Q1 2023 Canadian National Railway Co Earnings Call
Okay.
Good afternoon. My name is Lisa and I will be your operator today welcome to Cn's first quarter 2023 financial and operating results conference call.
All participants are now in a listen only mode and after the Speakers' remarks, there will be a question and answer session during which we ask that you kindly limit yourself to one question.
I would now like to turn the call over to Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Butcher.
Well. Thank you Lisa good afternoon, everyone and thank you for joining us for Cn's first quarter 2023 financial results Conference call.
Now before I 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 Law. 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.
We described in our cautionary statement regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct the Q&A session I do want to remind you to please limit yourselves to one question.
Our team will be available after the call for any follow up question.
Joining us on the call today are Tracy Robinson, our president and CEO , Doug Macdonald, our Chief Marketing Officer, <unk>, Our Chief Financial Officer, and Ed Harris, Our Chief operating officer. It is now my pleasure to turn the call over to CNS, President and Chief Executive Officer, Tracy Robinson met people do you have the new <unk>.
Diplomats three Mr. <unk> welcome to <unk> Q1 earnings call.
We very much appreciate you joining us today and before I get into the Q1 highlights let me just make a few comments on some recent developments.
Firstly, I'm really excited to announce that C N with U P and the G. M X T are launching a new transformational premium intermodal service that connects Mexico. The U S and Canada and this is a steel wheel interchange service that Leverages, the best of our three networks and COO.
Create the most direct route and the fastest transit times between Canada, and Mexico. It will provide our intermodal customers with the efficiency of bigger payloads and most importantly, the ability to accelerate the shift of truck business to rail.
And it's also an example of how we can collaborate to create the next level of service offerings for our customers. We're going to continue to work to create more of these creative and collaborative arrangements that will support our customers' ability to get to new markets or to their current markets, but faster and more efficiently.
I'm also happy to announce that we have reached a tentative agreement in Canada would be bursty, covering approximately 6000 C and locomotive engineers conductors yard conductors and yard coordinators. Now. This agreement is subject to ratification by the TCR T. Membership. So we aren't able to provide any details at this time.
But I will say that we appreciate the work the Union leadership has done with us to reach this agreement.
And finally I want to make just a couple of comments on safety.
The safe movement of all goods to the communities we serve across North America has never been more front of mind now this industry and our company have made tremendous progress on improving the safety of our operations over the past decade, and we're all working towards reducing and ultimately eliminating harm both injury.
He has an incidence and ensuring that we protect the communities there are communities in which we operate and in which we live.
There has and continues to be considerable investments in technology and training and advancing leadership and culture, we're not yet cause euro as an industry, but we're making progress and I am proud of the way the industry is coming together to advance together.
After the derailment in Ohio earlier this year, all the class ones convened to put all of our respective technology and protocols and wayside detection on the table and we together use that to develop new voluntary standards for our industry and for wayside detection and each of us in the process of implementing to those standards.
Yeah.
Now our regulators can and they should be positive partners in this effort and they will be as long as there is a fact based data driven approach that connects potential solutions with root causes and if we apply all the wrong solution will not only fail.
To make the necessary gains in safety outcomes, we run the risk of unintended consequences that impair the performance of our supply chain.
On that note I'm pleased to report that you know as seen as of yesterday, we've achieved 838 days without a fatality.
And 650 days without a serious injury.
He said the longest periods and see in history and I think it's proof that zero is possible now where its going to provide a little more information today on our progress on safety.
So let's get into the quarter I want to first thank all of our C unemployed for their dedication and their hard work to deliver some pretty solid performance.
Let me highlight a few key points.
Diluted EPS is a Q1 record it was up to 38% on an adjusted basis revenues were up 16% as we moved 6% more volumes more efficiently you're operating ratio was 61, 5% an improvement of 510 basis points on an adjusted basis and the lowest Q.
One at CN since 2016, we're continuing to deliver on our goal of driving the top line to the bottom line.
We remain focused on the disciplined execution of our operating model and on the basis of a strong first quarter, we're updating our financial outlook and we now expect to deliver 2023 EPS growth in the mid single digit range up from low single digit previously.
Now it's important to note that our views on the economy Hasnt changed our current volumes reflect that we are in a mild recession.
And you know, we're uncertain about how deep or how long it will go on but what we're modeling is negative north American industrial production for the full year.
We've been through this before the industry has been through this before and we will come out of it.
We're gonna stay focused on our scheduled operating plan, it's going to take you through what we're doing currently and to adjust to current volumes were.
And we're not going to make the mistakes of the past, we will maintain our workforce and our capital plan.
We will have less margin leverage as long as the volumes remained soft and more volume or margin leverage once the the more normalized volumes return will be ready when that happens and and see that as the economy list.
Now I'm very pleased with the work of adding the operating team and while the winter was milder in Q1 compared to last year was more of a normal winter are scheduled operation proved its worth as we demonstrated resiliency recovering much more quickly from the winter challenges that were thrown our way.
We delivered for our customers, it's going to provide you a little more detail, but let me highlight our origin on a train or origin train performance with 86%, reflecting our continued disciplined execution of our operating plans and.
And Doug and the marketing team delivered a pretty strong topline performance.
Our commercial team remains in close contact with our customers and Doug is going to give you a few more details on drivers of growth in Q1, and what we expect as we look forward to the remainder of the year.
With that I will get into the details of our solid financial performance in Q1, which is driving our updated financial outlook. So let's go over to you.
Thank you Tracy.
Let me start off by thanking all of the CN employees that helped deliver a solid performance in quarter one.
This team is delivering on expectations and I knew from the time I came back to this organization.
They had the muscle memory to take sand back into a leadership position.
This past winter was milder than the last year with about 45% of the days in the first quarter of this year facings.
Some type of chair restriction and train length versus 65% last year.
We still experience some periods of extreme cold that impacted our ability to operate the railroad as efficiently as expected.
What impressed me the most was our ability to recover from these events demonstrating the resiliency of this network and our ability to serve our customers. Despite facing these challenges.
As I said last quarter railroading needs to remain simple.
And we have continued our focus on running a scheduled operating plan, which drives the velocity and creates capacity. This provides a level of service that Doug can sell to those customers.
Me highlight a few key operating metrics for the first quarter.
I also want to echo that Tracy mentioned on safety.
We are all committed to move the North American economy, and our goal is to make sure all employees get back home safe.
Safe manner, I'm very proud of our safety performance with our injury frequency down 17% in this quarter and our accident rates down 41% Carver.
Car velocity averaged 211 miles per day in the first quarter up nearly 30% from the first quarter of last year. This is the best first quarter car velocity performance since 2017 origin train performance averaged 86% in the first quarter up 62%.
From the first quarter last year.
This performance is on the back of moving 6% more volumes in terms of our Tms in the quarter, including 90% more Canadian grain.
To highlight the strength of the operating model. We moved this additional volume in the first quarter with nearly 15000 less cars on the network. We continue to drive our sustainability agenda with fuel efficiency up 1% on a year over year basis, as we continue to lead the industry.
<unk> on that front as we look forward our goal is to drive continuous improvement on the operating model.
We have done a lot of heavy lifting since April of last year, when we reverted back to running a scheduled railroad. So we are starting to lap those early changes, we will continue to drive efficiencies and improvements will be similar.
It will be smaller and smaller increments excuse me.
As we have exited the winter and with volume softening given the uncertain economic environment. We are taking the opportunity to look at reducing train starts and also going after train length, all while adapting to the recent Canadian work rest rules on top of it we're already working agreement as.
Weather warms, so should our performance not only in train operations, but also safety warmer climate equates to velocity and this creates capacity, which we will quickly convert to efficient capital work blocks that will be built into our scheduled operating plan.
As I mentioned in my opening comments I'm very pleased about how the operating team has been performing over the past year and we still have more to do.
Many of you on the call we will have the opportunity to interact with the operating for folks next week at our Investor day in Chicago, and I am looking forward to seeing many of you there as well with that I'll pass it on to Doug to discuss topline performance and outlook.
Thanks, Ed I wanted to take this opportunity to thank you and your team for running a fluid and efficient operations as well as demonstrating resiliency against the winter conditions, we were able to deliver on our promise to better serve our customers and help them grow in their markets a true collaborative effort.
I'll now turn to slide nine and provide a review of our solid first quarter top line performance.
First quarter record revenues were $4 3 billion up 16% over Q1 of last year on 6% higher Rpms and led by the bulk segment.
Canadian grain was the biggest driver of growth in Q1, nearly doubling our volumes versus last year, including an all time tonnage record in February .
We are delivering for our grain customers, averaging 90% spotting performance over the current crop year and in line with our target we.
We did pull forward some of the Canadian grain into Q1, which will impact volumes in Q2, but we continue to engage with our customers to refine our demand outlook through this summer and in advance of next harvest co.
Coal demand remained solid through the first quarter with a favorable commodity pricing environment and strong commitments from our customers.
Strong frac sand volumes reflected a favorable market environment supporting an uptick in western Canadian drilling activity.
Automotive continued to be a bright spot for the quarter as inventory replenishment persisted across the industry.
We did however, see continued weakness in other segments.
A softening in international intermodal across all of our gateways reflected the inventory correction that is taking place throughout North America.
Domestic volumes held up during most of the quarter, but have more recently started to turn negative.
Petroleum and chemicals volumes remained under pressure with reductions in refined products as well as lower chemicals and plastics used as inputs into manufacturing, both reflecting general economic weakness.
Lumber shipments decreased only slightly despite this pressed housing indicators rising interest rates low commodity prices and extended mill curtailments, particularly in British Columbia volumes.
Volumes were steady due to the home renovation market doing better than expected.
Turning to slide 10, let me take a few minutes to talk about our top line outlook for the balance of the year.
We are still assuming north American industrial production to be negative in 2023, but remain confident that we will outperform this from a volume perspective.
While Q1 volumes were strong we are seeing some softness in certain markets right now and this is reflected in our April volume so far.
On the positive side, our bulk segment remains solid.
Gideon grain demand will start to lower as we head into the planting season, and we are anticipating an average crop for 2023 2020 for crop year.
Canadian metallurgical coal demand is expected to continue its strong pace with solid operational execution for at least Q2.
Automotive continues to outperform with strong sales and dealer inventory levels below historical levels.
Most other markets remain uncertain, given a weakening economy.
International Intermodal is expected to have multiple blank sailings in Q2, and Q3 remains uncertain with North American inventory levels still high.
Domestic retail volumes are softening due to the mild recession pricing is also under strain due to increasingly available truck capacity.
Lumber remains uncertain as commodity prices are still at low levels and housing demand is still low due to elevated interest rates. Despite a significant shortage of homes on the market.
Petroleum <unk> chemicals production is directly tied to the economy. So we expect demand to be soft for most of the year.
One bright spot is our intermodal sector is our recent announcement for a new service for heme, Mexico in CNS network in Canada, as well as Detroit, combining the best service in the industry provided by the FX <unk>.
<unk> will now have the shortest routes and fastest service to all of its key markets layering. This new service with our new E&P product with the Upenn S. <unk> customers will have a new options to convert truck volumes to rail.
To close we are working closely with our customers to monitor the economic environment as we run a scheduled railroad with a focus on velocity, we are driving solid customer service that will serve us well and position us to recover volumes when the economy recovers with that I'll pass it onto just land.
<unk> visited the valid in the Nordics and that is a Dutch plumbing to the Miss.
I will talk to slide 12 of the presentation, which will provide more visibility on our first quarter performance.
These results again highlight the strength and resilience of our franchise as we delivered volume growth of 6% in terms of our Tms and 16% revenue growth.
The topline performance combined with our strong operating performance drove solid earnings in the quarter and we deliver this with nearly 15000 fewer cars on our network.
We had a favorable fuel surcharge lag in the quarter with fuel prices coming down.
Let me provide you with some more details on the quarter and I will speak to the adjusted numbers, which exclude advisory costs related to shareholder matters in the first quarter of 2022, and I will talk to the variances on a constant currency basis.
Labor expense was up around $40 million in the quarter versus last year, mostly driven by higher average head count mainly on the transportation side, which was partly offset by higher capital credits.
Purchased services and material expense was up by 8% versus last year, driven by higher material costs and increased outsourced services expense.
We delivered record Q1 operating income of close to $1 7 billion.
Up 34% on an adjusted basis.
Our operating ratio came in at 61, 5%, which is 510 basis point lower than the adjusted operating ratio for the same period last year.
Record Q1 diluted EPS of $1 82 for the quarter was up 38% versus last year on an adjusted basis.
We generated free cash flow of nearly $600 million in the first quarter.
Under our current share repurchase program, which runs from February one 2023. So January 31 of 2024, we have repurchased nearly 5 million shares for almost $800 million.
As at the end of March.
Moving on to Slide 13, let me provide some visibility to 2023.
While Q1 saw strong volume growth in the bulk segment, we continue to see weakness in certain consumer driven segments like international intermodal lumber and chemicals and plastics.
We are still assuming a mild recession in 2023 with North American industrial production expected to decline.
So far in April volumes on an <unk> basis are down about 6%, reflecting the weakness in the economy and some traffic that was pull forward to Q1.
Despite the current recessionary environment, we remain focused on running our railroad. According to plan, providing reliable service for our customers and driving results to the bottom line.
Considering our strong financial performance in Q1, we are updating our full year outlook and now expect to deliver mid single digit EPS growth in 2023 versus low single digit previously.
We remain committed to shareholder distributions and still expect a budget of about $4 billion for our current share repurchase program, which runs through January 31 2024.
In conclusion, let me reiterate a few points.
We delivered a strong first quarter performance as we continued to realize the benefits of operating a scheduled railroad with a focus on car velocity.
We are witnessing continuing economic weakness and we're still calling for a mild recession in 2023.
Despite this weak economic environment, we are now guiding for mid single digit EPS growth for the year on the strength of our Q1 results 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. Thanks is now before we open up the line for questions. Let me just highlight that we are holding our investor day in Chicago next week.
Second and third and the presentations on May 3rd will be webcast. We hope many of you will be able to join us.
Let's open the line for Q&A.
Thank you we will now begin the question and answer session and if you would like to ask a question on the phone lines. Today. Please press star one on your telephone keypad to remove yourself from the Q&A Star one again.
Obviously mentioned, we ask that you kindly limit yourself to one question. The first question comes from Ben <unk> with Desjardin.
Yes, good afternoon, everyone and congratulations for the strong start.
Maybe my question could you talk a little bit about your transformational partnership with <unk> Group, Grupo Mexico, and the New Falcon premium service and also if you could talk about the other partnerships that you were looking at thank you.
Let me start that one off then one and then I'll hand, it over to answer a little color on the Falcon service, we believe that the right way to service our customers.
It is to be working with partners, where that makes sense and in this case.
And efficacy are a great example of that we've been able to put together a product that offers considerable transit benefits and.
That helps them and help get trucks off the road. There are other examples out there, where we're doing well and we're looking to do the same types of thing in different market and more on that to come in.
We pull those together does John doesn't make some comment from me on the New Falcon service.
Thanks, a lot and also one of the key things. We tried to do is take the best what was available on the market and when you look at today the service at the FX Z.
<unk> been providing north and south bound from between Chicago and the markets in Mexico.
Has been untouchable by anyone it's been phenomenal the customers rave about it and now we have been able to combine with these two great companies to sit down and offer that same type of service with CMS service from Chicago into the Canadian network as well as into Detroit. So we're really looking forward to that we know from doing a lot of historical.
Work is that there is a minimum of two trains each direction Thats moving over the road that we think we can go after by providing this service so it'll be it'll be a great thing to do but it's going to take a while and we're going to be working with our customers to do but we think we have the product to move forward.
That's great. Thanks for the color I have a great day.
Thank you. Your next question comes from the line of Ken <unk> with Bank of America.
Great Good afternoon, and definitely concur, great job on the quarter. So maybe just to follow up with AD or Tracy just laying on the outlook there.
Moving to mid single digits has anything changed or is this just kind of the flow through from first quarter is there anything that's changing in your outlook as you look in terms of the flow through of the improved service performance.
And is that I don't know if you want to talk about the fuel benefit that you got in the first quarter. If there is a flow through on that.
Trying to understand what's changed and what the potential upside from from this targeted thanks.
Thanks, Ken I'll listen.
Nothing has changed on our view of the year our guidance has been lifted based on some really strong performance in the first quarter, it's going to continue to focus on the next level of benefits unscheduled operating plan. We have lapped now one year of introducing scheduled operating plans for the benefits year over year won't be as Joe.
<unk> as they have over the last four quarters and he is going to be focusing on driving and making sure that the planned matches, the new volume levels and certainly some some benefits on that.
We are not as I said in my remarks going to overreact from a workforce perspective.
So we will have less leverage until we get the volume back on that Frank.
But we're going.
Can be focusing on delivering to our customers keeping our plan and our execution stable and being ready for when we left out. If that's just you want to comment on me on the lag like absolutely. So as I said in my remarks, Ken We did have a favorable lag this quarter and to give you an order of magnitude its about 10 cents of EPS and it helped by about 130.
Yeah.
Great. Thanks for the time and thoughts I appreciate it.
Your next.
Comes from the line of Sheryl Radburn with TD Cowen.
Thanks, very much good afternoon.
And I had one for you I was hoping you could speak to some of the changes to the winter plan that were particularly impactful year over year and just how comfortable you are feeling about being able to offset the impact of the new Canadian regs that you mentioned on work Reston and paid sick leaves with labor productivity.
Well, let me take the easier one first.
The bulk plan for Western Canada during the winter months went extremely well.
Scheduled our bulk servers between our regularly scheduled merchandise service.
Don't forget we control when we pull the train when we spot the train and when we deliver the train and that worked out very well for our our metrics and what we needed to address with our shippers. So I think everybody was real pleased with our performance during <unk>.
During the winter months, and especially on the bulk side.
It's a little pre <unk>.
Premature for me to mention the impacts of the new work rest rules I will tell you. This we're already working on a scheduled operation we're collaborating with our labor in regard to what we think would be best and what they want or what they think would be best so like anything else we were successful in negotiating.
In agreement with the TCR C and I really see no reason why we won't be successful in negotiating a good work risk plan that fits within the Canadian government guidelines and we'll be ready to go come May 25.
Thank you.
We will take our next question from Chris Wetherbee with Citigroup. Please go ahead.
Yeah, Hey, thanks, good afternoon.
I wanted to maybe focus on the sort of <unk> through <unk> period. So now that we have in the first quarter Donlin was obviously, a really strong quarter and then the outlook has improved to mid single digit EPS growth I guess.
You guys are calling for a mild recession. So maybe I just wanted to get a sense of what some of the underlying assumptions might be how do we think about RPM growth I know, we're off to I think down six inches lands, which you mentioned here in the second quarter, so far but should we see sort of maybe low to mid single digit decline in rpm's embedded in that sort of back three quarters of the year.
And then Ken EPS the positive year over year. During this period or is it a little bit harder to capture that leverage given that volumes can be a little bit softer than what we've seen so far.
Yes, I think I.
Thanks to Chris for the question. So I think obviously as you can see we're still assuming a mild recession and assuming an industrial production thats negative if you look at last consensus at.
It deteriorated actually from negative one suite to negative one four so and we see it in volumes I mean, we currently believe that we are in a mild recession I mean, when you look at our volumes.
They said they were down 6% on.
On the month to date basis so.
We're not going to guide on volumes going forward with what we said was we're going to do a little bit better than industrial production, but clearly.
We the way we've modeled this is Q2 and.
Will be will be.
In the recession, and we're assuming that we're getting we're slowly but surely getting out of it.
By Q4, and this will also assuming that we have a three year average.
Average grain crop Canadian grain crop in this still needs to be called out as we speak but that's what we're assuming.
Okay. That's helpful. Thank you.
Your next question comes from the line of Walter <unk> with RBC capital markets.
Yes, thanks, very much good afternoon, everyone.
Tracy when you when you first took over the role you talked a little bit about right sizing. Your brother I think used the word curating your book of business and that meant kind.
Kind of shedding or watching some contracts move over competitors.
I'm getting the sense that Thats done now is that correct and are you.
Is there any way you can measure or provide some kpis, particularly for Falcon.
Or are there are there are there are revenue targets that you have for that Falcon premium service could we see wins coming out of Halifax, now that Youre, starting new train service. There Rupert is doing very well just curious to see just to hear your perspective on how you move from that focus of Curating the book of business to now.
The book of business.
Thanks, Paul Let me first say that.
I continue to be impressed by the strength of.
Cn's network and as we came on I think we had oversold a part of the network and so that was the cure a part we've done that we had done that within a few months and right now the portfolio of business that we have fit matches, our operating plan and there's a great degree of.
Alignment between Ed and Doug and their teams so that it does is out there selling.
Selling into that plan and that's what.
That's the magic part that allows Ed to run a really efficient operation and again.
A very strong service level down to go out and talk to our customers next so that level of curation is done we're running.
And an excellent job of running a strong plan and delivering to our customers and as we think about the next level of growth, we'll think about it through that lens and then let Doug give you a little bit more color on the Falcon Brian for your questions.
So yes.
Walter like the easy answer is youre, probably going to have to wait for investor day to get some real numbers, but we are looking forward to the new service starting up in May.
We know from a transit time perspective that we will be between six and eight days faster than our prior service, which is dramatic for us outside of that some of your questions around being ready listen.
We obviously have reduced service out to some of the ports today with the reduced volumes in international but we still have all of those crews and all that all the equipment ready to go as their service ramps up. So we're looking forward to the rebound and we will be ready to take it.
Okay.
Great. Thank you very much.
Your next question comes from the line of <unk> <unk> with BMO.
Yes, good evening.
And congrats on the strong results here I wanted to ask a question on the CPU.
On the <unk>.
<unk>.
Hello, Max deal.
How how differentiated.
Is this service.
When you think about it in the context of potentially single line service by your competitor.
What are kind of maybe the targeted market that you think you got it.
A stronger opportunity then.
So fatty it's great question, so listen we did a lot of research when we are attempting to buy the case, yes. So we have.
A lot of we understand those markets really well.
Like I said, there is roughly on a balanced basis, there's about two trains a day in each direction that are moving over the road and we're targeting that business. So we believe that with this service we're going to have the best service actually between Mexico, and Canada as well as into Detroit, and we'll be in a premium position.
To be able to pick up some of that off the road it doesn't matter what my competition does.
We have a great product with this and we think we're actually going to have the fastest service.
Okay. Thank you.
Yeah.
We will take our next question from Tom Waterworks with UBS.
Yes.
Yes, great good afternoon.
I wanted to ask you a question on how you think the railroad can respond to weaker volumes just in terms of how you manage head count it seems like that equations may be different than it was for the rails in the past.
Or potentially different.
And I guess the other component maybe just are there some other things that we should be thinking about on the cost side that is kind of phase two for you as you.
Focus on how the network can run better and obviously you did it.
<unk> done really well over the past year, so congratulations on that.
Thanks for noticing.
Yes.
I can tell you will be taken out expenses, if indeed that business does.
<unk> added a little bit we're already looking at combining some train starts.
And working on what I call.
Nick issues that need to be addressed.
Youll hear more of those.
An investor day, I'll, just give you a sample.
Equipment equipment repairs and ensuring that our fleet is up to snuff across the board.
The comment regarding what we can do.
In the long run here would be to work with our crews and our crew base to qualify.
Current conductors and engineers.
We'll work strongly to make that happen over the quieter months, let's say and we'll be better prepared for fall and winter.
This year.
Is it fair, though to think that maybe head count less flexible than it was in the past.
I don't I'm not that familiar with Canadian head count in the past I just live in today and in the future I think we will have as much flexibility as will need certainly the work rest rules will have something to say about that but I can tell you right now a small percentage of our force actually meets the requirement for mandatory rest.
So we'll work within those means and those parameters.
We will continue to deliver a very very good operating model and Tom I'll, just add to that Ed keeps reminding us of the attrition that we have and so we're continuing to hire right now even though we're in a lower volume environment.
To offset that attrition and to make sure that we've got the right folks in place and trained up.
At various places across the network, where we struggled to keep them in the night to higher locations and then Ed will take a look at where we need as he said to train them up in.
Various different ways and how to use in the near term ultimately is we seem if we get really concerned about workforce in volumes, we have to lever to be able to stop hiring we don't see that just yet.
We'll continue to take a look at when the right time for that might be.
Okay, great. Thank you very much.
Okay.
Our next question comes from Scott Group with Wolfe Research.
Hey, Thanks afternoon.
I got a question on pricing. So we've had some really strong pricing yields over the last few quarters any change in same store pricing and a weaker volume environment any color on just trends you're seeing and then.
Julien I know you talked about the fuel lag tailwind in Q1 does that just sort of lap itself and just go away or does that actually become a headwind going forward as you think about the rest of the year.
So thanks, Scott I'll, let Doug I'll take on the pricing side, so listen on the carload side, we're still seeing great service and great demand or at least flat demand. So guess, what I think we still have very good pricing momentum moving forward, we're still repricing business like I said about a third of our business comes up every year. So I think we're still in really good shape. There there is more.
Pressure on the domestic intermodal just strictly because there is capacity out there in the market now, but we have a lot of contracts in place with our customer base, we don't see a lot of change right now in that area.
And then Scott maybe on fuel when you look at so fuel lag creates a lot of noise in a given quarter, but when you look at it over the year. If you look at fuel surcharge.
It will be in our fuel expenses I think it's not a headwind and it's not a tailwind it's about it it's a flat impact over over the 2023.
On a net net variance.
Okay, that's what I that makes sense. Thank you guys. Thank.
Thank you.
We'll take our next question from connect Gupta with Scotiabank.
Thanks, operator, and good afternoon, everyone my.
My question is for Ed.
And how much additional capacity do you think that schedule operational Sem improved car velocity.
The network and how are you guys going to market that new capacity.
Well I can't give you an exact percentage, but I can tell you. The faster we are the more capacity, we create and our ability to reduce our.
Car fleet has paid.
A lot of dividend across the operation of this railroad.
Okay. Thanks.
Your next question comes from the line of David Vernon with Bernstein.
Hey, Good afternoon I was just wondering if you could talk a little bit more about the grain outlook as we enter two.
Get into the second half of the year I know there was some early concerns I think the last time I caught up with the team around maybe the crop year ending a little bit early just because we had such a difficult comp.
How is the how does the grain sort of how should we think about grain volumes quarter to quarter as we get through the rest of this year.
Okay. So good question, Dave we have the same type of question from our board today, So listen on the Canadian side, we're dipping into that area, where how much is left in the country and how much to the farmers want to keep back to sell in the summer. So it will all be a function of pricing more than anything else not rail pricing, but actually what prices. They can sell it for in the market on whether they are.
You keep selling and probably have a very low summer or theyre going to sell more evenly for until the next crop comes in so we don't know, but all we know is because we had a very low last year, we're still going to have good comps. This year on the Canadian side on the U S side, obviously, we're lapping a great H, one and 2022 like we had a record so we're going to be.
A little bit lower but were still had a great Q1, and we're seeing decent volumes in Q2, there is still quite a bit of crop there to move in the U S. So we figure that will just be a normal crop for us.
And just as a follow up maybe as you think about the moisture and all the stuff that you guys get into the weeds on pun intended.
How are you guys thinking about the setup for second half.
So in the Canadian size moisture content is very good and the priorities right now probably a little bit too much snow, but recently over the last storms over the last couple of weeks, but much better than Manitoba was last year, where they were flooded out almost and they still had a good crop it's amazing what the science can do these days with respect.
Two growing crops in I'll say wet soil. So we're expecting still the average crop in Canada and the U S. Crop is now seeing a recovery with the amount of water that they have had where the Mississippi dried up it had a lot of I'll say.
<unk> areas last year, not on CN territories, but the others and right now they are expecting to have a normal crop as well in the U S. Alright. Thanks very much for the time look forward to seeing you guys next week.
Okay.
Thank you.
Your next question comes from the line of Brian Nelsen Beck with J P. Morgan.
Yeah.
Hey, good afternoon. Thanks for taking the question so just to follow up on the.
And Canadian grain, maybe Doug can you give us a sense of where pricing is headed for the 'twenty three 'twenty four Canadian grain crop I think the <unk> is actually do here, perhaps next week or so does it feel kind of as big of a swing factors. We've seen more recently and then just maybe just saying if you can clarify if that 100 million.
Headwinds for some of the work breast.
And time off is still in the guidance or if that's a little bit to be determined as you work through some of these agreements. Thank you.
Thanks, Brian So I'll start off on the eight listed on the Canadian grain crop I think it's a big black box with the federal government on how this thing gets done but what we're forecasting is just.
Roughly a 2% price increase for the next upcoming crop year we.
We will see at the same time, you guys well. So we're looking forward and we think it should be positive and there might be some upside there, yes and on the on the work rest rules and paid sick days, yes, we're still we're still assuming worst case scenario of about $100 million, we'll see Ed is starting to work hard on the scheduling.
Starting a new at work restful in May so it hasnt started yet so we'll see but we're going to work hard to try to offset some of some of the.
Worked with new rest rules that basic days as a cost because people will have taken those days, we didnt pay them before now we pay so thats a pure cost, but I think I think hopefully there is some room here to be able to offset some of the new work rest rules going forward.
Okay. Thanks, very much I appreciate it.
Thank you.
Your next question comes from Amit Malhotra with Deutsche Bank.
Thanks.
Just just on the.
Profitability question earlier.
Do you think first quarter is going to.
Representing kind of the high watermark on operating ratio as it typically does because of the weather I know weather was less increment in the first quarter, but you can just talk about kind of the cadence because I know obviously you are forecasting a mild recession or we're in a mild recession. So I'm just not sure if that impacts.
Operating ratio versus where you were in the first quarter and then Tracy Investor Day, obviously coming up next week very much looking forward to that but.
I was hoping you could help us calibrate some of our expectations I assume it's going to be an event about growth in kind of.
Setting the stage for the next several years of growth, but along with that should we be expecting kind of multiyear earnings targets op ratio I mean anything to sort of help us calibrate some of our expectations. We have out there next week. Thank you.
So maybe I can start with the ore. So typically we don't guide on Oahu.
For 2023, but to your question in Q1 typically in the winter or is just seasonality higher because of because of the winter because because fuel expenses typically are higher et cetera et cetera. So it's typically higher.
And but we don't guide on or what we upset to the market and we're committed to that is we're going to work to improve our margins and obviously that makes that makes it harder to do in a low volume environment than in a higher volume environment. In Australia. You mentioned, we are not going to have a knee jerk reaction and send people.
Home.
While we have the the mild recession I think that we are going to focus on.
Ed mentioned.
Training locomotive engineers, and so on and so forth and be ready for the rebound so will carry a little bit more cost than maybe in the past we would have historically done Tracey you want to second part yes. Thank you and thanks for your question and your interest in Investor Day.
We aim to do a few things that investor day, we're going to and where you're going to see.
A much bigger cross section of <unk>.
Well.
We'll spend some time with Ed and his team on scheduled railroad, where we're going to take that.
How are we going to sustain that where it could go on feature and then we're going to talk to you with Doug and his team around where we see growth and it will be directional and longer term in some cases, but.
We are going to try and put some brackets around how to think about the next three years.
Little color, sometimes maybe a little bit guidance that Ken we're looking forward to having the conversation with you.
Also from an or also from an earnings perspective outside of growth.
We will talk to you about earnings we don't guide in <unk> as you know that.
No, we'll be having conversations around leverage and the like there is a micro site that is going up is it up now Tonight is going up Tonight.
Wednesday, or Wednesday, I'm being told that will give you a little bit of a pre look at some of.
What you can see there wont give you kind of the bottom line, but you can start keeping your eye open on that for that micro site.
Cool alright, thank you very much appreciate it.
Your next question comes from the line of Jon Chapell with Evercore ISI.
Thank you good afternoon.
It does give us a look at April from an RPM perspective, So I guess it kind of get that every Monday anyway. How have your metrics has been trending in April you gave us a great update on <unk> on origin train performance velocity et cetera, just trying to get a sense for if those if that momentum is continuing and maybe a weaker demand backdrop and also how much of <unk> improvement.
Was actual structural versus just a really relatively easy winter comp.
I don't think winter had a lot to do with our improvement we've got focused on a scheduled environment and that drives discipline in our network and when you have discipline in the network you can make things happen, we are literally running 6% more traffic with 15000 less pieces of equipment.
That equates out to lower dwell quicker turns.
All of this done internally all of those down through operating model that worked for this railroad and I think we've been very successful in showing that in the first quarter and quite frankly, I don't see any slowdown.
Let's start with the second quarter, we're off to a great start as well.
Great. Thanks, Ed.
We will take our next question from Brandon <unk> with Barclays.
Hey, good afternoon. Thanks for taking my question, Doug I was wondering if you could talk to the outlook for intermodal.
I think you've made some comments about pricing, maybe being a little bit more challenging with the truck market, but also if we look at Vancouver, and Prince Rupert imports. So they've been down so significantly I mean, our customers telling you. This is the new level to expect or what's the outlook looking forward into summer and into peak. Thank you yes.
And Brennan so thanks for the question so really on the domestic side. It's just a function of domestic truck capacity is like us.
Weaker right that demand is weaker so the capacity is there. So there's some pressure on that from a pricing standpoint, but we don't have contracts that come up every day. So most of our customers business is locked up in contract. That's why we don't worry too much about pricing right for there now on the international side no. Like this is just a really low point as the inventory gets gets <unk>.
Soon within North America.
The international Ocean carriers are looking at ramping up it's just a function of when do they ramp up in Q3 or in Q4 and really that's what we're trying to focus on we expect to get back to normal volumes out of all of our ports and Thats really probably by the end of the year.
Thank you.
Your next question comes from the line from Ravi Shanker with Morgan Stanley .
Thanks, everyone. So just a couple of follow ups here, one is kind of on the commentary.
April softness.
Is that just a touch sequentially call. It I think there was some were green.
Green Williams got pulled forward to <unk>, but just wanted to check if youre actually seeing a sequential step down in the macro environment.
And kind of if that makes you incrementally more bearish on the back half than you were three months ago.
Second follow up is just on the new Mexico service.
Are you confident that you can actually like both you and your competitor I can actually drive truck conversion and.
And not just make it one railroad works the other way kind of going off of that and good luck. Thank you.
Okay. So I guess all right. Thanks for the question Ravi I'll, probably end up taking both.
So listen on the April softness, we're seeing a lot of our carload business is flat.
And some of it's down a little lifestyle petroleum <unk> chemicals as leading indicators in the economy, it's down a little so that's why we're pretty sure. We're in a mild recession. We're seeing the same thing in the domestic trucking side. We're seeing the same thing in some of the consumer product side, so, but the rest of it is hanging in there and actually our bulk franchise is still doing really well so our <unk>.
Electrical coal shipments are still very strong and we expect that to continue where our grain even though it's going to come down with pull forward is still a year over year doing very well both in U S and Canada. So overall some of that softness is really directly related to the mild recession network and mainly on the consumer product side.
Now when you want to talk about how do we convert the Mexico business over from over the road to intermodal.
That's really what we're aiming for we need a consistent quick transit time, and that's why we're partnering with the two best we're always to do that with the <unk> Z they've historically been able to convert some of that product over that moves today between Mexico, and Chicago and some of the <unk> network now we're layering on top of that CMS.
Network, where really there wasn't that product before so it is a brand new product coming into eastern Canada somewhat into Detroit and even into Western Canada. So that's how we're going to take those trucks off the road because they didnt have an alternative before if you layer on top of that the E&P product that we actually joined with <unk>.
In October last year that just as our ability to supply equipment into this market and really move it in as well as being able to send traffic back to their network. So overall I think we will be able to do it at a great cost structure, but as well as have the service that is really going to drive it.
Got it thank you and see you all next week.
Our next question comes from the line of Steve Hansen with Raymond James.
Oh, yes, good afternoon, thanks for the time.
One of the markets deteriorated more recently has been the manner of the Frac sand market that surprised me to some degree I just wondered if you could speak to the outlook, there and what's been driving that sequential move quarter over quarter, and then what you might expect through the back half of the year. Thanks.
That's funny, Steve I don't recall that Frac sand market, we didnt curated at all.
We had a fairly strong Q1 <unk>.
Primary area of our market is in the Western Canada, which saw a pretty good drilling all quarter were quiet. We are currently in the month of April were in spring breakup. It happened a month earlier than last year just because of.
It warmed up a little bit faster in Western Canada.
With LNG, Canada.
Continuing on stream to start pushing product out there drilling will continue at a very regular basis in that area and we will continue to move frac sand in there in fact, we're looking in future years is that for <unk> to expand.
Okay I'm just looking at the trailing three week data it down fairly materially relative to a strong Q1. So I was just curious about the delta.
That spring break out there is just a month earlier than last year.
Okay I appreciate the time.
We'll take our next question from area Rosa with credit Suisse.
Hey, good afternoon, and congrats on a strong quarter here.
Chris you spoke about this a bit in our opening remarks, but I wanted to get a sense for how youre thinking about potential changes to safety regulations impacting operations.
Really just wanted to get a sense of what what proposals you might be supportive of and with regulatory changes that have been floated you might think are actually counterproductive or would pose risks risk to some of the operating progress that you've made whether that's things like limitations on train length of train speeds or something other proposals that are out there.
Thanks.
So the question. So let me just start by answering it in a more general way. So we have all of that.
<unk> been working pretty hard and arms locked on trying to lift the performance of the supply chain up since.
Since COVID-19.
Kind of set them on their side and bolt on improving their performance, but also in continuing to invest in the capacity of those.
So yes, as we think about the regulators in that environment as I said earlier, they can and they should be a very strong partner.
The way that you are strong partner and that is when you have issues that you wanted to address like those that are under discussion.
As you look at those those discussions in that analysis.
Needs to be based on data in fact make sure that we are really understand the problem and that we apply the solutions that are really going to have an impact on the problem that we're trying we're trying to solve.
There's a lot of kind of preemptive moves that are taking place and in some cases, you know their favorite solutions that are now being attached to it and a lot of cases in appropriately.
<unk>.
The issues out there in the <unk>.
Risk of that of course is that you get you don't address the real issues. So you don't have the the improvement you don't get the improvement that Youre looking for and you could have unintended consequences, which means that you will have an impact on the performance and you have an impact on the capacity and supply chain and in general that is what we fear the most and we see some of that happening.
So we are working very closely with the other railroads in the industry and with the regulators to try and make sure that this is a very fact based process.
If it can be that we are side by side with them.
Efforts to continue to improve safety because theres some ideas out there.
New tank cars and other things that are very good ideas.
Some of the other suggestions or the solutions that are being presented will not in any way impact or improve safety, but would impair the.
The capacity in the supply chain. So in general I'll leave that at that we are vary wildly optimistic and we're prepared to work very hard with our regulators to try and make sure. They saw land in the right place, which is a much safer environment as we go into the future.
Okay, great. Thanks, guys.
Thanks, so much.
Your next question comes from.
One more question I think operator.
We'll take our last question from Justin long with Stephens.
Thanks for fitting me in I guess first question I wanted to ask about the new intermodal service and see if there was any color you could provide on the IMC strategy strategy and partnerships that you could utilize to help execute on this collaboration and then also on Capex.
I was curious if you had any updated thoughts on the outlook for 2023.
Okay. Thanks, Justin So I'll start off there and I'll, let just land chime in.
Listen for the intermodal.
We will work with everybody. So we will work with our key wholesalers.
Wholesalers will work with the <unk> will work with the FX EPS, we expect to be able to have this service offering out to everybody CFO .
Has its own retail as well as retail product that we can help sell as well as we have transactions that can help sell so there's a lot of different options. We have there overall to be able to fill out. These trains hopefully and we'll be working together with the <unk> to be able to do it.
Yes, and I think on Capex.
Just on what we plan on doing is recession or no recession, we're going to continue to do our plan. We are going to continue to do our basic actually.
Basic maintenance actually in the past when volumes have been softer we were able to to get better cost in terms of the unit cost for ties and rail. So we're going to do that we're going to continue as well to invest in capacity in western Canada.
Western Canada is the gift that keeps on giving so there's no there's no change on capex for us.
As we speak even with the weaker volumes that we can see ahead of us as we speak.
Got it thanks for the time.
Thank you.
And this concludes our question and answer session I would like to turn the call back over to Tracy Robinson.
Thanks, Thanks, very much for your interest today and I'm very proud of this team's performance in Q1.
Have a great team and they're running a great railway I just want to close by highlighting that this is Paul Butcher his last earnings call with that.
After a 30 year career at CN, Paul has decided to retire I guess 30 years. This is inevitable.
Paul has had a great career at CN started back in 93 and financial planning and then he moved into the marketing group, where he worked on this little project called the Port of Prince Rupert, which turned out to be a key growth driver for us over the years in the last 14 years. He has been working with all of you you know Investor Relations.
I just want to take this opportunity to thank Paul for your outstanding efforts Paul to serve the investment community over that period interacting with many of the guys on the call today.
And also personally for the help that you've provided me as I've come into it to see and Paul We all want to wish you the best and a very well deserved retirement and were little envious of all the great <unk>.
Adventures that Youll have in this next chapter of your life. So to all of US all of you on the line. Thanks, So much for today and we look forward to seeing you next week at our Investor Day.
Thank you the conference call has now ended thank you for your participation you may disconnect your lines at this time.
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