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CN will focus on improving velocity, finding customers where capacity available

CN is planning to tweak its operational plan to emphasize improving velocity and focus on finding customers in areas where there is available network capacity, executives said during the Canadian railway’s earnings call to discuss fourth-quarter 2022 financial results.

The adjustments come as CN (NYSE: CNI) is bracing for a mild recession in 2023.

The plan, which relies on “scheduled railroading,” also calls for trains to stay with a schedule and run the same schedule every day, regardless of whether the train is 120 cars long or 40 cars long, CN COO Ed Harris told investors on the Tuesday afternoon call. 

It also calls for shorter trains, since efforts to lengthen trains “created a lot of havoc across the network and really killed our service offering,” Harris said. 

“We got trains back where they need to be, and lo and behold, our velocity jumps up significantly. Probably 10% or so … made all the difference in the world,” Harris said. “So that’s the basis of the operating plan as we speak right now.”

Harris said CN is also planning to reinstitute individual car trip plans, in which CN tracks when, where and why a car falls off the trip so that it can address the issues behind why that happened. 

Another change will be moving CN back to three operating regions from two, according to Harris. 

“We simplified the network going from two regions, which to me was just too much for any one guy to handle, to three regions,” Harris said. “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.”

To achieve these adjustments, CN’s operations team is working with marketing and sales to determine where capacity is along each lane and then assigning scheduled traffic to it, according to Doug MacDonald, the railway’s chief marketing officer. 

“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 … [lets us know if there are] some areas to sell in, so we go do it,” MacDonald said. “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.”

The decision to modify operations comes amid prospects for an economic recession in North America in 2023, according to executives. North American industrial production is also expected to soften — a prediction that fellow Class I railroad Union Pacific (NYSE: UNP) also made when that railroad reported fourth-quarter 2022 earnings Tuesday morning.

While CN’s bulk segment, particularly its grain carloads, will help CN in the first half of the year, the railway has “less visibility in the second half” of 2023, said CN President and CEO Tracy Robinson.

“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,” Robinson said in prepared remarks during the earnings call. “And while current expectations that North American industrial production will be negative in 2023, we will grow EPS (earnings per share) in the low single-digit range.”

Besides grain, CN expects continued demand for coal, which will support pricing for the commodity. But some markets that were weaker in the fourth quarter, such as international intermodal, lumber, chemical and petroleum production and automobiles, are expected to remain soft for the first half of 2023. 

“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,” said CN CFO Ghislain Houle.

One area where CN could see increased costs in 2023 is through complying with new Canadian regulations regarding work/rest rules and paid sick days, Houle said. 

The new regulations, announced last December, call for 10 days of paid sick leave in all federally regulated private-sector workplaces, including railways and other transportation modes. 

CN calculates that the new rules could cost as much as $100 million in headwinds, which it will seek to offset via removing “unnecessary” operating expenses such as recrewing trains or deadheading, Harris said. Deadheading occurs when railways transport crews between terminals but those crews aren’t actually performing any service.

4th-quarter 2022 financial results

CN reported net income of CA$1.4 billion (US$1 billion), or $2.10 per diluted share, in the fourth quarter of 2022, compared with $1.2 billion, or $1.70 per diluted share, in the fourth quarter of 2021. (All figures are in Canadian dollars.)

Total revenue rose 21% to $4.5 billion year over year amid a 23% increase in freight revenue. Freight revenue was $4.4 billion for the quarter. Higher fuel surcharge revenue, a weaker Canadian dollar, freight rate increases and higher volumes of Canadian grain were among the factors for the revenue gains, CN said. 

Operating expenses grew 20% to $2.6 billion on higher fuel prices and a weaker Canadian dollar. Operating income grew 22% to $1.9 billion. 

“As expected, Canadian grain was very strong this quarter, including an all-time single-month record for tons shipped in October,” MacDonald said during the earnings call. “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.”

Coal demand was also strong in the fourth quarter, and CN set a record for coal shipments in 2022, MacDonald continued, noting that CN shipped more than 30 million tons for the full year. 

Automotive volumes were also strong but international intermodal volumes softened amid inventory overstocking, he said. CN also saw lower volumes for petroleum and chemicals as well as lumber and panels.  

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