Q1 2020 Earnings Call
[music].
All participants please stand by your meeting is ready to begin welcome to the C. N first quarter 2020 financial results Conference call.
Now 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 CN first quarter 2020, <unk> earnings call.
I would like to remind you about the comments already made regarding forward looking statements.
With me today is JJ, who is our president and Chief Executive Officer.
Just like what is our executive Vice President and Chief Financial Officer.
Rob Riley, our executive Vice President and Chief operating Officer.
Keith rewritten 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 queue in a 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 CN, President and Chief Executive Officer, Mr. JJ anyway.
Thank you Paul 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 are staying safe.
Focusing social this sensing and helping to reduce the spread of Corvidae 19.
We ftn have been diligent and providing a safe environment for all of our employees and I'm happy to report the railroad is safe and CN never slowed down.
We look back for the quarter.
My first message is that despite the unusual challenge we were faced with the men and women of CN produced solid financial results.
But I also believe it is important to look ahead.
My second message is that the resiliency of CN, which we demonstrated last quarter will serve us well through this challenging time and position us for the recovery.
I want investors know, we manage the business to deliver long term performance and we continued to build for 2021 and beyond.
We will balance that needs to manage through the short term with a focus on long term performance of the business. The network is currently in full operation and very fluid.
We have the capacity to move goods and enable the eventual recovery of the economy.
We also continued to build on our technology big ideas, such as automating track inspection automating train inspection fully enabling a connected and paperless train crews and increasing the automation of 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 will also 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 laying will give you more color on our financial strength I will cost our free cash as well as our balance sheet.
Our 2020 Capex will further enhance capacity in these strategic and mentor into Rupert growth corridor 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.
BSG is a strength for CN, our carbon footprint continues to decrease and our fuel costs continue to improve.
In these unusual time, we are beefing up our cyber security as well as pushing further on a broad range of key SCS aspect related to gender human capital and an eventful strategies.
So in summary, a good quarter. Despite a month of usually month long of illegal rail blockade a proven resilience that will help us deliver in the near term and we are ready to support the recovery and deliver long term shareholders value.
On that I will pass it on for Rob will talk to you about the operation Alright. Thank you Jay Jay.
Im 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 block H have been lifted current train velocity improved 10% year over year, while dwell was reduced by seven per.
Yes.
As you know by increasing current train velocity, while reducing well it allows us to use less locomotives in cars on our network to move the same amount of Gpms.
In addition, we had a very solid performance on other fronts as well.
Safety accident in injury rates decreased 36% and 3% respectively.
The discipline to execution of the C.N. team and how we utilize our locomotives on a daily basis led to a 20 million dollar savings and fuel efficiency year over here.
We remain focused on maintaining our industry leadership.
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 are 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 in continued to be to protect our employees ensure the continuity of our railroad doesn't the central service and right size, our 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 they're like 700 weekly train starts have been removed leading to 23% less active trains on our network.
We've also curtailed switching activities at multiple locations with reduced car volumes and discontinued work at a couple more locomotive shops, allowing us to further right size or transportation and mechanical workforces.
While we were aggressively rightsizing, our resources to fit the demand we do so with a purpose and a plan.
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 pulling 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 into our engineering gangs to maintain our 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 tracking infrastructure and more consistent and regular track evaluations. This will create capacity improve safety and reliability and save costs and.
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 miles 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 and fluid.
But that won't turn it over to James.
I think Iraq and Q1, we demonstrated our ability to bounce back in times of adversity, It's will help us in the months ahead and leave us wealth position for the recovery.
Let me walking through use specific market segments, highlighting are 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 record for Canadian grain and coal in March.
By 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 at energy related carloads crewed by rail with 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 Fracs AD from Q. for 2019, Q1, 2020 I've over 40%.
Turning it propane.
Volumes were flat for the quarter in spite of the negative impact of the rail blockade. The C.D.A. mandated train speed restrictions and a general lack of propane supply.
Importantly, our market share western Canadian propane kept on growing than the low seventies to almost 80 per cent in a quarter.
We saw more of the available propane moved 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 then and jet fuel are in decline.
Western Canada select the Canadian crude benchmark needs to be in that 25 to 30 dollar range before curtailed production could come back on line.
<unk>, we expect to move the majority of our crude volume will be Hattie undiluted crude.
This heavy crude which is similar to a <unk> recovery units back product.
Will be less impact it then deal bit crude and you too.
And we'll continue to move but at a reduced runrate.
Speaks to the diversity and resiliency of our group franchise.
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 the gas ramps up volume through 2020.
Are unique geographic franchise will continue to underpin are medium and longer term girl.
Serves as an unmatched strategic competitive advantage.
We exclusively provide physical service to the port au Prince Rupert as well as the north shore Vancouver.
Late this year early next Pembina is expected to commission their export propane facility had Watson island at the Port Au Prince Rupert, creating a second wave of West coast export propane carloads.
Vancouver granting export <unk> play capacity is expected to increase by almost 50% with all new facilities exclusively censored.
In addition, we expect to see another six high true, 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 corresponds to C.N. network.
Tech business is on track the 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 cold volumes in 2021.
Finally speaking on behalf keeping myself.
So against pricing strategy for carload and intermodal is consistent.
We will continue to maintain our price discipline.
<unk> had a 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 key 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 can be and smile and resourceful and quickly develop supply chain alternatives to connect Montreal in Toronto to keep some of our customers business moving despite the blockade.
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 services and our wholesale partner services.
The acquisitions up Transacts, an 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.
<unk> 37 blank sailings for the quarter.
Finally automotive.
The industry came to a halt in March following the temporary closures of the North American Assembly plant an issue for the entire real industry.
Our import business in eastern passage and in Vancouver continued to move volume, but at a lesser pace.
Now looking ahead.
And domestic in a model 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 volume 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 bounce 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.D.
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 balance gateway into Canada from those ports.
Lastly, automotive where in Q1, we renewed and extended or agreement with F.C.A. to handle over 80% of their Canadian destined traffic for another five years.
The first North American Assembly plants, only set to reopen in a few weeks Tutu volume will be we.
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.
In closing the strategies and structural advantages that we have built over the years give us resiliency. During these challenging times and then sure 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 financial.
<unk>.
Starting page 11 of the presentation I will summarize the key financial highlight.
My 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 controlled Backoffice system in 2019 operating income was up 4%.
Or operating ratio came in at 65.7%.
<unk> basis points lower than last year.
Excluding this one time charging 2019, <unk> issue improved by 150 basis points.
During the entire month of February over 30 illegal blockade 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 seven.
I'm extremely proud on how the teen recover and police the report the alarm in March was into high fifties. Despite the thought of that then then.
Net income was slightly above a billion dollars and reported diluted earnings per share with $1.42, 31% versus last year.
Excluding the impact on income tax of the U.S. economic stimulus package through the cares this quarter.
The expense related to the replacement of the V.T.C. Backoffice system and 2019 are adjusted the looting 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 board of demonstrated our ability to control costs quickly.
Along with on a strong balance sheet will serve as well in the coming months, while positioning 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 here.
Q1 also benefited from lower incentive compensation as a result of the impact of the illegal blockades end up and then.
Purchase services 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%. This was last year, mostly due to lower locomotive and rental car lease costs.
Now moving to cash on page 13, we generated 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 improve approach the financial management and capital of location.
The pandemic is having an unprecedented and extraordinary impact on the global economy.
In North America and in Canada in particular, these <unk> 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 company is withdrawing its 2020 financial guidance in fact, even the back of Canada totally unusable step 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 or whether line.
The red detector and C.N., specifically has a proven track record of resiliency in periods of economic weakness.
I 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 Red industry.
This has once again sort of as well.
Recent week, we have continued access to low cost financing, including the commercial paper market and we aren't as strong position in terms of overall acquitted.
We are slightly reducing or 2020 capital expenditure program to $2.9 billion, reflecting reduced near thrown to the man what protecting the recovery and on C.N. specific growth opportunities starting in 2021.
Well, if it's clear that no one can predict the ultimate inside 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 <unk> Chevy purchases at the end of March during our 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 David an increase of seven per cent in 2020.
On this node back to you J.J. okay.
<unk> and.
I think you've got an example of the pain provided an overview of a strong and resilient first quarter result.
Operation, a fluid and where am I doing very well to the current pandemic.
Supporting our customers in the broader calling me, we're I mean very bullish on the <unk> and a strategic grow to coming in 2021, so operator in order to maintain the whole question easy and since we're not all located in the same same place I will direct their question.
Also I will ask each analyst to refrain themselves to one question only for the sake of fairness, so I'm going to turn it back for you area for the question period.
Thank you.
He's press that one that just time, if you have a question.
And the first question is Sharon lend ride born with P.D. Securities. He's go ahead.
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So yeah, we we we cannot make a what you're <unk>.
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Okay, 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 we'll ended up to with the cave. So I think this this so called near shoring has been.
Spinning partly before depend that Mickey whereas related to the high 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 about energy 'cause overtime, Vietnam, Singapore feel you know the the and the countries or want to to India will.
You know it and it more important trade factor 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, we're going to me and making doors mask a in anything medical in North America, all that stuff. So currently it comes to us by Airfreight <unk>, because you know, there's a big biomass right now and I'm not too sure. It's moving the needle when it comes to container, but the.
Changing it will never be quite the same gate you want to add to some of that sort of <unk> and Cheryl on 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.
Yeah.
Can <unk> Bank of America. Please go ahead.
Mm.
Okay. Good afternoon, Hey, I took him so really sounds like a a really solid rebound, especially at the March given especially with the started the pandemic, but just plain can you may be just a talk a bit about your your two and a half million pre cash flow reiteration, maybe talking about some of the assumptions you've got in there, especially given near your.
<unk> separate them, you're just maintaining for future growth, but maybe just talk about some of these assumptions and oh are built into that that assumption that it's just say you want to provide color. Yeah. Thanks scan listen as a lot of companies today, we're running a lot of scenarios.
Divisibility that we had his his wife's limited hands 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 would tell you. This.
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 that and that that would apply.
Until 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 test questionnaires from <unk> with being most capital markets. Just go ahead.
Good afternoon fighting.
Hi.
Hi, everyone. Thanks, Thanks for taking my question I want a so called back on the 2.5 billion just just kinda bridging where your word last year at about 2 billion.
<unk> cutbacks down.
Maybe in New York at 1.1 billion.
The implied is maybe you're done about 600 million from from kind of operation or the other kind of moving part than the cash flow that we should think about the kind of understand.
Profitability outlook here that you're propensity talking about.
You want to add some further climbs the same and again you mentioned minimum yeah. So again, that's the that's the point no fatty 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 scenario, so obviously, where we'd run scenarios that are somewhat better.
But you know we wanted to offer to investors the floor and and you know you've got the pieces. There's nothing isn't the nine by o'clock. It said 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.
Name.
Q. The next question as from Chris whether it'd be with city. Please go ahead.
That's going on Chris <unk>.
Guys, maybe if you could touch a bit odd how you're managing the resources kind of in the shorter term relative to the volume declined c. or C., maybe if you can touch on the head count and change. It I think you had mentioned before that almost 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 a line items to a degree.
Here, you know into cues, you're responding to this drop off our camps.
Yes, <unk> you just go ahead.
But we'll some of this stuff he's doing week to week ready if not twice a week, but on the headcount.
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 fruity and 100 or you know people that we don't have an apparel discussed 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 others figures and stuff yeah sure. So as we continue to adjust to the volumes here I mentioned, we had over 2500 people furloughed, we haven't quite seeing the bottom yet. So we'll continue to ride size or operation in terms of train starts which will actually pull people out and also allow us to.
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 in the ground. 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 ride sizes would go along and.
And the team is being asked to really drive hardly appeal productivities, where it either in that space and we're going to make sure we remain a leader in to to.
And as a rod mentioned even to work ethics is down a bit we actually going to do as much as work as in the past maybe more because you really gets longer worked 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 they could Chris.
Thank you.
Next question is from <unk> <unk> with this 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 a more color about how the yield should evolve given the mix and fluctuation in fact and fuel. Thank you.
So maybe James can provide the pricing color in general and just they would be in better shape to a.
Few about the you ever long question of mixed so James just start.
Yeah in general bent on pricing, we maintain that practice went in good times that 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 and when in there and 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 of pricing opportunity in front of us.
As a as capacity may start to get scare says, we get well deep into the recovery there.
Huh.
Yeah, I think I think doesn't 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 you the rule of thumb every every penny of Ah Ah Ah depreciation and the Canadian dollar.
Ads about five cents a D.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 rents, where you know when we return some cars and we did we talking about 2000, Santa means little over 2007 centimeters since last year.
The least does 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 be labor purchasing services you know casualty another you could.
Assume and debate that we will get less actually going to cost because you 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 a that's the leading to a question to come back in line to what you're used to see I think we made the point in in the first quarter that Unfortunately, the illegal Mccain really had an unfortunate impact on us and and.
Gamma as I said, our law was in the mid seventies, but the I think robbing 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.
In jail for those of you may not be following the confusion exchanges. So closely we started a quarter almost around 75 cents right now where 170 cents yeah. So obviously it as an impact on the the mix that you're talking about but anyway.
Perfect. That's red color. Thank you very much thanks.
I think about your question.
Thank you. The next question is from Ravi Shankar with marking Sammy. Please go ahead.
<unk> <unk> maybe question for you you sound a call I think the the structural outlook is still pretty good and you got you expect a good rebound yard 2021 can you share the thought process behind pulling the three or a guidance in that case I mean do you do you expect.
I have an l. shaped recovery w. shape or.
Or does along come out and it was like.
So they couldn't <unk> you shape.
Or low slow on so I take the financial market might be a v. shaped because people will go on expectation from afraid point of view. This is why it really has to be is when when the will be going back to her natural they call it and be aware of all of us can get out of our house going shopping by Furniture's go to a restaurant.
Start to do some travel when will our factories and stuff for rugs that out again, except trucks et cetera, and that we don't really have you cause that you were ready reside with a 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 Fiscus one is.
Talking about reopening the economy step by step New Brunswick. These two province are small population so they're more about either call load and the world of a natural resource like potash mine at any problem. The what will take more time and it's common made in Michigan, Illinois, I'll tell you will get back where you have large population.
And why 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 that even the back of Canada has taken out their their forecasts for this part so.
We we we need to know more to go back to providing a specific guidance.
Yes.
You need to know more about how deep the decline is going to be to set the trajectory for the for the rebound or are you, saying that that could be of some changes in the fundamental outlook of somebody that market smell.
Display maybe you want to add some things yeah, I I think by the.
And that's how you sorry, rowdy I think that we still don't we still feel that the worse is not behind us.
<unk> until we see and we're comfortable that the worse is 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 continue to guide either on 2020 or to continue to keep our longer term three your guidance that we provided that the last analysts day I think that you know we want to see we want to get better visibility on on how deep that thing logo.
Things that maybe the worst month.
And Tutu will be the war's quarter, and then maybe into three people, saying that it'd be less worse than than they might be a little bit of the not sticking to four but at this point. It's all you know guessing work because again. These signs are unprecedented. So you know I would say to you stay too and as a as the world.
Cover some this 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 the best that thing is and the worst needs to be behind us first and foremost yeah. It Tiffany field definitely feel like there were close to the bottom the month of me.
Might be as about as a gift how faster recovery after that that's that's where the science. We don't have the signs to do that but taken from of the long term network instructional advantage that we have and also look at our confidence in investing capital of this here between Edmonton and Rupert because we believe.
The best friend supposed to be trade for Balkan container as well as effect, we also investing growth capital around Vancouver, because again same thing. We we have a long term faith into the bolt in a container trade business around the quarterback were so just these two things tells you that we're very confident about the long term future, but then they're short term when not too sure whether you call.
Husbands pro for us.
Okay Grant.
<unk>.
[noise]. Thank you for the next question is from Steve Hanson with Raymond James Go ahead.
Oh, Yeah. He got.
Just maybe a quick went on the near term outlook again relating to the magnitude racer. This these headwinds I I think it was mentioned earlier you had done a blank ceilings on a quarter I'm just curious 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 previous husband, we had some good discussion with some a partner was about to to to treat so holiday see the world from it without space Keith.
Sure.
The question.
You know it's in the first quarter, we saw a little bit as I mentioned 37 blanks.
This point in time, we're not seeing that many blanks for <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 coast, We do see a few east coast, a blank, but I also want to caution.
Yeah, 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 work 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 were seeing blanks happen.
You know throughout throughout all the month and and they 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, when a container side, but they may or may not be a so called some p. vectors.
School peak type thing because it will depend what a not a when our kids are going back to school and how much of what's already in the warehouse.
He needs to be replenish hung up but at the same time, our partner in the West Coast C.P. World of reiterated as a 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 prime time table and they also going ahead with the expansion that Rupert again with the same timetable because you know these days.
<unk> use that there is a future between you know be on 2020.
Thank you so you're going to <unk>.
Thank you. The next question is from Brian Ossenbeck with 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 need 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 longer term reduction in emissions what does that mean for efficiency overall. Thank you yeah before I pass it on for Rob We didn't know.
As to the other railroad I talked material efficiencies as well as a reduction of carbon emission and I'd taken both as well and also says there is a something if the rail 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 everything's 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.
A lot of that has to do with the discipline day in day out of how we use our locomotives.
Maximizing that tonnage to horsepower throttle limiting idling locomotives beyond that we use technology working with the vendor in trying to get that technology into where our manual processes are part of that technology. You know when you look at a long-term we're targeting 29% reduction in emissions.
By 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 her fuel efficiency everyday whether there's opportunities to improve that's part of the discussions that go on everyday so pretty solid process I think.
Because technology continues to evolve will only get better here as we go for.
That's right, it's not because he calling me as we've we've lost or poor customer he has g.
<unk>.
Thanks to J.
Thank you. The next question is from Walter Spracklin with I.V.C. capital markets. Please go ahead.
<unk> good afternoon today, thanks, very much take my question <unk>, So I I'm trying to get a handle on what the world will be like a poster post coping 19 and.
Two d. 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 instead of significantly more than you expect is it fair to say that the <unk>.
And 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 <unk>.
That 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've just got resigned this he thought what you're up which eventually we're produce some results and a trade what they used so we will always be between nations ports will always be quite key to us. It is important to invest in support and that's why.
We're going ahead would hutchison for with the criminal Kid Big City. So that we have a world class supply chain from the east coast as well as a west coast.
<unk> World, which is also own partly by the kids as if we're also going ahead with the expansion then Rupert I didn't send from so there's no really pulled back when these major capital investments.
Take a maybe a more relevant <unk>. So therefore <unk> world the trade will slow down.
And.
You know if it's not coming from China, you might <unk> 90, coming from Mexico, and Keith got a great domestic enter will pull up to more stuff around North America, but just one thing that might be actually one of the fallout and the new well under corner of the the pen that make is that as we think of people coming back to work here.
Headquarter, we have 15 16 floor about 2000 people aren't as building usually.
I don't see the future they'll be as many people working from offices there'll be more people working from home. So as we think of all people can return to work in a few weeks few months of between now and that this fall we know what we're going to be looking at maybe 20% of them working from home as the start.
<unk> 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 who.
<unk>.
You want to go back to how you see what the comment you get some trend specific 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 and is whether it's into cat or into the u.
Alignments automotive it's electronic it's it is white goods, it's 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's nice and products that are moving it does emotional.
Masking the medical supply and we're set up very well for that you know haven't three coast or three gateways to come in and so they have opportunities even if they wanted to bring it 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 in the market.
Place and I will definitely watch all these things as to where these different ball their layer late late I don't take your welfare Yep I appreciate the time.
Operator.
Thank you. The next question is from Scott Group with Wolf Research. Please go ahead.
Hey, Thanks afternoon, guys. So I just want to stop follow up on a a couple of things that came up so the comment about me being 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 the 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. and the first quarter is not to our liking.
Liked to have the freedom to run the railroad the way we wanted to run it.
Q go back in January we lost the main line to Vancouver aquatic was five days, Rob we basically a that half a month and came down or.
Health to try to get it back.
And then in February you know, we had a month of you know something the clown that moving around the country, especially knees. So we're not satisfied with the operating ratio the first quarter and we really want to <unk> work on that for the second floor.
Regarding I don't Q. on thought make.
<unk>, Keith about where the different movement in in a book of business right now with the motives are probably the biggest challenges, we obviously, 85% don't because.
<unk>, 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.
Due to 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.
Medical supplies and the like so Scott, we Oh I don't know if it helps you, but if there is a supplement allow you to do it because we didn't quite hear the beginning of your question. So.
No. The the beginning was you talked about me being the bottom I was just wondering which segments I I get autos down the most now I'm guessing which segments you thought had the most sort of incremental room to fall if.
<unk> well.
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 or they're not that you know there's not that much left but it might be it'll go file goal of <unk> energy not much left in.
<unk> and U.S. Cole you know might get worse from here.
Okay. Thank you. Thank you got on.
Thank you. The next question as some <unk> that with school should I think he's go ahead.
I wasn't going to Ireland, everyone. Just so one thing if we can help us understand and the clean mental margins that is for every dollar up revenue decline because of the one clients what kind of impact the anticipate on your operating income, but the cost initiate that's yeah. You have taken here I understand there are multiple personalities, but any how it would be appreciated.
Thank you so things just say, we'll we'll help you what I was giving you a quality guys.
Yeah, I don't think I'll give you any numbers related to this and I know or not you know this question has been a husband or the by a to all together all of our peers.
All I all I can tell you to con arc is 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.
Appreciation headwind. This you do to the you know high cafes that we had in the last two years and and I would tell you that we set in January depreciation was a head went up 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 where the discount rate finishes in December of the prior year, So and and that's mostly I mean that simplifying it but that's that's mostly the case and we've set in January attention was gonna be ahead when of about 70 million.
But everything else I mean, if you look at labor fueled 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 Ross said 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.
Side of pensions 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 a week made sure that we ride size where people are are are not only are people what our assets.
<unk> this quickly reducing demand that's in front of us.
Thank you.
<unk> say thank you.
They can do.
Thank you. The next question is from David Vernon with Bernstein. These go ahead.
Hey, guys. Thanks, a lot for taking the time James I was wondering if you might be able to help us kind of think about.
What volume and crude would sustain through the next couple of quarters. Here you mentioned that there was some heavier stuff that you guys were going to continue to run and then you know within that category with the R.P. you kind of ending last year. This year at 4500 Bucks or so should we be seeing a a head went down that has that.
Those those two thousands of carloads of the lighter crude come out.
Very good question, David James you want to handle that.
Yeah sure, let's talk about heavy crudeness began franchise, 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 it would be the same spec as would come out of a deal you went recovery already doing that today and about the same volume as you would expect from Apple build out of a billion recovery in it.
So we're not going to maintain the same runrate, we had in Q1 through cute too with heavy undiluted, but the heavy undiluted barrel will continue to move speaking to that resiliency of that type of barrel and the 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 Dilbit barreling today's climate, particularly given that you know the dilbit barrel as a pipeline spec barrel and the pipe lights have more than apple capacity to handle that barrel. The undiluted barrel moves to different markets. In these different markets will have some some demand moving forward through through Q. too so.
Not a scenario, where we see this ever going to zero on C.N.
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 on average of 200000 barrels a day and Q1 about 50000 barrels a day of that was a a heavy under Ben 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, gentlemen, 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 business to start that.
Come back and also wondering if there's been an update from the Canadian government on putting an L.D.'s if that is still plan for 2021.
Okay purely cheaper, but the drivers are in the same supply as they were yeah, and and our services stellar right now I mean, that's that's the true enabler of of getting domestic businesses being able to be more truck like in in getting it from a 0.8 point B.S.
Well as going through our terminals and making sure that we're efficiently handling the a trucker all of those key service metrics, we focus on daily So Ah, that's enabling us to to gain share on the truck as J. said, the fuels coming down a bit is 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 to 2021, you know, Jason we we view them as they kind of some little as an area of growth for C.N.. There's a lot of places where trucks still has the dominant share around North America. Just don't think of kinetic of North America, and it's a market where the railroad, especially C.N. is very focused on.
Finding a new growth during the years to come and that's the reason why we bought transaction patron or.
I appreciate the color.
Two.
Thank you. The next question is from John Chapel with ever car I as I. Please go ahead.
Thank you <unk>.
John Chappelle.
He's engineering Crusher <unk>, great pride in the appendix growth opportunities and I understand that you're <unk>, it's just changing a little bit <unk> period, but just wondering any conversations with customers.
The P.S.A.R. I'm I'm, sorry partners, you're saying here in Halifax, or propane terminology, even sitting at a word maybe that's a <unk> on time or in capital budgets were maybe some of these projects it <unk>.
So maybe maybe James your talk you want to talk about 10 minutes and also I guess in some of their capital extension of the <unk>.
And then you know after that to keep with complete with a discussion on P.S.N.L. effects 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 says 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 customers see that a customer see listen there's a real opportunity here for me to take advantage of that Prince Rupert Gateway to get my goods to a better netback market. So.
So far so good as far as folks that continued to invest in support they expansion of their business on C.N.
On P.S.A.T., yeah, and on P.S.A. I mean, you know James is for into 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 it's 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 is not only operational discussions, but marketing effort that's joint.
And we are putting together some very unique a round trip economic scenarios for our steamship line customers they come through Halifax to make it even more enticing for them to come in yeah. When you look up partner is like P.S.A.
Altogether feminine these are very aggressive company and.
C. N believes that there is <unk> there is a new calling me beyond this short term pandemic.
I think it'd be a question I.
Thank you very much.
Thank you. The final question will be from Tom a lot of which would you be s. Nice go ahead.
Because that's an income.
Yeah, good afternoon change anything for sitting in here yeah.
I I guess I'd want to refer to slide stabbing, you've got quite a bit commuter for you or Rob you've got quite a bit in terms of idol switching yards here, so pretty nimble response on that.
No well done in response to that.
Should we think of a component of those yard.
Switching yards or.
Give you mechanical activity facility is a portion of that structural or is that all kinds of you know quick cyclical response, where when the volume comes back to those facilities would also all come back on line.
<unk>, Yeah, Rob has been test with at least idling and then we'll see the future I leave some of these smaller yard which are used to be fed by cobbled business, which right now is a little a week Rob yeah. Thanks for thanks for recognizing the nimbleness there to.
Team really has when you think about we're at five weeks ago and chasing grain after the backlog and we delivered an all time record for Canadian grain chasing Colby delivered an all time record in March for Canadian coal team really did a good job in terms of bouncing back. After these blockades of February so to answer your question when we look at this.
You know some of it will be structural possibly on a 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 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.
Into your question in some of it would be structural I think someone will come back as volumes come back.
Extra the question tall.
Thank you.
Mhm.
Thank you the questioning that suspension has now and then I would like take now I'd like to turn the meeting over to Mr zones exactly.
Okay, just maybe some very short wrap up common so thank you for your time can be <unk> to be what us today.
You could see the network is a 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 that's job one on C.N. and that's why we got to supply of everything and anything that we might need to keep them safe where all these thoughts came to work on a sort of the slow back to work for those were 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.
Coughing by the future and I don't know if this will be a v. shaped you shape or what kind of shape of recovery. They will be why not comfortable you are ready to get back who running a solid railroad and do trade with a kind of the U.S. and with the rest of their <unk> no. Thanks for joining us and see you back in July.
Thank you.
Thank you say conferences now and it please just connecting lines at this time. Thank you for your participation.
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