Canadian National Railway Company (CNI) Q1 2023 Earnings Call Transcript

Canadian National Railway Company (NYSE:CNI) Q1 2023 Earnings Call dated Apr. 24, 2023.

Corporate Participants:

Paul Butcher — Vice President, Investor Relations

Tracy Robinson — President and Chief Executive Officer

Ed Harris — Executive Vice-President and Chief Operating Officer

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Analysts:

Benoit Poirier — Desjardins Securities — Analyst

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Cherilyn Radbourne — TD Cowen — Analyst

Christian Wetherbee — Citi Group — Analyst

Walter Spracklin — RBC Capital Markets — Analyst

Fadi Chamoun — BMO Capital Markets — Analyst

Thomas Wadewitz — UBS — Analyst

Scott Group — Wolfe Research — Analyst

Konark Gupta — Scotiabank — Analyst

David Vernon — Bernstein — Analyst

Brian Ossenbeck — J.P. Morgan — Analyst

Amit Mehrotra — Deutsche Bank — Analyst

Jonathan Chappell — Evercore ISI — Analyst

Brandon Oglenski — Barclays — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Steve Hansen — Raymond James — Analyst

Ari Rosa — Credit Suisse — Analyst

Justin Long — Stephens Inc — Analyst

Presentation:

Operator

Good afternoon. My name is Lisa, and I’ll be your operator today. Welcome to CN’s First Quarter 2023 Financial and Operating Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul Butcher — Vice President, Investor Relations

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 risk and uncertainty that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward-looking statements in our presentation.

After the prepared remarks, we will conduct a Q&A session. I do want to remind you to please limit yourselves to one question. The IR team will be available after the call for any follow-up question.

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

Tracy Robinson — President and Chief Executive Officer

[Foreign Speech]. Welcome to CN’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 GMXT are launching a new transformational Premium intermodal service that connects Mexico, the U.S. and Canada. Now, this is a steel wheel interchanges 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 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 with TCRC [Phonetic] covering approximately 6,000 CN locomotive engineers, conductors, yard conductors and yard coordinators. 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 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 decades, and we’re all working towards reducing and ultimately eliminating harm, both injuries and incidents, and ensuring that we protect the communities. There are communities, in which we operate, and in which we live.

There have been, and continue to be, considerable investments in technology and training and advancing leadership and culture. We’re not yet to zero 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 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 is in the process of implementing to those standards. 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 solutions, we will not only fail to make the necessary gains and safety outcomes, but we run the risk of unintended consequences that impair the performance of our supply chain.

Now 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 a serious injury. These are the longest periods in CN history and I think it’s proof that zero is possible. Now, Ed’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. 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. 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 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 scheduled operating plan. Ed’s going to take you through what we’re doing currently and to adjust that to current volumes. 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 and margin leverage once the more normalized volumes return. We will be ready when that happens and as the economy lifts.

Now, I’m very pleased with the work of Ed and the operating team. And while the winter was milder in Q1 compared to last year with 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. Our commercial team remains in close contact with our customers, and Doug’s 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.

So, now, we’ll 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.

Ed Harris — Executive Vice-President and Chief Operating Officer

Thank you, Tracy. Let me start off by thanking all the CN employees that helped deliver a solid performance in quarter one. This team is delivering on our expectations. And 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 first quarter of this year facings some type of tier restriction in 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 remains simple. And we have continued our focus on running a scheduled operating plan, which drives 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 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 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 first quarter, up nearly 30% from first quarter 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 RTMs 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 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. 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 volumes 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 already working agreement.

As weather warms, so should our performance, not only in train operations, but also safety. Warmer climates 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 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, I’ll pass it on to Doug to discuss top-line performance and outlook.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Thanks, Ed. I wanted to take this opportunity to thank you and your team 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 customers 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. First quarter record revenues were CAD4.3 billion, 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. 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.

Coal demand remains 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 in the manufacturing, both reflecting general economic weakness. Lumber shipments decreased only slightly despite the 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.

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 volumes 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, and we are anticipating an average crop for 2023/2024 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 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 faster service to all of its key markets. Layering this new service with our new EMP product with the UP and NS, CN’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. 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 on to Ghislain.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

[Foreign Speech]. 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 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 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 CAD40 million in the quarter versus last year, mostly driven by higher average headcount, mainly on the transportation side, which was partially 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 CAD1.7 billion, up 34% on an adjusted basis.

Our operating ratio came in at 61.5%, which is 510 basis points lower than the adjusted operating ratio for the same period last year. Record Q1 diluted EPS of CAD1.82 for the quarter was up 38% versus last year on an adjusted basis. We generated free cash flow of nearly CAD600 million in the first quarter. Under our current share repurchase program, which runs from February 1, 2023, through January 31, 2024, we have repurchased nearly 5 million shares for almost CAD800 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 continued 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. 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 the budget of about CAD4 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 continue 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 me pass it back to Tracy for some closing comments.

Tracy Robinson — President and Chief Executive Officer

Thanks, Ghislain.

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 3rd, 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&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. The first question comes from Benoit Poirier with Desjardins.

Benoit Poirier — Desjardins Securities — Analyst

Yeah. 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 are looking at? Thank you.

Tracy Robinson — President and Chief Executive Officer

Let me start there 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 in helping get [Phonetic] trucks off the road. 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?

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Yeah. So, thanks, Benoit. So one of the key things we tried to do is take the best of what was available on the market and when you look at today the service that the FXE and UP have been 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 and now we’ve been able to combine with these two 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 is a minimum of two trains each direction that’s moving over the road that we think we can go after by providing this service. So it will 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.

Benoit Poirier — Desjardins Securities — Analyst

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.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

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

Tracy Robinson — President and Chief Executive Officer

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 first quarter. Ed’s going to continue to focus on the next level of benefits from the scheduled operating plan. We have lapped now one year of introducing the scheduled operating plan. 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 these are 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 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. Ghislain, do you want to comment on the lag?

Ghislain Houle — Executive Vice-President and Chief Financial Officer

On the lag? Absolutely. So as I said in my remarks, Ken, we did have the favorable lag this quarter. And to give you an order of magnitude, it’s about CAD0.10 of EPS, and it helped the OR by about 130 basis points.

Ken Hoexter — Bank of America Merrill Lynch — Analyst

Great, thanks for the time and thoughts. Appreciate it.

Operator

Your next question comes from the line of Cheril Radbourne with TD Cowen.

Cherilyn Radbourne — TD Cowen — Analyst

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 plan that were particularly impactful year-over-year and just how comfortable you’re feeling about being able to offset the impact of the new Canadian regs that you mentioned on Work/Rest and paid sick leaves with labor productivity?

Ed Harris — Executive Vice-President and Chief Operating Officer

Well, let me take the easier one first. The bulk plan for Western Canada during the winter months went extremely well. 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. 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 in what they want or what they would think would be best. So like anything else, we were successful in negotiating an 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 25th.

Cherilyn Radbourne — TD Cowen — Analyst

Thank you.

Operator

We’ll take our next question from Chris Wetherbee with Citigroup. Please go ahead.

Christian Wetherbee — Citi Group — Analyst

Hey, thanks, good afternoon. Wanted to maybe focus on the sort of 2Q through 4Q period. So now that we have the first quarter 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, so maybe I just wanted to get a sense of what some of the underlying assumptions might be? How do we think about RTM growth? I know we’re off to, I think, down [Indecipherable] which you 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 be positive year-over-year during this period? Or is it a little bit harder to capture that leverage given that volume is going to be a little bit softer than what we’ve seen so far?

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Yeah. 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 negative. If you look at last consensus, it deteriorated actually from negative 1.3 to negative 1.4 [Phonetic], so — and we see it in volumes. I mean we currently believe that we are in our mild recession. I mean when you look at our volumes, as I said, 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, the way we’ve modeled this is, Q2 and Q3 will be in the recession, and we’re assuming that we’re getting — we are slowly but surely getting out of it by Q4. And in this, we’re also assuming that we have a three-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.

Christian Wetherbee — Citi Group — Analyst

Okay, that’s helpful. Thank you.

Operator

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

Walter Spracklin — RBC Capital Markets — Analyst

Yeah, thanks very much. Good afternoon, everyone. So Tracy, when you first took over the role, you talked a little bit about rightsizing your — but 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 a sense that that’s done now. 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 Falcon Premium service? Could we see wins coming out of Halifax now that you’re 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 growing the book of business.

Tracy Robinson — President and Chief Executive Officer

Thanks, Walter. Now 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 curate part, we’ve done that — we had 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 they’re selling, we’re selling into that plant 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 level to Doug to go out and talk to our customers next. So that level of curation is done. We’re 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.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Yeah. 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 six and eight days faster than our prior service, which is a 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 international, but we still have all those crews and all the equipment ready to go as those service ramps up. So we’re looking forward to the rebound, and we’ll be ready to take it.

Walter Spracklin — RBC Capital Markets — Analyst

That’s great, thank you very much.

Operator

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

Fadi Chamoun — BMO Capital Markets — Analyst

Yes, good evening. And congrats on the strong results here. I want to ask a question on the CP UP — I mean, on the CN, UP [Indecipherable] deal. 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’ll kind of have stronger opportunity then?

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

So Fadi, 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 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.

Fadi Chamoun — BMO Capital Markets — Analyst

Okay. Thank you.

Operator

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

Thomas Wadewitz — UBS — Analyst

Yeah, 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 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 2 for you as you focus on how the network can run better? And obviously, you did — have done really well over the past year. So congratulations on that.

Ed Harris — Executive Vice-President and Chief Operating Officer

Well, thanks, 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. 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 will 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.

Thomas Wadewitz — UBS — Analyst

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?

Ed Harris — Executive Vice-President and Chief Operating Officer

I don’t — I’m not that familiar with Canadian headcount in the past. I just live in today and in the future. I think we’ll have as much flexibility as we’ll need. Certainly, the Work/Rest rules, we’ll 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, and we’ll continue to deliver a very good operating model.

Tracy Robinson — President and Chief Executive Officer

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

Thomas Wadewitz — UBS — Analyst

Okay, great, thank you very much.

Operator

Our next question comes from Scott Group with Wolfe Research.

Scott Group — Wolfe Research — Analyst

Hey, thanks. Afternoon. I had 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 on just trends you’re seeing? And then Ghislain, 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?

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Hey. So thanks, Scott, I’ll — 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 a 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’s 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.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

And then, 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 a — it’s a flat impact over the 2023 on a net-net basis.

Scott Group — Wolfe Research — Analyst

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

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Thank you.

Operator

We’ll take our next question from Konark Gupta with Scotiabank.

Konark Gupta — Scotiabank — Analyst

Thanks, operator, and good afternoon, everyone. 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?

Ed Harris — Executive Vice-President and Chief Operating Officer

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.

Konark Gupta — Scotiabank — Analyst

Okay, thanks.

Operator

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

David Vernon — Bernstein — Analyst

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, you’re 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?

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

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. 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 2022, 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. There’s 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.

David Vernon — Bernstein — Analyst

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?

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

So in the Canadian side, moisture content is very good in the prairies right now, probably a little bit too much snow. But recently, over the last [Indecipherable] 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 with 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. And right now, they’re expecting to have a normal crop as well in the U.S.

David Vernon — Bernstein — Analyst

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

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Thank you.

Operator

Your next question comes from the line of Brian Ossenbeck with J.P. Morgan.

Brian Ossenbeck — J.P. Morgan — Analyst

Hey, good afternoon. Thanks for taking the question. Just a follow-up on Canadian grain. Maybe, Doug, can you give us a sense of where pricing is headed for the ’23 and ’24 Canadian grain crop? I think the VRCPI is actually due here perhaps in next week or so. [Indecipherable] going to be as big of a swing factor as we’ve seen more recently? And then just maybe, Ghislain, if you can clarify if that CAD100 million 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? Thank you.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Yeah. Thanks, Brian. So I’ll start off on the — hey, 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, we think it should be positive, and there might be some upside there.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Yeah. And on the Work/Rest rules and paid sick days, yes, we’re still assuming a worst-case scenario about CAD100 million, we’ll see. Ed is starting to work hard on the scheduling this — 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. But I think, hopefully, there’s some room here to be able to offset some of the new Work/Rest rules going forward.

Brian Ossenbeck — J.P. Morgan — Analyst

Okay. Thanks very much. Appreciate it.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Thank you.

Operator

Your next question comes from Amit Mehrotra with Deutsche Bank.

Amit Mehrotra — Deutsche Bank — Analyst

Thanks. Ghislain, just on the profitability question earlier, do you think first quarter is going to represent kind of the high watermark on operating ratio as it typically does because of the weather? I know weather was less incremental in the first quarter, 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 first quarter? 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. 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 [Indecipherable] I mean, anything to sort of help us calibrate some of our expectations as we head out there next week? Thank you.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

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, etc., etc. So it’s typically higher and — but we don’t guide on OR. What we have said 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. 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, do you want to take the second part?

Tracy Robinson — President and Chief Executive Officer

Yeah. Thank you. And thanks for your question and your interest in Investor Day. We aim to do a few things at Investor Day. We’re going to — you’re going to see much bigger cross-section of our team. We will 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 three years. We’ll give you a little color sometimes [Technical Issues] give you a little bit guidance, but we’re looking forward to having the conversation with you [Speech Overlap].

Amit Mehrotra — Deutsche Bank — Analyst

And also from an OR and earnings perspective outside of growth?

Tracy Robinson — President and Chief Executive Officer

We will talk to you about earnings. We don’t guide on OR, as you know, but I know we’ll be having conversations around leverage and the like. There is a micro site that is going up. Is it up now? It’s going up tonight [Speech Overlap] 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 micro site.

Amit Mehrotra — Deutsche Bank — Analyst

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

Operator

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

Jonathan Chappell — Evercore ISI — Analyst

Thank you. Good afternoon. Doug gave us the look at April from an RTM perspective. I guess [Indecipherable] kind of get that every Monday anyway. How have your metrics been trending in April? You gave us a great update on 1Q on origin train performance, velocity, etc. Just trying to get a sense for — if that momentum is continuing in maybe a weaker demand backdrop and also how much of 1Q’s improvement was actual structural versus just a really relatively easy winter comp.

Ed Harris — Executive Vice-President and Chief Operating Officer

I don’t think winter had a lot to do with our improvement. I — we’ve got focused 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 first quarter. And quite frankly, I don’t see any slowdown at the start of the second quarter. We’re off to a great start as well.

Jonathan Chappell — Evercore ISI — Analyst

Great. Thanks, Ed.

Operator

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

Brandon Oglenski — Barclays — Analyst

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. 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.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Yeah. 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 — the 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 contracts. 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 consumed within North America. The international — the 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 that’s really probably by the end of the year.

Brandon Oglenski — Barclays — Analyst

Thank you.

Operator

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

Ravi Shanker — Morgan Stanley — Analyst

Thanks, [Indecipherable]. 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 was some grain volumes that got pulled forward to 1Q. But 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 three months ago. 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 of that incremental share? Thank you.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

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 the leading indicator in the economy, it is 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 metallurgical coal shipments are still very strong, and we expect that to continue. Where our grain, even though it’s going to come down, 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. We need a consistent quick transit time, and that’s why we’re partnering with the two 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 the NS in October last year, 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. So overall, I think we’ll be able to do it at a great cost structure but as well as have the service that’s really going to drive it.

Ravi Shanker — Morgan Stanley — Analyst

Got it. Thank you and see you all next week.

Operator

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

Steve Hansen — Raymond James — Analyst

Yes, good afternoon, everyone. Thanks for the time. One of the markets that’s deteriorated more recently has been the manner of the frac sand market that surprised me to some degree. I was wondering 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.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

Now, that’s funny, Steve. I don’t recall that 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 a pretty good drilling all quarter. We’re quite — we’re currently in the month of April, we’re in spring break up. It happened 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 on 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 [Indecipherable] to expand.

Steve Hansen — Raymond James — Analyst

Okay. I’m just looking at the trailing three-week data that’s down fairly materially relative to a strong Q1. So just curious about the delta.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

No, that’s spring break out there. It just — it’s a month earlier than last year.

Steve Hansen — Raymond James — Analyst

Okay. Appreciate the time.

Operator

We’ll take our next question from Ari Rosa with Credit Suisse.

Ari Rosa — Credit Suisse — Analyst

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.

Tracy Robinson — President and Chief Executive Officer

Thanks for the question. So let me just start by answering it 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 performance, 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 can and they should be a very strong partner. But the way that you are a strong partner in that is when you have issues that you want to address like those 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 problem that we’re trying to solve. There’s a lot of kind of preemptive moves that are taking place and in some cases, they are favorite solutions that are now being attached to — in a lot of cases, inappropriately to the issues out there. 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 unintensive [Phonetic] consequences, which means that you have an impact on the performance and you have an impact on the capacity of the 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. And if it can be that, we are side by side with them at efforts to continue to improve safety. 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 [Indecipherable] 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.

Ari Rosa — Credit Suisse — Analyst

Okay. Great. Thanks Tracy.

Tracy Robinson — President and Chief Executive Officer

Thanks so much.

Operator

Your next question comes from [Speech Overlap].

Tracy Robinson — President and Chief Executive Officer

One more question, I think, operator.

Operator

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

Justin Long — Stephens Inc — Analyst

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.

Doug MacDonald — Executive Vice-President and Chief Marketing Officer

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. We’ll work with the UPs, we’ll work with the FXEs. We expect 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 up these trains hopefully, and we’ll be working together with the UP and FXE to be able to do it.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Yeah. 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 had been softer, we were able to get better cost in terms of unit cost for ties [Phonetic] 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.

Justin Long — Stephens Inc — Analyst

Got it. Thanks for the time.

Ghislain Houle — Executive Vice-President and Chief Financial Officer

Thank you.

Operator

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

Tracy Robinson — President and Chief Executive Officer

Thanks. 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 — I 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. I guess, 30 years is enough, Paul. Paul has had a great career at CN, started back in ’93 in 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’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 provided me as I’ve come into CN. Paul, we all want to 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.

So those 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

[Operator Closing Remarks].