R a i l w a y C o m p a n y JULY 2016

Transcription

1 Canadian National R a i l w a y C o m p a n y JULY 2016

2 Forward-Looking Statements The financial results in this presentation were determined on the basis of U.S. GAAP. Please refer to the website for the reconciliation of certain non- GAAP measures to comparable GAAP measures. To the extent that CN has provided non-gaap financial measures in its outlook, the Company may not be able to provide a reconciliation to the GAAP measures, due to unknown variables and uncertainty related to future results. Certain information included in this presentation constitutes forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, these forwardlooking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. To the extent that CN has provided non-gaap financial measures in its outlook, the Company may not be able to provide a reconciliation to the GAAP measures, due to unknown variables and uncertainty related to future results. Key assumptions used in determining forward-looking information are set forth below key assumptions CN has made a number of economic and market assumptions in preparing its 2016 outlook. The Company is assuming that North American industrial production for the year will increase by less than one per cent (compared with its previous assumption announced on Jan. 26, 2016, of approximately one per cent) and assumes U.S. housing starts in the range of 1.2 million units and U.S. motor vehicle sales of approximately 17.5 million units. For the 2015/2016 crop year, the Canadian grain crop was in line with the five-year average and the U.S. grain crop was above the five-year average. The Company assumes that both the Canadian and U.S. 2016/2017 grain crops will be in line with their respective five-year averages. With these assumptions, CN now assumes total carloads for 2016 will decrease by four to five per cent versus 2015 (compared with its previous assumption of slightly negative carloads versus 2015). CN expects continued pricing improvement above inflation. CN now assumes that in 2016 the value of the Canadian dollar in U.S. currency will be in the range of $0.75 to $0.80 (compared with its previous assumption of a range of $0.70 to $0.75), and that the average price of crude oil (West Texas Intermediate) will be in the range of US$35 to US$45 per barrel (as opposed to CN s previous assumption of a price range of US$30 to US$40 per barrel). CN now plans to invest approximately C$2.75 billion in its capital program (compared with its previous assumption of investing approximately C$2.9 billion in its capital program in 2016). CN still plans to target C$1.5 billion of this program toward track infrastructure. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to Management s Discussion and Analysis in CN s annual and interim reports, Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN s website, for a summary of major risk factors. CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement. 2

3 Company Highlights Second largest publicly traded North American railway with a market capitalization of approximately C$60 billion CN trades on Toronto (CNR) and New York (CNI) stock exchanges with average daily volume of close to 3 million shares Unique network of approximately 20,000 route miles (32,000 km) spanning Canada and mid-america, connecting North America to global markets on three coasts, with product, geographic and customer diversity Diversified franchise with a mix of natural resources and manufacturing reaching key industrial markets and approximately 75% of North American consumers Solid financial policy framework to maintain a strong balance sheet and investment grade credit ratings A solid track record and a strong commitment to creating value for customers and shareholders 3

4 Financial Highlights CAGR (%) Total revenues ($ millions) 8,297 9,028 9,920 10,575 12,134 12,611 9 Operating income ($ millions) 3,024 3,296 3,685 3,873 4,624 5, Adjusted diluted earnings per share ($) (1) Free cash flow ($ millions) (1) 1,618 1,746 1,661 1,623 2,220 2,373 8 Operating ratio (%) _ Capital investments ($ millions) 1,718 1,712 1,825 2,017 2,297 2, Share repurchases ($ millions) 913 1,420 1,400 1,400 1,505 1, Dividends per share ($) Adjusted debt-to-adjusted EBITDA multiple (times) (1) (2) (3) _ For 2016, CN now aims to deliver earnings in line with 2015 adjusted diluted EPS of C$4.44 (1) (1) Please see website, for an explanation of these non-gaap measures. (2) As a result of the retrospective adoption of a new accounting standard in the fourth quarter of 2015, the prior year debt balances have been adjusted and the related financial ratio has been restated. See Note 2 - Recent accounting pronouncements to the Company's 2015 Consolidated Financial Statements for additional information. (3) Debt is adjusted to include the present value of operating lease commitments. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and is adjusted to exclude Other income and the deemed interest on operating leases. 4

5 The CN Journey 1990 s Fundamental Turnaround IPO 2000 s Precision Railroading 2010 to Today Becoming a True Supply Chain Enabler 5

6 A Great Franchise Prince Rupert Global West 23% Edmonton Domestic Canada 18% Global East 4% Vancouver Calgary Saskatoon Winnipeg Transborder 35% Detroit Montreal Toronto Halifax Well Diversified Portfolio Intermodal 23% Petroleum and Chemicals 20% Grain and Fertilizers 18% Forest Products 16% Metals and Minerals 10% Automotive 6% Coal 3% Other Revenues 4% Based on Q revenues Domestic U.S. 17% Global South 3% Chicago Memphis Jackson Mobile New Orleans Unique three-coast access Originating carrier for ~85% of traffic moving on CN s network Close to 70% of traffic originating and terminating on CN s network Well diversified: economic exposure; products; geography; customers 6

7 Our Strategic Agenda 7

8 Starts with an unwavering commitment to safety Fosters enhanced employee engagement Targets continuous productivity improvement Anchored on data, fact-based dialogue and a culture of execution Operational Excellence Train Productivity (GTMs per train mile) 9,134 Yard Productivity (Cars per yard switching hour) ,625 8,739 8, % 9% Q1 15 Q Q1 15 Q1 16 Locomotive Utilization (Trailing GTMs per total horsepower) Car Velocity (Car miles per day) % 14% Q1 15 Q Q1 15 Q1 16 8

9 Service Excellence Customer-centric metrics Level of service agreements with ports and terminal operators CustomerFIRST initiatives including a greater focus on first-mile/last-mile service Visibility tools and enhanced communication channels Becoming a true supply chain enabler -- driving end-to-end efficiency and profitable growth 9

10 Leveraging Our Chicago Advantage 2009 Today Munger connection (2016) No direct routing to get across Chicago Inefficient connections with other railroads in the Chicago area Could take a freight train more than 24 hours to travel from the north to the south of Chicago about 30 miles (48 km) New streamlined interchange points with other carriers Better control of CN trains and routes Improved service offering to customers More efficient operations More than doubled train speed through Chicago since EJ&E acquisition -- roughly 25% of CN s revenues originate, terminate or pass through Chicago 10

11 Delivering on Our Growth Agenda at Low Incremental Cost 150 CN Volumes vs Economy and Industry (Index =100) Industry Operating Ratios (%) (Expenses / Revenues) CN RTMs CN Carloads N.A. Industrial Production (1) Industry Peers - Carloads (2) Q Q (1) Source for Industrial Production: U.S. Federal Reserve, Statistics Canada (2) Includes CP, NS, CSX, UP, KCS CN CP UP KCS CSX NS CN Operating Ratio (%) Outpacing the economy and the industry 11

12 Intermodal International Strong volume growth at Halifax Overall flat volumes on the West Coast New Panama Canal service from Asia to Mobile starting in July (Maersk / MSC) Domestic Strength in retail segment (CN door-to-door service in Canada) Expanding our cold supply chain Building for 2017 Pre-selling port expansions at Prince Rupert, Vancouver, Mobile and New Orleans Canadian ports benefit from weaker dollar to compete Merchandise U.S. housing starts driving carload growth in lumber, panels and other housing-related goods Strong automotive franchise Bringing all OEM products to consumers at destination with CN s Autoport network reach Low prices of crude and natural gas feedstock benefit key manufacturing sectors (refining, petrochemical, LPG and plastics) Supported by CN s unique private fleet management service Energy-related commodities (crude and frac sand) to experience further volume deterioration Crude and frac sand now less than 5% of CN s total revenue Market Outlook Bulk Canadian grain Negative volume outlook with tougher comps for Q2 and Q3 Negative impact of revenue cap pricing (i.e. fuel) until July 31 st Some opportunities in potash, but a global competitive environment Coal markets remain very depressed Coal now only about 3% of CN s total revenue U.S. grain exports flat, impacted by global dynamics 23% 52% Q revenue breakdown Other revenues represent the remaining 4% 21% Economic weakness across several markets Please see Forward-Looking Statements at the beginning of the presentation for a summary of key assumptions and important risk factors underlying CN s 2016 financial outlook

13 PRINCE RUPERT Exclusively served by CN Closest port to Asia Capacity: 850k TEUs (+500k TEUs by mid 2017) VANCOUVER Capacity: 3,500k TEUs (+650k TEUs by mid 2017) Seattle / Tacoma International Intermodal Unparallel Market Reach MONTREAL Capacity: 1,700k TEUs (+350k TEUs by late 2016/ early 2017) Arcadia HALIFAX Capacity: 1,400k TEUs New vessel calls added late 2015 Import discharge - West Coast (TEUs) 32% To U.S. To Canada 33% 43% 42% Q1 15 Q1 16 CAGR 13% 42% TEU: Twenty-foot equivalent unit 49% 47% 49% Mobile CN terminal investments New York / New Jersey Savannah / Brunswick GULF COAST Panama Canal expansion mid 2016 Port of Mobile Near-dock rail service spring 2016 and new vessel call from Asia Capacity: 350k TEUs (+125k in 2016) Port of New Orleans On-dock rail expansion completed Capacity: 800k TEUs (+100k in 2016) CN and partners coordinating terminal / port expansions 13

14 Growing Against And With Truck Differentiating Our Service Offering New 3 rd morning transcontinental service from Toronto to Calgary New 4 th morning transcontinental service from Toronto to Vancouver Dedicated customer service desk Only rail LTL cross border domestic container service Only overseas cross border repositioning program Most fuel-efficient Class I railroad Developing Innovative Products Refrigerated service for long haul cold supply chain Protected temperature service in super insulated ecotherm containers for beverages Container sleds for steel to compete with flatbed trucks Flexitanks for liquid foods to compete with tank trucks New Canada to/from U.S. continental service in collaboration with J.B. Hunt Domestic Intermodal Containers (Units) Rail and Truck Freight Flows U.S. (1) Canada (2) 28% 31% 33% 34% 36% 33% 36% 28% Q1 15 Q1 16 CAGR 4% (1) Domestic U.S. and transborder (2) Domestic Canada CN Rail Network Truck Freight Flows* Domestic intermodal: 37% of total intermodal revenues; average length of haul 1,600 miles (~2,500 km) *Source: Ohio Department of Transportation Office of Urban & Corridor Planning 14

15 Leveraging the U.S. Housing Market Largest carrier of forest products among Class I railroads Strong Western Canadian lumber and panel franchise Over 10% of CN revenues tied to housing Softwood Lumber Agreement expired in October , , , , , ,000 80,000 60,000 40,000 20, ,801 CN lumber / panel volumes to the U.S. (thousands of carloads) ,001 1,102 1,200* F Q1 15 Q1 16 CAGR 8% Panels Lumber U.S. Housing 2,000 Starts (000s) 1, ,600 1,400 1,200 1, CN volumes include Canadian and U.S. origins *CN assumption 15

16 Well Positioned to Handle Automotive Growth IMPORTS Asia Domestic Canada CN handles over 60% of cars produced in Canada Origin strength: access 16 vehicle assembly plants in Ontario, Michigan and Mississippi Destination strength: extensive network of 17 automotive distribution facilities Only rail-direct service from west coast to Detroit to handle imported vehicle parts in containers Well leveraged to strong U.S. sales of SUV s and light trucks IMPORTS Mexico Transborder Domestic U.S. IMPORTS Europe 16

17 Millions of metric tonnes Billions of bushels Prospects for increased grain production Canadian Grain Production U.S. Corn and Soybean Production CN Draw Territory (IL, IA, MI, WI) year average 13/14 Record Crop 14/15 15/16 5-year 13/14 14/15 15/16 average First look at 2016/17 crop; potential to be above average given early planting, favourable precipitation this spring First look at 2016/17 crop; earlier than normal, good growing conditions, and record corn acres suggest potential strong corn and soybean crops CN grain revenues: 68% originates from Canada and 32% from U.S. 17

18 Managing through an Evolving Energy Business Greater Edmonton Plastics / Petrochemicals Southern Ontario Plastics / Petrochemicals Serving the heart of Alberta s oil sands Unique Wisconsin frac sand franchise with single-line service to Western Canada shale gas Strong petrochemical and plastic franchise using low-cost energy feedstock Exclusive access to B.C. shale and LNG export potential Crude Oil Shipments (Carloads) ~128,000 ~73,000 ~98, ~5,000 ~34,000 ~30,000 ~14, Q1 15 Q1 16 New Orleans Baton Rouge Plastics / Petrochemicals ~41,000 ~33,000 ~26,000 Frac Sand Shipments (Carloads) ~58,000 ~89,000 ~77,000 ~23,000 ~13, Q1 15 Q

19 Limited Exposure to Coal Q Rail Industry Coal Revenues (% of total revenues) CN 3% Industry Peers (1) 12% Q CN Coal Revenue Breakdown Coal 82% Export Coal 59% Domestic Coal 41% Thermal Coal 83% Met Coal 17% Pet Coke 18% (1) Includes CP, NS, CSX, UP, KCS 19

20 Negotiating Value for Our Service and Our Capacity Q Value Pricing 2.5% 3% 3% 3.5% 4% 4% 3% Same Store Price Consistent measure of all past renewals Targeting around 2.5% in 2016 Negative impact from Canadian regulated grain for 2015/16 crop year and index-based pricing due to lower fuel prices Canadian regulated grain reverting to ~5% price increase for 2016/17 crop year % 3% 3.5% 5% 5% 5% More sophisticated yield management tools Unit revenue to cost ratio: customer provided cars Unit contribution per car day: CN provided cars Unit round trip revenue to cost ratio: Intermodal Same Store Pricing excludes foreign exchange changes and fuel surcharges. Measures year-overyear price changes on same store traffic (origin, destination, commodity, car type, customer). ~ 75% of CN s revenues are same store. Targeting inflation plus pricing and taking a disciplined approach to yield management 20

21 Effective Resource Planning Crews Locomotives Cars Plant Onboarding and training programs engaging the next generation of railroaders Adjusting resources to low volume environment 90 new AC locomotives in 2016 Continuing to drive productivity Regular stress testing of fleet sizes Approximately half of the railcars on CN s network are customer owned/leased CN car fleet is a mix of owned cars (2/3) and leased cars (1/3) mitigating risk to changing market conditions Plant safety and integrity, first and foremost Leveraging lower traffic volumes and cheaper commodity prices to maximize capital dollar efficiency Right-sizing resources 21

22 Delivering Responsibly FRA Train Accident Ratio (1) (accidents per million train miles) Q1 15 Q1 16 (1) U.S. Federal Railroad Administration Building on our strong 2015 performance On-going investments in infrastructure, rigorous train and track inspections, continued focus on safety culture and employee training Unwavering commitment to safety Fuel Efficiency (GTMs per US gallon ) ,019 1, ~ 20% improvement in fuel productivity over the last 10 years ~ 15% better than the industry average Q1 15 Q1 16 Targeting an incremental 1.5% in

23 D E L I V E R I N G R E S U LT S Delivering Results Revenues (in millions $ Cdn) Net Income (in millions $ Cdn) Adjusted Diluted EPS (1) (per share $ Cdn) $10,575 $9,920 $9,028 $8,297 $12,611 $12,134 $2,104 $2,680 $2,457 $2,612 $3,167 $3,538 Down 4% Up 13% $2.10 Up 16% $2.41 $3.06 $2.81 $3.76 $4.44 $3,098 $2,964 $704 $792 $0.86 $1.00 CAGR 9% CAGR 11% CAGR 16% Delivering strong growth at low incremental cost (1) Please see website, for an explanation of this non-gaap measure. 23

24 Generating Solid Cash Flow Free Cash Flow (1) (in millions $ Cdn) 2,220 2,373 1,618 1,746 1,661 1, Q1 15 Q1 16 Strong profitability driving steady cash generation (1) Please see website, for an explanation of this non-gaap measure. 24

25 Reinvesting in the Business Capital Investments (in millions $ Cdn) 2,700 2,750 PTC Equipment, including 90 AC locomotives Productivity initiatives, including IT Core network investments F Continuing to harden our infrastructure, taking delivery of 90 new AC locomotives and advancing our PTC implementation Leveraging lower traffic volumes and cheaper commodity prices to maximize capital dollar efficiency 25

26 Maintaining a Strong Balance Sheet Adjusted debt-to-adjusted EBITDA multiple (times) (1) (2) (3) Within adjusted debt / EBITDA guideline of 2.25x Committed to maintaining investment grade credit ratings Q1 15 Q1 16 Continuous, low cost access to financing (1) Debt is adjusted to include the present value of operating lease commitments. (2) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and is adjusted to exclude Other income and the deemed interest on operating leases for the twelve month period ended. (3) As a result of the retrospective adoption of a new accounting standard in the fourth quarter of 2015, the prior year debt balances have been adjusted and the related financial ratio has been restated. See Note 2 - Recent accounting pronouncements to the Company's 2015 Consolidated Financial Statements for additional information. Please see website, for an explanation of this non-gaap measure.. 26

27 Total Shareholder Distribution (in millions $ Cdn) Rewarding Shareholders Share Repurchases Dividends Share price - end of period ($ Cdn per share) $60.56 $80.02 $77.35 $84.82 $ $22.39 $28.67 $ $ ,420 $ ,400 1,400 1,505 1, , Q1 15 Q1 16 Dividend Payout Ratio 25% 31% 26% 27% 27% 28% 26% 28% % increase in dividend in 2016 vs 2015 Dividends increased every year since 1995 IPO - CAGR of 17% over 20 years Gradually moving towards a 35% payout ratio Current share repurchase program from October 30, 2015 to October 29, 2016 Budgeting approximately C$2 billion Over C$15B of share repurchases since % of net income returned to shareholders in

28 Solid Track Record CNR, CNI vs TSX, S&P Market Cap ~C$60B CNR 250 CNI 200 S&P TSX 100 CAD/USD $ Jan 2010 = 100 Up to June 30,

29 2016 Financial Outlook CN aims to deliver earnings in line with 2015 adjusted diluted EPS of C$4.44 (1) Carloads expected to be lower than last year by 4-5%, with pricing staying above inflation Higher foreign exchange and fuel price assumptions Continuing to reinvest in the business for safety and efficiency Capital envelope of C$2.75B Includes PTC investments and impact of foreign exchange Delivering sustainable value for our shareholders Protecting our profitability despite a tougher environment Rewarding our investors with consistent dividend and share buyback returns (1) Please see website, for an explanation of this non-gaap measure. Please see Forward-Looking Statements at the beginning of the presentation for a summary of key assumptions and important risk factors underlying CN s 2016 financial outlook

30 Investor Relations Contacts Paul Butcher Vice President, Investor Relations Stacy Alderson Senior Manager, Investor Relations