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.
Sure.
I would now like to turn the call over to Paul Butcher, 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 uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary 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 all 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 when approaching I'm getting close to the end of my first year with C. N N 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 it to the bottom line.
We started with a pretty tough first quarter, but we finished the year on guidance and EPS up 25% and an operating ratio that starts with a 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 Fisher, 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.
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'll 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 volume.
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.
These 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.
<unk> 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.
We 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 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.
Well 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 we 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.
Blahsy creates capacity 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 could 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.
Elaboration 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.
Our 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 restore 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.
For that timeframe.
Our approach of scheduled railroading and focus of our employees helps 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 this company saw last summer.
Winter is far from over but compared to last year. We're 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 Brill doing resiliency based on running a scheduled operating Pan 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 schedule 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 top line 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 ton 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.
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 D 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.
And 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 the 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 2023 2020 for crop year.
We expect coal demand through.
All participants please continue to standby design for the moderators are disconnected.
Once again please standby.
Brought back in the call. Please go ahead.
Thank you I, Brian I think we got cut off there. So I'll just continue with my remarks. So we expect coal demand to remain strong through 2023 with commodity pricing staying favorable energy shortages are keeping demand strong and the backlog in autos and development in Asia will underpin met coal demand we.
We expect more of a flat 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> 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 in the first half of 2023.
Automobiles are still in a tight supply situation, but this is changing with higher interest rates as well as parts 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 onto just lie.
Thanks, Doug and welcome Ed, It's nice that you're back home.
It's my pleasure to review excellent fourth quarter and full year financial results.
I'll 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 Tms and 21% growth in revenues. Despite some significant weather challenges in December .
The top line performance combined with our 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.
Labor expense was up around $40 million in the quarter, the Alaska versus last year, driven by increased wages due to higher average headcount of close to 900 transportation employees versus last year.
Our fuel expense was up nearly 50% 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 Q4 up 21% on an adjusted basis.
Our 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 an adjusted basis.
Turning to our 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 resiliency of our franchise and validates the effectiveness of operating a scheduled railroad with a focus on car velocity and.
Working on an integrated basis.
We generated free cash flow of nearly $4 $3 billion for the year exceeding our guidance.
Under our current share repurchase program, which runs from February one 2022. So January 31 of 2023, we have repurchased over 29 million shares for $4 $6 billion at the end of December .
Finally at the end of 2022, our return on invested capital finished 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 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 Doug and his team remained 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 2023 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 $19 95, IPO and reflects both the confidence and a 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 one 2023 to January 31 2024.
In conclusion, let me reiterate a few points, we delivered a strong fourth quarter performance as we continue to push on operating a scheduled railroad.
We met our 2022 financial guidance.
We are witnessing continuing economic weakness and calling for a mild recession in 2023 <unk>.
Despite this weak 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 our capital in a manner that drives long term value for our shareholders let.
Let me pass it back to Tracy for some closing comments.
Thank you Joseph.
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 together.
This team and are looking ahead to the future to where we wanted to take our company and it will take a continued focus on performing at an ever higher level across the organization.
So.
Not that complicated we're going to keep it simple.
Starting with the plan we are focusing on the next level of operating performance to the scheduled operating plan and further integrating our team cross functionally.
We're continuing to get closer to our customers, earning their trust with great service and partnering in their growth and we're going to leverage the strength of our network to grow with them in a manner that is 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 that means we 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.
A number of organizations last year recognized for our sustainability efforts.
We made the CDP a list once again and we've now been lifted.
For 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 is going to help us further improve our industry leading fuel efficiency.
And last but not least of course, we are intently focused on developing the next generation of talent at CN is tremendous capability in this company as you've seen and we have the senior team in place now to bring them and their performance.
To the next level Youre going to hear a lot more details about our vision and our growth plan and our performance at our Investor day in Chicago in early May and we're looking forward to seeing you all there and now Patrick I will open the lines for questions. Please.
Thank you.
We will now take questions from the telephone lines <unk> question and using a speaker phone. Please keep Joanne Smith connection okay.
Have a question. Please press star one on your device.
You may cancel your question at any time by pressing star two.
Please press star one at this time, if you have questions.
First question is from Chris Wetherbee from Citigroup. Please go ahead.
Hey, great. Thanks very much.
Wanted to start on the guidance and I appreciate the fact that you're being cautious about the outlook or may be realistic about the outlook for a for a recession in 2023.
Just leaner Tracey, maybe you could walk us through some of the underlying dynamics of that outlook. How do you think about rpms and maybe how did 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 is the question isn't it so we're giving you today our guidance based on.
You know what is the best information we have right now.
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.
And we'll be ready if that happens.
And as we get more clarity, we'll 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 RPM is maybe track roughly industrial production is that reasonable.
We think that I'm going to hand, it over to Jim to comment, but we do believe that we can lift our volumes higher than the industrial production is just uncertain as it is known so you've covered it well Tracy.
Thank you.
Thank you.
The next question is from <unk> Gupta from Scotiabank. Please go ahead.
Thanks have a good good evening everyone.
Just wanted to follow up on previous question actually.
If you look at the EPS guidance of low single digit.
You also have a share repurchase here.
Potentially be in the low single digit range and then volume as you said, it's about like the pricing above inflation is there something on the yield operating ratio that we need to figure out to kind of account for the gap is it the mix is it the accessorial charges something else at that much.
Yeah.
Well, thanks, Qaanaaq listen as we just said I think that we're assuming right now to industrial production in North America will be negative as Tracy just mentioned, we're assuming that we'll do a little bit better than that we will continue to will continue to work on our margins I mean, we know that we need to improve our margins on a year over year basis How's.
As you know, it's tougher to improve margins when you're in a low volume environment.
But we're very confident over the mid to long term that there's no question that we will improve our margins.
When you look at what we've done in 2022, I mean, our incremental margins for the full year was a respectable 50% and we improve our or by 130 basis points. So that sets the stage and you know with the scheduled railroading back in full force.
That is.
It's all going to depend on volumes and it's all going to depend on the economic and economic environment.
Economic environment is a little bit better then we'll ride the way.
Deeper than what we thank them and it's not mild but it's deeper than you know will will will perform well, we're well positioned to perform.
Recession, and we have a strong balance sheet. So you know I think.
And as I and I'll finish on this Ed 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 count a chicken too early we just have about 21 days behind us.
Thank you.
Thank you. The next question is from Tom <unk> from UBS. Please go ahead.
Yes, good afternoon.
I wanted to ask a bit about how you think about pricing against this backdrop of.
Weaker cyclical backdrop, I think the commentary from the Canadian rails in 2022 was pretty optimistic tight capacity pretty favorable trends in pricing.
Would we expect that to use meaningfully against weaker volume backdrop or do you think there is some momentum to carry through that you still have a may be stronger than the normal pricing in 2023. Thank you.
Thanks, Tom It's Doug So once again I will say, we have about a third of our book of business comes up every year for repricing.
So we do we have seen a strong pricing environment continue we do have some catch up to do from prior years and our goal continues to be pricing above rail inflation, and we really don't see any issues with that at all so far.
So can you kind of comment on pricing this year versus last year do you think it's.
Similar or a bit a bit lighter given the volume backdrop.
It's very similar right now we expect as like you don't pricing overall for 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 <unk> from Jpmorgan. Please go ahead.
Yeah.
Thanks, Scott Good afternoon, I just wanted to ask just saying you mentioned some headwinds on work rest rules and paid sick days I 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 how is that going to impact.
The financials are head count.
How should we expect that to kind of rollout through throughout the year.
Yes, Thanks, Brian Yes definitely.
Headwinds there.
And then the team will work hard to try to minimize the.
The unfavorable potential impact of those headwinds, but I would say that when you put them together they could be as much as $100 million of headwinds in 2023, So we'll see.
But thats certainly something we have to deal with.
Would that be would that require additional head count to cover some of the but that's that's the notion that the notion is that you would have to have more people to do the same work and therefore it does create a it does create a financial unfavorable impact, but as I said, Ed will and the team.
<unk> are working to try to minimize the impact but so we're all over this as we speak Brian 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.
Taken out a lot of.
Unnecessary operating expense like re Crewing trains that Diane route or deadheading onto a better schedule and there is quite a bit of savings that we 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 were working on.
Okay. Thank you very much.
Thank you. The next question is from Benoit Poirier from Desjardins capital markets. Please go ahead.
Yeah, Good afternoon, everyone and we'll come back Ed GCN.
Obviously, a lot that's been accomplished since April since April but could you provide more color about some changes that you are looking to implement that would bring the company to the next level and maybe if you could expand a bit on be it count for 2023, and Capex envelope 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 our operating plan and the discipline that.
We put in beginning in April started leading into some savings right off the bat and it 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 of slot, which just created a lot of havoc across a network.
And really killed our service offerings. So we got trains back where they need to be and Lo and behold, our velocity jumps up significantly probably what 10% or so looking at the team here.
Made all the difference in the world to get them 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 in <unk>.
Necessary expense behind dead, heading and re Crewing tighter.
Tighter schedule adherence and this is near and Dear to my heart.
We stay with the scheduled seven days a week and we run the same schedule every day and if the traffic's there we're going if the traffic is not there we're going whether it's a 120 cars a 40 cars, we're leaving on time, that's really the secret of the business.
The way I was brought up and that's what we've been doing.
We're also going to reinstitute individual car trip plans.
It 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.
Can isolate the location where it fell off trip plan. The reason why it fell off drip 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 rollout exactly why it wasn't on time and the reason for it.
When Doug Salesforce makes a call so thats 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 like talent. So that's that's where we're at and so far so good I am very pleased with the results and the process.
Progress that we've made operationally.
Okay. Thank you very much for the time.
Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks, very much and good afternoon.
I also had a question for Ed I guess I am picking up on the last one.
First of all welcome back.
Im just curious now that you've returned after having had the opportunity to assist those a couple of other class ones operationally can you comment on what you think RCM particular strength from an operating perspective and I think in your prepared remarks, you mentioned that the company is moving back to Q3.
Operating regions from Q, So maybe within that you could outline 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 in 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.
Mr. Harrison always yourselves, just like checkers keep them on the black squares and figure out a way around them and that's exactly what we're doing here today, what I'm very pleased about this network is 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.
The acquisition when I left the end to begin with I wish I was part of it the J&J acquisition, we fly through Chicago I mean.
<unk> taken 12 hours to get through the city to get to our yards on the south end where 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.
Fantastic I mean, I wish I could've been here when they bought it because that would have been on the first triangle and around the horn, but.
Actually a lot of opportunity a lot of possibilities here and I've just started digging back and really when it comes right down to it I am extremely impressed with the.
Management team here of the operators.
A 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 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 the organization. We just finished reorganizing the operating department in a traditional realm that we used to do back in the days and.
In fact June Landsat held Thats the way we used to do in Hunter was here and that was the truth. We did it the same way again, because that's what I was familiar with and it leads into what's down the road for the next generation of railroad as you can see it on our chart of your second or third out you can plan on getting promoted probably in about five years to 10 years and.
That's why I want these people thinking and I think that drives efficiencies and opportunities. So I hope that answered your question I, probably got a little long winded, but like.
As I say I like railroading.
That's great color. Thank you.
Thank you.
The next question is from Brandon <unk> from Barclays. Please go ahead.
Hey, good afternoon, everyone and thanks for taking the question and Ed welcome back.
Just lane I hate to focus on the operating ratio, but I guess, given the EPS guide.
It seems like there's some pushes and pulls here.
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 Brandon as I said before we are continuing to focus on costs.
We know we need to improve our margins on a year over year basis.
And it's just we have a low volume environment. So it makes it a little bit challenging, but we are working on it and.
And stay tuned I think.
We will see what happens and we'll see what happens with the economy, Let me come in over top of that just for a moment Brandon So I'm pretty proud of what this team did this year and 130 basis points improvement.
When you want to improve operating ratio improvement of margins.
It takes everybody. It means a good efficient operation that means that you sell into your network and it means you priced properly and you stay focused on the velocity of your operations. So those are all basic building blocks and in any economic environment. This year whatever unfolds. Those are the things that we're going to be working on.
And we have a couple of headwinds that you outlined to you will see how those play out over the year, we're going to mitigate them as much as we can so really it comes down to what kind of leverage we get out of volumes and that remains to be seen so we will be in front of us.
As that becomes more clear to us.
Thank you Bob.
Thank you.
The next question is from Ken extra from Bank of America. Please go ahead.
Okay, Great I'll add to what Ed welcome back Great to talk to you again.
I'm going to throw one to you I guess very similar to the hard questions, but maybe talk about last year's first quarter, Let's go near term I know theres. So much in the year ahead, you don't want to kind of guess too, but maybe talk about the weather impact that impacted first quarter last year. Because you had I guess you go back the last couple of years about a 500 basis points deterioration thats been normal in the first quarter.
Should we not expect that given it sounds like weather was a little bit better 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 yes, absolutely last year at this time, we were in deep freeze and you remember well. We finished Q1 with an ore that was $66 six so.
This year when you look at our volumes, they're up and Youll 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 will see what happens when there is not all over by the way when I look at the <unk>.
Weak it's supposed to be in the minus.
2025, and some parts of the country. So you know what.
And the bank is in the bank, we will see.
But definitely.
We had we had good operating conditions, so far maybe I'll turn it over to you Ed for the second piece of the question.
I would say that.
My comment about following the trip plan. It was just something as simple as you got a plant out there why don't you run to run on time depart on time and that really is what pushed.
The envelope to getting people focused on following a scheduled railroad that was the first step and we're well into it now so.
Great. Thanks for the thoughts guys.
Thank you.
The next question is from Ravi Shanker from Morgan Stanley . Please go ahead.
Thanks, Good evening everyone.
Follow up on the <unk>.
Volume commentary by 'twenty, three Tracey I think you said the copper call that.
Using the first half that'd be fine, but about the second half visibility is low I think there is at least a one.
One scenario that believes that.
In the back half of the euro kind of inflation should be more under control and the rates are potentially under control and inventory that potentially under control and sort of back half outlook should be better than the first half outlook can you talk about kind of why you think there is less visibility into the second half and maybe some of the kind of things that concern you about Williams Lake now thank you.
Hey, Ravi what I said was that we have the clear line of sight in the first half given we know what the grain crop is in and as Doug outlined we know.
Now with call glad looks like Doug outlined kind of where we see the softness what I said about the second half as we don't have line of sight, we've modeled a certain grain crop, but the crops in the ground yet.
So it remains to be seen what that looks like and we are hearing like you any number of different scenarios on what inflation may do and therefore, how quickly volumes may rebound as I said our guidance is based on the best information that we have right now.
And as we get further into the year I will give you an update as it becomes clear.
Great and just a very quick follow up how much of the NCI is included in the EPS Guide.
We were assuming that we will do the entire program. So we're assuming we're finishing at the end of January the $5 billion.
Share buyback program and we are assuming that we will do the entire program.
$4 billion, we're assuming we'll do that up until the <unk>.
The end of January of 2024.
Great. Thank you.
Okay.
Thank you the next.
Question is from <unk> <unk> from BMO. Please go ahead.
Yes, good evening.
And nice to have you back on these calls.
I.
Hate to make you endured one more question on guidance, but.
I here a year ago talking about how operationally things should continue to improve this year and pricing ahead of inflation and <unk>.
You've got the share count going down.
Okay.
Average this year potentially.
Just how bad do you think the volume could be this year 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 kind of specific.
And Mark if you're worried about are there other cost item, but outside of the labor maybe just flat.
Our are factored in this guidance that you may be missing.
Thanks, Eddie let me take a start at that one.
We think it's prudent given the uncertainty of the volume environment, the economic environment to be a little bit cautious here.
As we said North American.
Production industrial production slightly negative we believe on volumes, we're going to do more than that.
We've got the next schedule, we've got all the building blocks that will continue to work on the next till the next.
Step up on the scheduled railroading little bit more velocity.
Doug on the one third that's opening up is going to go after pricing ahead of inflation. This as I said, we've got some headwinds.
On the labor side that we're working through we hope to be able to mitigate but we think it's prudent.
Even where we are in the year to be a little bit cautious here. So that's where we're sitting at this point, we recognize that as the year unfolds.
This could be more optimistic or even I guess, there's a scenario where it's more pessimistic.
Where we're sitting right now.
Okay I appreciate it.
Thank you. The next question is from Scott Group from Wolfe 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 just leave you.
Talked about the $100 million headwind from the paid sick and work rules.
Rules.
Anything else just you want us to be considering is pension headwind I know fuel was a big tailwind last year does that turn into a headwind this year and 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 not can you just share capex for the year. Thank you.
Yes so.
Yes, the big the Big ticket items, obviously is what I mentioned in terms of the labor.
A headwind in terms of the pension we don't see.
A big a big headwind on pension I think we see even a little bit of a tailwind next year.
And I think.
I think on Capex I think that we did not talk a lot about capex I think you can assume that we would continue to invest in the range high level over 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 <unk> last year.
Is it was around $4 80, and I think that the spot rate on <unk>. So far is about $4 50. So if you assume that the $4 50 remains then that could be a bit of a headwind in <unk>.
Terms of fuel surcharge for 2023, but I would say that these are essentially the big ticket items.
Okay. Thank you.
Thank you.
Thank you. The next question is from Walter <unk> from RBC capital markets. Please go ahead.
Thanks, very much good afternoon, everyone and that it's great to have you back on the call and just.
On that Ed Hugh you mentioned grooming. The next generation of a railroader is certainly creating a.
We're re creating a culture of precision scheduled railroading is not easy it takes some time.
Curious, how youre going to approach that how long you think it'll take are you going to is.
Is it all going to be homegrown or are you going to look to to outside talent just curious to hear your role strategy in terms of.
That task.
Our agreement in the next generation growers.
Well.
Thanks for the question we've already started.
We've got three or four candidates that we're looking at very closely we're.
We're changing duties.
For each of the candidates as the year goes on to get them prepared to handle more than what their responsibilities are today.
I don't think we're going to look to the outside and less Tracy has got plans I am not aware of but.
I like this team I like everything I have seen about it since I came back full time and very confident in the level of expertise and operational knowledge. That's out there. So no I'm not looking on the outside and yes. We are we've got candidates we are considering right now.
That's great looking forward to hearing more about it at Investor day, Thanks very much.
Thank you. The next question is from Amit Mehrotra from Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everyone I wanted to follow up on that on that fuel question.
<unk>.
One of the things we've noticed obviously.
When you look at fuel surcharge revenue over the last several quarters and the coverage of that revenue relative to the extent. This is much higher than it has been really at any time in the past.
And I wanted to understand kind of.
Has there been a change in like the fuel mechanism or something that allowed that fuel surcharge revenue to kind of well more than cover the expense.
And Tim that online.
Yes.
Kind of profit headwind, just really based on like how that ratio has trended today from Alex trends over the last many years.
I mean, when you look at fuel.
Last year, you are 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 Q1 last year, I mean, our fuel lag.
Was negative by 13 13 cents on a year over year basis in terms of the in terms of the EPS. So you 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.
<unk> HD and whereas our fuel expense is based on fuel spot prices and there was a certain disconnect last year between the UHD and double UTI that created some of that noise, but.
I would I would leave it at that.
Pretty much it.
Okay. Thank you. Thank you.
Okay.
Thank you. The next question is from Jon Chapelle from Evercore ISI. Please go ahead.
Thank you good afternoon.
Doug I wanted to ask you about capacity I mean, youre dealing with a lot of moving parts here really strong green kind of uncertainty in international intermodal weak industrial at the same time, you're implementing somewhat of a new operating plan.
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 to ensure you still have the capacity if growth does pick up before you expect it to.
Well, it's a great question John So it's a really it's a team sport rates. So we work hand in hand, with Ed and his team.
We're really sitting share of segment by segment, we kind of detailed out what exactly or as our capacity along each lane, we actually assign our traffic our schedule of traffic to it so in edge team moves it in that lane. So as we continue to look at and change we add in more traffic, where we take out more traffic and we make sure that the network.
Can handle it so as we're out selling from a sales perspective, we actually come out and we price to that capacity and we try and fill out those trains.
The team does a great job at moving it so and they let US know here you got some areas to sell and so we go do it and it's worked out really well and we're going to continue to grow our railway based on the capacity that we have and we expand too.
Okay. Thanks, Dan.
Okay.
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
Hey, good afternoon guys.
This legislation just came about in December .
I guess I'm wondering how fixed and firm it is and whether there might be an opportunity to.
Work with the regulators to try and engineer a solution that that adds the time off but it is in a structured way that limits the.
The productivity drag of having that having just add excess resources to deal with the increased call outs and things like that.
Hey, David its Tracy I'll take that one I.
I think that the right forum 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 that is.
Are you in agreement on what works for them and what works for Us and.
We think that we're going to find something that comes in between.
I appreciate you don't want to negotiate on the color, but I mean, historically <unk> had a pretty good track record of kind of working with labor to find ways that align interests as opposed to the.
Disruptive things like this and I'm, just wondering like the $100 million estimate like how how firm is that.
I got to imagine it's a plug at this point, but.
I'd say its a rough estimate.
Based on a number of assumptions.
And we are in negotiations as you said right now without with a few of our Union we've had.
We've had we've got a new agreement in place with the IBEW, We've got a new agreement in place with the RTC as both of them are multiyear agreements we're in negotiations with others.
<unk>.
We hope to reach settlements as you say the way we have in the past to protect our workers and that protect our efficiency in agreements that work for both of US. So certainly that's the perspective that we're going into this with.
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.
Prudent to raise it as a as a variable this year.
Alright I appreciate the added color. Thank you guys.
Yeah.
Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.
Oh, yes. Good afternoon. Thank you for the time.
Just hoping you could perhaps provide some commentary around the intermodal outlook and specifically the delta you're seeing between international and domestic I think on the last call. You had started to acknowledge some weakness in the international side and that continues to be the case, but domestic weakness is a newer phenomenon. That's been downgraded. It seems just maybe some commentary around the relative prospects for the two would be helpful for the year.
Thanks.
Thanks, David So it's a good question.
Question. So on the international side, we continue to see some some inventory overstocking.
We continue to see blank sailings coming in from Asia. There is some forecast for that to continue all the way through the first quarter. So we do see weakness there, but we don't have 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.
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 I think right now that even though with dropping truck prices were still being very steady from a rail standpoint.
Very helpful. Thank you.
Thank you. The next question is from Ari 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.
The anticipated impact from the CP jcs merger going through.
And then separately.
With regard to this investor day coming up.
In May I, just wanted to understand Tracey kind of what are your objectives, there and what are the main things that you're trying to communicate to investors that you feel maybe arent being understood or I guess why hold an investor day now thanks.
Thanks for the question.
Firstly, the Tcs I mean, we've talked about this a number of times, we're very comfortable with our position relative to <unk>.
Any announcement or any merger that may take place there, we're pretty focused on our own game and when we're on our game and we're.
Pretty tough to beat.
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.
Reschedule 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 one.
In the future is really the core of how we run this railroad and when I say scheduled operation I mean, not just the operation side of it but it's how we sell into that capacity as well.
The second thing, we'll talk to you we'll lay out for you is how we see.
The growth.
Wrapping up as we look forward, we're pretty excited about some of the growth prospects. This year is an anomaly, we've got a little bit of a turndown. 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 in May in Chicago is how we see the growth over the medium term to longer term.
There's a lot there that we're excited to talk to that.
Okay, great. Thanks.
Thank you. The next question is from Justin long from Stephens. Please go ahead.
Thanks, Good afternoon Tracy when you were brought on board one of the themes you talked about was Curating. The book of business is that process now complete and if it is is the next leg of or improvement dependent on volume growth or do you still see what I would define itself.
Opportunities that can drive meaningful margin improvement in the absence of volumes moving higher.
Yeah.
So Justin last year. This time, we had a book of business that didn't fit our network and our capacity perfectly.
And when you do that it's very difficult to run the operation in such a way that you are efficient and fast and you deliver the service to your customers that you promise them. So we needed to fix some of that up and all of that is behind us.
The way that we look at the opportunities as scheduled railroad going forward, yes year over year, you're going to see improvements in velocity.
As that gets us completely organized around this there is some more than we need to do.
And he'll talk to you about that along with the team when we get to Investor day, but the next path on this the next step is really to sell into the capacity that we've unveiled as we've kind of advances scheduled plan. So we can now see where we've got train capacity and corridors and where we have capacity on trains.
Arent running yet to maximum length. So Doug gets the mandate to sell into the trains 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.
Which we've talked about before some of which we'll talk about to you in may.
We would invest for that growth. So I think it's those are the next two steps.
Got it thank you.
Okay.
Thank you. The next question is from Jason Seidl from Cowen. Please go ahead.
Thank you operator.
Racing team good afternoon, Ed welcome back wanted to piggyback on one of the questions about sort of the potential of a CPE.
Assume merger if it gets approved is the guidance assuming any concessions from that or was there any concessions potentially add to your outlook.
Listen I.
So I think that our guidance assumes the work that we've done now to make sure that we've secured our business relative to any transaction that may take place and it assumes the other volume and pricing estimates that you've seen there. So I think we'll leave that one at that and see what happens from here.
Okay I appreciate the time as always Tracy.
Thank you.
Thank you. This concludes today's question and answer session I would like to turn the meeting back over to MS. Robinson.
Thanks for your interest today we.
We know, it's a little bit of the uncertain climate uncertain year.
We're pretty focused on doing our job well running efficiently and we will we believe Mr volumes above what.
The market would tell us industrial production is this year and most importantly, we look forward to connecting.
Connecting with you again at the end of the first quarter were inevitably we will have a little bit more information. Thanks for your time today.
Thank you the conference has now ended.
Please disconnect your lines at this time and thank you for your participation.
Okay.
Okay.