorities
ESG Priorities Delivering responsibly is at the heart of how CN is building for a sustainable future. It means moving customers’ goods safely, being environmentally responsible, attracting and developing the best railroaders, helping build stronger communities and adhering to the highest governance
Slide 16: A Strong Track Record of Fuel and Carbon Efficiency
A Strong Track Record of Fuel and Carbon Efficiency CN is approximately 15% more carbon efficient then the industry average Rail locomotive carbon emissions intensity vs Gross Ton 40% Areas of Focus – Opportunities Miles (GTMs) Locomotive emissions intensity improvement over the last 25 years 19.0 6
Slide 17: Continuing to Reduce Our Carbon Footprint
Continuing to Reduce Our Carbon Footprint Fuel Efficiency GTMs (1) Q3 2019 Fuel Efficiency (1) 1.40 Worst 1.27 1.30 1.19 1.20 1.08 1.10 0.98 0.93 1.00 0.89 0.90 Best 2012 2013 2014 2015 2016 2017 2018 KSU NSC UP CSX CP CN Industry leading in fuel efficiency (1) Fuel consumed per 1,000 GTMs as report
Slide 18: Right Talent to Win
Right Talent to Win Action-oriented, deep bench with strong track record • Seasoned leadership team with an average of 20+ years • Onboarding experienced, external talent to drive next wave of innovation • Leveraging existing employee base with new talent to value methodology 18
Slide 19: Highly Experienced Leadership Team
Highly Experienced Leadership Team JJ Ruest Rob Reilly Ghislain Houle President & Executive VP & Executive VP & Chief Executive Chief Operating Chief Financial Officer Officer Officer • 23 years with CN • 30 years of experience in the rail industry • 22 years with CN • Served as CMO for 8 years • De
Slide 20: Leveraging Strong Talent Pool
Leveraging Strong Talent Pool First railroad to implement talent to value methodology Labour stability Empowering • Seasoned scheduled railroaders and proven market makers each with over internal Canadiantalent 20 years of experience unionized workforce Embracing • Challenging the art of what is pos
Slide 21: Developing the Best Railroaders
Developing the Best Railroaders Continuous learning and 1.9 million hours in 2018, covering skills, re-certification, and various leadership development programs as well as entry-level training development Ensuring continuous learning for our employees is critical to having a skilled, safe and engag
Slide 22: Creating a Diverse and Inclusive Work Environment
Creating a Diverse and Inclusive Work Environment Strengthening our diversity Partnerships driving our Promoting cultural commitment diversity objectives awareness • Focus on minorities, women, • Partnered with PGNAETA (1) • Created a Diversity Task Force persons with disabilities as and BCIT (2) to
Slide 23: Targeting Industry-Leading Long-Term Profitable Growth
Targeting Industry- Leading Long-Term Profitable Growth Solid pipeline of growth opportunities • Focused on consumer product and rail centric supply chain organic opportunities • Disciplined acquisitions and strategic partnerships • Aiming to deliver compounded pricing above rail inflation 23
Slide 24: Consumer Product Supply Chain Growth
Consumer Product Supply Chain Growth • Multiple gateways and 3-coast access to 15 port terminals • Extensive network reach with 23 intermodal terminals • Best gateways in North America • Port of Prince Rupert; exclusively served by CN and two days sailing advantage vs Los Intermodal Angels or Long B
Slide 25: Rail Centric Supply Chain Growth
Rail Centric Supply Chain Growth • Significant investments by various stakeholders in Prince Rupert and Vancouver to expand bulk capacity Energy • New NGL (propane) export terminal capacity in Prince Rupert • Clean energy segments growing (e.g. wind turbines, wood pellets, solar panels, lithium) • 2
Slide 26: Canadian West Coast Port Strategy
Canadian West Coast Port Strategy Vancouver – Investing to accommodate future growth Customer investments – Over $1B in private sector investments 1 Centerm – Planned increase in capacity from 600k TEU to 2 1.5M TEU (early 2022) Vanterm - Planned increase in capacity from 850k TEU to 1.1M TEU (2020)
Slide 27: Canadian West Coast Port Strategy
Canadian West Coast Port Strategy Prince Rupert – Served exclusively by CN Customer terminal and logistics – Over $1B in private and Canadian Federal Government investments 1 1 Fairview Terminal (DPW) – Planned increase in capacity from 1.35M TEU to 1.8M TEU (2022) 2 Vopak Pacific Canada – Planned b
Slide 28: Canadian East Coast Port Strategy
Canadian East Coast Port Strategy Emulating the success of our Prince Rupert model Sydney Leveraging our underutilized Eastern network Melford • East Coast port developments aim to Quebec capture growth from ultra large container Saint John Halifax vessels Montreal / Contrecœur • Canadian East Coast
Slide 29: 2019 Market Outlook – Weakening Demand Environment For the Rail Industry
2019 Market Outlook – Weakening Demand Environment For the Rail Industry Consumer Product Supply Chain Rail Centric Supply Chain International intermodal market – focused on 2020 and beyond Coal • Prince Rupert currently running at nameplate capacity (1.3-1.4 M • Strong growth in Canada - ramp up of
Slide 30: Leveraging our Unique Network
Leveraging our Unique Network Key capacity expansions across our network Prince Rupert • Expansion of terminals • Success of the supply chain and collaboration with our partners to compete in a global environment • Consistent service provides Vancouver Regina Quebec customers ability to grow their b
Slide 31: International Intermodal – Prince Rupert
International Intermodal – Prince Rupert Long term opportunity from ongoing capacity expansion • Currently operating at nameplate capacity of 1.35M TEUs • Best West Coast gateway to North America • 1-2 days closer sailing time • Favorable roundtrip economics supported by export balance • Close partn
Slide 32: International Intermodal – Vancouver
International Intermodal – Vancouver Joint investments by all supply chain stakeholders • Significant terminal investments increasing available capacity • Rail-related investments in Vancouver, funded by CN, Port of Vancouver and Federal North Government, aligned to ensure gateway Vancouver Lynn Cre
Slide 33: International Intermodal – Port of Halifax
International Intermodal – Port of Halifax Feeding the eastern network • Halterm Terminal now operated by PSA – a leading global port terminal operator • Current capacity of 750K TEUs (utilized at around 20%) • $250M of investments in the past 10 years: • Longer and deeper piers • Upgraded gates and
Slide 34: Recent Capacity Investments Enabling Service Improvements in Domestic Intermodal
Recent Capacity Investments Enabling Service Improvements in Domestic Intermodal Wholesale • Strengthening position through strong partnerships with industry leaders • Courier traffic now back on CN • Full membership in Equipment Management Pool (EMP) program reducing empty container movements and e
Slide 35: Automotive
Automotive New storefronts and capacity expansions • New auto compound in Vancouver providing ability to drive growth in the area • New auto compound in New Richmond, WI to access Minnesota market with direct, single-line CN service • New plant expansion plans/future product investments from Ford an
Slide 36: Crude Oil
Crude Oil Best-in-class network from Western Canada to U.S. Gulf Coast • Lack of U.S. Gulf Coast pipeline access and growing production increases demand for crude-by-rail • Mindful of risk related to crude price differentials and government interventions • Working to create long term crude-by-rail d
Slide 37: Frac Sand and NGLs
Frac Sand and NGLs Benefitting from our solid origin franchise in Wisconsin • Great origination and termination frac sand franchise • Single-line efficient hook-and-haul operation with long length of haul from Wisconsin to Western Canada • Mindful of risk related to local sourcing of frac sand and d
Slide 38: Coal & Petroleum Coke
Coal & Petroleum Coke CN exclusive export supply chains • Unique single access to Ridley and Convent Terminals, offering opportunities for strong growth in export coal Fort McMurray • Ramp-up of new Coal Spur (Vista) coal mine (started in May 2019) with plan for 3M tonnes annualized; potential to ev
Slide 39: Refined Petroleum Products & Sulphur
Refined Petroleum Products & Sulphur Market disruption creating opportunities • Growing demand for refined petroleum products in Southern Ontario creating opportunities to source refined petroleum products from Alberta • Unique CN reach from Alberta to Southern Ontario • Alberta oil sands production
Slide 40: CN Serving the Majority of New Grain Elevators Built in Canada since 2015
CN Serving the Majority of New Grain Elevators Built in Canada since 2015 CN grain revenues Increased car spotting per week Increased customer participation originating from Canada (1) for the 2019/2020 crop year in CN’s Western Canada fleet 67% 150 integration program 21 new grain elevators built o
Slide 41: Strategic Acquisitions and Partnerships
Strategic Acquisitions and Partnerships Building on our acquisition track record Rail Centric Intermodal and Logistics Port Partnerships Pursuing targets that help our customers get their products to market more efficiently, extend our reach, and increase volume on our network Please see Forward-Loo
Slide 42: Disciplined Target Selection
Disciplined Target Selection Right Target to Financially Compelling Proven Track Record of ONE Feed the Network and Executable Integration Goal Creates incremental rail volume Determine standalone Deliver on expected ROIC standalone return Onboards talent Identify revenue Driving shareholder Realize
Slide 43: TransX – Recent Intermodal Transaction
TransX – Recent Intermodal Transaction Creating Incremental Onboarding Talent Enabling Extending Physical Rail Volume Strong entrepreneurial Complementary and Commercial management team with deep Shifting over-the-road moves Services Reach to rail and leveraging expertise in logistics, Enhancing CN’
Slide 44: Implementing Advanced Technologies
Implementing Advanced Technologies Our next strategic driver of value • Increasing speed to market, repeatable and reusable • Focused on key projects – from pilot to implementation • Autonomous track inspection program • Automated inspection portals • Handheld devices for mechanics and crew • Enterp
Slide 45: Information & Technology
Information & Technology Deploying advanced technologies to drive value Autonomous Track Automated Inspection Handheld Technology Inspection Program Portals for Conductors Handheld Technology Enterprise Automation for Car Mechanics Smart Network 1 Targeting cumulative savings of $200–$400M (1) (2) 2
Slide 46: Autonomous Track Inspection Program
Autonomous Track Inspection Program Specially equipped railcars in regular train service at track speed with the latest sensor and AI technology to fully automate track inspections • Two geometry equipped inspection cars are now in service and gathering data on CN’s network • Avoids slow speed hi-ra
Slide 47: Automated Inspection Portals
Automated Inspection Portals High resolution imaging hardware coupled with powerful machine learning software is changing how we inspect our fleet • Immediate benefits from reduction of mechanical manual roll-by inspections at train departure from the yard, reducing initial train start delays and im
Slide 48: Handheld Technology
Handheld Technology A mobile foundation starting with 3 applications Mobile Device for Mechanics (500 devices deployed) • Increase data accuracy and scope of work billed • Improve supervisors’ visibility of work progression and efficiency with remote communication of instructions Mobile Device for T
Slide 49: Enterprise Automation
Enterprise Automation Using technology to automate and eliminate manual and time consuming tasks • Leveraging a variety of tools, such as Robotic Process Automation (RPA), smart data capture, conversational interfaces (chatbots), cognitive automation and agile orchestration technologies • Scalabilit
Slide 50: Smart Network (Digital Twin)
Smart Network (Digital Twin) An integrated digital scenario analysis and simulation tool to improve insight and enhance capacity planning relative to changing demand • Simulates train movements on the network to gain insight on capacity, cost and operational fluidity • Anchored on simulation and a h
Slide 51: Driving Shareholder Value Creation
Driving Shareholder Value Creation Aiming for continued strong earnings growth translating into solid Free Cash Flow (FCF) generation • Strong financial performance with industry- leading margins and revenue growth • Strong balance sheet and disciplined capital allocation • Solid historical Total Sh
Slide 52: Strong Track Record of Delivering Solid Results
Strong Track Record of Delivering Solid Results ▲8% ▲5% ▼ 20% Revenues Q3 YTD 19 vs Net Income Q3 YTD 19 vs Free Cash Flow (1) Q3 YTD 19 vs Q3 YTD 18 Q3 YTD 18 Q3 YTD 18 $M $M $M Impacted by upfront 14,321 5,484 2,778 delivery of locomotives 12,611 12,037 13,041 2,373 2,520 2,514 11,333 4,328 10,513
Slide 53: Disciplined Approach to Capital Investments
Disciplined Approach to Capital Investments Investing to support our business and committed to investing for the long-term Capital Investments and Adjusted ROIC (1) 4,500 in $M & % respectively 35.0% 4,000 3,900 3,531 PTC (2) 30.0% 3,500 Capacity / 3,000 2,706 2,752 2,703 Growth 25.0% Adjusted ROIC
Slide 54: 2019 Network Infrastructure and High Horsepower Locomotive Additions
2019 Network Infrastructure and High Horsepower Locomotive Additions Taverna – Prince Rupert Prince Rupert 3 miles double track 1 new siding New locomotive deliveries: Winnipeg – Edmonton Edmonton 49 miles double track Q1 063 P Taverna 34 miles completed Q2 061 P Vancouver Winnipeg Q3 011 P Edmonton
Slide 55: Rewarding Shareholders
Rewarding Shareholders Over $3.3B or ~82% of adjusted net income (1) returned to shareholders in 2018 Consistently increasing dividends Opportunistic share repurchases • Dividend increased every year since • Over $22B of share repurchases since 1995 IPO 2000 • Targeting 35% adjusted dividend • Norma
Slide 56: Maintaining a Strong Balance Sheet
Maintaining a Strong Balance Sheet Prudent financial management Adjusted debt-to-adjusted EBITDA multiple (1) 1.94 1.90 1.96 1.85 1.71 1.74 1.77 1.75 1.63 2012 2013 2014 2015 2016 2017 2018 LTM (2) LTM (2) ended ended Sep 18 Sep 19 Investment Grade Credit Ratings Moody’s A2 Dominion Bond Rating Serv
Slide 57: Latest 2019 Financial Outlook
Latest 2019 Financial Outlook • Targeting to deliver adjusted diluted EPS growth in the high single-digit range versus 2018 adjusted diluted EPS of $5.50 based on (1) (2): • Slightly negative volume growth in terms of RTMs • Overall pricing above rail inflation • Canadian to U.S. dollar exchange rat
Slide 58: Executing our Strategic Game Plan
Executing our Strategic Game Plan To deliver long-term profitable growth and create shareholder value Driving shareholder value creation $ Consistent capital allocation strategy with financial discipline and flexibility to drive strong and sustainable ROIC Implementing advanced technologies to moder
Slide 59: Appendix
Appendix 59
Slide 60: Appendix: Financial Highlights
Appendix: Financial Highlights Consistently delivered 15%+ ROIC since 2012 Q3 Change YTD Favorable 2012 2013 2014 2015 2016 2017 2018 CAGR 2019 (Unfavorable) (1) Total revenues ($M) 9,920 10,575 12,134 12,611 12,037 13,041 14,321 6% 11,333 8%) Operating income ($M) 3,552 3,819 4,498 5,155 5,032 5,24
Slide 61: Appendix: Non-GAAP Measures
Appendix: Non-GAAP Measures This presentation makes reference to non-GAAP measures that do not have any standardized meaning prescribed by GAAP, including adjusted dividend payout ratio, ROIC and adjusted ROIC. These non-GAAP measures may not be comparable to similar measures presented by other comp
Slide 62: Appendix: Non-GAAP Measures (Continued)
Appendix: Non-GAAP Measures (Continued) ROIC and Adjusted ROIC Management believes that ROIC and adjusted ROIC are useful measures of the efficiency in the use of capital funds. The Company calculates ROIC as return divided by average invested capital. Return is defined as net income plus interest e
Slide 63: Investor Relations Contacts
Investor Relations Contacts Paul Butcher Vice President, Investor Relations Paul.Butcher@cn.ca 514-399-0052 Michaël Archambault Senior Manager, Investor Relations Michael.Archambault@cn.ca 514-399-4654 For more information, please visit www.cn.ca/en/investors/investor-contacts. TSX: CNR NYSE: CNI 63
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