Q4 2022 Canadian National Railway Co Earnings Call
All participants thank you for standing by the conference is ready to begin.
Good afternoon. My name is Patrick and I will be your operator today welcome to <unk> fourth quarter and full year 2022 financial and operating results conference call.
All participants are now in listen only mode.
After the Speakers' remarks, there will be a question and answer session during which we ask that you kindly limit yourself to one question you May press Star one.
Yeah.
I would now like to turn the call over to Bob Archer, Vice President Investor Relations, Ladies and gentlemen, Mr. Butcher.
Well. Thank you Patrick good afternoon, everyone and thank you for joining us for Cn's fourth quarter and full year 2022 financial results conference call.
Before we begin I'd like to draw your attention to the forward looking statements.
And additional legal information available at the beginning of the presentation.
As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the U S and Canadian Securities laws.
These statements are subject to risks and uncertainty that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct a Q&A session I do want to remind you to please limit yourselves to one question. The IR team will be available after the call for any follow up questions. Joining us on the call today are Tracy Robinson, our president and CEO , Doug Macdonald, our Chief marketing officer, just like oil.
Our financial our Chief financial Officer, and last but not least the youngest recruit on the team at Harris, Our Chief operating officer. It is now my pleasure to turn the call over to Cn's, President and Chief Executive Officer, Tracy Robinson. Thanks.
Thanks, Paul and welcome to our earnings call I'm very pleased to be with you all today, whether you're with us by phone or webcast. We appreciate you joining us.
Now I'm approaching I'm getting close to the end of my first year with C N and as I do that I can't be prouder of this team and what we've accomplished together over the last year, it's important to me and to all of us.
We've delivered on what we promised we drove top line growth and we drove to the bottom line.
We started with a pretty tough first quarter, but we finished the year on guidance with an E. P. S up 25% and an operating ratio that starts with five first time first since 2017.
We also delivered a return on invested capital of 15, 9% and free cash flow of nearly $4 $3 billion.
Want to take this opportunity to thank each of our C unemployed.
I am grateful for your focus and.
Your hard work and delivering to some very big commitments. This year, we came together as a team and across the entire organization, we have risen to the challenge.
But we're not done we've got more work to do on many fronts and we'll be focusing on that through 2023 without a doubt we are in an uncertain economic time and like many others. We are assuming the share a mild recession.
Now our bulk segment will help us in the first half of the year.
But we have less visibility in the second half this company like others, we've dealt with recessions in the past and we will deal with this one we have a great network and a diverse book of business provides stability for us in times like this so we're going to remain nimble and close to our customers and we will perform well this year, regardless of volumes and we will pause.
<unk> ourselves for the upswing when it comes.
And while current expectations that North American industrial production will be negative in 2023, we will grow EPS in the low single digit range.
Now the team with me today will walk through our performance 2022, and our outlook for 2023.
I am pleased to have her joining us on the call today for the first time.
<unk> was appointed Chief operating officer in December .
And he brings.
So a little bit of experienced 40 years of experience to our team.
Most of that was with the C N running as scheduled operation these pretty passionate about being back in doing just that.
Ed will give us an update on our operating performance and he'll make some comments on our path forward and continuing to prove our operation and importantly on his mandate to get the next generation of operating talent ready.
Following our strong topline performance in 2022, Doug and his team are working closely with our customers to monitor volume trends and making sure. Our portfolio continues to fit our network, we're going to maintain our approach of selling into our capacity.
Doug Today will give you an update on our key markets and how it will look to outperform that north American industrial production. This year in terms of volumes.
And as long as always will cover the details of our financial performance in the quarter and the year as well as assumptions driving our 2023 financial outlook Ed over to you.
Thank you Tracy.
Despite what Paul said, Tracy and I do go back a long way.
When we both work for our Canadian competitor.
And I can't tell you how happy I am to be back home, where I dedicated a big part of my career.
Jeeze land, Doug and I also go back a few years from my prior days at C N.
Very happy to reconnect with them and also many others that saying some of which are the sons and daughters. Other people I've worked with a few years back.
I reached out to Doug early on to better understand some of the challenges that we faced.
I've been working closely very closely.
Sense to continue to improve our customer service.
I Love this business and I feel energized about taking scheduled railroading to the next level.
But more importantly, I'm here to help identify and mentor our talent and develop the next generation of railroad or <unk>.
I can say that we have one of the best networks in the industry and a darn good team of operating people to maximize the efficiency of this network and enable growth for the North American economy.
I came on board in April as a consultant and was very excited about the idea of helping this company refocus on schedule railroading.
You have seen significant the significant improvements throughout the year.
I was convinced that this team had the muscle memory to get us back to where we used to be and I want to thank all of the operating people for their efforts.
I have spent considerable amount of time with the operating team since April I've been out on the property quite a lot and let me tell you that the talent is deeper than I. Initially thought they are passionate and as a team they want to drive more efficiencies going forward.
While as a consultant my role was more about suggesting ideas and making recommendations like starting on time and controlling train lengths and getting back to the three regions from the two that existed now as chief operating officer, I can direct and.
And have a more influential role in working with the team to implement some of the changes that will take this company to the next level.
I am here to help the company I want to be fast and quick but before anything I Wanna be safe.
We have made great strides when it comes to safety performance and we are now 748 days without a fatality and 560 days without a serious injury.
Every day, we are beating a record.
Railroading needs is very simple.
I think we got away from that over the past few years.
Velocity creates capacity the faster we are the more we can handle.
And the more we stick to the plan the more reliable we are.
Which means that I can provide a level of service that Doug can sell to his customers.
I've heard Tracey say, so many times about how we're working in a more integrated basis.
A big part of my philosophy is to work together as a team and work closely with the other functions.
Collaboration is key and that's how we will move forward together.
I could talk about railroading for hours, but now let me speak about a few of the operating highlights of the fourth quarter and some of my priorities for 2023.
We continue to make good headway in terms of operating performance, though not without some challenges in the quarter car velocity averaged 207 miles per day.
In the fourth quarter up 10% from last year, well origin train performance averaged 85%.
In quarter, four also up 10% from last year.
What I'm most proud of in the fourth quarter is how the operating team responded to the challenges and restored fluidity on the network. Following a period of extreme winter conditions in Western Canada in late December with temperatures in some areas dropping to a minus 50 Celsius.
Or that timeframe.
Our approach of scheduled railroading and focus of our employees helped us to restore fluidity on the network I am amazed how the team responded and you can see it in the operating performance.
So far this month alone car velocity is hovering near 220 car miles per day.
Similar to the numbers that just come in they saw last summer.
Winter is far from over but compared to last year, we were in a much better position to start the year and that means we should be in a better position to come out of winter into the spring.
We are building resiliency based on running a scheduled operating path plan.
With focus on service asset utilization and velocity.
Those terms should be familiar to all of you.
Before I pass it on to Doug Let me provide you with some of my priorities for 2023.
We're going to take scheduled railroading to the next level.
More yet to be done here with a focus on destination and train performance and individual trip plans.
We continue to drive capital efficiencies and we will deploy capital on the network engineering is already equipped and ready to get started on this year's program starting naturally on our sharpened.
The mechanical team is bolstering and modernizing our fleet of locomotives with camera technology, and energy management systems, which will help us be more efficient with fuel and safer.
And finally, and perhaps most importantly, we are going to continue to coach and develop the next generations of railroad is.
With that I'll pass it onto Doug to.
To discuss topline performance and outlook.
Thank you Ed and a huge thanks to you and your team from both me and our customers on the speed of our operating recovery after the extreme winter temperatures on our network in December .
The team's disciplined execution and focus on velocity has delivered the service our customers need and we are pleased that January is off to such a strong start.
I'll now turn to slide nine and provide a review of our solid fourth quarter topline performance.
Fourth quarter revenues were $4 5 billion up 21% over Q4 of last year on 6% higher Rts are bulk segments led the charge this quarter with strong year over year volume growth.
We continue to achieve rail inflation plus pricing on renewals and the lower Canadian dollar also contributed to our revenue growth in the quarter.
As expected Canadian grain was very strong this quarter, including an all time single month record for tons shipped in October .
We also saw growth in U S grain given the supply chain shift with the low water levels on the Mississippi River through the fall.
For the full year unit train shipments of U S grain to the golf beat the previous record from 2006.
Coal demand remained strong through the fourth quarter with a strong commodity pricing environment. In fact, we set a record for coal shipment in 2022 with over 30 million tons shipped for the full year.
Automotive volumes were strong in the quarter as inventory replenishment continued across the industry.
We did however, see some weakness expand in other segments in the fourth quarter.
Softening in the interim national intermodal as volumes tapered through all gateways due to inventory overstocking.
Lower petroleum and chemicals volumes with reductions in refined products as well as lower chemicals and plastics used as inputs into manufacturing due to numerous small outages in a softer market demand.
Lumber and panels decreased following additional mill curtailment curtailments in British Columbia, due to low commodity prices high stumpage fees in B C and lower housing demand due to rising interest rates.
Before I review our market outlook for 2023, let me provide you with updates on some of the initiatives we spoke about earlier this year.
Despite some recent softness at the port of Halifax had a record volume year for intermodal in 2022 handling in excess of 600000 Teus.
C N and our partners PSA and the Port of Halifax are all working with our customers to grow the terminal in 2023 and look forward to selling out the terminal in years to come.
On the E. M. P program, which is a shared intermodal equipment pool with the U P. N N. S. C. N has now fully integrated the program into our operations and sales.
C N will be adding containers to this pool over the next two years as we continue to grow the business for the interline domestic intermodal.
When finished off 2022, averaging over 1 million per week of new business.
The Canadian West Coast export propane program continued to gain momentum in 2022, working with our partners in Prince Rupert C. N moved over 10000 cars this quarter to terminals in Prince Rupert to support Canada's growing energy export market, an increase of 17% over Q4 2021, we.
We expect this program to continue to grow as additional drilling in gas processing takes place in advance of a new LNG plant coming online in 2020 five.
Finally, turning to slide 10, we are assuming a mild recession as our base case.
We have good visibility in each one as we continue to move significantly higher Canadian grain crop.
With the current economic environment. The H two outlook remains uncertain at this point.
On the bulk side, we expect continued strength in 2023.
We will be moving last fall's Canadian grain crop well into 2023, and we are anticipating an average crop for the 'twenty to 'twenty three 'twenty 'twenty four crop year.
We expect coal demand through.
All participants please continue to standby designs for the moderators are disconnected.
Once again please standby.
<unk> are back in the call. Please go ahead.
Thank you everyone I think we got cut off there. So I'll just continue with my remarks. So we expect cold demand to remain strong through 20 twenty-three with commodity pricing staying favorable energy shortages are keeping demand strong and the backlog in autos and development in Asia will underpin met call demand, we expect more of a flag.
To negative performance with most other commodities.
The weakness that we began seeing in the fourth quarter is expected to persist through at least the first half of 2023.
International Intermodal will have multiple blank sailings as the north American inventories rebalance <unk>.
Lumber will be slow to recover due to market oversupply and high interest rates dampening demand.
Chemical and petroleum production is directly tied to the economy. So we expect demand to be soft and the first half of 2023.
Automobiles are still in a tight supply situation, but this is changing with higher interest rates as well as park shortages.
To close we are working closely with customers to monitor the economic environment as we run a scheduled railroad with a focus on velocity. We are achieving solid performance that will serve our customers well and continue to grow with our customers as the economy recovers.
With that I will pass it on to his leg.
Doug and welcome and it's not as that drew back home.
It's my pleasure to review excellent fourth quarter and full year financial results.
I will talk to slide 12 of the presentation, which will provide more visibility on our fourth quarter performance.
These results highlight the strength and resilience of our franchise as we delivered volume growth of 6% in terms of our T M's and 21% growth in revenues. Despite some significant whether challenges in December .
The top line performance combined with a strong operating performance grew solid earnings in the quarter.
Let me provide you with more details on the quarter and I will speak to the adjusted numbers, which exclude advisory costs related to shareholder matters in the fourth quarter of 2021.
Labour expense was up around $40 million in the quarter relaxed versus last year, driven by increased wages due to higher average head count as close to 900 transportation employees versus last year.
Our fuel expense was up nearly 50 per cent FX adjusted as fuel prices were over 45% higher in the quarter versus Q4 of 2021 and volumes contributed to the remaining 5%.
We delivered operating income of $1.9 billion in queue for up 21% on and adjusted basis.
We're operating ratio came in at 57.9%, which is in line with the adjusted operating ratio for the same period last year.
Diluted EPS of $2.10 for the quarter was up 23% versus last year on and adjusted basis.
Turning to a full year results on slide 13, I am very proud of our adjusted EPS growth of 25% versus last year, which is aligned with our guidance demonstrating the strength and resilience of our franchise and validate the effectiveness of operating a scheduled railroad with a focus on car velocity and we're.
Working on an integrated basis.
We generated free cash flow of nearly $4.3 billion for the year exceeding on guidance.
Under current share repurchase program, which runs from February 1st 2022. So January 31st of 2023, we have repurchased over 29 million shares for $4.6 billion at the end of December .
Finally at the end of 2022 or return on invested capital finish at close to 16% exceeding our 15% guidance.
Moving on to Slide 14, let me provide some visibility to 2023.
As we continue to see weakness in certain segments like international intermodal driven by lower consumer spending lumber chemicals and plastics. We also see weakening economic indicators with negative North American industrial production expected in 2023.
Therefore, like many others, we are assuming a mild recession in 2023 with Ah some rebound in 2024.
We have good visibility on Canadian grain for the first half of 2023 and currently assume an average crop starting in the second half of the year.
As Ed mentioned, we're off to a good start in January from an operating perspective and dug an esteemed remain disciplined on pricing, but we will be facing some headwinds on the Canadian Labor fund in regards to work rest rules and paid sick days.
Despite a weakening economic environment, we expect to deliver low single digit EPS growth in 2000 twenty-three versus 2022.
In terms of shareholder distributions, we are pleased to announce that our board of directors approved an 8% dividend increase for 2023.
This represents the 27th consecutive year of dividend increase since the 1995 IPO and reflects both the confidence in our strong cash flow generation capacity throughout business cycles, and the long term prospects for the company.
The board also approved a new share buyback program of up to 32 million shares for an amount in the range of $4 billion to be returned to shareholders through a normal course issuer bid from February 1st when he twenty-three to January 31st 2024.
In conclusion, let me reiterate a few points, we delivered a strong fourth quarter performance as we continued to push on operating a scheduled railroad.
We met her 20 twenty-two financial guidance.
We are witnessing continuing economic weakness and calling for a mild recession in 2000 twenty-three.
Despite this week economic environment, we are still guiding for EPS growth demonstrating the resilience of our franchise and the strength of our team.
We have a strong balance sheet that provides us financial flexibility and we will allocate capital in a manner that drives longterm value for our shareholders let.
Let me pass it back to Tracy for some closing comments.
Thank you.
So today has been a good opportunity to look back at a number of our successes in 2022 and I'm really proud of what we've accomplished to get it.
But.
This team and are looking ahead to the future to where we want to take our company and it will take he continued focus on performing at it never higher level across the organization.
So.
Not that complicated we're gonna keep it simple.
Starts with the plan, we're focusing on the next level of operating performance to just schedule, an operating plan and further integrating our team across function.
We're continuing to get closer to our customers or an attractive great service and partnering in their growth and we're gonna leveraged the strength of our network to grow with them in a manner. That's good for both of us.
We're in the longest stretch of our company's history without a fatality or serious injury and there's nothing more important to us.
But it doesn't mean, we get complacent immune to get even more committed to our safety culture and looking out for each other every day, we know now what's possible.
Our efforts on climate and sustainability are advancing <unk>.
A number of organizations last year recognized our sustainability effort.
We made the CD P. A list once again and we've now been lifted so the 11th consecutive year on the Dow Jones sustainability World Index. We appreciate the recognition, but we're really focused on is to continue to pursue this agenda, which among other objectives, it's gonna help us.
Further improve our industry leading fuel efficiency.
And last but not least of course were intently focused on developing the next generation of talented C. N T.
Tremendous capability in this company as you've seen and we have the senior team in place now to bring them and their performance.
Up to the next level, you're gonna hear a lot more details about our vision and our growth plan.
[noise] performance header Investor day in Chicago in early man, we're looking forward to seeing you all that and.
And now Patrick Campbell opened the Lions questions.
Thank you will now take questions from the telephone lines question and using a speaker phone. Please get your ancestors.
Their selection.
Did you have a question since press star one on your devices.
You'll be canceling your question that anytime my pricing star too.
Star one at this time, if you have a question.
This question is from it.
Whether it be from Citigroup. Please go ahead.
Yeah, Hey, great. Thanks, very much you know maybe he wanted to start on the guidance and appreciate the fact that you're being cautious about the outlook or maybe realistic about the outlook for for a recession in 2023 you know.
Maybe you could walk us through some of the underlying dynamics of that outlook. How do you think about rpm's and maybe how to those progress over the course of the year and then if we can get revenue growth in the year do you think operating ratio improvement as possible as well to get you to that low single digit EPS growth.
Hey, Chris that that is the question isn't it so we're giving you today our guidance based on.
What is the best information, we have right now you know giving.
Given the uncertainty in the economy and what May happen. This year I think it's the right amount of information to provide.
We do hope that it will be better than what we expect.
You know and.
We'll be ready if that happens done and as we get more clarity you know will be in front of you with updates, but I think we'll keep it pretty much at that level for today.
Just one quick point is it fair to assume that our team was maybe track roughly industrial production.
In the mall.
We think that I'm going to hand, it over to <unk> to come in but we do believe that we can lift our volumes higher than the industrial production has just been said in his in his nose, so coveted well tracing.
Thank you.
Thank you.
The next question is from corner Gupta from Scotiabank. Please go ahead.
That sounds like a good good evening, everyone. Just wanted to follow up on this question actually.
You look at B B S that has been low single digit. We also have a share repurchase here, which could potentially be in the low single digit range and then volume as you said, it's about like the pricing of <unk> is there something on the yield operating ratio that's needed to you know figure out what kind of account for the gap is it the mix.
A consortium charges something else that they're missing.
Well, Thanks gone Ark listen as we just said I think that we're assuming right now to industrial production in North America will be negative is Tracy just mentioned, we're assuming that we'll do a little bit better than that.
We will continue to <unk> <unk>.
Continue to work on our margins I mean, we know that we need to improve our margins on a year over year basis. However, however is you know it's tougher to improve margins. When you were in the low volume environment.
But we're very confident over the mid to long term, but there's no question that we will improve our margins. When you look at what we've done in 2022, I mean are incremental margins for the full year was a respectable 50% and we improve our award by 130 basis points. So that sets the stage and you know.
The the scheduled railroading back in full force I think that you know, it's all going to depend on volumes and it's all going to depend on the economic economic environment. I mean, if you cannot make environment does a little bit better than than will ride the way if it's deeper than what we think then and it's not mild but it's deeper than.
We'll we'll we'll perform I mean, we'll we're we're well positioned to perform in a recession and we have a strong balance sheet. So you know I think we're in as I finish on this AD mentioned it but we're starting January quite well with the weather collaborating so our volumes.
Are good but remember that we are comping versus last year, where we were in deep freeze so and we can counter chicken too early we just have about 21 days behind us.
Thank you.
Thank you. The next question is from it tomboy from UBS. Please go ahead.
Yeah. Good afternoon, I wanted to ask a bit about how you think about pricing against this backdrop of weaker.
Weaker cyclical backdrop I think the commentary from the Canadian rails in 2022 was pretty optimistic you know tight capacity pretty favorable trends in pricing.
Would we expect that to ease meaningfully against weaker volume backdrop, where you think there is some momentum to carry through that you still have a you know maybe stronger than the normal pricing in 2023. Thank you.
Thanks, Tom its Doug So once again I'll say, we have about a third of our book of business comes up every year for repricing. So we do you know we have seen a strong pricing of environment continue we do have some catch up to do from prior years and you know our goal continues to be pricing above royal inflation.
We really don't see any issues with that at all so far.
So can can you kind of comment on pricing this year versus last year using it.
Similar or or a bit a bit lighter given the volume backdrop. It's.
It's very similar right now we expect US like you don't pricing overall for the costing for overall for the rail industry. We expect to stay ahead of that so right now it's showing very high when you look at the all inclusive index and things like that and we continue to be above that.
Great. Thank you.
Thank you. The next question is from Brian Awesome back from J P. Morgan. Please go ahead.
Good afternoon, and just wanted to ask just saying you mentioned some headwinds work rest rules and paid sick days wanted to see if you could elaborate on that is that the federally mandated one that kicked in at the end of last year and you know how is that going to impact the financials are head count and and how should we.
You expect that to kind of roll out through throughout the year.
Yeah. Thanks, Bryan Yeah definitely [noise] some headwinds there you know and then the team will work hard to try to minimize the you know the unfavorable potential impact of those headwinds, but I'd say that when you put them together they could be as much as $100 million of headwinds in 2023, So we'll see.
But that's certainly something we have to deal with.
Would that be would that require additional account to cover some of the but that's the that's the notion that the the notion is that you would have to have more people to do the same work and therefore it does create it does create a financial unfavourable impact, but as I said at will and the team.
[noise] are working to try to minimize the impact but so.
So we're we're all over this as we speak Bryan if I could just add said Harris.
We're looking at the operating plan very closely and we look at it every day, which is no secret to anyone.
I think the things that you have to remember with a stronger operating plan and better system performance were taken out a lot of.
Unnecessary operating expense like Regrowing trains, Diane route or deadheading onto a better schedule and there's there's quite a bit of savings that will see through that as we get stronger in our operating plan. So that's one of the ways that we're thinking about offsetting some of the headwinds.
We talk about this quite a bit and we got a pretty good plan we're working on.
Okay. Thank you very much.
Thank you. The next question is from the North pole, you're from Disheartening capital markets. Please go ahead.
Yeah, Good afternoon, everyone and we'll come back and do <unk>.
Obviously, a lot that's been accomplished since since April but could you provide the more color about some changes that you were looking to to implement that would bring the company to the next level and maybe if you could expand a bit on the account for 2023, and Capex and Lopez in order to drive.
The operations.
Well I think one of the first things that I saw while I was consulting beginning in April was there wasn't much adherence to a operating plan and.
And the discipline that we put in beginning in April started leading into some savings right off the bat and there was something as simple been why is running on time.
From that we looked at.
Train length, we were running trains way too long way out a slot, which just created a lot of havoc across a network and and really killed our service offerings. So we got trains back where they need to be and low and behold, our velocity jumps up significantly probably what 10% or so looking at the mirror.
Made all the difference in the world of getting across the railroad. So that's the basis of the operating plan as we speak right now.
Train speed has come up very nicely I've already mentioned about the progress we've made an unnecessary expense beyond deadheading and re crewing tighter.
Tighter schedule adherence and this is this is near and Dear to my heart.
We stay with the schedule seven days, a week and we run the same schedule everyday and if the traffic's there we're going if the traffic's not there we're going whether it's 120 cars or 40 cars were leaving on time, that's really the secret of the business, where I you know.
The way I was brought up and that's what we've been doing we're also gonna reinstitute individual car trip plans. This was something that we started back in the early two thousands you probably remember it where we can actually see where the car falls off trip plan, we can isolate the.
Asian, where it fell off trip planned the reason why it fell off trip plan and it was a daily correction exercise we went through very impressive to a customer that wants to know why their cars not on time and we can roll out exactly why it wasn't on time and the reason for when Doug Salesforce makes a call. So that's just some of the some of the.
Plan that we've been addressing since I've been on board and it's a lot easier to do it as an active employee then it as a consultant.
I don't like suggesting anything I liked talent. So that's that's where we're at and so far so good I'm very pleased with the results in the process progress that we've made it operationally.
Okay. Thank you very much for that time.
Thank you. The next question is from Cheryl then Radburn from T. D Securities. Please go ahead.
Thank you very much and good afternoon. I also had a question for I guess I'm picking up on the last one first of all welcome back I'm. Just curious now that you've returned to C. N. After having had the opportunity to <unk>.
A couple of other ones operationally can you comment on what you think or see in particular strength from an operating perspective and I think in your prepared remarks, you mentioned that the company is moving back to three operating reasons for them to send me within that you could add a line the rationale for that in particular.
Well I don't like to compare ourselves to other carriers because all the networks are different to begin with and I can tell you I learned a lot.
My time with other carriers.
I learn different ways of doing the business, but quite frankly as I said earlier. This is a simple process I mean, Mister Harrison always yourselves, just like checkers keep them on the black squares and figure out a way around him and that's exactly what what we're doing here today, what I'm very pleased about this network is it's solid it's linear.
It's easy to operate on and it's pretty easy to schedule. When it comes right down to it there's not a lot of interference.
With cross traffic or other railroads and the acquisition when I left the end to begin with I wish I was part of it the Janie acquisition, we fly through Chicago I mean instead.
Instead of taken 12 hours to get through the city to get to our yards on the South then we're around it in an hour.
That benefit is unbelievable and the ability to run trains out of Winnipeg through the J to Toronto around the South Lake Michigan.
It's just fantastic I mean, I wish I could've been here when they bought it cause I would've been on the first train going around the horn, but actually a lot of opportunity to eat a lot of possibilities here and you know I've just started digging back and rarely when it comes right down to it I am extremely impressed with the management.
Management team here the operators.
Lot of knowledge a lot of people that were here before a lot of people that came from other carriers that understand the game too so.
Besides that and we simplified the network go on from two regions, which to me it was just.
Too much for anyone guy to handle the three regions.
I like my operating officers to be able to be in the face and talk to the cruise and be part of the crew.
Solutions and this allows them to do that and we set up their organization. We just finished reorganizing the operating department in a traditional realm that we used to do back in the days in fact, jeez Landsat Hell. That's the way we used to do an owner was here and that was the truth. We did it the same way again, because that's what I look for.
A million with and it leads into what's down the road for the next generation of railroad as you can see it on the Archer if your second or third out you can plan on getting promoted probably in about five to 10 years and that's that's the way I want these people thinking and I I think that drives efficiencies and opportunities. So I hope that answered your <unk>.
Question, I, probably got a little long winded, but like I say I like railroading.
That's a great color. Thank you.
Thank you.
The next question is from Brendan Glinski from Barclays. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my question and add welcome back.
Just lane I hate to focus on the operating ratio, but I guess, you know given the EPS guide.
It seems like there's some pushes impulse here on the outlook for margins so.
Is this an environment, where you think some of those cost pressures might be too much to show a lot of improvement this year.
No listen Brenden as I said before we are continuing to focus on cost.
We know we need to improve our all of our margins on a year over year basis, and you know it's just.
We have a low volume environment. So it makes it a little bit challenging, but we are working on it and.
Stay tuned I think you know, we'll see what happens and we'll see what happens with economy, Let me come in on top of that just for a moment Brandon.
I'm pretty proud of what this team did this year and 130 basis points improvement when.
When you want to improve operations are improving margins you know it it take everybody. It means a good efficient operation that means that you fell into your network and it means you price properly and you stay focused on the velocity of of your operation. So those are all basic building blocks and in any economic environment. This year whatever unfolds.
Those are the things that we're gonna be working on.
We have a couple of headwinds that.
Outline to you will see how those play out over the year was going to mitigate them as much as we can so really it comes down to see what kind of leverage we get out of volumes.
And that remains to be seen so we will be I in front of you as you know is that becomes more clear to us.
Thank you both.
Thank you.
The next question is from an extra from Bank of America. Please go ahead.
Hey, great.
<unk> welcome back Great to talk to you again, I'm, just saying I'm gonna throw one to you you know I guess very similar to the hard questions, but maybe talk about last year's first quarter. Let's go near term I know, there's so much in in the year ahead, you don't want to kind of guess too, but maybe talk about the weather impact that impacted you know first quarter last year cause you had I guess you could put the last coupla years about a 500 page.
This points deterioration that's been normal in the first quarter should we not expect that given that sounds like whether it's a little bit better or or anything different because of the operations just maybe going near term on that and then just a quick follow up did you say the plan and traffic changed or where people just not following the plan that existed just trying to understand what.
What difference happened so quickly.
Well, let me let me start with your first piece of the question and then we can turn it over to add so yeah I can absolutely last year at this time, we were in deep freeze and you remember well. We finished Q1 with an O. R that was 66 six so this year when you look at our volumes there up and you see them on a weekly basis.
The weather, we've been blessed with the weather across the network. So that's helped the team is functioning very well, but as I said don't let's not count our chickens too early we have 20, some odd days behind US we'll see what happens winter is not all over by the way when I look at the next week, it's supposed to be in the minus.
2025 in some parts of the of the of the country. So you know what what's in the bank is under bank will see but definitely Ah you know we had a we had good operating condition. So far maybe put an order where do U S for the second piece of the question.
I would say that you know my comment about following the trip plan. It was just something as simple as you got a plan out there why don't you run to it run on time, the part on time and that really is what pushed.
The envelope to getting people focused on following scheduled railroad that was the first step and we're well into it now so.
Great. Thanks for the autograph.
Thank you.
The next question is from Ravi Shankar from Morgan Stanley . Please go ahead.
Thanks for the nearly one a follow up on the the the volume commentary twenty-three Crazy I think instead of the top of the call that using the first house that'd be fine, but about the second half visibility low I think there is at least a one scenario that believes that in the back half of the yard kind of inflation.
Should be more under control and from the rates are potentially under control and and mentally that prevention under control instead of backup outlook should be better in the first half outlook can you talk about why you think there is less visibility into the second half and maybe some of the things that concern me about Williamsburg enough. Thank you.
What I said was that we have a clear line of sight in the first half given we know what the grain crop is in and dug outlined we know we know what to call. It looks like it does outline kind of where we see the softness what I said about the second happens if we don't have lines site, we've modeled a certain grain crop at the crops in the ground yet.
It remains to be seen what that looks like and we are hearing like you.
Any number of different scenarios and what inflation may do and therefore, how quickly volumes me rebound as I said.
Based on the.
The best information that we have right now and as we get further end of the year will give you an update as it becomes clear.
Great and just a very quick follow up how much of the NCI B is included in the E. P. S.
It's the we're assuming that we will do the entire program. So we're assuming I mean, we're finishing at the end of January the 5 billion dollar a share buyback program and we're assuming that we will do the entire program.
The $4 billion were swimming will do that up until the the end of January of 2024.
Great. Thank you.
Thank you.
The next question is from <unk>.
<unk>. Please go ahead.
Yes, good evening and I had a nice to have you back on these calls.
I I hate to make you endured one more question on guidance, but.
I hear a year ago talking about how operationally things to continue to improve this year and pricing ahead of inflation and.
You've got the shared kind of going down in the city.
On average this beautiful essentially.
Just how bad you think of all of them could be the seasons it seems to be kind of thing.
The variable that may be keeping you on the edge a little bit with the guidance.
Are there are kind of specific.
And market, you're worried about other cost item, but outside of the labor that maybe you could fly.
R. R. A factor in this guidance.
Oh, Thanks, let me take it started that one.
We think it's prudent given the uncertainty of the volume and environment, the economic environment to be a little bit cautious here.
Is she as we said you know North American.
Production industrial production slightly negative we believe on volume so we're gonna do more than that.
We've got the next schedule they've got all the building blocks of or continue to work on the next the next.
Step up on the scheduled Rab, writing a little bit more velocity.
<unk> on the one third that's opening up is going to go after pricing ahead of inflation.
And I said, we've got some headwind uhm.
The labor side that we're working through we hope to be able to mitigate but we think it's prudent given where we are in the air.
<unk> you know a little bit cautious here. So you know that's where we're sitting at this point, we recognize it as a year unfolds.
This could be more optimistic or even I guess, there's a scenario where it's more pessimistic Ah. This is where we're sitting right now.
Okay I appreciate it.
Thank you. The next question is from Scott Group from Wolf Research. Please go ahead.
Hey, Thanks afternoon. So obviously, we're all trying to figure out like how much of this is.
Macro uncertainty conservatism versus reality, so maybe it just means that you talked about 100 million dollar headwind from the paid sick and and we're.
Rules.
Anything else just you want us to be considering his pension a headwind and no fuel was a big tailwind last year does that turn into a headwind. This year anything else that you just want us to be thinking about and then I didn't hear a capex number I don't know if I missed it but if it's not going to just share capex Whittier. Thank you.
Yeah. So yeah, the big the Big ticket items, obviously is what I mentioned in terms of the labor <unk>.
Headwind in terms of the pension we don't see a big big headwind on pension I think we see even a little bit of a tailwind next year.
And I think I think on on Capex I think that we we did not talk a lot about capex I think you can assume that we would continue to invest in the range high level of the last few years.
And those are the big ticket items I think that when you look at fuel it could be a bit of a headwind in terms of fuel surcharge. When you look at our average O H D last year.
Is it was around 480, and I think that the spot right on the way. So far is about 450. So if you assume that the 450 remains then that could be a bit of a headwind.
In terms of fuel surcharge for 2023, but I would say that these are essentially the big ticket items.
Okay. Thank you thank.
Thank you.
Thank you. The next question is from Walter's Crackling from RBC capital markets. Please go ahead.
Thanks, very much good afternoon, everyone and <unk> have you back on the call in and just on that at you. You you mentioned grooming. The next generation of Ah Railroaders and and certainly creating a we're recreating a culture of precision scheduled railroading is not easy to take some time.
Here's how you're going to approach that how long you think it'll take are you going to you.
It always it all gonna be homegrown or are you going to look to to outside talent. Just curious to hear your royal strategy in terms of of that task of the agreement.
Grew up in the next next generation rivers well.
Well thanks for the question we've already started.
We've got the three or four candidates that we're looking at very closely.
We're changing duties for each of the candidates as your boson that get them prepared to handle more than what the responsibilities are today I.
I don't think we're going to look to the outside unless Tracy has got plans I'm not aware of but.
I liked this team I like everything I've seen about it since I came back full time, and very confident and the level of expertise and operational knowledge. That's out there. So no I'm not looking on the outside and yes, where he got candidates were considered on right now.
That's great looking forward hearing about it more about it at the rest of your day, thanks very much.
Thank you. The next question is from Liberal trunk from Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everyone I wanted to follow up on that on that fuel question and discussion one other thing. We've noticed obviously is is when you look at fuel surcharge revenue over the last several quarters and the coverage of that revenue relative to be expenses. This is much higher than it has been.
You know really anytime in the past.
And I want to understand kind of you know <unk>.
They're gonna change and like the fuel mechanism or something that allows that fuel surcharge revenue to kind of well more than cover the expense and.
Can that online.
Source of of of kind of profit headwind just really based on like how that ratio was trying to do today, but somehow was tripped over the last many years.
No I mean, when you look at fuel last year, you're right I mean, it had a lot of noise.
On a quarter to quarter basis due to the fuel lag I mean, if you look at last.
Last last Q1 last year I mean, our fuel lag was negative by 13 13 cents on a yoga your basis in terms of the in terms of the EPS. So you've had a lot of noise on fuel lag and also if you look at it as you know the fuel surcharge is really.
Is really based on Oh, HD and whereas our fuel expense is based on fuel spot prices and there was a certain disconnect last year between the O H D and W. T. I that created some of that noise, but I would I would leave it at that that's that's pretty much it.
Okay. Thank you. Thank you.
Thank you. The next question is from John checked out from Evercore ISI. Please go ahead.
Thank you good afternoon.
Doug I wanted to ask you about capacity when you're dealing with a lot of moving parts here really strong green kind of uncertainty and international intermodal week industrial at the same time, you're implementing somewhat of a new operating plan. How are you managing your capacity across the entire network with so many moving parts to ensure that you don't have an elevated cost basis, but also doing.
Sure you still have the capacity of growth does pick up before you expect it to.
Oh, that's a great question John So it's a really it's a team sport right. So we work hand in hand, with Ed and his team were really sitting share a segment by segment, we kind of detailed though what exactly are is our capacity along each lane, we actually assign our traffic or schedule a traffic to it so an edge team moves it in that lane. So as we continue to look.
At and change we are adding more traffic, where we take out more traffic and we make sure that the network can handle it so as were out selling from a sales perspective.
We actually come out and we price of that capacity and we try and fill out those trains.
It's team does a great job at moving it so and they let us know hair you got some areas to sell it. So we go do it and it's worked out really well and we're gonna continue to grow our railway based on the capacity that we have and we expand too.
Okay. Thanks to.
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
Hey, good afternoon, guys. So just learn this legislation just came up about in December I guess, I'm wondering how how six and firm it is and whether there might be an opportunity.
To work with the regulators to try and an engineer a solution that that adds the time off but in a structured way that limits. The the productivity drag of of having having just add X as resources to deal with the increased call out and things like that.
Hey, David is Tracy I'll take that one you know I think that the right form to work that out is sitting in front of our employees and their representatives and so we have discussions and we'll be in negotiations this year with a number of them and we look forward that opportunity to work out what.
No in agreement on what works for them and what works for US and you know, we think that we're going to find something that in between.
I. Appreciate you you don't Wanna negotiate on the on the color, but historically as he has had a pretty good track record of of of kind of working with labor to find ways that a line interests as opposed to the the.
Things like this and I'm just wondering like the 100 million dollar estimate like how how firm is that I mean, I I Gotta imagine it's a it's a plug at this point, but you know it it it it's a it's a rough estimate based on a number of assumptions so.
We are in negotiations as you said right now with a with a few of our Union we've had.
Had we've got a new agreement in place of the IBEW, We've got a new agreement in place with the Rtc's. Both of them are multiyear agreements. We're in negotiations with others and you know we hope to reach settlements as you say the way we have in the past to protect our workers and that protect our efficiency and agreements that work for both of US. So certainly that's the perspective that.
We're going into this with I and it's one of those things that will give you a little bit more visibility on as we get into it over the course of the year, but it's prudent to raise it as a as a variable this year.
Alright I appreciate the good they added color. Thank you guys.
[noise]. Thank you. The next question is from Steve Hudson from Raymond James. Please go ahead.
Oh, Yeah. It's good afternoon. Thank you for the time, just hoping you could perhaps provide some commentary around the intermodal outlook and specifically that the delta you're seeing between international and domestic I think on the last call you had started to acknowledge and weakness in the international side and that continues to be the case, but domestic weaknesses a newer phenomenon that's been downgraded it seems.
Just moving some commentary around the roads prospects for the two would be helpful for the year. Thanks.
Thanks, Steve it's dug so it's a good question. So on the international side, we continue to see some some inventory overstocking, we continue to see a blank sailings coming in from Asia. There's some forecasts without the continue all the way through chord with the first quarter. So we do see weakness air, but we don't have a lot a lot of visibility moving forward.
On the domestic side, we're actually seeing some very some very normal volumes right now we're not seeing a lot of weakness, but we're not seeing a lot of strength. So what we're doing is we're being we're doing fairly conservative around volumes. We think we're set up to move at all and the customers are think right now, even though with dropping truck prices were still being very steady.
From the rail standpoint.
Very helpful. Thank you.
Thank you. The next question is from Rosa from Credit Suisse. Please go ahead.
Hey, good afternoon. So I wanted to ask in terms of the volume outlook and maybe some of the conservatism around that does any of that reflect.
Anticipated impact from the C. P. K C S merger going through and then separately.
With regard to this investor day coming up in May I, just wanted to understand Tracy kind of what are your objectives. There and what are the main things that you are trying to communicate to investors that you feel maybe aren't being understood or I guess why holding investor day now thanks.
Thanks for the question Firstly the case, yes, I mean, we've talked about this number of times for very comfortable with their position relative to a.
[noise] announcement or any merger that may take place there, we're pretty focused on our own game and you know when we're on our game and.
We're pretty tough to beat so what we'll do at Investor Day is lay out for you a couple of things that we think are important to have a dialogue with you about them. One of them is where we see the schedule of operation taking us in the future and the resilience of that is the basis for all of what we're going to talk to you in the first place in in in the future is really the core.
Probably run this roadmap and when I say scheduled operation I mean, not just the operation side of it but it's how we fell into the capacity as well.
The second thing, we'll talk to you will lay out for you is how we see the growth is shaping up as we look for a a pretty excited about some of the growth prospects. This year as an anomaly, we've got a little bit of a turn down. This has happened before it'll happen again, but we will come out of this very nicely I think we're very well positioned but what we'll be talking to you about it.
And Chicago is how we see the growth over the medium term to the longer term and.
There's a lot there that we're excited to talk to them.
Okay, great. Thanks.
Thank you. The next question is from Justin wrong from Stevens. Please go ahead.
Thanks, Good afternoon Tracy when you were brought on board one of the themes you talked about was curating. The bulk of business is that process now complete and if it is it is.
The next leg of a wire improvement dependent on volume growth or do you still see when I went to finding self-help opportunities that can drive meaningful margin improvement in the absence of volumes moving higher.
Suggesting last year. This time, we had a book of business that didn't fit our network in our capacity perfectly and when you do that it's very difficult to run the operation in such a way that you can't efficient.
And fast and that you deliver the service to your customers that you promised them. So we needed to fix some of that up and all of that is behind it.
The way that we look at the opportunities to schedule, Robert going forward, yes year over year, you're going to see improvements in velocity Zed gets us that completely organized around this there's some more that we need to do and he'll talk to you about that along with the team when we get to investigate but the next path on this the next step is really just fell into it.
The capacity that we've unveiled as we've kind of advances scheduled the plan that so we can now see where we've got trained capacity in quarters, and where we have capacity on trains that aren't running yet to maximum length. So Doug gets the mandate to sell into the train where we have capacity.
And to focus on selling into the existing capacity that we have on the railroad primarily right now in the east and the south beyond that we're focused on where we can partner with our customers organic growth new markets, some which we've talked about before some of which will talk about you and me where we wouldn't.
Best for that so I think it's those are the next two steps.
Got it thank you.
Thank you. The next question is from Jason.
Cohen. Please go ahead.
Thank you I'm right or wrong.
[noise] team good afternoon, and welcome back wanted to piggyback on one of the questions about sort of the potential of a C. P.
K S U murderer. If it gets approved is the guidance, assuming any concessions from that or would any concessions potentially add to your outlook.
Listen I.
I think that our guidance assumes can work that we've done now to make sure that we've secured our business relative to any transaction that and it may take place and it assumes the other volume in pricing estimates that you've seen there. So I think we'll leave that one at that and see what happens from here.
I appreciate the time is always pricey. Thank you.
Thank you. These symptoms today's question and answer session I would like to turn the meeting back over to Mrs. Robinson.
Thanks for your interest today, we know it's a little bit of a uncertain climate uncertain year, we're pretty focused on doing our job while running efficiently and we will we believe Mr volumes above what you know the.
The market would tell us industrial production is this year I am most important to look forward.
Connecting with you again at the end of the first quarter were inevitably will have a little bit more information. Thanks for your time today.
Thank you to conference has now ended please.
Please disconnect your lines at this time and thank you for your participation.
[noise].