Q1 2021 Canadian National Railway Co Earnings Call
Welcome to the CN first quarter 2021 financial and operating results Conference call I would now like to turn the meeting over to Bowl betcha.
Vice President Investor Relations, ladies and gentlemen, Mr. Butcher.
Well. Thank you Christina good afternoon, everyone and thank you for joining us for Cn's first quarter 2021 financial results Conference 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.
And <unk> our executive.
Vice President and Chief Financial Officer, Rob.
Rob Reilly, our executive Vice President and Chief operating Officer, and Sean Finn, Our executive Vice President corporate services and Chief Legal Officer.
I do want to remind you to please limit yourselves to one question.
So that everyone has the opportunity to participate in the Q&A.
The IR team will be available after the call for any follow up questions. It.
It is now my pleasure to turn the call over to CNS, President and Chief Executive Officer, Mr. J J W and well. Thank you Paul and good afternoon to everyone and I Hope you all have a safe healthy and constructive start through 2020 one.
<unk> and we're off to a good strong running start.
And the underlying performance of CN has been strong and this is thanks to our dedicated colleague our railroad or is delivered despite severe winter operating condition unprecedented demand and number of market like ports and grain and ongoing channel and the pandemic.
As you can see from slide five <unk> is on track to become the Premier railway of the 20 <unk> century.
For our focus on our role as an engine of the North American economy growth and prosperity as well as the supply chain and instrumental leader.
And we pioneered and we are the first to implement precision scheduled railroading across our network and where our clear industry leader in ESG and our strong balance sheet is a testament to our operational excellence and we continue to prudently invest and their business and our strategy as we grow and expand our reach.
<unk> has a long standing successful track record of strategic and accretive acquisition throughout North America, which has resulted and successful integration of our current rail network.
In line with our existing strategy CA and made a superior proposal to acquire <unk>. This is the right next step for both <unk> and <unk> towards becoming the Premier railway of the 20 <unk> century.
Turning to slide six.
We are confident that together with Tcs experienced and very talented team, we will be able to continue that success and a combination of <unk> and tcs for the benefit of both companies specifically this offer will deliver superior value for <unk> shareholders.
He and his proposal represent a 21% premium for the CP proposal and more than doubled the amount of cash per share, resulting in net just greater value, but also a greater certainty of the value for <unk> shareholders.
The combination will also significantly enhance customers' choice and competition in particular, it would create a new express route that connect the U S, Mexico, and Canada with end to end seamless single owner single operator service.
It would connect vibrant and port from all three coasts to more infill and market and cities. It would connect CN and Tcs buyers and sellers through more destination.
We will also preserve access to all existing entered change option to enhance Ralph choice and ensure a robust competition.
We are also firmly committed to maintaining open gateway two companies or the network.
We believe this combination will enable better solution to our customers speed of movement of goods from country to country coast to coast, and hence competition create jobs up and down the railroad and prevent prevent millions of tons of greenhouse gas from entering the atmosphere by converting truck traffic to rail supply chain.
As an update on where our proposal currently stand.
And on April 21, we submitted our pre filing notification to the STB of our intent to file an application seeking authority to combined with Tcs should the KC as Golar director, except that our superior proposal we.
We are proposing to use and identical of voting to our structure that Cps proposed and we are confident that the STB will not subject or proposal to any different standard and are proving devoting to us than those that would be applicable to CP. We.
We believe that both voting trust equally likely to be approved.
And if our board and trucks is approved and a combination with Casey's is consummated <unk> shareholders will receive a value the value of their concentration being offered when the transaction closed and trust, which we anticipate could be as soon as the second half of 2021.
We are fully committed for this transaction and confident in our ability to achieve all of this is Jerry regulatory approval for clothes into a voting to us and then ultimately receive approval to combine with Tcs.
On page seven.
I would like to provide a brief update on our strong progress as we have made and the only one week since announcing our proposed combination.
We were very pleased to learn on Saturday the debt.
For a tcs determined at CN and offer is reasonably expected to lead to a company superior proposal and we were granted permission to conduct our comfort inventory due diligence, we look forward to working towards finalizing a definitive agreement merger to combine two great Railroad.
And connected with that the CEO of QTS over the weekend and reiterated C and strong enthusiasm readiness and most importantly, our deep commitment to begins collaborations with our key SCS team toward a successful combination.
Secondly, we filed earlier today and application with the STB for the approval of our voting to us and named Dave Starling as a trustee.
Finally, a great importance of note and less than a week of making a proposal to combine with Tcs. We have received an overwhelming amount of support for more than 500 freight customers for ecosystem partners supplier government officials and other stakeholders.
Have voiced their support support for a combined <unk>, Tcs, which will help them compete and their market and better serve day needs by offering greater choice and greater efficiencies.
We have also spoken to our shareholders and many of you as well and I. Appreciate you Trump's report and this combination.
And myself on behalf of the entire CN team. We are fully committed to this transaction and we're very confident and our ability to achieve all of the necessary regulatory approval for closing to avoiding trust and then ultimately receive approval to combine with Tcs.
Together, we will create the Premier North America and railway for the 20 <unk> Centurys.
Moving on page eight I am very proud of the sea and underlying performance in Q1.
This quarter, we realized solid result, and we continue to work on our yield of our new business mix.
During the quarter, we continued to delivered industry, leading volume growth, where artyem up 5%, while revenue were flat versus last year, mainly due to adverse lag fuel lag and exchange rates.
Our <unk> strategy is working our same store pricing was for 2% and Q1, our network is fluid and we recovered very well from the polar vortex of February.
And our efforts are reflected in our ability to capitalize on consumer driven trend and growth of our intermodal business, which was up 19% for the quarter with significant with CN significantly outpacing the rest of the industry.
As well as our strong financial performance and gain and safety train length car velocity labor productivity and fuel efficiencies and other key measure of operational performance we.
We are confident and our business and committed to our long term strategy.
While debt I'll turn it to Rob Rob Alright, Thank you J J and thank you to the talented employees from CN, who helped deliver a very solid quarter.
As Youll see on slide 10, our team moved and all time Q1 record for volume with <unk> up 6% year over year. Despite the impact of the polar vortex that JJ just spoke about in February.
For volume was up crew starts were up only 1% our active online inventory of railcars was down 3% and train length improved 5%.
The railroad continues to run very well and is fluid with car velocity also improved 5% in.
In addition, our labor productivity improved 9%.
All in all just a solid quarter of winter operation.
As detailed on slide 11, where are the North American rail leader and fuel efficiency.
We improved our fuel efficiency, 4% versus the same time last year to an all time Q1 record.
These efforts allowed us to save $12 million from our initiatives alone and save the planet over 60000 tons of Cotwo emissions during the quarter.
From a safety perspective, our personal injury rate and accident rate were improved an impressive 27% and 36% respectively.
Living up to our core values.
From a technology standpoint, our FRE approved autonomous track inspection cars provides safety and cost improvements to our railroad.
As we prepare to enter into phase III of our program, we will be able to enhance overall safety, while reducing manual inspections by 75%.
In Q1 alone our accident costs decreased over $30 million versus Q1 last year.
Due to this technology and the dense ecosystem of portal and wayside detectors on our network.
These cars are now covering 100% of our core mainline and 95% of where our gross ton miles move.
As I previously mentioned, we experienced a couple of weeks of February extreme cold temperatures with temperatures dipping below minus 40 degrees on large parts of our network <unk>.
During this time, we were able to deploy our aircraft fleet, which allowed us to use multiple ore sources. During this challenging time.
With this technology, we moved and additional 232000 feet of traffic and February they will.
Would have otherwise been delayed or lost due to the cold.
This helped us move 5% more volume during the quarter, while holding crew starts flat along with that we're able to continue to deliver for our customers.
And is now set 13 consecutive all time monthly records for Canadian grain keeping the streak intact throughout the winter months, we continued deploying technology to make our railroad safer more efficient and more reliable and we're starting to see additional benefits from key projects, including track and train inspections.
Moving to slide 12.
We are optimistic on the volumes as we look out over the remainder of the year to that and our board approved an additional 75 locomotives over the next 12 months to 24 months to support the projected growth and economic improvement.
Our business is doing very well as evidenced by our strong performance this quarter, our capital investments over the last three years continue to provide safe and sustainable transportation options for our customers as the global and North American economies remain on a steady path to recovery.
As you can see on slide 13, our strong operational performance coupled with strong demand led to record Q1 Canadian grain shipments.
And last year's revenue record by over 20% setting a new all time high watermark for sustainable grain supply chain volume.
In total as I said.
But I'll say it again, we have now set records for grain tonnage now for 13 consecutive months delivering for the Canadian farmers.
And as JJ highlighted a moment ago. Our intermodal performance has also been very strong increasing by 19%, which far outpaced industry growth.
Turning to page 14, we are confident and our ability to continue delivering strong results as the economy rebounds, our network is fluid and we recovered well from the extreme temps and February we look forward to realizing the pipeline of growth opportunities in front of US. This includes continuing to grow our position as a key.
For industry leader and intermodal.
We continue to maintain a very disciplined approach to yield management and the strategy is working including same store pricing of four 2% and Q1.
We are also focused on diligently managing our capex to drive productivity and best in class capacity and resiliency.
As we look towards the future, we expect to maintain our leadership and digital scheduled railroading building on our history as a <unk> pioneer.
This will continue to be a competitive advantage as we execute on our strategy.
And as J J already mentioned ESG will continue to be a priority. We've recently undertaken major new ESG initiatives focused on environmental protection active social responsibility stakeholder engagement and best in class governance.
On that point <unk> Board of directors announced in Q1 that at least 50% of independent directors come from diverse groups, including gender parity the establishment of indigenous Advisory Council and and annual advisory vote on <unk> climate change action plan.
We expect to continue to grow our ESG leadership and serve as an example, and the industry.
As I mentioned earlier, our best in class employees have done an exceptional job and care and helping to carry out our strategy and we know that we have the right talent in place to continue to drive sustainable long term growth.
With that I will turn the call over to <unk> to go over our financial results in detail.
Yes. Thank you Rob My comments will start on page 16 of the presentation, which will get a bit more color on some of the highlights of our first quarter performance that JJ discussed earlier.
During the quarter, we booked a non cash benefit of $137 million.
And to recover part of the charge we recognized on the non core branch lines, we put up for sale in Q2 last year.
Recall that in Q1 of 2020 earnings also included an income tax recovery of $141 million, resulting from the cares Act.
Excluding these nonrecurring items adjusted net income was around $870 million essentially flat with adjusted diluted EPS of $1 23 up 1% versus last year.
If we adjust for the impact of fuel lag and stronger Canadian dollar and our adjusted EPS would have been up 11% so quite a solid underlying performance.
Now moving onto slide 17, we generated strong free cash flow of nearly $540 million and Q1 down about $35 million from last year, mainly from lower net cash from operating activities, partly offset by lower capex.
We have paused buying back shares in light of our proposal to combine with the Casey's.
Moving on to page 18, we are encouraged about the economic recovery and the vaccine rollout, which is giving a strong confidence for the balance of the year the.
And the underlying performance in Q1 is a testament.
For the dedication of the CN railroad, those who perform day in and day out.
We are building off a strong volume performance in Q1, and looking to see the rail centric part of our business we cover the.
The increase and industrial production will drive growth and our carload segment moving forward, such as chemicals forest products metals fuels and plastic.
With that said we are pleased to update our financial outlook and are now targeting double digit adjusted diluted EPS growth for 2021 versus high single digit EPS growth previously.
This is backed by the assumption of high single digit volume growth in terms of revenue ton miles.
We still expect to deliver free cash flow and the range of three to $3 $3 billion, which will drive further improvement and free cash flow conversion.
I will now turn the call back to Jay Jay to give some closing remarks ahead of the Q&A.
Thank you Rob and thank you would you say so.
And thank you for all of you to joining us today.
It's a proactive approach way, probably kind of a growth mode.
For merger that we're proposing connecting more sellers and buyers.
And I would like to take a moment to reiterate some of the highly compelling aspect of our proposal.
Combining with Tcs, we would compete head to head on all three coasts.
Lower cost save for service better fuel efficiencies for Mexico through the Heartland of America.
This will result in a safer faster cleaner stronger railway and addition, we will bring our leading ESG and operating expertise to a <unk> business to the benefit of both companies take holders as mentioned during our April 20th announcement based on our conservative and preliminary analysis of publicly available information.
The combined company is expected to achieve EBITDA synergies approaching $1 billion.
With the vast majority coming from additional revenue opportunity.
The strong cash flow generation of the combined company with <unk>.
Allow the company to rapidly Delever following the close of the transaction.
We anticipate the transaction will be accretive to see and adjusted diluted earning per shares and the first full year following termination of devoting to us and CNS, assuming control of the Casey's and double digit equity accretion up and full realization thereafter.
We are confident and the strength of our business and strategies and we've progressed towards becoming the Premier railway of the 20 <unk> century.
And look forward to engaging constructively with the QC as board and other relevant stakeholders to deliver the superior transaction with Tcs to deliver a greater choice and efficiencies for our customers and deliver enhance opportunities for our employees and local communities. Overall, we have a better bid better wear a better partner better railway and <unk>.
Best solution for Casey's and and North American economy.
On that note, we will start to take some questions operator.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
And your first question comes from the line of David Vernon with Bernstein.
Good afternoon, David.
Good afternoon guys.
Hey, Jay I wanted to ask a question again, a little bit I know, we talked about this when you made the bid.
But.
And looking at this transaction why why is now the right time.
To come in with.
With it with a competing offer again like where.
Like what's changed and the market that makes it such a better deals and that had been two years.
Free of five years ago, and a lower price point.
So theres many reasons why now and.
And then a covered them those earlier late last week, but the main reason why now is that the board of Tcs obviously.
For a very total thinking have decided at this time for them to crystallize the value for their shareholders. Therefore, they're waiting at this point to entertain doing a merger and strategic.
Strategic partner, a merger, what basically and other railroad thats. So the timing of that is also very much dependent and I was wondering.
You have a partner who could dense and then from an economy point of view of where the beginning of a Polish economy recovery. The GDP forecast for North America looks great.
Good as can be.
And we had the U S MCA, which was renew which is also something that has specific value to and also top combination and then depending on who you believe and all the time on Mexico and this might be the decade of Mexico, and some of near shoring now.
There is some challenge between relationship North America I'm, China.
But also the fact that.
And the cost of labor and China has been rising to the point, where Mexico might have might have a better decade and all of that you put that together. The fact that long term money is affordable when you put all that together it's.
First to CN.
It's time for you to make a good offer for the Casey's board and for them to consider it very seriously.
Alright.
That's very clear, maybe if I could just kind of squeeze one little follow up and here as you think about the unique drivers of value is it more about getting the and.
Rail connections further west for further south.
So there is a driver of value here ready definitely for us to be successful we need to create a superior product a product that can really compete with long haul truck and.
And on that point I could ask Rob to comment on that but right now the rail network in North America was not really designed to.
Really be successful that can be for long haul distance from say, Mexico City, all the way to Detroit and Toronto on the East, while Mexico City to a Wisconsin and category on the west and in order to do that.
Moving to railroad together already makes it appealing.
And to make some comment Rob about the product that we have and yes sure JJ.
David when you look at it.
J J just talked about with the <unk> contract.
Just finalized here last year and it really needs a strong transportation option, we don't get to Mexico, and certainly the Casey's does and it allows us to really become the true North American rail.
Railroad really connecting the continent, but we bring a lot of things to the table when we look at it when we look at the different and.
Industries, the auto industry would get a second line of service between Detroit, and Kansas City, and would help increase and enhance options.
Intermodal service from Mexico to the upper Midwest, and Southern Ontario, that's actually being trucked today, and so 935, it's really about taking it off off the highway safety and fuel and emissions really increasing choices for for shippers for.
For farmers, and the Midwest, Iowa, Illinois, and Wisconsin, Indiana, and others see opportunities to better access the Mexican market.
Our reach and port access with would open the Midwest and Casey as shippers to the world quite frankly.
And from the Atlantic to the Pacific and the Gulf.
And for Canadian aluminum producers the ability to directly reach markets and southern U S and Mexico for lumber and panel buyers and Texas <unk> Force products franchise gets fully unlocked and and allows for further optimization and utilization of our fleet of over 10000 and center beams and boxcars and can keep.
Going on but Theres a lot of things this combination would bring.
Enhancing choices for shippers and customers and really be and the backbone of U S. MCA.
Pro choice pro competition and very much focused on growth. Thank you David.
And as a reminder, please limit yourself to one question and your next question comes from the line of Scott Group with Wolfe Research.
Good afternoon Scott.
Thanks afternoon, guys and so.
I'm going to I wanted to ask about the operating ratio just because it does look like this and it'll be worst among our rail this quarter and.
I know you talked about maybe a sub 60 or earlier in the quarter is that now and.
And this higher guidance and then longer term CP talked about and then maybe a low fifties or pro forma with <unk>. How do you think about <unk> longer term.
So forma basis, and and maybe do you see opportunities to leverage some of the success.
Tcs has had with <unk> to get your margins back on track.
So maybe I can start and then Theres, just link and add but when we look long term we looked at.
North America and network focusing on the economy try and I was talking about earlier and significant growth coming from intermodal. So.
And in a world of growth growth momentum and model the focus at CN will be very much more EPS than the trial, they get the lowest or debt.
One could get for example, if you move a lot of crude a lot of coal.
Yes and on that.
From JJ, Thanks on EPS, and we're quite proud of our results for this quarter I mean, when you look our earnings are up 1% all the other rails are down including our Canadian competitor. They stated that their earnings was up but if you take out the $50 million one time land sales they are actually down 5%. So we're up 1%.
And when you look at the underlying fundamentals of the business as we mentioned we would be up 11% when we consider the fuel lag and we consider FX. So quite thought of EPS and this is what we're focused on.
Can you just please go.
Go ahead.
Sorry go ahead JJ.
As I've said, we're focused on EPS and our focus on these is on EPS and that's what we we want to optimize.
Okay and do you have.
I mean can you clarify and where the guidance is on or though.
No I mean, our guidance as we and we're quite proud I mean, we upped our guidance I think that we're quite bullish on the on the economy coming forward on the markets and we've upped our guidance.
As you know too.
And targeting double digit EPS growth.
And that's what that's what our guidance is with the backed up by a mid to high or high single digit RPM growth that's our guidance.
Okay. Thanks, Scott and thanks for the question and thank you.
Your next question comes from the line of Cherilyn Radbourne with TD Securities.
Good afternoon Cherilyn.
Thanks, very much good afternoon.
I wanted to ask and relationships and increasing guidance.
And particularly the increase and your volume outlook, obviously intermodal and very strong so maybe that.
But would love to know if you're starting to see some signs of life and the carload side of the business, which I think would be helpful from a mix standpoint.
So Rob you want to talk about what we expect to move between now and the end of the year, So Cheryl and we actually see some positive.
Movement here, particularly in the second half of the year is really where we see the upside of the economy really starts to kick in and we.
We are moving quite a bit of gas moving out to export.
Through the port of Prince Rupert and actually the second gas terminal and just opened up.
Forest products group has continued to stay strong here and we talked about Green I think the single carload franchise really starts to move and the second half of the year quite frankly is what we see the big side.
In terms of the upside Cherilyn.
It's pretty broad base and a broad base.
Thank you.
Your next question comes from the line of Tom <unk> with UBS.
Good afternoon and Todd.
J J.
Thank you for the.
And the question here.
I wanted to try to get your sense of the kind of negotiation with <unk> and how you address.
And maybe some of the concerns that they potentially would have regarding the regulatory process. So I guess and particular CP now has visibility with the waiver.
And that they would be able to go to a voting trust.
You don't yet have that visibility and so is that is significant.
Barrier to an agreement with <unk> are there things that you can do.
In terms of the negotiation net debt would address concerns.
They might have that they reached an agreement with you, but then STB comes back and says no.
And we're not going to allow you to do a voting trust.
Thank you for the question Tom So we've only put our offer to casey's choose.
Tuesday of last week, and the small and it this morning that we file for the volume to us So and we fully intend to address every.
Regulatory issue concerning the QC as have some and maybe Sean maybe you could give a brief for brief and an update kind of where we're at and the process of doing these different things sure. Thanks, JJ share Tom happy to do so.
So obviously, we've now signed a nondisclosure agreement with <unk> and we have access to the data room, but we're going to start a dialogue and the coming days with them and I think you saw today, we filed at the STB.
Letter setting out our views on the process by which the STB will rule on the volume Trust for.
First of all secondly, we also filed a petition.
With our voting trust, which is identical to the other will interest me for the STB those put forward by CP and other applications very simple, we're just asking the STB.
And then Seth their process to approve the loading trust that they do both at the same time. So the same track the same standards and ultimately comes and this isn't the same time with respect to both.
And what interests and ARVO and interest and we're very confident that even working with it with <unk>.
We will obviously be interested and both parties seem they are bought and trusts getting approved debt be adopted it process that is fair.
And spirit and even handed and we're confident debt.
The STB, we'll do that we've asked them to rule by May 31, which puts us in line to be in a position where both for the interest of and approval of sdd prior to.
The vote by the KC shoulder sometime in June. So obviously that dialogue is ongoing we will be able to show no doubt with the Tcs that when it comes to the voting trust our position is identical to Cps and hopefully we're very confident that the STB will rule on both at the same time, we think that's the best approach.
To have and even and even the level playing field for everybody and ultimately at this stage as you know the standards for the <unk> public interest does not go to the competitive issues, but again, our transaction is pro competitive where we have new choices additional choices for customers and the U S. It across our network and we are.
Very confident that we'll get to avoid interest to be approved STB and.
Early early June late May.
Do you need and agreement first for them to review it or not and agreement with cash you are not necessarily no.
We filed that we opened our preceding last week and we filed the <unk> interest and Thats not require that you have a final agreements signed before they approve the vote and trust.
Great. Thank you thank.
Thank you Tom.
Okay.
Your next question comes from the line of Allison Landry with credit Suisse.
Good afternoon.
Good afternoon, and many of you.
Following up on Tom's question.
There seems to be some.
Disparity between.
And view about what the public insurance barnburner actually means.
And the voting trust.
Compared with net.
Excuse me CP is outlining the public interest standard maybe for you can just sort of walk us through.
And how you understand the STB language.
What do you think it means.
And then basically.
And <unk> are arguing that competition is something that will be considered I think the other thing it's more about yes.
Financial fitness and that's <unk>.
And sort of the Opex now, helping that UK and provide some clarity on your <unk> and public interest standard.
And specifically it's been about income thank you for.
Sean you want to talk for these technical point trials, so very happy to well first of all again, Alice and our position is that our bid is pro competitive will create choices for our customers and therefore it doesn't has competition.
And also on and I could comment there. Our view is there are no and solvable regulatory problems I mean, there is a history of up.
<unk>.
Issues that are raised and the context of and STD application is being mitigated and it worked out with obviously the customers through the STB process for standard with respect to the voting trust is very clear and.
And our trust and exactly the same as Cps.
And it's a public interest standard, but it focuses on the risk and financial harm of the African carriers and that goes to if that for some reason and transaction for that to be approved that both carriers and our case case, yes, and see and we remain financially viable.
Post the transaction if you had to unwind the volume trusts and we're very confident both companies are extremely viable would not have an issue post devoting trusts were not to be approved and ensuring that there is no and proper control of kcl and it is clear both in our and.
Voting trust that there is no control by CN, the trustee being Dave starting as an independent trustee with the great experience when it comes to both the rail industry, but also casey's, specifically and we were able to welcome heads and independents as trustee.
And therefore, we are very confident that the public standard test that must be met at this stage will be debt will be analyzed by the STB and again.
The issue will be and what we're asking us to do is to apply the same standard and.
And the same criteria and the same timeframe for both board and trusts. So we're confident that when the STB receives both applicant detailed submission on the public interest that they will come to the view that.
And our case, we meet the public interest dressed and R. R.
Voting trust will be approved by the STB.
Thank you Allison if I can thank you.
Your next question comes from the line of Ken <unk> with Bank of America.
Hey, Greg Good afternoon, and JJ Robyn just lane.
Looking at the cost side of the 66 and large and thoughts on near term on employees relatively.
The flat performance in the quarter, how do you think your ramp is as volumes ramp through the year and your thoughts on costs and I guess, maybe long term your thoughts on synergies you mentioned kind of top line versus the cost side as well. Thanks.
Thank you Ken So maybe I can start and then Rob can add and so the month of February was a bit of an expense per month for the railroad and some of the polar vortex.
<unk> talked about yield same store price at four 2%. So that's a good trend, we'd like debt numbers and the volume ahead of us.
Obviously positive and constructive just like the economy and.
When you look at all the series of TPI that Rob is going to and during the presentation on the operations side. We have made progress just about on all fronts. If not all fronts. So I mean, we are with that and light things looks it looks positive for the rest of the year, Rob and if you want to add Ken.
Just look at our operations team so what it takes to move the freight out there and the first quarter our operations head count, even though I said volume was up 6% our head count was down 6% and operations roughly about 800 people less to move that freight and as I mentioned, our labor productivity was up 9% when we look at it.
As we came out of the.
The COVID-19.
Depth of second quarter last year into the third quarter, we didnt bring all of our resources back on a one to one basis and we've been able to maintain that here through the second half of last year, and then and then certainly and the first quarter. This year and as you look at the second quarter.
This year versus last year of course, we're going and a different direction, we're seeing growth versus the big downturn. We saw really at the end of April and May's, we're starting to trough on us. So we werent doing any hiring last year and the second quarter at all that all stopped assumes COVID-19 set in and we made energy.
As Youll recall, we had a lot of people furloughed to the contrary, we're actually hiring were actually higher and conductors right now getting ready for the second half of this year. So we're preparing and we are optimistic about the second half of this year in terms of the volume and Thats really where our focus is preparing to move that.
And maybe J J I can add if youre looking Ken that the labor costs of Q1 being higher.
That's all major variances and incentive compensation because to Rob's point, our average number of employees and the quarter were down 3%.
Great. Thanks, guys. Thank you. Thank you Ken.
Your next question comes from the line of Brian <unk> with Jpmorgan.
Hey, good afternoon, and thanks for taking the question just a quick one on the end markets can.
Can you just remind us what impact do you think you will see from that.
Mandate and when it becomes effective and and Canada.
Mid this year and for some concerns about availability of.
Devices being certified.
Is that really something that you are focused on having an impact on some of your end markets that overlap with trucking.
So maybe I can pick this one up to most most trucks.
Trucking firm and Canada will do cross borders have to have the equipment already because thats what sales are legal refinery United States. So then you're left with only the the fleet that's only running and care that has to meet that mandate by mid year. So the impact is I would say I would qualify as a slightly positive.
Because already a good portion of the fleet has to be converted because a number of equipment and move cross border. So the impact is a slight positive, but I think it's coming up at a time when the economy is going to be strong. So really the economy is going to be a bigger factor than the <unk>.
And the implementation.
Thank you alright got it thanks JJ.
And your next question comes from the line of Jason Seidl with Cowen.
Thank you very much operator, AA JJ and team. Thanks for taking my question I wanted to talk on.
And any of the customer overlap that may exist and maybe you could walk us through some of your options on how to sort of play.
Placate the STB and the customers going forward and the deal.
So the overlap that is well known is between Baton Rouge, and New Orleans, where both <unk> and <unk> out of the parallel line and.
And we know the detail of debt and we think we can definitely solve debt as Sean.
Sean said earlier.
Two to one problem and none of them are solvable and we will resolve them Ravi you want to add.
This will call overlap, yes, I think you hit it.
And the overlap just like we said on Tuesday is really between Baton Rouge, and New Orleans, where we do have a few customers that their options will go from two to one we knew that going in and we said that and again that represents less than 1% of the combined railroads network. So we will remedy and Theres a number of things you can do with that including divestiture.
The line, but we'll cross that bridge when the time comes but we will handle it and other.
Other places that are out there that have been mentioned and I'll just.
Go through them real quick Jackson, Mississippi, Theres, no two to one east St. Louis No two to one Springfield, Illinois, No two to one council bluffs and no two to one mobile Alabama, no two to one and in fact, the port and mobile, Alabama and has sent in there.
Port for our proposed.
Merger, so they get it.
If for some reason there is another issue out there who will work with our customers to remedy that.
As we always have and.
And as JJ said, it's important to note that.
And a little over three business days over 500 letters of support that's significant in terms of.
What we're seeing out there thanks.
Thanks for the question.
And so on location.
And this helped clarify everything has been said on this and the last week. So thank you for the question Jason.
Next question.
Your next question comes from the line of Justin long with Stephens.
Thanks, and good afternoon.
I wanted to ask about the 75 locomotive orders that you mentioned I think you got approval for that from the board any color you can give on the expected timing of those units and when they should be delivered and is this and order that's contingent on the merger being approved or is this.
Predicated on just the Standalone business and the growth you're expecting.
So maybe I'll pass it onto Rob and just to clarify the approval of the board for the grain fleet expansion and the locomotive fleet expansion took place before we made the offer took acos and Rob that's exactly right. It had nothing to do with the merger and does not have anything to do with the merger, it's really based on growth and growth prospects, we see over the next.
12 months to 24 months and in terms of timing.
We expect to get roughly 25 of those here and the second half of this year. The other 51st half of next year, there could be some variability and volumes bigger and that we could pull some of those forward but.
That's about what we look like in terms of the timing so.
And so we're not losing our focus at all on Canadian grain and Canadian farmers.
We're making a major capital investment over three years, adding renewing $35 3500, new lower cube.
High capacity up because and the 75 locomotives, we've got some flexibility if and when we take them and it's basically our commitment.
We see growth coming we want to be prepared for it we want to be able to move the economy and do our part for to enable the recovery post COVID-19.
Thank you Justin great. Thank you.
Your next question comes from the line of Chris Wetherbee with Citi.
Hi, Chris.
Hey, guys. Thanks for taking the question.
And I guess, maybe a couple of things here first just on the.
On the voting trust when you think about sort of the similar approaches that you'd like the STB to take that for you both of them I guess I'm trying to make sure I understand that relative to the desire to have your deal I've reviewed by the new merger rules as opposed to this are seeking the waiver. It there and your reason why maybe the same rules makes sense.
For the trust as opposed to potentially the deal and then.
In terms of what ultimately kind of how the industry ultimately shapes up how would you expect something to that.
Downstream effects to look if you were to be able to acquire in case you do you think this trigger something else and the future do you think this is sort of one and done and then as debt.
So thank you Chris Thats, a question off and us So we'll revert to our expert here Sean to cover the thanks, Chris on the question of.
The waiver, maybe and what you're asking about but to be specific.
And we believe we can close the transaction on new rules are old rules.
So for some reason the STB were to rule, but we've taken that position from the outset debt. We think we think that this transaction should be reviewed and the new rules first of all secondly, it does provide and obviously our 500 or more support letters are recognized the fact that CN has taken the position that we are confident that under the new rules.
We can get this transaction approved and closed and when it comes to evaluating the voting trust again, we're of the view that.
And our submission and what we said is that we want the same standards applied and the same timeline and the public interest test for the approval of the voting trust.
Our submission is that it is the same for both loan interest.
Leading that to ask for the STB to rule both for the same time.
And hopefully adopting a process, which will allow us to even though even a little less.
Level, playing field excuse me, which is fair transparent and even handed so obviously our position is that when it comes to the volume Trust.
Our regulatory assessment is identical to <unk> and when it comes to getting it approved as a vehicle to use to move on to the next level of this transaction.
So I hope this helped and inbound.
Go ahead.
And as that downstream effects, where do you think about that.
Well I think thats something that will be obviously assessed by the board based on the new rules on the overall transaction and we'll address those as they as they come through but again.
<unk>.
Capability, demonstrating and is pro competitive that.
As Rob and clearly explained that there is no. There is has competition and there is not there are areas, where we'll have to address with mitigation, but we remain confident that on the new rules. We can get this transaction approved and closed.
Okay. Thank you thank.
Thank you.
Next question.
<unk>.
Okay.
Operator.
And your next question comes from the line of Jon Chapell with Evercore ISI.
Hi, Jon Good afternoon, Hi, JJ.
I wanted to ask about the impact of what's going on and that the port of Montreal right. Now obviously this one is a little bit more.
Expected and it sounded like there was business already shifting to Halifax, how is your network positioned for the proactive shift and freight and if you can just remind us what was the impact both from a volume and a cost perspective on the prior strike and how do you expect it to be similar or different this time around.
So this is the second time and.
About six months that they have a labor disruption.
And the last time it was maybe you cut shippers are importers by surprise this time because it was seven.
Second time and this was also they had a specific deadline so customers saw it coming diversion of freight that to take place many weeks ago.
And that's another important aspect when disruption took place last year. It was disruptive to our own operations. So I would say.
There were some new business, but it was also unplanned costs as a result of so at this time, we were organized differently and I'm sure of the importers also organize differently, there's been diversion of freight already for St. John and other effects both.
And currently the federal government is actually looking at potentially having some.
Some regulation that may bring either their workstyle page to a close or maybe bring the two probably closer together. So for all in it's not a big to do and some of our second quarter result.
Great. Thank you JJ.
Thank you.
Your next question comes from the line of Brandon Glinski with Barclays.
And Randy.
Good afternoon, and thanks for taking my questions I guess.
J J and Rob.
From a lot of public discussion last week about how your potential combination would be somewhat answered competitive from a rail perspective, and I think it went beyond.
And the share in line and Louisiana, or so can you give us maybe some more expense in response to those comments, especially in relation to interline agreements, which supposedly could be more challenged going forward.
Well, maybe I'll start I mean, frankly, our focus from the beginning has been on Acs and creating value for their shareholders and their customers as well as C and shareholders.
The combination that we're proposing is really really a pro competitive it's really about creating new products new services to compete harder there is nothing wrong with competition competition is good and brings innovation and bringing new services and how to connect more buyers with more sellers.
And as a bigger network, we can actually connect more destination. All these gateway will remain open.
And as there is no rail.
Railroad and including <unk>, and we make good money and to changing traffic what other railroad so theres definitely no incentive financially otherwise.
Now to guidance.
Continue to grow the interchange business, what other railroad and including the CP at Kansas City. So a merger Thats based on growth as a merger Thats really is looking for a bigger pie of the overall freight and North America not to we're not looking for a bigger pie.
Biggest side of a small pie, we're looking for a bigger pie and therefore enter changing what other railroad as well as the competing much harder with truck with obviously what can be created now as a premier railroad.
For the 20 <unk> century focus on the economy ahead. The economy ahead of us is going to be a much more related to consumers and to intermodal or a lot less reliant on thermal coal and crude has been good and good and bad time accrued crew is too volatile to actually do a merger of this size and.
So I mean this.
Our view is always from the beginning this is pro competition as to create new product, it's about growth and it's about creating reason for freight shippers to use our rail network and Rob you want to add.
You nailed it I think you hit on all the key points I'd, just reemphasize as JJ said.
We plan on keeping the gateways open there's no plans to shut those so as far as your question on the interline that's our plan.
And just to add when you look at the ports and mobile New Orleans, Montreal, and Quebec City, how that effects.
Hoover and Rupert.
And those arrows kept Dana is very crews all the sports with this combination can really connect to even more into other end market you could you could connect St. Louis Memphis.
Kansas City to all three coasts.
And the Trans Atlantic trade to Kansas City, Gulf, South America controls and Kansas City coming from the West as well you could potentially given unfortunately again for lazaro cardenas to potentially be an option for those and port product and Houston and or export product from Houston back too.
When you look at them App, you got to look at what it could do to actually enhance the economy and.
Enable something that was put together with a lot of effort U S. MCA and enabled with content and also to do more to aid in itself.
Now the content of our finished vehicle and North America requires a higher content made from North America. So that means more product more parts moving went into content and very long haul and that's why this combination is all about is to support and enable.
And the economy has not with no intention of reducing competition are closing gateway.
Thank you. Thank you.
And your next question comes from the line of Amit <unk> with Deutsche Bank.
So let me ask a question.
J J.
I wanted to ask a previous question slightly a different way if I could so.
Bear with me for a second I mean, you and the team have obviously done a lot of work offered a compelling proposal I think that's undeniable.
But at the end of the day the outcome is quite binary.
And what I was hoping you could help us with.
How C&I is impacted by a potential CPE Kate <unk> merger.
I guess with respect to the competitive implications for C&I and then also it doesn't outcome like that.
Acetate the need for your company and.
The CNI board to pursue other acquisition opportunities to counterbalance that competitive application.
So thanks for the question Amy.
It's really a question for later, it's something we've been talking about obviously for the last many many years as to the.
And the so called and game our focus really is the opportunity at hand, the Baltic Acs and decided that they are willing to partner with another railroad and a strategic partner and CN.
From the very beginning of when we got privatized.
The first thing that we did was made an acquisition early on and deal and the Central we had a marketing alliance with Acs.
And then early days, we've been focused on what was at that time and those as NAFTA.
NAFTA has now been renewed with somewhat differently for a lot of the wealth and asset traction was still there today. So that's really the focus that we have.
This doesn't happen then.
We'll see how that plan at that time, but.
There's a lot of value and we believe as Shaun was saying earlier that we can resolve these different issues.
And as they come and that's what we're focused on right now, but just look at it and network. The way it is today with <unk> huge.
And what a potential just standalone risk and remember when we started 25 years ago, The company and was nowhere and what it was today, we built it up over 17, and 18 different acquisitions big and small we build it up where organic growth and that is always be the case, we are very innovative very nimble and we're going to keep doing debt right.
And now we're focusing on the one and specific the Casey's and be NAFTA railroad, the USC and see a railroad. It doesn't mean that we don't our future is.
Is any different long term, we have a bright future and no matter, what but we think that this is this is the time to do this one transaction.
And first time since I joined <unk> and that actually.
Tcs is actually willing to.
Merger and other railroad so we'll jump on that.
Very good. Thank you best of luck. Thank you.
J J, if I may just a lot of abundantly clear that.
Talked about the vote and trust before clearly our application there is no date, yet for the <unk> shareholder vote, but our application and today. We're looking to have the are avoiding trust approved on the same timeline Sep's will interest the same standards and the same.
Our criteria and that would be done prior to the board and trusted Acs and I say that voting interest by the end of May or June and who I presumptuous Im assuming thats, what it could take taste, but clearly I wanted to be clear that we want to ensure that the STB rules on both floating trust prior to the case the shareholder vote later this year.
A very important point and thank you Shaun.
Your next question comes from the line of Ben <unk> with Desjardins capital markets.
Yes.
Good afternoon, everyone.
Obviously very good color about the voting trust, but now when we look at.
The data room could you provide maybe more color about the timing to perform.
That's our room analysis I know, it's not your first time and I would assume it's more virtual these days and if you could also provide some color about the timing to make and binding proposal and finalize the definitive merger agreement. Thank you.
Sean you want to cover debt yes.
Mr Okubo and why thank you, yes, as I said, we've started we will be starting.
Tomorrow fleet getting access to the data room.
King at.
The material, it's and there is a virtual data room to your question Benoit.
That could take us two weeks, two and a half weeks to get.
Get our confirmatory due diligence completed and therefore allow us to then move to finalizing we've already tabled a draft merger agreement.
We have one ready to go so we will just update it in line with the due diligence and hopefully.
And it will be engaging a very proactively and very respectfully and in the day to come with the Casey's team and.
And we're looking forward to be and are positioned to have hopefully a merger agreement and the next 30 to 40 days.
Perfect that's great color best of luck.
Okay. Thank you.
Thank you I would like to turn the meeting back over to Mr. JJ <unk>.
Well. Thank you. Thank you for joining us today, obviously, it's an important time and the C and the history.
And we mentioned earlier.
We're proud of our first quarter result economy ahead of us looks good.
Operating matrix of solid fuel efficiency is good.
Very important to US also is our safety performance much improved for the first of all injuries and train accident and so a lot of good things that look real good for the quarters to come on the long term view, obviously the desire of CN to.
Give reason for the board of Tcs to consider a combination with us is very much top of mind and.
And we're going to be putting a lot of focus and effort on to that.
In the coming weeks. So thank you for joining us today and more to come and weeks and months to come.
Thank you.
You are welcome. The conference has now ended please disconnect your lines at this time and thank you for your participation.
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