Q1 2020 Earnings Call
All participants please standby your meeting is ready to begin.
Coming to the C N first quarter 2020 financial results conference call.
I'd like to turn the meeting over to Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Bush.
Well. Thank you Eric good afternoon, everyone and thank you for joining us for C. N first quarter 2020 earnings call.
I would like to remind you about the comments already made regarding forward looking statements.
With me today is JJ do it our president and Chief Executive Officer.
She's slate well, our executive Vice President and Chief Financial Officer.
Rob Riley, our executive Vice President and Chief operating Officer.
Keith Weird in our senior Vice President consumer products supply chain and James cares, our senior Vice President rail centric supply chain.
Once again I do remind you to please limit yourself to one question. So that everyone has the opportunity to participate in the Q when they session.
The IR team will be available after the call for any follow up questions. It is now my pleasure to turn the call over to C.N., President and Chief Executive Officer, Miss Your JJ anyway.
Q Pablo and good afternoon, everyone and welcome to our first quarter, earning calls.
In keeping with our commitment to safety I Hope you and your families that stay safe.
Good thing social this sensing and helping to reduce the spread of cool good 19.
We have to you end up being diligent and providing a safe environment for all of our employees and I'm happy to report the railroad is safe and see a never slowed down.
We look back to the core.
My first message is that despite the unusual challenge we were faced with the men and women of C and because it was solid financial results.
What else we believe it is important to look ahead.
My second message is that the resiliency of C N, which we then once we did last quarter will serve us well through this challenging time and position us for the recovery.
I wouldn't best or is no we manage the business to deliver long term performance and we continue to build for 2021 and beyond.
We will balance the need to magnitude or short term with a focus on long term performance of the business. The network is currently in full operation and very fluid.
We have to capacity to move goods and enabled eventual recovery of you calling me.
We also continued to build on that technology big ideas, such as auto meeting track inspection automating train inspection fully enabling a connected and paperless train crews and increasing the automation up trains.
Rob will walk you through the strength of operation.
And highlights some specific progress we continue to make in technology and safety.
Our financial strength, what else, we serve us well in the near to long term.
We have a very robust balance sheet and a proven track record of dealing with any type of business disruption.
Just lay will give you more color. It went up by National Strep, I will cost our free cash as well as a balance sheet.
Our 2020 Capex will further enhance capacity in these strategic and meant into Rupert growth card or as well as the infrastructure required for our growth in and around the port of Vancouver.
Keith and James will speak as to how we are building businesses, even in this tough marketplace.
He is GE is a strength for CN I will convert carbon footprint continues to decrease and or fuel costs continue to improve.
In these unusual time, where our beefing up our cyber security as well that's pushing further on a broad range of Tcs aspects related to gender human capital and then eventually strategies.
So in summary, a good quarter. Despite a month of usually month longer illegal rail blockade. He proven resilience that will help us deliver in the near term and we are ready to support the recovery and deliver a long term shareholders value.
I will pass it onto Rob will talk to you about the operation Alright. Thank you Jay Jay seem delivered impressive results in Q1 with car velocity, improving 5% train velocity, improving by 7% and dwell was reduced by 4% even better if we look at the month of March after the illegal blockades and then let.
The current train velocity improved 10% year over year, well dwell was reduced by 7%.
As you know by increasing current train velocity, while reducing well it allows us to use less locomotives and cars on our network to move the same amount of Gpms.
Addition, we had a very solid performance on other drugs as well in safety accident and injury rates decreased 36% and 3% respectively.
Productivity and sustainability fuel efficiency improved 6% to an all time Q1 record for CN, while avoiding over 100000 tons of CEO to be missions.
In progressing on our long term carbon efficiency target and we expect to be able to deliver low single digit year over year fuel efficiency for the balance of the year.
What is most impressive is that we were able to achieve all of this while we faced multiple challenges, including 30, plus illegal blockades across our network in February and the subsequent recovery a backlog traffic in March.
Needless to say I'm very proud of the entire C.N. team.
As J.J. mentioned were also well positioned to continue to operate safely and efficiently throughout the impact of the pandemic.
Our priorities have been and continued to be to protect our employees ensure the continuity of our railroad as an essential service and right size or resources to the decreasing demand.
500 locomotives are now laid up reducing fuel maintenance and labor costs are active online inventory of rail cars has been reduced by 16%.
Over 2500 employees have been furloughed and nearly 700 weekly train starts had been removed leading to 23% less active trains on our network.
We've also curtailed switching activities at multiple locations with reduce car volumes and discontinued work at a couple more locomotive shops, allowing us to further right size or transportation and mechanical workforces.
While we are aggressively rightsizing, our resources to fit the demand we do so with a purpose anaplan.
We lay up or at least reliable locomotives first and ensure that they're stored in good working condition. So that when the time comes we can get them back into service polling freight quickly.
Restore cars and locomotives that locations, where they will be needed and with our furloughed employees. We've established regular and frequent communications. So that they are aware of our business demands.
In addition, with fewer trains on our network. We're using this time to further strengthen our railroad by providing more productive time to our engineering gangs to maintain or infrastructure.
This will allow us to more quickly ramp up to volumes when demands increase.
Finally, we continue to progress on our technology initiatives.
Yeah Farai as now proved our test program to perform automated track inspections between Chicago and New Orleans.
By operating these cars and regular train service. This multi phased approach will ultimately lead to less on track inspection time for track and infrastructure in more consistent and regular track evaluations. This will create capacity improves safety in reliability and save costs and we're.
We're already seeing the positive impacts to our railroad with a 90% reduction in track defects found as we've inspected 12 times more track minds and last year with better inspection quality and lower costs.
In closing thanks goes out to all of our central employees in the vital role, we play and moving critical supplies to keep the North American supply chain open influence.
But that won't turn it over to James.
<unk> <unk>.
Q1, we demonstrated our ability to bounce back in times of adversity, It's will help us in the months ahead and leave us well positioned for the recovery.
Let me walk you through a few specific market segments, highlighting or if you want performance.
Q1, we set a record for domestic potash with revenue growth in the range of 20% compared to the prior winter. We also produced all time records for Canadian grain and coal in March.
Despite some difficult conditions and Q1, we handle the majority of Canadian grain rail shipments with market share, 51% for the quarter and almost 52% in March.
Looking broadly energy related carloads crewed by rail was a significant growth driver up 45% year over year for the quarter with nearly a third of that volume being heavy non dangerous undiluted crude.
We also saw sequential growth in cracks AD from Q. for 2019, Q1, 2020 I've over 40%.
Printing it propane.
Volumes were flat for the quarter in spite of the negative impact on the rail blockades. The C.T.A. mandated train speed restrictions and a general lack of propane supply.
Importantly, our market share western Canadian propane kept on growing the low seventies to almost 80% and a quarter.
We saw more of the available propane move to export markets via the new C.N., Prince Rupert supply chain connects Canadian production with more profitable and readable long-term demand in Asia.
As we look at the second quarter, we know what will be tough, we know crude track fan and jet fuel are in decline Western Canada select the Canadian crude benchmark needs to be in the 25 to 30 dollar range before curtailed production could come back on line.
Q too we expect to move the majority of our crude volume will be heavy undiluted crude.
This heavy crude which is similar to a guilty when recovery units back product.
Will be less impact that then deal bit crude and cute too and will continue to move but at a reduced runrate.
The speaks to the diversity and resiliency of our crew franchise.
[noise] aluminum steel plastics, and some chemicals will continue to be impacted by the temporary auto production shut down.
Once production resumes will be ready to fill those supply chains backup.
On the positive and in spite of the current environment, we could see more record volumes of Canadian coal in granting cute too just like we saw into one.
We will continue to see growth and propane, it's all to gas ramps up volume through 2020.
Are unique geographic franchise will continue to underpin are medium and longerterm growth and serves as an unmatched strategic competitive advantage.
The exclusively provide physical service or the port au Prince Rupert as well as a north shore Vancouver.
Late this year or early next <unk> is expected to commission their export propane facility at watching island at the Port Au Prince Rupert, creating a second wave of West coast export propane carloads.
Vancouver grain export name play capacity is expected to increase by almost 50 per cent with all new facilities exclusively censored.
In addition, we expect to see another six high through but loop track country elevators come on line exclusively serve by C.N. by the end of 2021, adding in the range of 10% more car spots to see a network.
<unk>. This is on track to start April 2021, and a market conditions remain favorable we could see <unk> continue to ramp up production, which will position us to move record coal volumes in 2021.
Finally speaking on behalf of keeping myself <unk>.
<unk> pricing strategy for carload and intermodal is consistent.
We will continue to maintain our price discipline pressing ahead of railway cost inflation as we keep a close eye on their recovery curve. So that we ramp up capacity and price smartly to allocate capacity through the recovery phase.
I will now turn it over to Keith to walk you through our consumer markets Keith.
Thank you James you good afternoon, everyone.
Begin by saying, we produce strong results in the first quarter and have kept essential products. Moving we also showed we could be and smile and resourceful and quickly developed supply chain alternatives to connect Montreal in Toronto to keep some of our customers business moving despite the blockades.
Let me highlight a few points for each segment and two one.
On domestic intermodal, we continue to develop and refine our product offering to convert business from truck to rail.
Using R.C.N.T.L. domestic retail service and our wholesale partner services.
The acquisitions of Transacts, and H. and R. and the development of our cargo cool business segment have given us the ability to increase our market presence in foods and other goods requiring temperature protective service.
For international intermodal the entire overseas shipping industry was impacted with volumes weaken from the.
Supply side and now from the demand factors.
We saw 37 blank sailings for the quarter.
Finally automotive.
The industry came to a halt and March following the temporary closures of the North American Assembly plant an issue for the entire real industry.
Import business in eastern passage and in Vancouver continued to move volume, but out of lesser pace.
Now looking ahead.
And domestic intermodal, we remain focused on moving essential goods and continued to see good opportunities in the refrigerated segment.
For example, we renewed and expanded our relationship with Maritime, Ontario, one of Canada's leading transportation and logistics services providers.
Several additional strategic growth initiatives continue to show results, including the E.M.P. Trans border volumes that increased 15% over Q1 2019.
Moving over to the international intermodal business.
Through close collaboration with our supply chain partners, we are mitigating the potential congestion at inland terminals as warehouses and distribution centres become full.
This enables us to prepare for the bounced back in imports we will see some volume gains in early may related to the business transition of the shipping lines Oh any back to C.N.
We continue to focus and dry Ford mid terms strategic and structural opportunities at our international intermodal gateways through close collaboration with our terminal partners such as the proposed expansion plan at both Vancouver, and Prince Rupert with G.C.T.
And D.P. world and working with P.S.A. in Halifax.
The C.S.X.C.N. container services from the ports of New York, New Jersey, and Philadelphia continue to grow and create a new balanced gateway into Canada from those ports.
Lastly, automotive wearing Q1, we renewed and extended or agreement with F.C.A. to handle over 80% of their Canadian destined traffic for another five years.
With the first North American Assembly plants, only set to reopen in a few weeks two two volumes will be week.
We continue to focus on our long term strategy of increasing the number of automotive storefronts and leveraging our great franchise of finished vehicle menu factoring plant one or close to our network. We continued to develop new business in our Vancouver Auto Port facility.
We are also on target for a late fall opening of our new automotive compound and new Richmond, serving the Minneapolis Saint Paul markets.
Enclosing the strategies and structural advantages that we have built over the years give us resiliency. During these challenging times and ensure we are well position for the recovery and ready to deliver on our growth opportunities I will now turn it over to his his land for his commentary of the financials.
Thanks Ski starting page 11 of the presentation I will summarize the key financial highlights about first quarter before.
Operating income came in a slightly above $1.2 billion 135 million or 13% versus last year.
Excluding a one time chunking depreciation and amortization related to the replacement.
Of our positive train control Backoffice system in 2019 operating income was up 4%.
Or operating ratio came in at 65.7% 380 basis points lower than last year.
Excluding this one time charging 2019 <unk> issue in pool by 150 basis points.
During the entire month of February over 30 illegal blockades popped up on the network that impacted revenues <unk> and limited our ability to reduce costs accordingly, which resulted in a february or in the mid seventies.
I'm extremely proud on how the teen recover and pleased to report the whole are in March was into high fifties. Despite the start of the pandemic.
Net income was slightly above a billion dollars and reported diluted earnings per share was $1.42, 31% versus last year.
Excluding the impact on income tax of the U.S. economic stimulus package through the cares and this quarter and the expense related to the replacement of the P.T.C. back office system and 2019 are adjusted the alluded D.P.S. was up 4% versus last year.
There was no material impact of foreign currency in the water.
Turning to expenses on page 12, or operating expenses were down 5% $2.3 million versus last year.
I will now covers some of the key highlights.
Overall, the quarter of demonstrated our ability to control costs quickly.
Which along with Armstrong balance sheet will serve as well in the coming months, while positioning us for the recovery.
Laboring fringe benefit expenses were 7% lower than last year.
Headcount at the end of the first quarter was down 3100, 812% decrease you over you.
Q1 also benefited from lower incentive compensation as a result of the impact of the illegal blockades end up and then.
Purchased services and material expense was 4% higher than last year.
This was mostly the result of higher trucking and Transload expenses due to the inclusion of transics, partly offset by lower material costs and contracted services.
Finally equipment, rather decreased by 8% versus last year, mostly due to lower locomotive and railcar lease costs.
No I'm moving to cash on page 13, regenerated strong free cash flow close to $600 million. So the end of March double the amount of from last year.
Let me now address on 2020 financial outlook, including our strategic and prudent approached a financial management and capital allocation.
The pandemic is having an unprecedented and extraordinary impact on the global economy.
In North America and in Canada in particular, these impacts are being compounded by the drop in oil prices.
The economic outlook and therefore overall demand for transportation services is highly correlated to the duration of containment measures and the impacts on businesses and consumers, which at this point remain uncertain.
As a result, C.N. like many companies is withdrawing its 2020 financial guidance in fact, even the bank of Canada. So the unusable step of halting it's economic forecasts and it's most recent financial update to the house of Commons.
We are continuing to closely monitored demand in each of our business segments and I'm moving swiftly to ensure our resources are well aligned.
The rest sector and C.N., specifically has a proven track record of resiliency in periods of economic weakness.
I'd see yeah, we have always taken a strategic approach to the balance sheet.
We have a strong investment grade credit rating talk to you it amongst all company.
And the best in the real industry.
This has once again sort of the swell in recent weeks, we have continued access to low cost financing, including the promotional supermarket and we aren't as strong position in terms of overall liquid.
We are slightly reducing or 2020 capital expenditure program to $2.9 billion, reflecting reduce near turned the man, while protecting the recovery and R.C.N. specific growth opportunities starting in 2021.
While it's clear that no one can predict the ultimate impact of the current global economic environment.
Based on what we know today the company is still working to generate a minimum of approximately $2.5 billion a free cash flow.
We pause Chevy purchases at the end of March during a blackout period.
We will continue to pause and we'll reassess the repurchase of shows on an ongoing basis.
We are committed to maintaining or previously announced dividend increase of seven per cent in 2020.
<unk>.
<unk> and.
I think you've got an example of the team provided an overview of a strong and resilience first quarter result.
I'll operation, a fluid and we're managing very well to the current pandemic.
Supporting our customers and abroad, calling me, we're I mean very bullish on the structural advantage and a strategic grow to coming in 2021. So operator in order to maintain the flow of question easy and since we're not all located in the same same place I will direct the question and also I will ask each analysts to refrain.
Themself to one question only for the sake of fairness, so I'm going to turn it back to you Eric for their <unk>.
Thank you.
<unk> style, one that just time, if you have a question.
<unk>.
<unk> Sherlund ride born with T.D. Securities. He's go ahead.
<unk>.
Hi.
Yeah.
[laughter].
<unk>.
Yeah, I don't notice at all but you were having an issue with your line.
So yeah, we we we cannot make a what your question was though Shirley.
Scare me now.
A bit better yeah.
Yeah.
Go ahead much better okay. So if we think about how supply chains might be reconfigured as a result this pandemic.
What are your thoughts on how that might shake out between reassuring to North America versus diversification away from China to other low cost countries in Asia, and how might though shifts impact your business.
So maybe it's her then that could start a bit and then after that that will ended up who at the cave. So I take this this so called near shoring it's been.
Spinning partly before depend a Mickey was related to go higher labor costs in China, and some of that manufacturing moving to other countries like Vietnam and that's one reason why for example, we're still working hard on the east coast by their <unk> 'cause overtime, Vietnam, Singapore feel you know, the though and the countries I want to to India will.
Come you know it more important trade Packer for us I think though regarding.
Frankly, some of this is emotional some of it is overblown some of it is real so if you're buying mask of course, what they mean, making doors mask a in anything medical in North America, all that stuff they'll come into your comes to us by a airfreight, we <unk> casinos, a big by of mass right now and I'm not too sure. It's moving the needle when it comes to container, but the <unk>.
Exchanging will never be quite the same.
You want to add to some of that sort of <unk> and Shirlon as you know we've been keeping close tabs on this for the last several years as these.
Manufacturing capabilities are moving around the either for lower costs or to get closer to the vertical integration of the supply chain. Another in other countries. So it it will continue to happen there will be some near shoring, but I think for the most part we're we're still going to see.
Quite a bit of production in in Asia, maybe some moving to Mexico, but I don't think there's gonna be any drastic changes.
Thank you very clear that's my one yeah.
Q.
Thank you. The next question is from Ken <unk> Bank of America. Please go ahead.
I can't pay good afternoon, Hey, <unk>, so it really sounds like a a really solid rebound, especially in some march given especially with the started the pandemic, but just plain can you may be just talk a bit about your your two and a half billion pre cash flow reiteration, maybe talk about some of the assumptions you've got in there.
Given your your slight drop for cutbacks separate them, you're just maintaining for future growth, but maybe just talk about some of these assumptions and how are built into that that assumption. Thanks. It's just say you want to provide color yeah time scan listen as a lot of companies today, we're running a lot of scenarios the visibility that we had his wife limits.
It has why we we you know removed or suspended our guidance.
If you look I mean, I'm I won't give you a specific number but I'll tell you. This if you look at April volumes, a month today in terms of R.T.M.'s would down roughly about 15%.
So what we looked at is worse than and that that would apply.
On build the balance of you to the full balance of years, so worse to the full balance of you. That's what we've assumed and we feel comfortable that we are still would deliver you know around $2.5 billion. So that's how that's what we took.
Thank you can then time Thanksgiving.
Thanks.
Thank you. The next cats question is from <unk> with B. and most capital markets. Just go ahead.
<unk>.
Hi.
Hi, everyone. Thanks, Thanks for taking my question I want a so called back on the 2.5 <unk> just just kinda bridging where are you worried last year at about 2 billion.
You have cut backs down.
Maybe in the over the at 1.1 billion.
The implied is maybe you're you're done about 600 million from from kind of operation are there other kind of moving part than the cash flow that we should think about the kind of understand the profitability O. two kids like your propensity talking about.
So do you want to add some further yeah, just say it again you mention minimum yeah. So again, that's the that's the point no fatty I I think what's important in this is a minimum so you can define and you can define it otherwise to say this is you know a worst case scenarios, so obviously, where we'd run scenarios that are better.
But you know we want it to offer to investors the floor and and you know you've got the pieces. There's nothing isn't the nine back pocket. The this is what we believe as as a minimum we will deliver yeah. We felt that since we're not providing guidance now's. The time, we're caches king that we would.
Gives you some color on their cash.
Thanks.
If a name.
Q. The next question is from Chris whether it be with city. Please go ahead.
Good afternoon, Chris <unk>.
Guys, maybe if you could touch it fit on how you're managing the resources kind of in the shorter term relative to the volume declined to your C., maybe if you can touch on the head count than changing I think you had mentioned before they don't want to everything's on the table sort of X. interest expense and probably depreciation it maybe pension, but can you talk about sort of the flexibility in the line items to a degree.
Here, you know into cues, you're responding to this drop off our camps.
<unk> you just on the head count. The then rub it will some of this stuff he's doing week to week ready to snuff twice a week, but on the headcount.
It's as we speak here you know like this week, we're 30 3800 less people than last here. So we're 14% don't have which 2500 are for a little that we will call back in time, and 1300 or you know people that we don't have and the payroll D.C. that we had last here. So we went down because obviously headcount rolling stock is one of the place we start.
Rob you want to add some other figures and stuff yeah sure. So as we continue to adjust to the volumes here I mentioned, we had over 2500 people for load we haven't quite seeing the bottom yet. So we'll continue to ride size or operation in terms of train starts which will naturally pull people out and also a allows too.
Lay up locomotives as well.
We've also use this opportunity as I said to further strengthen our railroad in terms of having the additional time available out there on the track where even know just on talked about reducing our our capital spend we're going to use that in terms of increase productivity and still get the units underground. So we're doing.
Lot of things here in terms of reacting to the volumes and you know we have as as of today, we have 14000 cars and storage. We see you know a few more going into storage over the next few weeks. So we'll continue to right.
Along.
And the team is being asked to ready to drive hard on fuel productivities, where either in that space and we're going to make sure. We remain the leader in Q. too.
And as a Rob mentioned, even to work ethics is down a bit we actually going to do as much as work I was in the past maybe more because you really get longer work block and you know rising. These team in engineering is being passed to be sure that they get more done with the same amount of dollars.
Great. Thank you very much like your Chris.
Thank you. The next question as <unk> with these I think capital markets. Please go ahead.
<unk>.
Good afternoon, everyone. So you mention called her about the the pricing environment kind of inflation plus but I was wondering if you could provide more color about how the yield but should evolve given the a mix and fluctuation in a fixed and fuel. Thank you.
So maybe James can provide the pricing color in general and just laying we'd be in better shape to talk to you about the you ever low question of mixed so James will start.
Yeah in general a battle on pricing, we maintain that price discipline in good times and in Bad times, you know that's something that our customers come to expect from us in order to offer the product that our customers need to compete in winning their end markets. We have to have you know a disciplined approach for pricing.
I think where where we have to be prepared for is when we see that recovery to make sure that we have some pricing leverage or pricing opportunity in front of us as a as capacity may start to get scare says, we get well deep into the recovery there.
Just one.
Yeah, I think I think been want as you see the you were asking about profitability in about effects. As you know effects. It is about 70 71 sense as we speak so that's a shock absorber again remind me the rule of thumb every every penny of the of the depreciation and the Canadian dollar.
Ads about five cents a V.P.S. So that's that's number one and number two you know from an expense standpoint, when you look at it you know outside of depreciation that's pretty much fixed.
And equipment runs where you know when we return some cars and we did return about 2000 Centerbeam little over 2007 centimeters since last year the leases have to expire so you've got a little bit of timing there, but otherwise you know most of the other expenses are essentially a variable so again.
Very important and as we you know get this business coming into business declining then we're adjusting that variable a expenses, whether it'd be labor purchasing services you know casualty. Another you put the assume in debate that we will get less actually going to cost because we have less volume on your network. So.
You can expect the profitability and you can expect.
You know the the alarm because I think that's the that's the leading to a question to come back in line to what you're used to see I think we <unk>. We made the point in in the first quarter that unfortunately, the illegal blockade really had an unfortunate impact on us and again.
As I said our war was in the mid seventies, but the I think robin the team and all of US are back on track and and stay doing but you will see you will see numbers that you're used to see that's right in jail for those of you may not be following the confusion exchange. So closely we saw the quarter almost around 75 cents.
Oh, where I'm I'm 70 cents, yeah. So obviously it as an impact on the the mix that you're talking about been away.
Perfect. That's red color. Thank you very much.
Think of it all your question.
Thank you. The next question is from Ravi Shankar with marking Sammy. Please go ahead.
Yeah, We won <unk> maybe question for you as you said of the call I think the the structural outlook is still pretty good and you got you expect a good rebound you aren't 2021 can you share the thought process behind pulling the three or guidance in that case I mean do you do you expect.
More of an l. shaped recovery w. shape or.
Or does alone come out of it was like.
So they could be many type of recovery out their v. shape you shape.
Or low slow and so I take the financial market might be a v. shaped because people will go and expectation from afraid point of view. This is where it really has to be is whether whether we'll be going back to her natural they calling me why all of us can get all of our house going shopping by furniture is going to restaurants.
Start to do some trouble when with our factories those type of drugs that out again, except treks et cetera, and that we'd over the Hobbit view cause that you were radio reside with each governor each premier of each province, and what you've seen lately is the beginning of silver lining up potential return the province of says Gosh one is.
Talking about reopening calling me step by step New Brunswick, These two province, or a small population so they're more about the either call load and the world of a natural resource Likewise mine and then he probably the what will take more time in this column and made in Michigan, Illinois until you will get back where you have large population.
And where the issue is bigger in the bigger cities. So at this point, that's why we don't feel comfortable to provide.
Guidance on stuff like even the back of Canada has taken up their their forecasts for this part so we.
We we we need to know more to go back to providing is because the item.
<unk>.
You need to know more about how deep the decline is going to beat to set the trajectory for the for the rebound or are you, saying that there could be of some changes in the fundamental outlook does somebody Denmark and smell.
Just name maybe you want to add some things yeah, I I think fatty.
And that's how you sorry, Rodney I think that we still don't we still feel that the worst is not behind us. So <unk> until we see and we're comfortable that divorces behind US I think we'll have better visibility of the recovery and and that this is why we felt we didn't feel comfortable to but.
Beneath the guy either on 2020 or to continue to keep our longer term three your guidance that we provided that the last analysts. They I think that you know we want to see we want to get better visibility on on how deep that thing. We'll go everybody things that maybe the worst month and Tutu will be the wars.
Quarter, and then maybe into three people think that it'll be less worse, and then they might be a little bit of a not sticking to four but at this point. It's all you know guessing work because again in these times are on precedented. So.
Oh, I would say do you stay too and as a as the world recover. Some this a pandemic then we'll get better visibility and we'll be able to provide a and we'll see on on the recovery will have better, but you know visibility on the recovery, but we need to know how deep that that thing is and the worst needs to be behind us first and foremost yeah. It.
In a field definitely feel like there were close to the bottom the month of me might be as about as it gets how fast a recovery after that that's that's where the science. We don't have the signs to do that but think in term of the long term network and structural advancers that we have and also look at our confidence in in it.
<unk> capital of this here between Edmonton and Rupert because we believe in the past, France supposed to be truthful Balkan container as well as effect. We also investing growth capital around Vancouver, because again same thing we have a long term faith into the bolt and the container trade business around the quarterback rumors are just these two things tells you that we're very.
Coughing and about the long term future, but then they're short term when not too sure what you're calling me has in store for us.
Okay.
Thank you.
Thank you for the next question is from Steve Hanson with Raymond James He's go ahead.
Yeah, Oh, Yeah, Hey, guys.
Just maybe a quick went on the near term outlook again relating to the magnitude and Rachel. This these headwins I I think it was mentioned earlier that you have a blank feelings on a quarter I'm just curious that in discussions with your your your line customers. If you've got a sense for how many you'll see in in two q. and three q.
Maybe he could give you a sense and we had some good discussion with some of our partner was about to to to treat so how do you see the world from it without space Keith.
Thanks for your question.
You know it's in the first quarter, we saw a little bit as I mentioned 37 blanks at this point in time, we're not seeing that many blanks for the <unk> for the second quarter for us that doesn't mean that there's not that many blanks that are going to happen, but after talking to our customers. That's what we're seeing is gonna be impacting us for the west.
Codes, we do see a few east coast blanks, but I also want to costing you. It's it's not necessarily the number of blanks, it's how much those blanks or affecting how much discharges on that vessel, we got caught up in that a little bit to where we we were seeing all these blanks and.
And we saw bigger discharge is with the vessels that were coming so it's not a it's not an exact science just because you count up how many blanks are going there. So we've been cautious about that I don't think that we'll see as many for the second quarter, but then again we.
We're seeing blanks happen you know throughout throughout all the month and and they won't make a decision until maybe the week before they actually called the black. So we'll see how that plays out and there. There is if you have some who are very involved in the on the ocean side of the container side that they may domain.
It'd be a so called some p. back to school peak type thing because it will depend what a not a when their kids going back to school and how much of what's already in the warehouse really needs to be replenish on but at the same time our apartment on the west coast <unk> as of a few days ago, they're still going further with the expansion.
That centre, they're going ahead with that as planned on the same crime fine table and they also going ahead with the expansion that Rupert again with the same timetable because you know they the lycos you that there is a future between you know beyond 2020.
Thank you see your got like Okay.
Thank you.
Next question is from Brian Awesome.
J.P. Morgan. Please go ahead.
Right.
[noise] hi, good afternoon. Thank you j. so when they come back to your comment on fuel efficiency have C.N. I. This course more competition from your peers talking about this area more as well big focal point for C.N.
What else do you expect to meet to implement to get to the goals that you're targeting for this year and beyond that how much of that is volume dependent and curious if you can maybe tie some financial implications to that longerterm reduction in emissions what does that mean for efficiency overall. Thank you yeah before I pass it on to rub we didn't know.
As to the other railroad document feel deficiencies as well as a reduction of carbon emission and I'd take as long as well and also says there is a something if they're real industry to focus on rub your they'll either of you industry right. Now. So you want to talk about how you're going to keep that thinks J.J. and and as you just said when C.M. sets a record.
It is an industry record were the best in North America have been for Awhile and will continue to be and really a lot of that has to do with the discipline day in day out of how we use our locomotives.
It's amazing that tonnage to horse power throttle limiting idling locomotives beyond that we use technology working with the vendor in trying to get that technology to wear our manual processes are part of that technology. You know when you look at a long-term we're targeting 29% reduction in emissions.
2030 versus 2015, I wouldn't do everything we can to do that was part of our daily process. When we talk on conference calls in the morning, we talk about or fuel efficiency everyday whether there's opportunities to improve that's part of the discussions that go on every day, so pretty solid process I think.
As technology continues to evolve will only get better here as we go for.
Right, it's not because you're telling me as we've we've lost or poor customer he has g.
<unk>.
Thanks, Thanks for.
Thank you. The next question is from Walter Spracklin with RBC capital markets. Please go ahead.
You know afternoon, Walter good afternoon today, Thanks, very much take my question. So so I I'm trying to get a handle on what the world will be like a poster post koeppen 19 and.
Judy and and Keith as well you. Both indicated that you didn't think near shoring would be a major change from what was happening before so I guess my question is if it is a major change so if it is significant.
Significantly more than you expect is it fair to say that the Canadian gateway will be significantly disadvantaged in that environment and if it's not a significant if near <unk>. If nurturing is not a significant change what is your best guess as to what would be.
So maybe I can start and then they'll us unknowns the key but <unk>.
<unk> is a trading nation I mean as a nation here, we've always been a major trading nation with the U.S.M.C.A.. We're just got resigned this he thought what you're up which eventually work to do some result.
And the trade what they use so we will always be between nation ports will always be quite key to us. It is important to invest in support and that's why we're going ahead would have just import with the the criminal Kid Big City. So that we have a world class supply chain from the east coast as well as a west coast and as I mentioned D.P. World, which is also.
Partly by the kids as if we're also going ahead with the expansion in Rupert I didn't send from so there's no really pulled back on these major capital investment.
I think maybe more relevant <unk>. So therefore, <unk> world the trade will slow down and.
But you know if it's not coming from China, you might come becoming <unk>, we might be coming from Mexico, and Keith got a great domestic <unk> more stuff around North America, but just one thing that might be actually one of these although the new well under corner of the the pandemic is that I was we think of people coming back to work here.
Headquarter, we have 15 16 floor about 2000 people aren't as building usually you know I don't see the the future they'll be as many people working from offices W. more people working from home. So as we think about people can return to work in a few weeks few months of between now and the this fall. We know we're we're going to be looking at maybe.
20% of them working from home as the start and then that take some of that some of the real estate aspect and how you see people commuting back and forth will be one of the new world as it relates to no depend then make but do you want to go back to how you see what the comment you get some transpacific truth, so Walter the near shoring.
Opportunities are what the focus is now a lot of that is essential.
Essential goods right. The medical side, if you look at what we bring through they are gateways is whether it's into can't or into the U.S. a lot of its automotive. It's electronics. It's it is white goods garments and and I don't see those types of things being near short <unk>, they're not as strategic they're not as.
Security sensitive so I, that's why we feel the way that we do it to new heights of products that are moving isn't as emotional masking the medical supply and we're set up very well for that you know, having three coast or three gateways to come in.
And so they have opportunities even if they wanted to bring into the U.S. I mean, we service immobile and a new Orleans as well so yeah, but we keep in mind open no wasted into marketplace and we'll definitely watch all these things as to where these different ball or layer lately, though.
Q welfare Yep appreciate the time.
Yeah.
Operator.
Thank you. The next question, it's from Scott Group with Wolf Research. Please go ahead.
Hey, Thanks afternoon, guys. So.
<unk> follow up on a a couple of things that came up so the comment about maybe the worst of it any sense on which segments you think get worse from here in the near term and then you know I I get just lanes point about B.O.R. and March but I guess for you J.J. is this do you think there's a a refocus at C.N. about.
Closing, the O.R. gap relative to peers.
So maybe I'll start with the the the U.R. gap, we obviously, if they're operating ratio of C.N., a first quarter is not to our liking we would've liked to have the freedom to run the railroad the way we wanted to run it.
If you go back in January we lost the main line to Vancouver, Karthik was five days, Rob we basically a that half a month and came down <unk> Oh man.
<unk> health and try to get it back back.
And then in February you know, we had a month of you know something the clown that moving around the country, especially in these so we're not satisfied with the operating ratio to first quarter, and we really want to <unk> work on that for the second for.
Regarding I know q. on thought make.
<unk>, Keith about where the different movement in in the book and business right now with the motives are probably the biggest challenge we I was 85% don't because.
Presented producing yeah, I mean, I'd say, it's even a.
Greater than that down by almost 90, and so you know those are the.
Those are the things that are impacting aside from May we we were thinking that some of the plants, we're going to be opening up in a on may 4th.
Do do a lot of social this thing and other issues from some of the state that looks like that might get pushed out a week or so we're not exactly sure. So we can be affected for at least half a month longer on the automotive side, that's really the the most difficult spot. We have and then you know as more and more people are out of work for longer.
For a longer term that discretionary income that they may have to go buy things for the kids are getting ready for school and who knows when school's going to start back up you know those those types of things are not being purchased today, it's really the essential goods the things that are going across the grocery store shelves.
And medical supplies and and the like so Scott <unk> I don't know because it helps you, but if there is a supplement allow you to do is because we didn't quite hear the beginning of your question. So.
The the beginning was you you talked about me being the bottom I was just wondering which segments I I got autos down the most now I'm guessing which segments you thought of the most sort of incremental room to fall.
In the near term well what coming here automotive is as long as a gift yeah energy might get a little worse, even though crude and products and or you know as we speak it enough that you know there's not that much left but it might be able to go file goal of <unk> energy not much left in.
<unk> and the U.S. Cole you know my get worse from here.
Okay. Thank you. Thank you got on.
Thank you. The next question as some <unk> that with Scotiabank. Please go ahead.
<unk>. So wondering if you can help us understand the clean mental margins that is for every dollar up revenue decline because of the one clients what kind of impact do you anticipate on your operating income, but the costs associated yeah. You have taken here I understand there are multiple scenarios, but any health would be appreciate.
Thanks, <unk> things just say, we'll we'll help you what I'd, giving you a quality guidance on or yeah. I don't think I'll give you any numbers related to this and I know not you know. This question has been has been asked by to all together all of our peers.
All I all I can tell you a car because that you know what you look at what's variable versus what six again as I said before most of all of our most of all of our expense categories is our variable except depreciation and again if you remember we do have a.
Depreciation headwind. This you due to the you know high Catholics that we had in the last two years and and I would tell you that we set in January depreciation was a hadwin of about about 100 million over 100 million I would say the other thing that we have that's fixed mostly fix for Canadian railroad, including us his pension.
And again, we said and pensions expense is really determine on would the discount rate finishes in December of the prior year, So and that's mostly I mean that simplifying it but that's that's mostly the case and we've set in January their pension was going to be a head when of about 70 million.
But everything else I mean, if you look at labor fuel equipment brands, there's a bit of timing, we'd turning the cars and see I know is variables. So I think what you have to do you get the volumes every week and a and you have to look at what we're doing in terms of you know what Rob set in terms of having people.
Being furloughed.
And you can do the math and put a new model and you can make your calculation, but but that's the way I'll answer it is outside of pension for Canada and depreciation most of everything else is is variable and we're pushing hard and J.J. is pushing the team hard pushing as hard every and we have these discussions you know every week even twice.
We made sure that we write size where people are are are not only on people, but our assets in light of this quickly reducing demand that's in front of us.
Thanksgiving say question, you're playing they say thank you just by thinking.
Thing to do.
Thank you. The next question is from David Vernon with Bernstein needs go ahead.
Hmm yeah.
Hey, guys. Thanks, a lot for taking the time James that was wonder if you might be able to help us kinda think about the what volume and crude would sustain through the next couple of quarters. Here. You mentioned that there was some have your stuff that you guys were going to continue to run and then you know within that category with the European.
Under ending last year. This year at 4500 Bucks and so should we be seeing a a head went down that has that you know those those those 2000 carloads of the lighter crude come out.
Good question, David James you want to handle that.
Yeah sure, let's talk about heavy crude must be enfranchised, we started moving a heavy unconventional barrel way back in about 2000 at 12, and that's been our most consistent barreling good times in bad times.
If you look at where we were in Q. why don't we moved about 50000 barrels a day of a heavy undiluted non dangerous crude now this wouldn't be the same spec as would come out of a deal you went recovery in it already doing that today and about the same volume as you would expect from that bull build out of a deal in recovery in it.
So we're not going to maintain the same runrate, we had in Q1 through Q2 with heavy undiluted, but the heavy undiluted barrel will continue to move speaking to that resiliency of that type of barrel under diversity of our of our crew franchise, we expect moving into cute too that the majority of crude we continue to move is going to be the heavy undiluted barrel. It.
Just simply does not make sense to move the deal bit barreling today's climate, particularly given that you know the deal, but barely as a pipeline spec barrel and the pipe whites have more than apple capacity to handle that barrel. The undiluted barrel moves to different markets and these different markets will have some some demand moving forward through through too so.
Not a scenario, where we see this ever going to zero one see yet.
So that 50000 barrels a day I think last the last slide deck you were doing about 170, some odd thousand in Q2 Q3 is that right.
We did an average of 200000 barrels a day in Q1 about 50000 barrels a day of that was a a heavy under then I heavy undiluted conventional barrel.
Thanks very much.
Thank you David.
Thank you. The next question is from Jason Sidell with Callan. Please go ahead.
Thank you could afternoon gentleman, one or two ask a little bit about domestic intermodal, obviously, there's probably going to be increased competition on the truck side wondering where you see that shaking out as we move throughout the year and businesses start to come back and also wondering if there's been an update from the Canadian government on putting an L.D.'s if that is so.
Plan for 2021.
So keep fuel is cheaper, but a drivers are in the same supply as they were yeah and and our services stellar right now I mean, that's a that's the true enabler of of getting domestic businesses are being able to be more truck like in in getting it from a 0.8 point b.
As well as going through our terminals and making sure that we're efficiently handling the trucker all of those key service metrics, we focus on daily So that's enabling us to to gain share on the trucks as J.J. said, the fuels coming down, but it's coming down for us as well.
And so that gap between the between our fuel surcharges and their fuel surcharges actually.
About the same so.
The second question on the L.D.'s.
I don't believe that anything is changed from what what was proposed and and written about.
So nothing nothing's changed their still still just 2021, you know Jason we we've you know <unk>. There's a lot of places where trucks feel has a dominant share around North America. Just don't think of cannot take of North America, and it's a market where the railroad, especially C.N.'s refocus.
On finding a new growth they they used to come and that's the reason why we bought transaction agent or.
Thank you and I appreciate the color.
Thank you.
Thank you. The next question is from John Chapel with ever car I as I. Please go ahead.
Thank you <unk>.
Good I'm John Chappelle.
<unk> <unk> crusher, <unk> appendix for our opportunity and I understand that you're <unk> purchase changing a little bit <unk>, just wondering <unk> <unk> <unk> you have to say I'm I'm, sorry partners, you're saying in Halifax server propane terminology.
Completing that we're maybe that's a <unk> on time or in capital budgets for maybe some of these projects <unk>.
So maybe maybe James you talk you want to talk about pimento and else I guess in some of their capital extension up the Rupert.
Then you know after that keyed with complete with a discussion on P.S.A. in Halifax James.
So that Prince Rupert supply chain continues to be the most profitable.
Export opportunity for propane produce as if they export the product through <unk> through a prince Rupert they have the opportunity for a better netback.
Altogether is moving forward with an expat not expansion, but an increased production out of their facility and <unk>. It's still a full steam ahead as we understand thinking about queue for possibly Q1 of next year.
As we look at these new projects that are coming online you know you think about the long term structural advantage that Prince Rupert lays in front of us and customer see that customers see listen there's a real opportunity year for me to take advantage of that print trooper gateway to get my goods to a better netback market. So.
So far so good as far as folks that continue to invest in support the expansion of their business on C.N.
On P.S.A.T., yeah, and on P.S.A. I mean, you know James is referring to a Prince Rupert and you know the Halifax or any of the terminals that we're working with the with the folks who are either building one or expanding one on the east the Prince Rupert model of the of the east So.
We're we're very much engage with P.S.A. in fact, we're we're talking to them a weekly about our plans it or not only operational discussions, but marketing effort that's joint.
And we are putting together some very unique a round trip economic scenarios for steamship line customers they come through Halifax to make it even more enticing for them to come in yeah. When you look up partners like P.S.C.
Altogether feminine these are very aggressive company and they like the like C.N. believe that there is a there is an economy beyond this short term pandemic.
Thank you for your question I.
Thank you very much.
Thank you. The final question will be from Tom <unk> with U.B.S. Please go ahead.
Good afternoon.
Yeah. Good afternoon, J.J. thing for sitting in here yeah.
Well I I guess I'd want to refer to slide seven you've got quite a bit you know some either for you or Rob you've got quite a bit in terms of idled switching yards here, so pretty nimble response on that.
No well done in the responses.
Did we think of a component of those yards switching yards or reduce that give you mechanical activity facility is of course, you know that structural or is that all kind of you know quick cyclical response, where when the volume comes back to those facilities would also all come back online.
Rub, yeah, Robin's been test with.
<unk> Idling, then we'll see the future idling some of these smaller yard which are used to be said by cobbled business, which right now is a little a week Robyn yeah. Thanks for thanks for recognizing the nimbleness or.
The team really has when you think about we're at five weeks ago and chasing grain after the backlogs and we delivered an all time record for Canadian grain chasing coal, we delivered and all the time marks for Canadian coal team really did a good job in terms of bouncing back. After these blockades February so to answer your question when we look at this.
You know some of it will be structural possibly on the locomotive side you know on the yard switching sides. Some of this is intermediate switching that allows us to keep cars moving to destination. So we'll look at that and try and make what we can permanent but a lot of it will depend on when and where there's traffic volume comes back so.
And your question some of that would be structural I think somebody will come back as volumes come back.
Extra the question tall.
But thank you.
Thank you the question and answer session has now and then I would <unk> now I'd like to turn the meeting over to Mister <unk>.
Okay, just maybe some very short wrap up comments. So thank you for your time can be <unk> to be what else today.
You could see the network is running very fluid very solid we're very well prepared to go to the pandemic here in the weeks and months to come.
<unk> safe nice job one at C.N. and that's why we got the supply of everything and anything that we might need to keep them safe. We're always thought came to work on a sort of the slow back to work for those are we're currently working in offices and we'll see how fast that goes in the weeks and months to come and we're focused on beyond the pandemic beyond a you know that.
The law, though maybe the low points of the month of me.
We're we're <unk> we're.
Recall them into the future and I don't know if this will be a v. shaped you shape or what kind of shape of recovery there will be why not come it will be we're ready to get back who running a solid railroad.
And do trade with a kind of the U.S. and with the rest of the world's on that no. Thanks for joining us and see you back in July.
Thank you <unk>.
Kills accomplish this now and then please just connecting lines at this time. Thank you for your participation.
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