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 Paul Butcher, Vice President Investor Relations, Ladies and gentlemen, Mr. Boucher.
Well. Thank you Christina good afternoon, everyone and thank you for joining us for <unk> first quarter, 2020, one financial results conference call.
I would like to remind you about the comments already made regarding forward looking statements with me today is J J and do it our president and Chief Executive Officer.
Recently, our executive Vice President and Chief Financial Officer.
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 is now my pleasure to turn the call over to CNS, President and Chief Executive Officer, Mr. JJ revert.
Thank you Paul and good afternoon to everyone. I Hope you all have a safe healthy and constructive start through 2020 one.
And we're off to a good strong running start.
The underlying performance of CN has been strong and this is thanks to our dedicated colleague.
And our railroad or was delivered despite severe winter operating condition on crescent.
And then to demand and number of market like fourth and grain and ongoing channel as Independencia.
And you could see from slide five Sienna is on track to become the Premier railway of the 20, <unk> century, where our focus on our role as an engine of the North American economy growth and prosperity as well as the supply chain and and then incremental leader.
We pioneered and we're the first to implement precision scheduled railroading across our network and we are a clear industry leader in ESG and our strong balance sheet is a testament to our operational excellence and we continue to prudently invest and the business and our strategy as we grow and expand our reach.
Yeah, and as a longstanding successful track record of strategic and accretive acquisition throughout North America, which has resulted in successful and integration of our Kermit rail network.
In line with our existing strategy CA and made a superior proposal to acquire the case. Yes. This is the right next step for boats here and and QC us 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 to the benefit of both companies specifically this offer will deliver superior value to Acacia shareholders.
He and his proposal represent a 21% premium to 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 QTS 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 seemed a single on a single operator service.
It would connect vibrant port from all three coasts to more Intel and market and cities. It would connect CN and Tcs buyers and sellers to more destination.
We will also preserve access to all existing and to change your option to enhance route choice and then share a robust competition.
We are also firmly committed to maintaining open gateway to competitors' 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.
On April 20, <unk>, we submitted a pre filing notification to the STB.
And I intend to file an application seeking authority to combined with Tcs should the Casey's board of director, except our superior proposal.
We are proposing to use and identical a voting trust structure that Cps propose and we are confident that the STB well on that subject our proposal to any different standard and are proving devoting to us than those that would be applicable to <unk>. We believe that both voting to us equally likely to be approved.
If our board and trust us that prove and a combination with Casey's is consummated tcf shareholders will receive the 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 2020 one we.
We are fully committed to this transaction and confident and our ability to achieve all of this is sherry regulatory approval to close into a voting to us and then ultimately receive approval to come by and 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 and the board of 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 a true.
Railroad and connected with that the CEO of QTS over the weekend and reiterated at sea and strong enthusiasm readiness and most importantly, our deep commitment to begins collaborations with a 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 receive and overlay and welding amount of support from more than 500 free customers Port ecosystem partners supplier government officials and other stakeholders. They have voiced their support support for a combined <unk> Tcs, which.
We'll 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 your trucks to report and this combination I 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 the necessary regulatory approval to close into avoiding to us and then ultimately receive a pool.
To combat and 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 CN and underlying performance in Q1.
This quarter, we realized solid result, and we caution you to work on our yield of our new business mix.
During the quarter, because he knew 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 rate.
Our <unk> strategy is working our same store pricing was four 2% and Q1, our network is fluid and we recovered very well from the polar vortex of February.
Our efforts are reflected in our ability to capitalize on consumer driven and trends 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 as fuel efficiencies and other key measure of operational performance, we are confident and our business and committed to our long term strategy with that I will 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.
While volume was up crew starts were up only 1% our active online inventory of railcars and 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 addition, our labor productivity improved 9%.
All in all just a solid quarter of winter operations.
As detailed on slide 11, we are the North American rail leader and fuel efficiency, we improved our fuel efficiency, 4% versus the same time last year, two and 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 foray 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.
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 would've otherwise been delayed or lost due to the cold.
This helped us move 5% more volume during the quarter, while holding true 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.
Last year's revenue record by over 20% setting a new all time high watermark for sustainable grain supply chain and 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 in our ability to continue delivering strong results as the economy rebounds, our network is fluid and we've 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 clear 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 and.
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 <unk>.
<unk> 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 and <unk> Board of directors announced in Q1 that at least 50% of independent directors come from diverse groups, including gender parity.
Establishments and 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 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 our adjusted EPS would have been up 11% so quite a solid underlying performance.
Now moving on to 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.
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 us strong confidence for the balance of the year the underlying.
On performance in Q1 is a testament.
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 and.
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 as you say so.
Thank you for all of you to joining us today.
It's a proactive approach way probably kind of a growth.
And the merger that we're proposing connecting more sellers and buyers and.
And I would like to take a moment to reiterate some of the highly compelling aspect of our proposal like combining with Tcs, we would compete head to head on all three coasts out lower cost safer service better fuel efficiencies from <unk>.
CECO through the Heartland of America.
And this will result in a safer faster cleaner stronger railway and addition, we will bring our leading ESG and operating expertise to Casey's 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 will 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 Tcs and double digit equity accretion up and full realization thereafter.
We are confident and the strength of our business and strategies and we progressed towards becoming the Premier railway of the 20 <unk> century.
We look forward to engaging constructively with the QC as board and all relevant stakeholders to deliver the superior transaction with Tcs to deliver greater choice and efficiencies for customers and deliver enhanced reports and netease for employees and local communities. Overall, we have a better bid better we're a better partner better railway and <unk>.
Best solution for Casey's and on North American economy on.
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'd 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.
Good day I wanted to ask a question again, a little bit I know we've talked about this when you made the bid.
And what.
Looking at this transaction.
Why is now the right time to come in with.
With a competing offer here like we're on what's changed and the market that makes it such a better deal than maybe two or three or five years ago at a lower price point.
So theres many reasons why now.
And on a covered them those earlier late last week, but the main reason why now is that the board of Tcs, obviously after a very thorough and thinking of decided it's time for them to crystallize the value for their shareholders. Therefore, there wasn't at this point to entertain doing a merger and we're just.
Strategic partner and merger with basically and other railroad. So the timing of that is also a very much dependent and I was wondering if you have a partner who you could dense and then from an economy point of view, where the beginning of the Polish economy recovery. The GDP forecast for North America looks great.
As good as can be.
We had the U S MCA, which was venue, which is also something that has specific value to and also top combination and then depending on who you believe.
And the time on Mexico, and this might be the decade, and Mexico and some of near shoring now.
There is some challenge between the relationship North America, China.
But also the fact that.
The cost of labor and China has been rising to the point, where Mexico and might have might have a better decade and all of that you put that together. The fact that long term money is a favorable when you put all that together it's.
The CN, it's time for you to make a good offer to the Casey's board and for them to consider very seriously.
Alright.
Very clear, maybe if I could just kind of squeeze one little follow up on here as you think about the unique drivers of value is it more about getting the and rail connections further west or further south.
So the driver of value here ready definitely for us to be successful, we need to create a superior product and product that can really compete with long haul truck and on.
And 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 CA and Mexico City, all the way to Detroit and Toronto on the East or Mexico City to a Wisconsin and <unk> on the west and in order to do that.
Putting two railroad together already makes it appealing you want to make some comment Rob about the product that we have and yes sure JJ.
David when you look at it and.
As J J, just talked about with the <unk> contract.
Just finalized here last year.
And really need to 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.
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 <unk>.
Industries, the auto industry would get a second line of service between Detroit, and Kansas City, and it 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 on I 35 true.
About taken it off off the highway saving and fuel and emissions really increasing choices for for shippers 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.
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.
Fully unlocked and and allows for further optimization and utilization of our fleet of over 10000 and center beams and boxcars.
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 yet.
And yet Virtualized 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. So.
I'm going on I wanted to ask about the operating ratio just because it does look like and it'll be worst among the rails 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 euro on our longer term on a pro 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 our North American network focusing on the economy tried I was talking about earlier and significant growth coming from intermodal. So.
On a world of growth growth momentum model the focus at CN will be very much more EPS and that's why they get the lowest or that one could get for example, if you move a lot of crude a lot of coal to say.
Yes and on.
And Thats 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 of 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 one person.
<unk> 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 proud of EPS and this is what we're focused on.
Can you just cancel it.
No no sorry, and truck go ahead JJ.
And as I've said, we're focused on EPS and our focus on these is on EPS.
What.
We want to optimize.
Okay and do you have.
I mean can you clarify 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 and 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 our that's what our guidance is with the backed up by a mid to 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 Chairman.
Thanks, very much good afternoon.
I wanted to ask in relation to the increase in guidance.
On 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 on the carload side of the business, which I think would be helpful from a mix standpoint.
Thanks.
So Rob you want to talk about.
And you 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 as the economy really starts to kick in.
We are moving quite a bit of gas moving out to export.
Through the port of Prince Rupert actually the second gas terminal just opened up the.
Forest products group has continued to stay strong here and we talked about Green I think the single carload franchise really starts to move into 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 pretty broad base.
Thank you.
Your next question comes from the line of Tom <unk> with UBS.
Good afternoon, and Tom Yes.
J J.
Thank you for the.
And the question here.
I wanted to try to get your sense of the kind of negotiation with key issue 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.
And 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.
The day might have that they reached an agreement with you, but then STB comes back and says no.
No 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 Tcs choose.
Tuesday of last week and on a disappointing did we file for the voting to us so and we fully intend to address every regulatory issue concern of QC as have some of them maybe Shaun maybe you could give a brief 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 that case, yes, and we have access to the data room, but.
We're going to start a dialogue and the coming days with them.
You saw it today, we filed that the STB.
Setting out our views on the process by which the STB will rule on the voting Trust first of all secondly, we also filed a petition with.
Our voting trust, which is identical to the edible and trust before the STB and was put forward by CP and are on.
The case is very simple, we're just asking the STB.
And then stay at their process to approve the voting trust that they do both at the same time. So the same track the same standards and ultimately come to the decision at the same time with respect to both Cp's voting trust on our vote and trust and we're very confident even working with it with jcs.
We will obviously be interested and both parties, saying Theyre voting trust getting approved that.
After that process that is fair transparent and even handed and and we're confident that.
On 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 floating and trust of and approval of the STB 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 gcs that when it comes and 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 a level playing field for everybody and ultimately at this stage as you know the standards for the <unk> public interest.
And 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're very confident that we'll get to avoid interests to be approved STB and.
And the early early June late May.
And do you need and agreement first for them to review it or not and agreement with cash you are not necessarily.
We filed that we opened.
And <unk> preceding last week, and we filed the Wil and <unk> and Thats not require that you have a final agreements signed before the approval and trust.
Great. Thank you.
Thank you Tom.
Your next question comes from the line of Allison Landry with credit Suisse.
Good afternoon.
Good afternoon, and maybe just following up on on Tom's question.
And there seems to be.
Disparity between.
And view about what the public interest standard actually means.
And the voting trust.
Compared with.
Excuse me CP is outlining their view on the public thinks of standard. So maybe if you could just sort of walk us through.
And how you understand the STB language.
Do you think it means.
I think basically cp's trying to you are arguing that competition is something that will be considered I think the other thing it's more about.
Financial fitness and the divestiture of the assets now.
Hoping that you could provide some clarity on your view on what the public interest standard means specifically from the voting time. Thank you.
Sean you want to talk to these technical point trials and very happy to well first of all I get Allison.
And position is that our bid is pro competitive will create choices for customers and therefore, it doesn't has competition.
So on it could comment our view is there are no and solvable regulatory problems I mean, there is a history of these.
Issues that are raised and the context of and STD application is being mitigated and it worked out with obviously their customers through the STB process standard vector to the voting trust is very clear.
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 optic and carriers and that goes to if for some reason and transaction were not 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 voting trust and we're very confident both companies are extremely viable with Diovan issue post the voting trust, we're not to be approved and ensuring that there is no proper control of case, yes, and it is clear both and are.
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 railway industry, but also gcs, specifically and we were happy 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 data will be analyzed by the STB and again.
The issue will be and what we're asking us to do is apply the same standards and.
And the same criteria and the same timeframe for both blood and trusts. So we're confident that when the STB receives both advocates detailed submission on the public interest that they will come to the view that.
And our case, we made the public and distressed and rest on our.
Voting trust will be approved by the STB.
Thank you Alison just 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 line.
Looking at the cost side of the percentage from our again thoughts on near term on unemployed relatively.
The flat performance in the quarter, how do you think your ramp is as volumes ramp through the year and your thoughts on cost 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 and expenses month, followed the railroad some of the polar vortex.
Talking about yields same store price at four 2%. So that's a good trend we liked that numbers and the volume ahead of us.
Obviously positive and constructive just like the economy and.
When you look at all of the series of TPI that Rob is going to join the presentation on the operations side. We have made progress just about on all front 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 If you want to add Ken.
Ken on.
If you 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 as I mentioned, our labor productivity was up 9% when we look at it.
As we came out of the.
The COVID-19.
Depths 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 in 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.
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're 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.
A quick one on the end markets.
Can you just remind us what impact do you think you'll see from that.
The mandate when it becomes effective and in Canada.
Mid this year, we've heard some concerns about availability of.
Devices being certified.
Is that really something that you're focused on having an impact on some of your end markets that overlap with trucking.
So maybe I can pick this one up.
Most most.
Trucking firm and Canada will do cross borders have to have the equipment already because thats. What there is a 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.
A good portion of the fleet has to be converted because a number of equipment to 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>.
The implementation.
Thank you alright got it thanks P J.
And your next question comes from the line of Jason Seidl with Cowen.
Thank you very much true a JJ and team.
Thanks for taking my question I wanted to talk on any of the customer overlap that may exist and maybe you could walk us through some of your options on how to sort of.
Placate the STB and the customers going forward and the deal.
So the overlap is.
Well known as between Baton Rouge, and New Orleans, where both <unk> and Tcs have parallel line and.
We know the detail of that and we think we can definitely solve that.
Sean said earlier.
Two to one problem and none of them are on solvable and we will resolve them Ravi you want to add.
And we'll call overlap, yes, I think you hit it.
<unk> just like we said on Tuesday is really between Baton Rouge, and New Orleans, and 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 one percentage of the combined railroads network. So we will remedy and Theres a number of things you can do with that including divestiture of the <unk>.
Line, but we'll cross that bridge when the time comes but we will handle it.
Other places that are out there and had been mentioned on just <unk>.
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 no two to one mobile Alabama.
<unk> hundred one in fact, the port and mobile, Alabama is and in there.
Port for our proposed.
Merger, so they get it if for some reason there is another issue out there we'll work with our customers to remedy that is 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 for the question I appreciate some clarification.
Hopefully this helps 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 locomotives.
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 ordered 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 to Casey us Rob and Thats exactly why 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.
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 30 to 500, new low cube.
High capacity up because and the 75 locomotive we got some flexibility if and when we take them and Thats basically our commitment as we see growth coming we want to be prepared for it we want to be able to move the economy and.
And do our part for <unk> 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 to review 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 and there is a reason why maybe the same rules makes sense.
For the trust as opposed to potentially the deal and then.
And in terms of what ultimately becomes the industry ultimately shapes up how would you expect something to the downstream effects to look if you were to be able to acquire and case you do you think this trigger something else on the future do you think this is sort of one and done and then is it.
So thank you Chris it's a question off and if so will revert to our expert Sean to cover the thanks, Chris on the question of.
And the waiver, maybe and what youre asking about but to be specific.
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 the position from the outset that we thought we think that this transaction should be reviewed on the new rules first of all secondly, it does provide and obviously our 500 or more support letters are recognized the fact that <unk> has taken the position that we are confident that under the new rule.
And we can get this transaction approved and closed and when it comes to evaluating the voting trust again, we're of the view that clarity and our submission and what we've said is that we want the same standards applied and the same time line and the public interest test for the approval of the floating trust.
And our submission is that it is the same for both floating and trust.
And that to ask you the STB to rule on both at 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 board and trust.
Our regulatory assessment is identical to <unk> when it comes to getting it approved.
And the vehicle to use to move on to the next level of this transaction.
So I hope this helped and balance sheet.
Go ahead.
And as that downstream effects.
About that.
Well I think thats something that it will be obviously assessed by the board based on the new rules on the overall transaction and we'll address those as they come through but again.
Are.
Capable of demonstrating and is pro competitive that has Rob clearly explained that theres not theres have 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 you.
Next question.
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 was 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 you have a labor disruption.
And the last time it was maybe you cut shippers on imported by surprise. This time, because we were saving it was the second time and this was also they had a specific deadline. So customers saw it coming diversion of free start to take place many weeks ago.
That's another important aspect when the disruption took place last year. It was disruptive to our own operations. So I would say, we their western and your business, but it was also unplanned costs as a result of so at this time.
We're organized differently and I'm sure of the importers also organize differently, there's been diversion afraid already to Saint John and how it affects both.
And.
Currently the federal government is actually looking at potentially having some.
So on regulation that may bring either the work stoppage to a close or maybe you bring the two probably closer together. So all in it's not a big to do it and some of our second quarter result.
Great. Thank you JJ.
And <unk>.
Your next question comes from the line of Brandon <unk> Glinski with Barclays.
And Randy.
Yes, good afternoon, and thanks for taking my questions I guess JJ.
J J and Rob.
And there was a lot of public discussion last week about how your potential combination would be somewhat anti competitive from a rail perspective and I think.
And it went beyond.
And the share in line and Louisiana. So can you give us maybe some more extensive response to those comments, especially in relation to interline agreements, which supposedly could be more challenge going forward.
Well, maybe I'll start I mean, frankly, our focus from the beginning has been on tcs and creating value for their shareholders and their customers as well as see on shareholders.
On the.
Combination that we're proposing is really really pro competitive it's really about creating new products new services to compete harder theres nothing wrong with competition competition is good and brings innovation and bring new services and it helps connect more buyers with more sellers CNS a bigger network, we can actually connect more destination.
All of these gateway will remain open.
And as there is no.
Railroad and including <unk>, and we make good money and to changing traffic what other railroad so theres definitely no incentive financially otherwise.
Not too many.
Continue to grow the interchange business with all the railroad, including the CP at Kansas City. So a merger Thats based on growth as a merger. That's really is looking for a bigger pie of the overall freight and North America net to we're not looking for a bigger pie biggest.
Biggest side of a small pie, we're looking for a bigger pie and therefore, changing what other railroad as well as a competing much harder with truck with obviously what can be created now as the Premier Railroad.
20, <unk> century focus on the calling me ahead and the economy ahead of us is going to be much more related to consumers and to intermodal.
Relying on thermal coal and crude has been good and good and bad of time accrued crew is too volatile to actually do a merger of this size and.
So I mean, there's.
Our view was always from the beginning this is pro competition as to create new product, it's about growth and it's about creating reason for free chip or to use our rail network and Ravi you on it.
You nailed it I think you hit on all the key points I would just reemphasize as JJ said.
And we plan on keeping the gateway is open there's no plans to shut those so as far as your question on the interline.
Plan and.
And just to add when you look at the ports and mobile New Orleans, Montreal, and Quebec City Halifax Bank.
Hoover and Rupert.
And those arrows Kadena is very crews all of these sports with this combination can really connect to even more Intel and market you could you could connect St. Louis Memphis, Ken.
Kansas City to all three coasts.
And the dress up and Trans Atlantic trade to Kansas City Gulf, South American Trolls, and the Kansas City coming from the West as well you could potentially give unfortunately again from lazaro cardenas to potentially be an option for those through and port product and Houston and or export product from Houston back to <unk>.
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 trade within 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 within the continent very long haul and that's why this combination is all about is to support and enable.
And the economy has no.
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 letting 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, do 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 CP case TTS merger close.
Both.
I guess with respect to the competitive implications for C&I and then also it doesn't outcome like that.
Necessitate the need for your company and.
And I bore to pursue other acquisition opportunities to counter balance that competitive and application.
So thank you for the question Amy So that's really a question for later.
On <unk>, we've been talking about obviously for the last many many years is too.
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 a strategic partner and CN.
And from the very beginning of when we got privatized.
The first thing that we did was made on acquisition early on of dealer and a central we had a marketing alliance with Tcs.
And then early days, we've been focused on what was at that time those as NAFTA.
NAFTA has now been renewed with somewhat differently, but a lot of the what the naphtha traction was still there today. So that's really the focus that we have.
This doesn't happen then.
We'll see at that time 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.
As they come and that's what we're focused on right now, but just look at the C and network. The way it is today, which we coast huge amount of potential just stand alone just remember when we started 25 years ago, The company and was nowhere and what it was today, we built it up over 17 18 different acquisitions big and small we build up our organic growth.
And that is always be the case, we are green weighted very nimble and we're going to keep doing that right now we're focusing on the one and specific the casey's and B and the NAFTA railroad the USC and see a railroad it doesn't mean that we and.
And our future is.
Is there 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.
The first time since I joined <unk> and that actually the.
Tcs is actually willing to.
Merged with another railroad so we'll we'll jump on that.
Okay very good thank you best of luck.
J J, if I may just a lot of bonded to be clear that.
Talked about the vote and trust before clearly our.
Our application there is no date, yet for the <unk> shareholder vote, but our application and today, we're looking to have our voting trust approved on the same time line Sep's Boy and trust the same standards and the same.
Our criteria and that would be done prior to the board of Trustees case, yes, when I say that voting trust by the end of May or June and White 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 trusts prior to the case, yes shareholder vote later this year.
Very important point and thank you Shaun.
Your next question comes from the line of <unk> <unk> with Chardan capital markets.
Yes.
Good afternoon, everyone.
Obviously very good color about the folding trust, but now when we look at.
The data room could you provide maybe more color about the timing to perform that.
Our room analysis I know, it's not your first line and I would assume it's more virtual these days and.
And if you could also provide some color about the timing to make a binding proposal and finalize the definitive merger agreement and thank you.
Sean you want to cover that.
Mr Okubo and why thank you, yes, as I said, we've started we will be starting.
Tomorrow, hopefully getting access to the data room.
King at.
On the material that scenario is a virtual data room to your question Benoit.
That could take us two weeks, two and a half weeks to get.
And I get our confirmatory due diligence completed and therefore allow us to then move to finalize and we've already.
<unk> a draft merger agreement.
We have one ready to go so we will just update it in line with the due diligence and hopefully.
We will be engaging a very proactively and very respectfully and the dates that come with the Casey's team 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. J J <unk>.
Well. Thank you. Thank you for joining us today, obviously, it's an important time and the C and the history.
As we mentioned earlier.
And we're proud of our first quarter result, you, calling me ahead of us looks good.
Operating matrix of solid fuel efficiency is good.
Very important to US also is our safety performance much improve on that first of all injuries and train accidents. So a lot of good things.
And we look good for the quarters to come on the long term view, obviously the desire of CN.
You don't give reasons and our board of Tcs to consider a combination with us is very much top of mind.
And we're going to be putting a lot of focus and effort on to that.
And 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.
Okay.
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