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Operator: Good afternoon. My name is Patrick, and I will be your operator today. Welcome to CN’s Fourth Quarter and Full Year 2022 Financial and Operating Results Conference Call. After the speaker’s remarks, there will be a question-and-answer session. . I would now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul Butcher: Well, thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN’s Fourth Quarter and Full Year 2022 Financial results Conference Call. Before we begin, I’d like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today’s conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward-looking statements in our presentation.

After the prepared remarks, we will conduct a Q&A session. I do want to remind you to please limit yourself to 1 question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; and Doug MacDonald, our Chief Marketing Officer; Ghislain Houle, our Chief Financial Officer; and last but not least, the youngest recruit on the team, 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: Thanks, Paul, and welcome to our earnings call. I’m very pleased, whether you’re with us by phone or webcast. We appreciate you joining us. Now I’m approaching — getting close to the end of my first year with CN. And as I do that, I can’t be prouder of this team and what we’ve accomplished together over the last year, it’s important to me and to all of us that we’ve delivered on what we promised. We drove top line growth and we drove it to the bottom line. We started with a pretty tough first quarter, but we finished the year on guidance with an EPS up 25% and an operating ratio that starts with the 5 first since 2017. We also delivered a return on invested capital of 15.9% and free cash flow of nearly $4.3 billion.

I want to take this opportunity to thank each of our CN employees. I am grateful for your focus and your hard work and delivering to some very big commitments this year. We came together as a team and across the entire organization, we have risen to the challenge. But we’re not done. We’ve got more work to do on many fronts, and we’ll be focusing on this through 2023. Without a doubt, we are in an uncertain economic time. And like many others, we are assuming this year, a mild recession. Now our bulk segment will help us in the first half of the year but we have less visibility in the second half. In this company, like others, we’ve dealt with recessions in the past, and we’ll deal with this one. We have a great network and a diverse book of business provides stability for us in times like this.

So we’re going to remain nimble and close to our customers and will perform well this year regardless of volumes, and we will position ourselves for the upswing when it comes. And while current expectations that North American industrial production will be negative in 2023, we will grow EPS in the low single-digit range. Now the team with me today will walk through our performance 2022 and our outlook for 2023. I am pleased to have Ed Harris joining us on the call today for the first time. Ed was appointed Chief Operating Officer in December. And he brings a little bit of experience, 40 years of experience to our team. Most of that was with the CN running a scheduled operation. He’s pretty passionate about being back and doing just that. Ed will give us an update on our operating performance, and he’ll make some comments on our path forward on continuing to improve our operations and importantly, on his mandate to get the next generation of operating talent ready.

Following a strong top line performance in 2022, Doug and his team are working closely with our customers to monitor volume trends and making sure our portfolio continues to fit our network. We’re going to maintain our approach of selling into our capacity. Doug today will give you an update on our key markets and how we’ll look to outperform that North American industrial production this year in terms of volumes. And Ghislain, as always, will cover the details of our financial performance in the quarter and the year as well as assumptions driving our 2023 financial outlook. Ed, over to you.

Edmond Harris: Thank you, Tracy. Despite what Paul said, Tracy and I do go back a long way, when we both work for our Canadian competitor. And I can’t tell you how happy I am to be back home where I dedicated a big part of my career. Ghislain, Doug, and I also go back a few years from my prior days at CN. Very happy to reconnect with them and also many others at CN. Some of which are the sons and daughters of the people I worked with a few years back. I reached out to Doug early on to better understand some of the challenges that we faced. And we have been working closely — very closely sense to continue to improve our customer service. I love this business, and I feel energized about taking scheduled railroading to the next level.

But more importantly, I’m here to help identify and mentor our talent and develop the next generation of railroaders. I can say that we have one of the best networks in the industry and a darn good team of operating people to maximize the efficiency of this network and enable growth for the North American economy. I came on board in April as a consultant and was very excited about the idea of helping this company refocus on scheduled railroading. You have seen the significant improvements throughout the year. I was convinced that this team had the muscle memory to get us back to where we used to be, and I want to thank all the operating people for their efforts. I have spent a considerable amount of time with the operating team since April.

I’ve been out on the property quite a lot, and let me tell you that the talent is deeper than I initially thought. They are passionate and as a team, they want to drive more efficiencies going forward. While as a consultant, my role was more about suggesting ideas and making recommendations like starting on time and controlling train lengths and getting back to the 3 regions from the 2 that existed. Now as Chief Operating Officer, I can direct and have a more influential role in working with the team to implement some of the changes that will take this company to the next level. I am here to help the company. I want to be fast and quick, but before anything, I want to be safe. We have made great strides when it comes to safety performance. and we are now 748 days without a fatality and 560 days without a serious injury.

Every day, we are beating a record. Railroading needs to remain simple. I think we got away from that over the past few years. Velocity creates capacity, the faster we are, the more we can handle. And the more we stick to the plan, the more reliable we are, which means that I could provide a level of service that Doug can sell to his customers. I’ve heard Tracy say so many times about how we’re working on a more integrated basis. A big part of my philosophy is to work together as a team and work closely with the other functions. Collaboration is key and that’s how we will move forward together. I could talk about railroading for hours, but now let me speak about a few of the operating highlights of the fourth quarter and some of my priorities for 2023.

We continue to make good headway in terms of operating performance, though not without some challenges in the quarter. Car velocity averaged 207 miles per day in the fourth quarter, up 10% from last year, while origin train performance averaged 85% in quarter 4, also up 10% from last year. What I’m most proud of in the fourth quarter is how the operating team responded to the challenges and restore fluidity on the network following a period of extreme winter conditions in Western Canada in late December, with temperatures in some areas, dropping to a minus 50 Celsius for that time frame. Our approach to scheduled railroading and focus of our employees helped us to restore fluidity on the network. I am amazed how the team responded and you can see it in the operating performance.

So far this month alone, car velocity is hovering near 220 car miles per day, similar to the numbers that this company saw last summer. Now winter is far from over, but compared to last year, we are in a much better position to start the year, and it means we should be in a better position to come out of winter into the spring. We are building resiliency based on running a scheduled operating plan with focus on service, asset utilization and velocity. Those terms should be familiar to all of you. Before I pass it on to Doug, let me provide you with some of my priorities for 2023. We’re going to take scheduled railroading to the next level. There’s more yet to be done here with a focus on destination and train performance and individual trip plans.

We continue to drive capital efficiencies and we will deploy capital on the network engineering is already equipped and ready to get started on this year’s program, starting naturally on our . The mechanical team is bolstering in modernizing our fleet of locomotives with camera technology and energy management systems, which will help us be more efficient with fuel and safer. And finally, and perhaps most importantly, we are going to continue to coach and develop the next generations of railroaders. With that, I will pass it on to Doug to discuss top line performance and outlook.

Doug MacDonald: Thank you, Ed, and a huge thanks to you and your team from both me and our customers on the speed of our operating recovery after the extreme winter temperatures on our network in December. The team’s disciplined execution and focus on velocity has delivered the service our customers need, and we are pleased that January is off to such a strong start. I’ll now turn to Slide 9 and provide a review of our solid fourth quarter top line performance. Fourth quarter revenues were $4.5 billion, up 21% over Q4 of last year on 6% higher RTMs. Our bulk segments led the charge this quarter with strong year-over-year volume growth. We continue to achieve rail inflation plus pricing on renewals and the lower Canadian dollar also contributed to our revenue growth in the quarter.

As expected, Canadian grain was very strong this quarter, including an all-time single-month record for tons shipped in October. We also saw growth in U.S. grain given the supply chain shift with the low water levels on the Mississippi River through the fall. For the full year, unit train shipments of U.S. grain to the Gulf beat the previous record from 2006. Coal demand remained strong through the fourth quarter with a strong commodity pricing environment. In fact, we set a record for coal shipment in 2022 with over 30 million tons shipped for the full year. Automotive volumes were strong in the quarter as inventory replenishment continued across the industry. We did, however, see some weakness expand in other segments in the fourth quarter.

A softening in international intermodal as volumes tapered through all gateways due to inventory overstocking. Lower petroleum and chemicals volumes with reductions in refined products as well as lower chemicals and plastics used as inputs into manufacturing due to numerous small outages and a softer market demand. Lumber and panels decreased following additional mill curtailments in British Columbia due to low commodity prices, high stumpage fees in BC and lower housing demand due to rising interest rates. Before I review our market outlook for 2023, let me provide you with updates on some of the initiatives we spoke about earlier this year. Despite some recent softness, the Port of Halifax had a record volume year for intermodal in 2022, handling in excess of 600,000 TEUs and CN and our partners, PSA and Port of Halifax are all working with our customers to grow the terminal in 2023 and look forward to selling out the terminal in years to come.

On the EMP program, which is a shared intermodal equipment pool with the UP and NS, CN has now fully integrated the program into our operations and sales. CN will be adding containers to this pool over the next 2 years as we continue to grow the business for the interline domestic intermodal. CN finished off 2022 averaging over $1 million per week in new business. The Canadian West Coast export propane program continued to gain momentum in 2022. Working with our partners in Prince Rupert, CN moved over 10,000 cars this quarter to terminals in Prince Rupert to support Canada’s growing energy export market, an increase of 17% over Q4 2021. We expect this program to continue to grow as additional drilling and gas processing takes place in advance of the new LNG plant coming online in 2025.

Finally, turning to Slide 10. We are assuming a mild recession as our base case. We have good visibility in H1 as we continue to move significantly higher Canadian grain crop. With the current economic environment, the H2 outlook remains uncertain at this point. On the bulk side, we expect continued strength in 2023. We will be moving last fall’s Canadian grain crop well into 2023, and we are anticipating an average crop for the 2023, 2024 crop year. We expect coal demand to…

Operator: All participants continue to stand by. The lines for the moderators have disconnected. Once again, please continue to stand by. We are back in the call. Please go ahead.

Doug MacDonald: Thank you, everyone. I think we got cut off there, so I’ll just continue with my remarks. So we expect coal demand to remain strong through 2023 with commodity pricing staying favorable. Energy shortages are keeping demand strong, and the backlog in autos and development in Asia will underpin net coal demand. We expect more of a flat to negative performance with most other commodities. The weakness that we began seeing in the fourth quarter is expected to persist through at least the first half of 2023. The international intermodal will have multiple blank sailings as the North American inventories rebalance. Lumber will be slow to recover due to market oversupply and high interest rates dampening demand. Chemical and petroleum production is directly tied to the economy, so we expect demand to be soft in the first half of 2023.

Automobiles are still in a tight supply situation, but this is changing with higher interest rates as well as part shortages. To close, we are working closely with customers to monitor the economic environment as we run a scheduled railroad with a focus on velocity, we are achieving solid performance that will serve our customers well and continue to grow with our customers as the economy recovers. With that, I will pass it on to Ghislain.

Ghislain Houle: Thanks, Doug, and welcome, Ed, it nice that you’re back home. It’s my pleasure to review our excellent fourth quarter and full year financial results. I will talk to Slide 12 of the presentation, which will provide more visibility on our fourth quarter performance. These results highlight the strength and resilience of our franchise as we delivered volume growth of 6% in terms of RTMs and 21% growth in revenues despite some significant weather challenges in December. The top line performance, combined with the strong operating performance, grew solid earnings in the quarter. Let me provide you with more details on the quarter, and I will speak to the adjusted numbers, which exclude advisory costs related to shareholder matters in the fourth quarter of 2021.

Labor expense was up around $40 million in the quarter versus last year, driven by increased wages due to higher average head count of close to 900 transportation employees versus last year. Our fuel expense was up nearly 50% FX adjusted, as fuel prices were over 45% higher in the quarter versus Q4 of 2021 and volumes contributed to the remaining 5%. We delivered operating income of $1.9 billion in Q4, up 21% on an adjusted basis. Our operating ratio came in at 57.9%, which is in line with the adjusted operating ratio for the same period last year. Diluted EPS of $2.10 for the quarter was up 23% versus last year on an adjusted basis. Turning to our full year results on Slide 13. I am very proud of our adjusted EPS growth of 25% versus last year, which is aligned with our guidance, demonstrating the strength and resiliency of our franchise and validates the effectiveness of operating a scheduled railroad with a focus on car velocity and working on an integrated basis.

We generated free cash flow of nearly $4.3 billion for the year, exceeding our guidance. Under our current share repurchase program, which runs from February 1, 2022, through January 31, 2023, we have repurchased over 29 million shares for $4.6 billion at the end of December. Finally, at the end of 2022, our return on invested capital finished at close to 16%, exceeding our 15% guidance. Moving on to Slide 14. Let me provide some visibility to 2023. As we continue to see weakness in certain segments like international intermodal, driven by lower consumer spending, lumber, chemicals and plastics, we also see weakening economic indicators with negative North American industrial production expected in 2023. Therefore, like many others, we are assuming a mild recession in 2023 with some rebound in 2024.

We have good visibility on Canadian grain for the first half of 2023 and currently assume an average crop starting in the second half of the year. As Ed mentioned, we are off to a good start in January from an operating perspective, and Doug and his team remain disciplined on pricing, but we will be facing some headwinds on the Canadian labor front in regards to work/rest rules and paid sick days. Despite a weakening economic environment, we expect to deliver low single-digit EPS growth in 2023 versus 2022. In terms of shareholder distribution, we are pleased to announce that our Board of Directors approved an 8% dividend increase for 2023. This represents the 27th consecutive year of dividend increase since the 1995 IPO and reflects both the confidence in our strong cash flow generation capacity throughout business cycles and the long-term prospects for the company.

The Board also approved a new share buyback program of up to 32 million shares for an amount in the range of $4 billion to be returned to shareholders through a normal course issuer bid from February 1, 2023 to January 31, 2024. In conclusion, let me reiterate a few points. We delivered a strong fourth quarter performance as we continue to push on operating a scheduled railroad. We met our 2022 financial guidance. We are witnessing continuing economic weakness and calling for a mild recession in 2023. Despite this weak economic environment, we are still guiding for EPS growth, demonstrating the resilience of our franchise and the strength of our team. We have a strong balance sheet that provides us financial flexibility, and we will allocate our capital in a manner that drives long-term value for our shareholders.

Let me pass it back to Tracy for some closing comments.

Tracy Robinson: Thank you, Ghislain. So today has been a good opportunity to look back at a number of our successes in 2022, and I’m really proud of what we’ve accomplished together. But this team and I are looking ahead to the future to where we want to take our company and it will take a continued focus on performing at an ever higher level across the organization. As Ed said so, it’s not that complicated. We’re going to keep it simple. It starts with the plan. We’re focusing on the next level of operating performance through the scheduled operating plan and further integrating our team across functions. We’re continuing to get closer to our customers, earning their trust through great service and partnering in their growth, and we’re going to leverage the strength of our network to grow with them in a manner that’s good for both of us.

We’re in the longest stretch of our company’s history without a fatality or serious injury, and there’s nothing more important to us than this. But it doesn’t mean that we get complacent. That means we get even more committed to our safety culture and looking out for each other every day. We know now what’s possible. Our efforts on climate and sustainability are advancing. A number of organizations last year recognized our sustainability efforts. We made the CDPA list once again, and we’ve now been listed for the 11th consecutive year on the Dow Jones Sustainability World Index. We appreciate the recognition, but we’re really focused on is to continue to pursue this agenda, which amongst other objectives is going to help us further improve our industry-leading fuel efficiency.

And last but not least, of course, we’re intently focused on developing the next generation of talent at CN. There’s tremendous capability in this company, as you’ve seen. And we have the senior team in place now to bring them and their performance up to the next level. You’re going to hear a lot more details about our vision and our growth plan and our performance at our Investor Day in Chicago in early May, and we’re looking forward to seeing you all there. And now Patrick will open the line to questions, please.

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Operator: . First question is from Chris Wetherbee from Citi Group.

Christian Wetherbee: Maybe I wanted to start on the guidance and I appreciate the fact that you’re being, I think, cautious about the outlook or may be realistic about the outlook for a recession in 2023. Ghislain or Tracy, maybe you could walk us through some of the underlying dynamics of that outlook. How do you think about RTMs and maybe how do those progress over the course of the year? And then if we can get revenue growth in the year, do you think operating ratio improvement is possible as well to get you to that low single-digit EPS growth.

Tracy Robinson: Chris, that is the question, isn’t it. We’re giving you today our guidance based on what is the best information we have right now. Given the uncertainty in the economy and what may happen this year, I think it’s the right amount of information to provide. We do hope that it will be better than what we expect. And we’ll be ready if that happens. And as we get more clarity, we’ll be in front of you with updates. But I think we’ll keep it pretty much at that level for today.

Christian Wetherbee: Just one quick point. Is it fair to assume that RTMs maybe track roughly industrial production? Is that reasonable?

Tracy Robinson: We think that — I’m going to hand it over to Ghis to comment, but we do believe that we can lift our volumes higher than the industrial production, as Ghislain said in his note.

Ghislain Houle: So you covered it well, Tracy.

Operator: The next question is from Konark Gupta from Scotiabank.

Konark Gupta: Just wanted to follow up on previous question actually. If we look at the EPS guidance for low single digit, we also have a share repurchase here, which could potentially be in the low single-digit range. And then volume, as you said, it’s above IP pricing of inflation. Is there something on the yield or operating ratio that we need to figure out to kind of account for the gap? Is it the mix? Is it the accessorial charges? Something else that you’re missing.

Ghislain Houle: Well, thanks, Konark, listen, as we just said, I think that we’re assuming right now the industrial production in North America will be negative. As Tracy just mentioned, we’re assuming that we’ll do a little bit better than that. We will continue to work on our margins. I mean, we know that we need to improve our margins on a year-over-year basis. However, as you know, it’s tougher to improve margins when you’re in a low volume environment. But we’re very confident over the mid to long term that there’s no question that we will improve our margins. When you look at what we’ve done in 2022, I mean, our incremental margins for the full year was a respectable 50%, and we improved ROR by 130 basis points. So that sets the stage.

And with the scheduled railroading back in full force, I think that it’s all going to depend on volumes and it’s all going to depend on the economic environment. I mean if economic environment does a little bit better, then we’ll ride the way. If it’s deeper than what we think, then — and it’s not mild, but it’s deeper, then we’ll perform. I mean, we’re well positioned to perform in a recession, and we have a strong balance sheet. So I think we’re — and as — and I’ll finish on this, Ed mentioned it, but we’re starting January quite well with the weather collaborating. So our volumes are good. But remember that we are comping versus last year where we were in deep freeze. So — and we can count our chicken too early. We just have about 21 days behind us.

Operator: The next question is from Tom Wadewitz from UBS.

Thomas Wadewitz: I wanted to ask a bit about how you think about pricing against this backdrop of weaker cyclical backdrop. I think the commentary from the Canadian rails in 2022 was pretty optimistic, tight capacity, pretty favorable trends in pricing. Would we expect that to ease meaningfully against weaker volume backdrop? Or you think there’s some momentum that carries through that you still have a maybe stronger than normal pricing in 2023?

Doug MacDonald: Thanks, Tom. It’s Doug. So once again, I’ll say we have — about 1/3 of our book of business comes up every year for repricing. So we do — we have seen a strong pricing environment continue. We do have some catch-up to do from prior years. And our goal continues to be pricing above rail inflation. And we really don’t see any issues with that at all so far.

Thomas Wadewitz: So can you kind of comment on pricing this year versus last year? Do you think it’s similar or a bit lighter given the volume backdrop?

Doug MacDonald: It’s very similar right now. We expect a pricing overall for — or costing for overall for the rail industry. We expect to stay ahead of that. So right now, it’s showing very high when you look at the all-inclusive index and things like that, and we continue to be above that.

Operator: The next question is from Brian Ossenbeck from JPMorgan.

Brian Ossenbeck: I just wanted to ask, Ghislain, you mentioned some headwinds on Work/Rest Rules and paid sick days. I wanted to see if you could elaborate on that is that the federally mandated one that kicked in at the end of last year? And how is that going to impact the financials or headcount? And how should we expect that to kind of roll out throughout the year?

Ghislain Houle: Yes. Thanks, Brian. Yes, definitely some headwinds there. Ed and the team will work hard to try to minimize the unfavorable potential impact of those headwinds. But I’d say that when you put them together, they could be as much as $100 million of headwind in 2023. So we’ll see, but that’s certainly something we have to deal with.

Brian Ossenbeck: Would that be — would that require additional headcount to cover some of the…

Christian Wetherbee: That’s the notion. The notion is that you would have to have more people to do the same amount of work, and therefore, it does create a financial unfavorable impact. But as I said, Ed will — and the team are working to try to minimize the impact. But — so we’re all over this as we speak.

Edmond Harris: Brian, if I could just add, it’s Ed Harris. We’re looking at the operating plan very closely, and we look at it every day, which is no secret to anyone. I think the things that you have to remember with a stronger operating plan and better system performance, we’re taking out a lot of unnecessary operating expense like recrewing trains, the die and route or deadheading to a better schedule. And there’s quite a bit of savings that we’ll see through that as we get stronger in our operating plan. So that’s one of the ways that we’re thinking about offsetting some of the headwinds. We talk about this quite a bit, and we got a pretty good plan we’re working on.

Operator: Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets.

Benoit Poirier: Yes. And welcome back, Ed, to CN. Obviously, a lot has been accomplished since April, but could you provide more color about some changes that you’re looking to implement that would bring the company to the next level? And maybe if you could expand a bit on the headcount for 2023 and CapEx envelope in order to drive the operations.

Edmond Harris: Well, I think one of the first things that I saw while I was consulting beginning in April was there wasn’t much adherence to an operating plan and the discipline that we put in beginning in April started leading into some savings right off the bat. And it was something as simple, Benoit, is running on time. From that, we looked at train length. We were running trains way too long, way out of slot, which just created a lot of havoc across the network and really killed our service offering. So we got trains back where they need to be. And lo and behold, our velocity jumps up significantly, probably, what, 10% or so looking at the team here, made all the difference in the world of getting across the railroad. So that’s the basis of the operating plan as we speak right now.

Train speed has come up very nicely. I’ve already mentioned about the progress we’ve made in a necessary expense behind dead heading and recrewing, tighter schedule adherence, and this is near and dear to my heart. We stay with the schedule 7 days a week, and we run the same schedule every day. And if the traffic is there, we’re going. If the traffic is not there, we’re going, whether it’s 120 cars or 40 cars, we’re leaving on time. That’s really the secret of the business, right? The way I was brought up, and that’s what we’ve been doing. We’re also going to reinstitute individual car trip plans. This is something that we started back in the early 2000s. You probably remember it, where we can actually see where the car falls off trip plan, we can isolate the location where it fell off trip plan, the reason why it fell off trip plan, and it was a daily correction exercise we went through.

Very impressive to a customer that wants to know why their car is not on time, and we can roll out exactly why it wasn’t on time and the reason for it when Doug sales force makes a call. So that’s just some of the plan that we’ve been addressing since I’ve been on board, and it’s a lot easier to do it as an active employee than it as a consultant. I don’t like suggesting anything. I like telling. So that’s where we’re at. And so far, so good. I’m very pleased with the results and the progress that we’ve made operationally.

Operator: The next question is from Cherilyn Radbourne from TD Securities.

Cherilyn Radbourne: I also had a question for Ed. So I guess I’m picking up on the last one. First of all, welcome back. Just curious now that you returned to CN after having had the opportunity to assist out a couple of other class ones operationally. Can you comment on what you think RCM’s particular strength from an operating perspective? And I think in your prepared remarks, you mentioned the company is moving back to 3 operating regions from 2. So maybe within that, you could outline the rationale for that in particular?

Edmond Harris: Well, I don’t like to compare ourselves to other carriers because all the networks are different to begin with. And I can tell you, I learned a lot in my time with other carriers. I learned different ways of doing the business. But quite frankly, as I said earlier, this is a simple process. I mean Mr. Harrison always just tell us it’s like checkers, keep them on the black squares and figure out that way around them. And that’s exactly what we’re doing here today. What I’m very pleased about this network is it’s solid. It’s linear, it’s easy to operate on, and it’s pretty easy to schedule when it comes right down to it. There’s not a lot of interference with cross traffic or other railroads and the acquisition, when I left CN to begin with, I wish I was part of it, the EJ&E acquisition, we fly through Chicago.

I mean, instead of taking 12 hours to get through the city, to get to our yards on the south end, where we rounded in an hour. That benefit is unbelievable. And the ability to run trains out of Winnipeg through the J to Toronto around the South Lake, Michigan, is just fantastic. I mean I wish I could have been here when they bought it because I would have been on the first train going around the horn. But actually, a lot of opportunity, a lot of possibilities here. And I’ve just started digging back in really when it comes right down to it. I am extremely impressed with the management team here, the operators, lot of knowledge, a lot of people that were here before. A lot of people that came from other carriers that understand the game, too.

So besides that, and we simplified the network going from 2 regions, which to me was just too much for any 1 guy to handle to 3 regions. I like my operating officers to be able to be in the face and talk to the crews and be part of the crew solutions. And this allows them to do that. And we set up the organization. We just finished reorganizing the operating department and a traditional realm that we used to do back in the days. In fact, Ghislain said, “Hell, that’s the way we used to do it when was here.” And that was the truth. We did it the same way again because that’s what I was familiar with, and it leads into what’s down the road for the next generation of railroads. You can see it on the org chart. if you’re second or third out, you can plan on getting promoted probably in about 5 to 10 years.

And that’s the way I want these people thinking. And I think that drives efficiencies and opportunities. So I hope that answered your question. I probably got a little long winded, but like I say, I like railroading.

Operator: The next question is from Brandon Oglenski from Barclays.

Brandon Oglenski: And Ed, welcome back. Ghislain, I hate to focus on the operating ratio. But I guess given the EPS guide, it seems like there’s some pushes and pulls here on the outlook for margins. So — is this an environment where you think some of those cost pressures might be too much to show a lot of improvement this year?

Ghislain Houle: No. Listen, Brandon, as I said before, we are continuing to focus on costs. We know we need to improve our margins on a year-over-year basis. And it’s just — we have a low volume environment, so it makes it a little bit challenging, but we are working on it and stay tuned. I think we’ll see what happens, and we’ll see what happens with the economy.

Tracy Robinson: Let me come in over top of that just for a moment, Brandon. So I’m pretty proud of what this team did this year on a 130 basis points improvement. When you want to improve operating ratio and improving our margins, it takes everybody. It means a good efficient operation. It means that you sell into your network, and it means you price properly and you stay focused on the velocity of your operations. So those are all basic building blocks. And in any economic environment this year, whatever unfolds, those are the things that we’re going to be working on. We have a couple of headwinds that Ghislain outlined to you. We’ll see how those play out over the year. We’re going to mitigate them as much as we can. So really, it comes down to what kind of leverage we get out of volumes. And that remains to be seen. So we will be in front of you as that becomes more clear to us.

Operator: Thank you. Next question is from Kenneth Hoexter from Bank of America.

Kenneth Hoexter: Great. I’ll echo Ed, welcome back. Great to talk to you again. Ghislain, I’m going to throw one to you, I guess, very similar to the questions. But maybe talk about last year’s first quarter, let’s go near term. I know there’s so much in the year ahead, you don’t want to kind of guess too. But maybe talk about the weather impact that impacted first quarter last year because you had, I guess, you go about the last couple of years about a 500 basis points deterioration that’s been normal in the first quarter. Should we not expect that, given it sounds like weather is a little bit better or anything different because of the operations just maybe going near term on that? And then just a quick follow-up. Did you say the plan and traffic changed? Or were people just not following the plan that existed? Just trying to understand what difference happened so quickly.

Ghislain Houle: Well, let me start with your first piece of the question and then we can turn it over to Ed. So yes, Ken, absolutely last year, at this time, we were in deep freeze. And you remember well, we finished Q1 with an OR that was 66.6%. So this year, when you look at our volumes, they’re up and you see them on a weekly basis. The weather, we’ve been blessed with the weather across the network. So that’s helped. The team is functioning very well. But as I said, don’t — let’s not count our chickens too early. We have 20-some-odd days behind us. We’ll see what happens. Winter is not all over, by the way, when I look at next week, it’s supposed to be in the minus 20, 25 in some parts of the country. So what’s in the bank is in the bank, we’ll see. But definitely, we had good operating conditions so far. Maybe I’ll turn it over to you, Ed, for the second piece of the question.

Edmond Harris: I would say that my comment about following the trip plan, it was just something as simple as you got a plan out there, why don’t you run to it and run on time, depart on time. And that really is what pushed the envelope to getting people focused on following a scheduled railroad. That was the first step. And we’re well into it now. So…

Operator: The next question is from Ravi Shanker from Morgan Stanley.

Ravi Shanker: A follow-up on the volume commentary for ’23. Tracy, I think you said at the top of the call that you think the first half is going to be fine, but the second half visibility is low I think there is at least one scenario that believes that in the back half of the year, kind of inflation should be more under control and kind of rates are potentially under control and inventories are potentially under control. And so the back half outlook should be better in the first half outlook. Can you talk about kind of why you think there’s less visibility into the second half and maybe some of the kind of things that concern you about volumes right now?

Tracy Robinson: Ravi, what I said was that we have a clear line of sight in the first half, given we know what the grain crop is. And as Doug outlined, we know what coal looks like. And Doug outlined kind of where we see the softness. What I said about the second half is we don’t have line of sight. We’ve modeled a certain grain crop, but the crop is not in the ground yet. So it remains to be seen what that looks like. And we are hearing, like you, any number of different scenarios on what inflation may do and therefore, how quickly volumes may rebound. As I said, our guidance is based on the best information that we have right now. And as we get further into the year, we’ll give you an update as it becomes clear.

Ravi Shanker: Great. And just a very quick follow-up. How much of the NCIB is included in the EPS guide?

Ghislain Houle: It’s the — we are assuming that we will do the entire program. So we’re assuming — I mean, we’re finishing at the end of January, the $5 billion share buyback program, and we’re assuming that we will do the entire program, the $4 billion, we’re assuming we’ll do that up until the end of January of 2024.

Operator: The next question is from Fadi Chamoun from BMO.

Fadi Chamoun: Yes. And, Ed, nice to have you back on this call. I hate to make you endure one more question on guidance. But I hear you talking about how operationally things should continue to improve this year and pricing ahead of inflation and you’ve got the share count going down in the 3%, 4% on average this year potentially. Just how bad do you think the volume could be this year? Just seems to be kind of the variable that may be keeping you on the edge a little bit with the guidance. Are there kind of specific end market you’re worried about? Are there other cost items that outside of the labor that maybe just last are factored in this guidance that you may be missing?

Tracy Robinson: Thanks, Fadi. Let me take a start at that one. We think it’s prudent given the uncertainty of the volume environment, the economic environment to be a little bit cautious here. As we said, North American the production — industrial production slightly negative. We believe on volumes, we’re going to do more than that. We’ve got the next schedule. We’ve got all the building blocks that we’ll continue to work on the next step up on the scheduled railroading, a little bit more velocity. Doug, on the 1/3 that’s opening up is going to go after pricing ahead of inflation. As Ghislain said, we’ve got some headwinds on the labor side that we’re working through. We hope to be able to mitigate. But we think it’s prudent given where we are in the year, to be a little bit cautious here.

So that’s where we’re sitting at this point. We recognize that as the year unfolds, this could be more optimistic or even, I guess, there’s a scenario where it’s more pessimistic. This is where we’re sitting right now.

Operator: The next question is from Scott Group from Wolfe Research.

Scott Group: So obviously, we’re all trying to figure out like how much of this is macro uncertainty, conservatism versus reality. So maybe Ghislain, like you talked about the $100 million headwind from the paid sick and work rules. Anything else just you want us to be considering. Is pension a headwind? I know fuel was a big tailwind last year. Does that turn into a headwind this year? Anything else that you just want us to be thinking about? And then I didn’t hear a CapEx number. I don’t know if I missed it, but if not, can you just share CapEx for the year?

Ghislain Houle: Yes. So yes, the big ticket items, obviously, is what I mentioned in terms of the labor headwind. In terms of pension, we don’t see a big headwind on pension. I think we see even a little bit of a tailwind next year. And I think on CapEx, I think that we did not talk a lot about CapEx. I think you can assume that we would continue to invest in the range, high level of the last few years. And those are the big ticket items. I think that when you look at fuel, it could be a bit of a headwind in terms of fuel surcharge. When you look at our average OHD last year, is — it was around $480. And I think that the spot rate on OHD so far is about $450. So if you assume that the $450 million remains, then that could be a bit of a in terms of fuel surcharge for 2023. But I would say that these are essentially the big ticket items.

Operator: The next question is from Walter Spracklin from RBC Capital Markets.

Walter Spracklin: It’s great to have you back on the call. And just on that, Ed, you mentioned grooming the next generation of railroaders and certainly creating a — or recreating a culture of precision scheduled railroading is not easy. It takes some time. Curious how you’re going to approach that? How long do you think it will take? Are you going to — is it all going to be homegrown or are you going to look to outside talent? Just curious to hear your overall strategy in terms of that task of groom in the next-generation railroaders.

Edmond Harris: Well, thanks for the question. We’ve already started. We’ve got 3 or 4 candidates that we’re looking at very closely. We’re changing duties for each of the candidates as the year goes on to get them prepared to handle more than what the responsibilities are today. I don’t think — we’re going to look to the outside unless Tracy’s got plans I’m not aware of, but I like this team. I like everything I’ve seen about it since I came back full time and very confident in the level of expertise and operational knowledge that’s out there. So no, I’m not looking on the outside. And yes, we already got candidates we’re considering right now.

Walter Spracklin: That’s great. Looking forward to hearing more about it at Investor Day. Thanks very much, Ed.

Operator: The next question is from Amit Mehrotra from Deutsche Bank.

Amit Mehrotra: I wanted to follow up on that fuel question and discussion. One of the things we’ve noticed, obviously, is when you look at fuel surcharge revenue over the last several quarters and the coverage of that revenue relative to the expense is just much higher than it has been really at any time in the past. And I want to understand kind of, has there been a change in like the fuel mechanism or something that allows that fuel surcharge revenue to kind of well more than cover the expense? And can that unwind and could that be a source of kind of profit headwind just really based on like how that ratio has trended today versus how it trends over the last many years?

Ghislain Houle: Amit, when you look at fuel, last year, you’re right. I mean it had a lot of noise on a quarter-to-quarter basis due to the fuel lag. I mean if you look at last — Q1 last year, I mean, our fuel lag was negative by $0.13 on a year-over-year basis in terms of EPS. So you’ve had a lot of noise on fuel lag. And also, if you look at it, as you know, the fuel surcharge is really based on OHD and whereas our fuel expense is based on fuel spot prices, and there was a certain disconnect last year between the OHD and WTI that created some of that noise. But I would leave it at that. That’s pretty much it.

Operator: The next question is from Jon Chappell from Evercore ISI.

Jonathan Chappell: Thank you. Good afternoon. Doug, I wanted to ask you about capacity. I mean you’re dealing with a lot of moving parts here, really strong grain, kind of uncertainty in international intermodal, weak industrial. At the same time, you’re implementing somewhat of a new operating plan. How are you managing your capacity across the entire network with so many moving parts to ensure that you don’t have an elevated cost basis, but also to ensure you still have the capacity if growth does pick up before you expect it to?

Doug MacDonald: Well, it’s a great question, Jon. So it’s really a team sport, right? So we work hand-in-hand with Ed and his team. We’re really sitting segment by segment, we kind of detailed out what exactly are our capacity along each lane. We actually assign our traffic, our scheduled traffic to it. So — and Ed’s team moves it in that lane. So as we continue to look at and change, we add in more traffic where we take out more traffic and we make sure that the network can handle it. So as we’re out selling from a sales perspective, we actually come out and we price to that capacity and we try and fill out those trains. Ed’s team does a great job at moving it. So — and they let us know here, you’ve got some areas to sell in, so we go do it. And it’s worked out really well, and we’re going to continue to grow our railway based on the capacity that we have and we expand to.

Operator: The next question is from David Vernon from Bernstein.

David Vernon: So just on this legislation just came about in December. I guess I’m wondering how fixed and firm it is and whether there might be an opportunity to work with the regulators to try and engineer a solution that adds the time off, but in a structured way that limits the productivity drag of having just to add excess resources to deal with increased callouts and things like that?

Tracy Robinson: David, it’s Tracy. I’ll take that one. I think that the right form to work that out is sitting in front of our employees and their representatives. And so we have discussions and we’ll be in negotiations this year with a number of them, and we look forward to that opportunity to work out what an agreement on what works for them and what works for us, and we think that we’re going to find something that’s in between.

David Vernon: Yes. I mean I appreciate you don’t want to negotiate on the call here. But I mean, historically, CN has had a pretty good track record of kind of working with labor to find ways that align interests as opposed to the disruptive things like this. I’m just wondering like the $100 million estimate, like how firm is that? I mean, I got to imagine it’s a plug at this point?

Tracy Robinson: You know it is. It’s a rough estimate based on a number of assumptions. So we are in negotiations, as you said, right now, with a few of our unions. We’ve had — we’ve got a new agreement in place with the IBEW. We’ve got a new agreement in place with the RTCs. Both of them are multiyear agreements. We’re in negotiations with others. And we hope to reach settlements, as you say, the way we have in the past to protect our workers and they protect our efficiency and agreements that work for both of us. So certainly, that’s the perspective that we’re going into this with. And it’s one of those things that will give you a little bit more visibility on as we get into it over the course of the year. But it’s prudent to raise it as a variable issue.

David Vernon: All right. Appreciate the added color. Thank you, guys.

Operator: The next question is from Steve Hansen from Raymond James.

Steven Hansen: Just hoping you could perhaps provide some commentary around the intermodal outlook and specifically, the delta you’re seeing between international and domestic. I think on the last call, you had started to acknowledge some weakness in the international side, and that continues to be the case. But domestic weakness is a newer phenomenon that’s been downgraded it seems. Just maybe some commentary around the relative prospects for the 2 would be helpful for the year.

Doug MacDonald: Thanks, Steve. It’s Doug. So it’s a good question. So on the international side, we continue to see some inventory overstocking. We continue to see blank sailings coming in from Asia. There’s some forecast for that to continue all the way through the first quarter. So we do see weakness there, but we don’t have a lot of visibility moving forward. On the domestic side, we’re actually seeing some very normal volumes right now. We’re not seeing a lot of weakness, but we’re not seeing a lot of strength. So what we’re doing is being — we’re doing fairly conservative around volumes. We think we’re set up to move at all. And the customers are, I think, right now that even though with dropping truck prices, we’re still being very steady from the rail standpoint.

Operator: The next question is from Ariel Rosa from Credit Suisse.

Ariel Rosa: So I wanted to ask, in terms of the volume outlook and maybe some of the conservatism around that, does any of that reflect anticipated impact from the CP KCS merger going through? And then separately, with regard to this Investor Day coming up, in May. I just wanted to understand, Tracy, kind of what are your objectives there? And what are the main things that you’re trying to communicate to investors that you feel maybe aren’t being understood? Or I guess why holding Investor Day now?

Tracy Robinson: Thanks for the question. Firstly, the KCS, I mean, we’ve talked about this a number of times. We’re very comfortable with our position relative to any announcement or any merger that may take place there. We’re pretty focused on our own game. And when we’re on our game, and we’re pretty tough to beat. So what we’ll do at Investor Day is lay out for you a couple of things that we think are important to have a dialogue with you about. And one of them is where we see the scheduled operation taking us in the future. And the resilience of that is the basis for all of what we’re going to talk to you in the first — in the future is really the core of how we run this railroad. And when I say scheduled operation, I mean not just the operations side of it, but it’s how we sell into the capacity as well.

The second thing we’ll talk to you, we’ll lay out for you is how we see the growth shaping up as we look forward. We’re pretty excited about some of the growth prospects. This year is an anomaly. We’ve got a little bit of a turndown. This has happened before. It will happen again. But we’ll come out of this very nicely. I think we’re very well positioned. But what we’ll be talking to you about in May and Chicago is how we see the growth over the medium term to the longer term. And there’s a lot there that we’re excited to talk to you about.

Operator: The next question is from Justin Long from Stephens.

Justin Long: Tracy, when you were brought on board, one of the themes you talked about was curating the book of business. Is that process now complete? And if it is, is the next leg of OR improvement dependent on volume growth? Or do you still see what I would define as self-help opportunities that can drive meaningful margin improvement in the absence of volumes moving higher?

Tracy Robinson: So Justin, last year this time, we had a book of business that didn’t fit our network and our capacity perfectly. And when you do that, it’s very difficult to run the operation in such a way that you get efficient and fast and that you deliver the service to your customers that you promised them. So we needed to pick some of that up and all of that is behind us. The way that we look at the opportunities of scheduled railroad going forward, yes, year-over-year, you’re going to see improvements in velocity. As Ed gets us completely organized around this. There’s some more that we need to do, and he’ll talk to you about that along with the team when we get to Investor Day. But the next path on this, the next step is really to sell into the capacity that we’ve unveiled as we’ve kind of advanced the scheduled plan then.

So we can now see where we’ve got train capacity in corridors and where we have capacity on trains that aren’t running yet to maximum length. So Doug gets the mandate to sell into the trains where we have capacity and to focus on selling into the existing capacity that we have on the railroad primarily right now in the East and the South. Beyond that, we’re focused on where we can partner with our customers, organic growth, new markets, some of which we’ve talked about before, some of which we’ll talk about to you in May, where we would invest for that growth. So I think it’s — those are the next 2 steps.

Operator: The next question is from Jason Seidl from Cowen.

Jason Seidl: Ed, welcome back. I wanted to piggyback on one of the questions about sort of the potential of CP KSC merger, if it gets approved, is the guidance assuming any concessions from that? Or would any concessions potentially add to your outlook?

Tracy Robinson: Listen, I — interesting question. I think that our guidance assumes the work that we’ve done now to make sure that we’ve secured our business relative to any transaction that may take place. And it assumes the other volume and pricing estimates that you’ve seen there. So I think we’ll leave that one at that and see what happens from here.

Jason Seidl: Okay. I appreciate the time as always Tracy.

Tracy Robinson: Thank you.

Operator: Thank you. This concludes today’s question-and-answer session. I would like to turn the meeting back over to Ms. Robinson.

Tracy Robinson: Thanks for your interest today. We know it’s a little bit of an uncertain climate and a certain year. We’re pretty focused on doing our job well, running efficiently, and we will, we believe, lift our volumes above what the market would tell us industrial production is this year. And most importantly, we look forward to connecting with you again at the end of the first quarter, where inevitably, we’ll have a little bit more information. Thanks for your time today.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.