Canadian National Railway Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 24, 2023

There are 19 speakers on the call.

Operator

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.

Operator

I would now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher?

Speaker 1

Well, thank you, Lisa. Good afternoon, everyone, and thank you for joining us for CN's Q1 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.

Speaker 1

Canadian Securities Law. 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 and 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.

Speaker 1

Joining us on the call today are Tracy Robinson, our President and CEO Doug MacDonald, our Chief Marketing Officer Ghislain Hul, our Chief Financial Officer and Ed 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.

Speaker 2

Welcome to Cian's Q1 earnings call. We very much appreciate you joining us today. Now 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 CN with UP and the GM XT are launching a new transformational premium intermodal service that connects Mexico, the U. S.

Speaker 2

And Canada. Now this is a steel wheel interchange service that leverages the best of our three networks and creates the most direct route and the fastest transit times between Canada and Mexico. It will provide our AirMold customers with the efficiency of 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 with the TRC, covering approximately 6,000 CN locomotive engineers, conductors, yard conductors and yard coordinators.

Speaker 2

Now this agreement is subject to ratification by the TCRC membership. So we are unable 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 So 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 decades, and we're all working towards reducing And ultimately eliminating harm, both injuries and incidents and ensuring that we protect the communities.

Speaker 2

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 to 0 as an industry, but we're making progress. And I am proud of the way the industry is Coming together to advance together. Now after the derailment in Ohio earlier this year, all the Class Is convened to put all of our respective Technology and protocols on waste side detection on the table, and we together use that to develop new voluntary standards for our industry and for wayside detection.

Speaker 2

And each of us is in the process of implementing to those standards. Now our regulators can and they should We'll 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 solutions, we'll not only fail To make the necessary gains and safety outcomes, we run the risk of unintended consequences that impair the performance of our supply chains. On that note, I'm pleased to report that at CN as of yesterday, we've achieved 838 days without a fatality And 650 days without serious injury. These are the longest periods in CN history, and I think it's proof that 0 is Possible.

Speaker 2

Noed's 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 CN employees 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.

Speaker 2

It was up 38% on an adjusted basis. Revenues were up 16% as we moved 6% more volumes more efficiently. The operating ratio was 61.5%, An improvement of 510 basis points on an adjusted basis and the lowest Q1 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.

Speaker 2

And on the basis of a strong Q1, 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 haven't changed. Our current volumes reflect that we are in a mild recession, And 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'll come out of it. We're going to stay focused on our Ed is going to take you through what we're doing currently and to adjust to current volumes.

Speaker 2

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 remain soft and more volume margin leverage once the more normalized volumes return. We'll be ready when that happens and as the economy lifts. I'm very pleased with the work of Ed and the operating team.

Speaker 2

And while the winter was milder in Q1 compared to last year, it was more of a normal winter. Our scheduled operation proved its worth as we demonstrated resiliency, recovering much more quickly from the winter challenges that were thrown our way. And we delivered for our customers. Ed is going to provide you a little more detail, but let me highlight our Origin Train performance with 86%, reflecting our continued disciplined execution of our operating plan. And Doug and the marketing team delivered a pretty strong top line performance.

Speaker 2

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 And what we expect as we look forward to the remainder of the year. Ghislain will get into the details of our solid financial performance in Q1, which is driving our updated financial outlook. So let's go. Ed, over to you.

Speaker 3

Thank you, Tracy. Let me start off by thanking all the CN employees that helped deliver a solid performance in quarter 1. This team is delivering on expectations I knew from the time I came back to this organization that they had the muscle memory to take CN back into a leadership position. This past winter was milder than the last year with about 45% of the days in the Q1 of this year Facing some type of tier restriction in train length versus 65% last year. We still experienced some periods of extreme cold that impacted our ability to operate the railroad as efficiently as expected.

Speaker 3

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 his customers. Let me highlight a few key operating metrics for the Q1. I also want to echo that Tracy mentioned on safety.

Speaker 3

We are all committed to move the North American economy And our goal is to make sure all employees get back home safe in a safe manner. I'm very proud of our safety performance With our injury frequency down 17% in this quarter and our accident rate down 41%. Car velocity averaged 211 miles per day in the Q1, up nearly 30% from Q1 last year. This is the best Q1 Car Velocity performance since 2017. Origin Train performance averaged 86% in the Q1, up 62% from the Q1 last year.

Speaker 3

This Performance is on the back of moving 6% more volumes in terms of RTMs in the quarter, including 90% more Canadian grain. To highlight the strength of the operating model, we moved this additional volume in the Q1 with nearly 15,000 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 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.

Speaker 3

We will continue to drive efficiencies, but improvements will be similar will be smaller and be in 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 on top of our 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.

Speaker 3

Many of you on the call will have the opportunity to interact with the operating folks next week at our Investor Day in Chicago. And I'm looking forward to seeing many of you there as well. With that,

Speaker 4

For running a fluid and efficient operation as well as demonstrating resiliency against the winter conditions. We were able to deliver on our promise to better serve our and help them grow in their markets, a true collaborative effort. I'll now turn to slide 9 and provide a review of our solid first quarter Top line performance. 1st quarter record revenues were $4,300,000,000 up 16% over Q1 of last year On 6% higher RTMs 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.

Speaker 4

We did pull forward some of the Canadian grain into Q1, will impact volumes in Q2, but we continue to engage with our customers to refine our demand outlook through the summer and in advance of next harvest. Coal demand remained solid through the Q1 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.

Speaker 4

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 depressed Housing indicators, rising interest rates, low commodity prices and extended mill curtailments, particularly in British Columbia. Volumes were steady due to the home renovation market doing better than expected.

Speaker 4

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. Canadian grain demand will start to lower as we head into the planting season We are anticipating an average crop for 2023, 2024 crop year.

Speaker 4

Canadian metallurgical coal demand is expected to continue at 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.

Speaker 4

Petroleum and 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 sectors, our recent announcement for a new service between Mexico and CN's network in Canada as well as Detroit. Combining the best service in the industry provided by the FXE and UP, CN will now have the shortest routes and fastest service to all of its key markets. Layering this new service with our new E and P product with the UP and NS, GN's customers will have new options to convert truck volumes to rail. To close, we are working closely with our customers to monitor the economic environment.

Speaker 4

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 will pass it on to Ghislain.

Speaker 5

I will talk to Slide 12 of the presentation, which will provide more visibility on our Q1 performance. These results again highlight the strength and resilience of our franchise as we delivered volume growth of 6% In terms of RTMs and 16% revenue growth, the top line performance combined with a strong operating performance Drove solid earnings in the quarter and we delivered this with nearly 15,000 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 excludes advisory costs related to shareholder matters in the Q1 of 2022 and I will talk to the variances on a constant currency basis. Labor expense was up around $40,000,000 in the quarter versus last year, mostly driven by higher average headcount, mainly on the transportation side, which was partly offset by higher capital credits.

Speaker 5

Purchased services and material expense was up by 8% We delivered record Q1 operating income of close to $1,700,000,000 up 34% on an adjusted basis. Our operating ratio came in at 61.5 percent, which is 510 basis points 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 $600,000,000 in the Q1. Under our current share repurchase program, which runs from February 1, 2023 to January 31, 2024, we have repurchased nearly 5,000,000 shares for almost $800,000,000 as at the end of March.

Speaker 5

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 RTM basis are down about 6%, reflecting the weakness in the economy and some traffic that was pulled 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.

Speaker 5

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 $4,000,000,000 for our current share repurchase program, which runs through January 31, 2024. In conclusion, let me reiterate a few points. We delivered a strong Q1 performance as we continue to realize the benefits of operating a scheduled railroad with a focus on car velocity. We are witnessing continuing economic weakness and we are still calling for a mild recession in 2023.

Speaker 5

Despite This week 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 me pass it back to Tracy for some closing comments.

Speaker 2

Thanks, Jess. Now before we open up the line for questions, let me just highlight that we are holding our Investor Day in Chicago next week, May 2nd and third, and the presentations on May 3rd will be webcast. We hope many of you will be able to join us. So let's open the line for Q and A.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Benoit Poirier with Desjardins.

Speaker 6

Yes. Good afternoon, everyone, and congratulations for the strong start. Maybe my question, could you talk a little bit about your transformational partnership with UP and Grupo Mexico And the new Falcon premium service, and also if you could talk about the other partnerships that you're looking at. Thank you.

Speaker 2

Let me start that one off Benoit and then I'll hand it over to Doug for a little color on the Falcon service. We believe that the right way to service our customers is to be working with partners where that makes sense. And in this case, UP and FXE 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 it helps get There are other examples out there where we're doing and we're looking to do the same types of things in different market and more on that to come as We pull those together. Doug, do you want to make some comments on the new Falcon service?

Speaker 4

Yes. So thanks Benoit. So one of the key things we try to do is take the best what was available on the market and when you look at today the service that the FXC and the UPF in providing north and southbound From between Chicago and the markets in Mexico has been untouchable by anyone. It's been phenomenal. The customers rave about it.

Speaker 4

And now we've been able to Combined with these 2 great companies to sit down and offer that same type of service with CN's 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's a minimum of 2 trains each direction that's moving over the road that we think we can go after by providing this service. So 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 it, but we think we have the product to move forward.

Speaker 6

That's great. Thanks for the color. Have a great day.

Operator

Thank you. Your next question comes from the line of Ken Hoexter with Bank of America.

Speaker 7

Great. Good afternoon and definitely concur great job on the quarter. So maybe just to follow-up with Ed or Tracy, just laying on the outlook there. Moving to mid single digits, has anything changed? Is this just kind of the flow through from Q1?

Speaker 7

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 the I don't know if you want to talk about the fuel benefit that you got in the Q1, if there's a flow through on that. Just trying to understand what's changed and what the potential upside from this target? Thanks.

Speaker 2

Thanks, Ken. Listen, nothing has changed on our view of the year. Our guidance has been lifted based on some really strong performance in the Q1. Ed is going to continue to focus On the next level of benefits from the scheduled operating plan, we have lapped now 1 year of introducing the scheduled So the benefits year over year won't be as dramatic as they have over the last four quarters. And he's going to be focusing on driving making sure that the plan matches The new volume levels and so there will be some benefits on that.

Speaker 2

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 volumes back on that front. But we're going to be focusing on delivering to our customers, Keeping our plan and our execution stable and being ready for when we lift out of this. Jis, do you want to comment on the

Speaker 5

On the lag?

Speaker 2

On the lag?

Speaker 5

Absolutely. So as I said in my remarks, And we did have a favorable lag this quarter. And to give you an order of magnitude, it's about $0.10 of EPS and it helped the OR by about 130 basis points.

Speaker 7

Great. Thanks for the time and thoughts. Appreciate it.

Operator

Your next question comes from the line of Sheryl Radbourne with Edi Cowen. Thanks very much. Good afternoon. Ed, I had one for you. I was hoping you could speak to some of the changes to the winter The impact of the new Canadian regs that you mentioned on work, rest and paid sick leaves with labor productivity.

Speaker 3

Well, let me take the easier one first. The bulk plan for Western Canada during the winter months went We scheduled our bulk service between our regularly scheduled merchandise service and 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 metrics and what we needed to address with our shippers. So I think everybody was real pleased with our performance during the winter months and Especially on the bulk side. It's a little premature for me to mention the impacts of the new work rest rules.

Speaker 3

I will tell you this, We're already working on a scheduled operation. We're collaborating with labor in regard to what we think would be best And what they want or what they would think would be best. So like anything else, we were successful in negotiating Agreement with the TCRC and I really see no reason why we won't be successful in negotiating a good work rest plan That fits within the Canadian government guidelines and we'll be ready to go come May 25.

Operator

Thank you. We'll take our next question from Chris Wetherbee with Citigroup. Please go ahead.

Speaker 8

Hey, thanks. Good afternoon. Wanted to maybe focus on the sort of 2Q through 4Q periods. So now that we have the Q1 done and it 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.

Speaker 8

So maybe you just wanted to get

Speaker 9

a sense of what some

Speaker 8

of the underlying assumptions How do we think about RTM growth? I know we're off to,

Speaker 5

I think, down 6% is

Speaker 9

just laying as what you

Speaker 8

mentioned here in the second quarter so far. But Should we see sort of maybe a low to mid single digit decline in RTMs embedded in that sort of back three quarters of the year? And then can EPS The positive year over year during this period or is it a little bit harder to capture that leverage given that volumes could be a little bit softer than what we've seen so far?

Speaker 5

Yes. I think 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 that's If you look at last consensus, it deteriorated actually from negative 1.3 to negative 1.4. So and we see it in volumes. I mean, we currently believe that we are in our mild recession.

Speaker 5

I mean, when you look at our volumes, as I They're down 6% on a month to date basis. So we're not going to guide on volumes Going forward, 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 Q3 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 in this, we're also assuming that we have a 3 year Average grain crop, Canadian grain crop and this still needs to be called out as we speak, but that's what we're assuming.

Speaker 8

Okay. That's helpful. Thank you.

Operator

Your next question comes from the line of Walter Spracklin with RBC Capital Markets.

Speaker 10

Yes. Thanks very much. Good afternoon, everyone. So Tracy, when you first took over Raul, you talked a little bit about rightsizing your book, I think you used the word curating your book of business and that meant kind of shedding or watching some contracts Move over to competitors. I'm getting the sense that that's done now.

Speaker 10

Is that correct? And are you Is there any way you can measure or provide some KPIs, particularly for Falcon? Are there revenue targets that you have for that Fulcrum premium service? Could we see wins coming out of Halifax now that you're starting Nutrien service there? Rupert is doing very well.

Speaker 10

Just curious to see just to hear your perspective on how you move from that Focus of curating the book of business to now growing the book of business.

Speaker 2

Thanks, Walter. 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 Qurate part. We've done that.

Speaker 2

We have done that within a few months. And right now, the portfolio of business that we have fits matches our operating plan. And there's a great degree of alignment between Ed and Doug and their teams. So that as Doug is out there selling, we're selling into that plan and that's where That's the magic part, right? That allows Ed to run a really efficient operation, and he gives a very strong service to Doug to go out and talk to our customers next.

Speaker 2

So that level of curation is done. We're running Doing 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. I'm going to let Doug give you a little bit more color on the Falcon part of your question.

Speaker 4

Yes. So Walter, like the easy answer is you're 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 6 8 days faster than our prior service, Which is dramatic for us. And outside of that, some of your questions around being ready, listen, we obviously have reduced service out of some of the ports today with the reduced volumes in So we're looking forward to the rebound and we'll be ready to take it.

Speaker 10

That's great. Thank you very much.

Operator

Your next question comes from the line of Fadi Chamoun with BMO.

Speaker 10

Yes, good evening and congrats on the strong results here. I want to ask question on the CUP, I mean on the CN

Speaker 9

UP Aeromex deal,

Speaker 1

how differentiated

Speaker 10

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're going to have stronger opportunity then?

Speaker 4

So Fady, it's a great question. So listen, we did a lot of research when we were attempting to buy the KCS. So we have A lot of we understand those markets really well. Like I said, there's roughly on a balanced basis, there's about 2 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.

Speaker 4

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.

Speaker 10

Okay. Thank you.

Operator

We'll take our next question from Tom Wadewitz with UBS.

Speaker 11

Yes, great. Good afternoon. Ed, 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 headcount? It seems like that equation is maybe 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 2 for you as you focus on how the network can And obviously, you did a done really well over the past year.

Speaker 11

So congratulations on that.

Speaker 3

Well, thanks for noticing, Tom. I can tell you we'll be taking out expenses if indeed the business does deteriorate a little bit. We're already looking at combining some train starts and working on what I call Organic issues that need to be addressed. You'll hear more of those in Investor Day. I'll just give you a sample Equipment repairs and ensuring that our fleet is up to snuff across the board.

Speaker 3

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 into 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.

Speaker 11

Is it fair though to think that maybe headcount is Less flexible than it was in the past. Or is that the wrong way to look at it?

Speaker 3

I don't I'm not that familiar with Canadian headcount in the past. I just live in today in the future. I think we'll have as much flexibility as we'll 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.

Speaker 3

So we'll work within those means and those parameters and we'll continue to deliver a very good Operating model.

Speaker 2

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, It's very places across the network where we struggled to keep them in hard to hire 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 them in the interim. Ultimately, as we see if we get really concerned about workforce and volumes, We have the lever to be able to stop hiring.

Speaker 2

We don't see that just yet, but we'll continue to take a look at when the right time for that might be.

Speaker 11

Okay, great. Thank you very much.

Operator

Our next question comes from Scott Group with Wolfe Research.

Speaker 10

Hey, thanks. Good afternoon. I've 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 in a weaker volume environment? Any color And then, Ghislain, I know you talked about the fuel lag tailwind in Q1.

Speaker 10

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?

Speaker 4

Thanks, Scott. It's Doug. I'll take it 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.

Speaker 4

We're still repricing business. Like I said, about a third of our business 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.

Speaker 5

And Scott, maybe on fuel. When you look at the 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, where it will be and our fuel expenses, I think it's not a headwind and it's not a tailwind. It's about It's a flat impact over the 2023 on a net net basis.

Speaker 10

Okay. That's what I thought. Makes sense. Thank you, guys.

Speaker 7

Thank you.

Operator

We'll take our next question from Karnak Gupta with Scotiabank.

Speaker 10

Thanks,

Speaker 9

My question is for Ed. Ed, how much additional capacity do you think the scheduled operations and improved car velocity Bring to the network and how are you guys going to market that new capacity?

Speaker 3

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.

Speaker 9

Okay, thanks.

Operator

Your next question comes from the line of David Vernon with Bernstein.

Speaker 12

Hey, good afternoon. I was just wondering if you could talk A little bit more about the grain outlook as we enter get into the second half of the year. I know there were 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 kind of had such a difficult comp. 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.

Speaker 4

Okay. So good question, Dave. We had 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 do 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 price they can sell it for in the market on whether they keep selling And probably have a very low summer or they're going to sell more evenly until the next crop comes in.

Speaker 4

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 H1 in 20 Like we had a record. So we're going to be a little bit lower, but we still had a great Q1 and we're seeing decent volumes in Q2.

Speaker 4

There's still quite a bit of crop there to move in the U. S. So we figured that'll just be a normal crop for us.

Speaker 12

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?

Speaker 4

So in the Canadian side, moisture is very good in the prairies 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 to 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 The amount of water that they have had where the Mississippi dried up, they had a lot of, I'll say, tough areas last year, not on CN territories, but the others.

Speaker 4

And right now they're expecting to have a normal crop as well in the U. S.

Speaker 12

All right. Thanks very much for the time. Look forward to seeing you guys next week.

Speaker 13

Thank you.

Operator

Your next question comes from the line of Brian Ossenbeck with JPMorgan.

Speaker 14

Hey, good afternoon. Thanks for taking the question. So just to follow-up on Canadian grain, maybe Doug, can you give us a sense of where Pricing is headed for the 2023 and 2024 Canadian grain crop. I think the RCPI is actually due here Perhaps the next week or so, is fuel going to be as big with swing factors we've seen more recently? And then just maybe just Lane, if you can clarify if that $100,000,000 Headwind for some of the work rest 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?

Speaker 14

Thank you.

Speaker 4

Thanks, Brian. So I'll start off on the listen, 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'll see at the same time you guys will. So we're looking forward to it.

Speaker 4

We think it should be positive and there might be some upside there. Yes. And on the WordPress rules and paid sick days, yes, we're still assuming worst case scenario about We'll see Ed is starting to work hard on the scheduling. This is

Speaker 5

starting the new work rest rule in May. So it hasn't started yet. So we'll see, but we're going to work hard To try to offset some of the work new rest rules, the paid sick days is a cost Because people have taken those days. We didn't pay them before, now we pay. So that's a pure cost.

Speaker 5

But I think hopefully there's some room here to be able to Some of the new work rest rules going forward.

Speaker 14

Okay. Thanks very much. Appreciate it.

Speaker 5

Thank you.

Operator

Your next question comes from Amit Mehrotra with Deutsche Bank.

Speaker 13

Thanks. Just Lane, just on the profitability question earlier, do you think Q1 is going to Represent kind of the high watermark on operating ratios that typically does because of the weather. I know weather was less inclement in the Q1, but can you just talk about Kind of the cadence because I know obviously you're forecasting a mild recession or we're in a mild recession. So just not sure if that impacts operating ratio versus where you were in the And then Tracy, Investor Day, obviously, coming up next week, very much looking forward to that. But I was hoping you'd help us calibrate some of our expectations.

Speaker 13

I assume it's going to be an event about growth and 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, Operator, I mean anything to sort of help us calibrate some of our expectations as

Speaker 9

we head out there next week? Thank you.

Speaker 5

So maybe I can start with the OR. So typically we don't guide on OR For 2023, but to your question in Q1 typically in the winter OR is just seasonality higher because of the winter Because fuel expenses typically are higher, etcetera, etcetera. So, it's typically higher and but we don't guide on OR. What we have to the market and we're committed to that is we're going to work to improve our margins. Now obviously that makes it harder to do in a low Volume environment than in a higher volume environment.

Speaker 5

And as Tracy mentioned, we are not going to have a knee jerk reaction and send people home While we have the mild recession, I think that we are going to focus on, as Ed mentioned, Training locomotive engineers and so on and so forth and be ready for the rebound. So we'll carry a little bit more cost than maybe in the past we would have historically done. Tracy, you want to second part?

Speaker 2

Yes. Thank you. And thanks for your question and your interest in Investor Day. We aim to do Few things at Investor Day. We're going to you're going to see a much bigger cross section of our team.

Speaker 2

We We'll spend some time with Ed and his team on scheduled railroad, where we're going to take that, how we're going to sustain that, where it could go in the future. 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 3 years. We'll give you a little color, sometimes Give you a little bit guidance, but we're looking forward to having the conversation with you.

Speaker 13

Also from an OR and earnings perspective outside of growth?

Speaker 2

We will talk to you about earnings. We don't guide an OR as you know, but I know we'll be having conversations around leverage and the like. There is a microsite that is going up. Is it up now?

Speaker 4

Tonight, yes.

Speaker 2

It's going up tonight.

Speaker 15

No. Wednesday.

Speaker 2

Or Wednesday, I'm being told. That will give you a little bit of a Pre look at some of what you're going to see there, won't give you kind of the bottom line, but you can start keeping your eye open on that for that microsite.

Speaker 13

Cool. All right. Thank you very much. Appreciate it.

Operator

Your next question comes from the line of Jon Chappell with Evercore ISI.

Speaker 16

Thank you. Good afternoon. Ed, Doug gave us the look at April from an RTM perspective. I guess, we kind of get that every Monday anyway. How have your metrics been trending in April?

Speaker 16

You gave us a great update on 1Q on Origin Train performance, velocity, etcetera. 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 1Q's

Speaker 3

on a scheduled environment and that drives discipline in the network. And when you have discipline in the network, you can make Things happen. We are literally running 6% more traffic with 15,000 less pieces of equipment. That equates out to lower dwell, quicker turns, all this done internally, all this done through an operating model That works for this railroad and I think we've been very successful in showing that in the Q1. And quite frankly, I don't see any slowdown It started the Q2.

Speaker 3

We're off to a great start as well.

Speaker 14

Great. Thanks, Ed.

Operator

We'll take our next question from Brandon Oglenski with Barclays.

Speaker 10

Hey, good afternoon. Thanks for taking the 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, they've been down so significantly.

Speaker 10

I mean, are customers telling you this is the new level to expect? Or What's the outlook looking forward into summer and into peak? Thank you.

Speaker 4

Yes. No problem, Brandon. So thanks for the question. So really on the domestic side, it's just a function of domestic truck capacity is like is weaker, right? The demand is weaker, so the capacity is there.

Speaker 4

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 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 like Gets consumed within North America. The international the ocean carriers are looking at ramping up.

Speaker 4

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 that's really probably by the end of the year.

Speaker 15

Thank you.

Operator

Your next question comes from the line from Ravi Shanker with Morgan Stanley.

Speaker 15

Thanks for calling everyone. So just a couple of follow ups here. One is kind of on the commentary of the kind of April softness. Is that just a tough sequential comp? I think there were some grain volumes got pulled forward to 1Q, but I just wanted to check if you're 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 3 months ago.

Speaker 15

And the second follow-up is kind of just on the new Mexico service. How are you confident that You can actually like both you and your competitor can actually drive truck conversion and not just make it kind of one railroad versus the other kind of going off that incremental share? Thank you.

Speaker 4

Okay. So I guess I'll 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 like so petroleum and chemicals is a leading indicator in the economy. It's down a little.

Speaker 4

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 metallurgical coal shipments are still very strong and we That to continue.

Speaker 4

Where our grain, even though it's going to come down and we pull forward, it's still 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 that we're in, 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, Well, that's really what we're aiming for.

Speaker 4

We need a consistent quick transit time and that's why we're partnering with the 2 best railways to do that with the UP and FXE, they've historically been able to convert some of that product over that moves today between Mexico and Chicago and some of the UP's network. Now we're layering on top of that CN's network where really there wasn't that product before. So it's 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 didn't have an alternative before. If you layer on top of that the EMP product that we actually joined with the UP and ENS in October last That just adds 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.

Speaker 4

So overall, I think we'll be able to do it at a great cost structure, but as well have the service that's really going to drive it.

Speaker 15

Got it. Thank you and

Speaker 14

see you all next week.

Operator

Our next question comes from the line of Steve Hansen with Raymond James.

Speaker 17

Yes. Good afternoon, everyone. Thanks for the time.

Speaker 7

One of the markets that's deteriorated more recently has been the met manner, Frac sand market that surprised me to some degree. I wonder if you could speak to the outlook there and what's been driving that sequential move quarter over quarter and what you might expect through the back half of the year? Thanks.

Speaker 4

That's funny Steve. I don't recall the frac sand market. We didn't curate it at all. Actually we had a fairly strong Q1. The primary area of our market is in the Western Canada, which saw pretty good drilling all quarter.

Speaker 4

We're currently in the month of April, we're in spring breakup. It A month earlier than last year just because it warmed up a little bit faster in Western Canada. But 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 as that for App to expand.

Speaker 17

Okay. I'm just looking at

Speaker 7

the trailing 3 week data and it's down fairly materially relative to a strong Q1. So I was just curious about the delta.

Speaker 4

No, that's spring break up there. It's just it's a month earlier than last year.

Speaker 17

Okay. Appreciate the time.

Operator

We'll take our next question from Ariel Rosa with Credit Suisse.

Speaker 9

Hey, good afternoon and congrats on a strong quarter here. So, Tracy spoke about this a bit in her opening remarks, but I wanted to get a sense for how you're thinking about potential changes to safety regulations impacting operations. Really just wanted to get a sense of what proposals you might be supportive of and which regulatory changes That have been floated, you might think are actually counterproductive or would pose risk to some of the operating progress that you've made, whether that's things like Limitations on train length or train speeds or some of the other proposals that are out there? Thanks.

Speaker 2

Thanks for the question. So let me just start by answering that in a more general way. So we have all of us been working pretty hard and arms locked on Trying to lift the performance of the supply chains up since COVID kind of set them on their side and both on improving their But also on continuing to invest in the capacity of those. And so as we think about the regulators in that environment, as I said earlier, they That are under discussion. As you look at those, those discussions and that analysis needs to be based on data and fact, Make sure that we all really understand the problem and that we apply the solutions that are really going to have an impact on the There's a lot of kind of preemptive moves that are taking place and in some cases, there are favorite solutions that are now being attached to the in a lot of cases inappropriately to the issues out there.

Speaker 2

And the risk of that, of course, is that you get you don't address the real issue. So you don't have the improvement you don't get the improvement that you're looking for. And you could have unintended consequences, which means that you have an impact on the performance and you have an impact on the capacity of supply 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. And if it can be that, we are side by side with them at efforts to continue to improve safety.

Speaker 2

So there's 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 capacity in the form of the supply chain. So in general, I'll leave that at that. We are very We want to be optimistic and we're prepared to work very hard with our regulators to try and make sure this all lands in the right place, which is a much Safer environment as we go into the future.

Speaker 9

Okay, great. Thanks, Tracy.

Operator

Thanks so much. Your next question comes from

Speaker 2

One more question, I think, operator.

Operator

Thank you. We'll take our last question from Justin Long with Stephens.

Speaker 18

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 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? Thanks.

Speaker 4

Okay. Thanks, Justin. So I'll start off there and I'll let Ghislain chime in. So listen for the intermodal, it's We will work with everybody. So we'll work with our key wholesalers.

Speaker 4

We'll work with the UPs. We'll work with the FXEs. We Back to be able to have this service offering out to everybody. CN has its own retail as well as retail product that we can help sell As well as we have TransX 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 UP and FXE to be able to do it.

Speaker 5

Yes. And I think on CapEx, I think, Justin, what we plan on doing is recession or no recession, we're going to continue to do our plan. We're going to continue to do our basic Actually, our basic maintenance actually in the past when volumes have been softer, we were able to get better cost In terms of unit costs 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, Because that's Western Canada is the gift that keeps on giving. So 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.

Speaker 5

Got it. Thanks for the time.

Speaker 14

Thank you.

Operator

And this concludes the question and answer session. I would like I'll turn the call back over to Tracy Robinson.

Speaker 2

Thanks very much for your interest today. I'm very proud of this team's performance in Q1. We have a great team and they're running a great railway. I just want to close by highlighting that this is Paul Butcher's last earnings call with us. After a 30 year career at CN, Paul has decided to retire.

Speaker 2

I guess 30 years is enough, Paul. Paul has had a great career at Ian started back in 'ninety three in financial planning and then he moved into the marketing group where he worked on this little project called the Port Rupert, which turned out to be a key growth driver for us over the years. In the last 14 years, he's been working with all of you in Investor Relations. And 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 CN. Paul, we all wish you The best in a very well deserved retirement, and we're a little envious of all the great adventures that you'll have in this next chapter of your life.

Speaker 2

So to all of you on the line, thanks so much for today, and we look forward to seeing you next week at our Investor Day.

Operator

Thank you. The conference call has now ended. Thank you for your participation. You may disconnect your line at this

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Earnings Conference Call
Scotts Miracle-Gro Q1 2023
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