Q2 2021 Canadian National Railway Co Earnings Call
Good afternoon, and my name is Lisa and I will be your operator, and welcome to see and second quarter 'twenty 'twenty, 1 financial and operating results conference call all of them.
Participants are now in the listen only mode. After the Speakers' remarks, there will be a question and answer session.
I would now like to turn the call of a breakthrough fall the true Vice President Investor Relations, Ladies and gentlemen, he said was true.
Well, thank you Nico and good afternoon, everyone and thank you for joining us for C and second quarter 2021 financial results Conference call now.
Now before we begin I'd like to draw your attention to the forward looking statements and additional legal information available at the beginning of the presentation.
As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of the U S and Canadian Securities Law.
These statements are subject to risks and uncertainty that may cause actual results to differ materially from those expressed or implied in the statements and are more fully described in our cautionary statement regarding forward looking statements in our presentation.
After the prepared remarks, we will conduct a Q&A session I do want to remind you to please limit yourself to 1 question the <unk>.
IR team will be available after the call for any follow up questions.
It is now my pleasure to turn the call over to see and President and Chief Executive Officer, Mr. J J P of it.
Thank you Paul and thank you and the caps. So good afternoon, everyone and the today, we have 2 agenda 2 item for this.
For this call first we want to highlight our quality result, and also we wanted to give you an update on our Tcs combination therefore, the call might be a bit longer than usual today.
But first I will talk goes out to the community and first nation of listen and B C and the terrible fires impacting British Columbia This summer.
We are committed to helping our neighbors and crisis and several of the CN employees, whose life has been impacted by the natural disaster.
Let's go to the queue to highlight on the page 6.
I want to start by saying how proud I am of our dedicated railroad as performance. This year, the hard work and exceptional effort of our people continue to deliver on the business our.
Our results reflect broad based strength and forward momentum across all of our business and also the enduring power of our vast and diversified CN network.
For 3 quarters and the role we have delivered year over year growth and our EPS and the last quarter. Our adjusted diluted EPS was $1.49, which is up 16% versus last year, but it is also up 25% by the constant currency.
Our operating income is up 76% year over year and adjusted operating income is up 9%.
We help enable the economy with exceptional growth volume was up 13%.
We diligently work and our combination with Tcs and we also stayed focus on the yield management and network operation and execution.
Freight revenue per carload grew 7% and same store pricing was up well over 4% and the second quarter.
Safety performance and employee engagement and index customer sentiment index have all sequentially improve.
We are focused on our customers on our safety and on the combination with Casey's all of which will drive long term value creation for our shareholders, we have confidence and the future I will now pass it onto Rob who will review our operations Lob alright. Thank you J J and as you mentioned our thoughts are with the communities in.
<unk> by the wildfires and British Columbia with nearly 300 active fire is still burning and more specifically with the people of Lytton as they begin the road to recovery from the devastating fires.
With those fires we did lose the critical bridge on a route to Vancouver through the great work of our engineering team, we were able to restore service last week. After 2 week outage and we will begin we will be a few weeks more before we are fully recovered from the backlog of traffic of the outage.
Turning to the last quarter's results very solid performance delivering on 13% volume growth with car velocity dwell and labor productivity improved year over year.
And the quarter the team delivered another quarterly record on fuel efficiency, improving 2% over last year's industry, leading numbers and also setting an all time monthly record and June year to date the team of saved approximately $20 million from our fuel efficiency initiatives alone and avoided nearly 100000 tons of cotwo emissions into the atmosphere.
And our.
Our safety culture is delivering results with an all time lowest quarter.
The injury frequency ratio and year to date, our injury and train accident ratios have improved 27% and 30% respectively operating the safe railroad for our employees customers and communities. We operate in is Paramount to our success as a company.
In the quarter. We also continued to deliver for our customers as noted in our improvement with customer satisfaction index and in April we completed our 14th consecutive record months of Canadian grain movements, we are confident and the business outlook and to that and we have 500, plus conductors and engineers and training to support that need along with having the necessary.
Locomotives ready to pull that freight that I'll turn it over to James.
Thank you Rob during Q2, we saw the more balanced demand recovery that we expected with carload volume up 21%, beating Q2 and almost all commodity segments.
Manifest carload growth was the key driver of our sequential and year over year improvement and volume.
With a 23% increase and lumber driven by continued record commodity pricing record propane volumes up over 20% and better than 150% increase and frac sand versus last year.
In spite of the impact of 3 mine closures late last year, we saw volume growth and coal as a result of the startup of our new tech contract and strong U S exports.
Potash was another bright spot in Q2 on the strength of North American potash market share gains we increased our average length of haul by over 200 miles and beat last year's Q2 volume by more than 40%.
U S grain volume was up 21% versus last year, but Canadian grain with the different story.
After 14 consecutive months of record performance grain was an outlier.
As we lap the record Q2, and 2020 and our strong performance in Q1 left us with less and average carryover to move and Q2.
We continue to move more grain tonnage with less resources as the result of our aggressive push towards system fleet renewal.
We will benefit from continued strong demand for lumber and each too and escalating demand for frac sand as seasonally adjusted drilling activity continues to improve.
Exiting Q2, we saw continued volume ramp up through the Watson Island propane export facility at Prince Rupert.
This will position us to continue to set new records for export propane volume through the balance of the year.
Were the worst of Covid, possibly behind us and strong export pricing for metallurgical and thermal coal, we may see 1 or possibly 2 Canadian coal plants restart and the second half of this year.
Our same store price has been accelerating each quarter since mid last year.
We expect this pace to continue through 2021 as customers look to secure valuable capacity.
As J J stated Q2 same store price was again well over 4%.
And with sequential improvement compared to Q1 of this year.
We will continue to price ahead of railway cost inflation during the post COVID-19 economic recovery and maintain a very disciplined approach to yield management with that I'll turn it over to Keith.
Thanks, James the <unk>.
Consumer based economy continued to generate strong volumes for CN combined containers moving through the West coast ports of Prince Rupert and Vancouver grew 18% versus 2020 and grew 5% over Q2.2019 to set an all time quarterly record the.
The <unk> business through the ports of Halifax, Saint John New York, New Jersey, Philadelphia, New Orleans, and mobile combined also to set an all time Q2 record.
Collecting our proven track record and industry, leading ability to establish and convert on new products <unk> is truly a leader in the intermodal execution.
Our domestic business continued strong with volume growth of 11% over Q2, 2020 and up 3% over Q2.2019.
Working with our strategic wholesale IMC partners and through our door to door sales channels grocery e-commerce and consumer products purchasing drove the volume overall CN intermodal volumes were up 14% over Q2 last year, a record Q2 for our intermodal business.
Our automotive 2021, Q2 results show of 98% increase versus Q2.2020 due to the rebound in demand and the reopening of auto manufacturing facilities.
And is well positioned for the micro chip supply chain recovery as we serve both Canadian ports and several large volume high demand model of assembly plants, we continue to improve train utilization and service metrics average intermodal train density increase was 6% more containers per train a key enabler of profitability.
<unk> as a result, we are generating additional revenue per train at low incremental costs, our operational and commercial initiatives such as contract renewal pricing and capacity optimization programs drove double digit intermodal contribution margin improvement over 2020 and sequential improvement over Q1.
2021.
And with the ongoing strong job creation and both the United States and Canada. We are focused on the optimize the use of our capacity and the value creation of our customer focused services and our unique 3 coast network I will now pass it on the just land for the financial perspective. Thanks.
Thank you Keith My comments will start on page 12 of the presentation, which will provide more color on our second quarter performance.
During the quarter, we recorded $32 million related to the amortization of the bridge financing fees related to the pending <unk> acquisition <unk>.
Recall that in Q2.2020 earnings also included a noncash charge for non core branch lines held for sale.
Excluding these nonrecurring items adjusted net income was around $1 billion 60 up 17% with adjusted diluted EPS of $1.49 up 16% versus last year.
Foreign exchange was a headwind of 11 cents of EPS.
In addition, fuel lag negatively impacted the quarter by 7 cents of EPS year over year and added around 400 basis points of the ore.
If we adjust for these 2 items, our adjusted EPS would have been up 30% so of solid underlying performance.
Other income was up by around $50 million versus last year due to the mark to market gain on an equity investment and autonomous driving technology.
Turning to page 13, let me highlight a few of our key expense categories expressed on the constant currency basis.
Labor and fringe benefit expense was up 28% versus last year. This was mostly driven by increased wages due to a 9% higher average head count and higher incentive compensation.
Fuel expense was up 86% driven by of 76% increase and price and a 14% higher workload, partially offset by another solid fuel efficiency improvement of 2%.
Now moving to cash on page 14, we generated free cash flow of close to $1.3 billion through the end of June $300 million lower than 2020, mainly from lower net cash from operating activities, mostly due to cash tax deferrals last year as part of Covid measures, partly offset by lower capex.
We continue the Pos share buybacks in light of our proposal to combine with Acs.
Moving on to page 15, we are encouraged by the broad economic recovery and continued vaccine rollout, which reinforces our confidence for the balance of the year.
Therefore, we are reaffirming our financial outlook and are targeting double digit double digit adjusted diluted EPS growth for 2021.
We still expect to deliver free cash flow and the range of 3 to $3.3 billion.
Which will drive further improvement and free cash flow conversion.
I will now turn the call back to you JJ.
And.
Joining me on page 17.
The <unk> safer faster and these are stronger and to end the conversation and you need all of the.
And that was south of I'd say, the the deeper dive into the potential of the combination.
Thank you.
The benefit.
Great.
Yes.
The increase of array of an intermodal and compensation.
And that is low.
That makes this combination of truly of compelling vision of the future the.
Combination will create a new seamless single operator service, while preserving access to all of the existing gateways and.
We will be adding new route choice and enhancing the robust price competition, what are the gateway pricing transparency.
The combination will strengthen the north American supply chain and create the first true north South and North American Railroad.
The new direct connection will be created that allow for more reliable and less expensive of supply chain to Canada, and Mexico from the American of Heartland.
They are also a very important ESG benefit.
Together with Tcs, we will shift thousands and thousands of long haul of truckload off the road and onto the rail intermodal network and.
And at the same time create new jobs different kind of jobs better jobs.
The <unk> and <unk> combination represent a pro competitive solution, a new model for the future with unparalleled opportunities for a broad group of stakeholders and the all have responded with strong support.
And with every step of the process. We are committed to work with the STB throughout the rest concerned that may have that they may have and enable a successful combination with tcs.
We will go and page 18.
The combined <unk> and <unk> network present, numerous public cancerous and customer benefit.
We will add new single line route that will be more reliable and more cost effective for our customers.
And we'll combine network will enhance the ability to connect with other class 1 at the major gateway. This is of carload growth story with vibrant gateway.
By enhancing pricing visibility to all the existing gateways customers will add and hence rail competition, greater optionality of choices and new ability to shop for the best price Best service combination that's the model for a better future the.
<unk> combination will work in partnership with passenger of rail service and both of the United States and Canada.
We are confident that our plain vanilla avoiding truss meets the STB insulation from control and public interest requirements as Tcs will be fully independent during the avoiding stress period and continue to grow their business and invest capital and provide the same high quality level of service.
Together, CNN and Tcs will be able to recognize great synergies targeting $1 billion of EBITDA synergies primarily from growth. This is a merger of based on growth.
But theres a lot more but these are just some of the many benefits that we expect from our combination with <unk>, which has already received widespread support that I will talk about more of Nyx.
And page 19.
Our customers the communities and all of other stakeholders evidently share the same view as we have at the end of the comment period over 1700.50 letters of support were filed with the STB and including more than 1000, which requested the approval of the voting to us.
Notable support came from more than through the elected official the former STB Commissioner and Vice Chairman William flavor Junior and shareholders, such as Cascade and CDP Q.
Industry experts, including Dr. William Hickey, former director of the office of economy, and former Chief economist of the STB also recognize the competitive benefit of our combination including more competitive shipping option.
Now and summary of the path to conclusion.
The graph on page 20.
We are winning a few weeks of of decision from the STB and we made a solid filing on the merits of our submission.
And then the next key milestone is the <unk> special shareholders meeting, which will be held on August 19 sub.
Subject to approval from Tcs shareholders, the STB voting to us and the Mexican regulators as well as other customary closing condition CN will acquire tcs shares and place them into avoiding to us.
At that time QC of shareholders will be able to receive the consideration from CN.
We are targeting obtaining the approval and closing and 2 we're going to us and the second half of this year.
Our full force transaction does not require CN shareholders' approval and does not requires approval by the Canadian regulators.
And the second half of 2022, we expect to obtain come and control approval from the STB and other regulatory authorities.
Wes full of STB approval is received the volume to us will be terminated and CN will acquire avoiding right and operating control of Tcs.
So in conclusion.
Page 20.
Our combination is pro competitive and it will yield significant public benefits.
We are committed to increased customer of option.
We are keeping all of the existing gateway available.
We are enhancing rail to rail competition with other class 1 we.
We are committed to divest the owned the overlapping line between New Orleans, and Baton Rouge, creating a true and to win transactions.
And we will drive conversion from truck traffic derived from modal providing ESG benefit for the environment and local communities.
And the joint CN Tcs filing to the STB of July 6 we demonstrated our proposal proposed voting trust satisfies the board tests of.
The avoiding to us our volume to us allow tcs to maintain control doing the trust period and the approval of avoiding trust caused no arm and his and note and his and the public interest.
To conclude we are looking forward to a parts of ruling of the voting trust from the STB and we are fully committed to this highly strategic transaction that will create significant value for all of our stakeholders.
Operator, we will the now turning it into the question period Paul.
Thank you we will now begin the question and answer session.
<unk> previously mentioned, we asked the can you kindly limit yourself to 1 question.
The first question comes from the line of Ken <unk> from Bank of America.
Your line is now open.
Great good afternoon and JJ.
J J M I'm actually going to start on kind of operations and not on the M&A, but.
Just looking at your train might tick down a bit you talked about the congestion impacts and getting back to the fluidity, maybe just start with the operations and.
And Keith noted the west coast congestion driving some volume to other Canadian gateways can you talk about the fluidity around the Janie and.
And similarly, and the answer you kind of talk about labor and the ability to get labor to keep pace with the growth. Thanks for thank you cant answer the question and we love questions regarding the operations. So Rob you want to talk a bit about the <unk> and maybe what's happening and Western Canada, yes, absolutely starting with the fires there Ken.
We lost the bridge.
Between the Cam loops and.
Boston and bar on June 30.
And had it restored back July 13th and that's the segment of railroad that average is about 25 trains a day, so not moving anything or very little during that time has created a backlog. So we've opened it up but I would also say, it's a very active situation and British Columbia and with the fires. So there are.
Our starts and stops out there with with some 300 fires out there but.
The road to recovery is on and will probably.
A couple of weeks as I've made mention in my and my remarks before we're fully recovered and have this thing reset as far as the J D.
We're very fluid there's no issues, there and again the Jna why you bring it up is a true advantage that we have the bypasses the city of Chicago and allows us and advantage that no. Other railroad has it goes to Chicago. So it's stay it remains fluid and we are operating quite well down there.
Keith did you want to say anything and as far as of the divergence.
The we're working very closely with our supply chain partners in the British Columbia, and the ports there to take on any business that has been diverted north.
And Q1 and Q2, we've been very very fluid at our terminals not only and the west coast, but the east coast and the and the Gulf Coast. So we were ready to hand.
Handle the business coming to us and this very tragic.
Incident that occurred and BC will get back as Rob said, a couple of weeks and we'll be back.
And that fluid thanks.
Thanks for your question Ken Thank you Ken.
Thanks JJ.
Thanks, Ron.
Your next question comes from the line of Allison Landry from Credit Suisse. Your line is open.
So my question Hello.
I just wanted to ask about the incremental margins and the quarter.
And you did at under 30% I understand that the fuel and the incentive comp headwind back.
With the core pricing accelerating to something north of 4% 1 of them.
The expected the operating leverage too.
A little bit stronger, so, yes, assuming the strength and price persists.
How should we think about the incremental margins and the back half and do you expect operating profit to grow faster than the top line. Thank you. Yes. Good question Allison just lay and we'll take that he has the detail around the operating margin the incremental thank you Alison and the incremental margin.
And I think and the quarter the on a reported basis, the incremental incremental margins were 30%.
And to your point, if you adjust for FX and you adjust for fuel and then the incremental margins were 60% so quite good hopefully.
And the headwinds on FX and fuel can dissipate and little bit when you look at it today.
FX of around 78.
And it hovered.
Between 80% to 82% and 83 during the quarter. Our guidance is supported by <unk>. The FX for the full year and fuel as well it came down and were talking together here before the call.
Used to be last week around 70 to $73 of UTI and now it's down to about the 65. So again I think that our underlying performance is quite good.
And when you look at it when you adjust for these 2 uncontrollable factors and our EPS was up 30%. So we're quite the we're quite pleased.
Pleased with that performance.
We're very pleased with the performance and the.
C and B and a railroad that has quite a bit of revenue into 2 currency. If you look at your of Bloomberg.
Screen and look at the Canadian dollars and the second quarter, you will notice and it's sort of peak for May and June and right now it's back to 79, but it was as much as 83. So it has it has an impact on the short term. Thank.
Thank you Allison.
Thank you.
Your next question comes from the line of Cherilyn Radbourne.
From TD Securities. Your line is now open.
Thanks, very much good afternoon good afternoon.
As you know the market reacted with some concern and a couple of weeks the go to the <unk>.
Second quarter and I was just hoping to get your take on the tone and content of that order.
Yes, so Sean as I've been following this very closely Sean you want to talk about the STB and the executive order share Charlotte and the extra for the question I guess sort of the best.
Indication of the see how the chair of the STB and the day was issued responded the publicly in the press release and <unk>.
Obviously, we share at the end of the goals of the use of order about a fair open and competitive marketplace.
The cornerstone of the U S economy, but if you look at what the Chairman said.
And clearly indicate that the order encourage the STB to provide accessible remedies to shippers to focus vigorously on enforcing and accounting for a onetime performance standards and avoid unwarranted delays and passenger rail service and that's the focus of the the chairman and.
At the same press release, you recognizes that the under certain conditions consolidation does.
It would be beneficial and I think this is a good example of where our TNT Acs.
Combination with the enhanced competition and obviously the remedies that or the.
The the.
The possibilities are setting forth the comes to open gateways and really going at this looking at how do we ensure that customers have more choices and not less choices and the combination and we're very comfortable that the through the STB overall control application will clearly demonstrate the benefits of this transaction and we think that film will do so.
And a way that the rec.
The recognizes the comments made by chairman and Oberman.
On the exit of order, but also just making sure that we're putting forward.
We're not 1 of the force for railway has mentioned and as you got the order we're not in that and.
That group and I think we have an opportunity to show how the.
This end to end the combination will create more competition, but also really serve customers and the very strong fashion.
Through all 3 countries and really connect the continent. So we think that the.
The exit of order is has.
And some very strong comment that we can build off to show that this combination is the solution to what's being set out and the order itself.
Thank you from me.
Thank you Sharon.
Your next question comes from the line of David Vernon from Bernstein. Your line is now open.
Hi, David.
Hey, how are you and good afternoon, everyone.
So it gives a lot of J J you guys are holding guidance into what is it pretty steep steep headwind on currency a little bit of a headwind on fuel there's a little help there from the mark to market stuff could you just kind of tell us kind of in very simple terms, what's what's doing better than you had a volume coming into the year and then how do you think about sustaining that into the 'twenty, 1 and 2002 timeframe.
So with other than just land without some comment you will notice 1 of the phase where we reaffirmed our guidance that were using and approximately 80.
This is the 75 that we had originally and our guidance, but today. The dollar is running at 78 is fluctuating what quite of bit it seems to be following the price of crude which is also very volatile on the volume.
High single digit volume the month of July has affected here by the issue and British Columbia. The network is a bit of a stop and go as we have to be.
And be mindful of what we need to run safely around the communities, where we operate where there's some fires and we also have a bit of a back of the sort of Vancouver and the pricing I think pricing is the strong story.
And then before the fire and DC I think the operating matrix as well.
Rob described and in Q2, there were very solid and I'm sure of sometime in August we will pull back on a piece of that too.
And you want to add something.
And maybe J J just a couple of points. So we are and we are very comfortable with reaffirming our guidance of David but theres a lot of things and a lot of moving parts going out there I mean, when you look at the forest fires for sure and Rob touched upon them, but we think we're going to be able to recover.
This and the next few weeks as you mentioned there is also now the Delta variant and Covid and the U S. So I don't think we're out of the woods, yet we'd like to I hope it is.
And then obviously, the FX and fuel and Thats moved like of Yoyo. So.
At the end of the day things are moving things are moving in different directions, we're quite confident about the broad economic recovery when you look at different sectors.
And consumer consumption I think it's quite strong.
But theres things that are moving out there so.
That's what I would add Jay Jay that.
We're comfortable with the with the guidance, but theres lots of moving parts out there.
Having said all of that we have we are reaffirming today our guidance for 2021.
Thanks, guys. Thank you David.
Your next question comes from the line of Scott Group.
Of Wolfe Research your line is now open.
And let Scott.
Yes, hi, Thank you so I understand some of the quarterly volatility with the operating ratio, but it does seem like we're on track for the fifth straight year of the operating ratio getting worse and I know you've been more focused on operating income but.
Even if we look at second quarter. It is down from 4 years ago and operating income so.
Yes, JJ, Mike My question is.
What do you feel like you need to do differently to sort of get this thing going and the right direction again.
So we are and the guiding on the operating ratio as you mentioned, we're focused on the operating income.
Focus on growing EPS and focus on the free cash flow growth.
And so focus on the balanced scorecard with safety and employee engagement and customer sentiment, which is key and the things like our merger proceedings as well as the.
Being good custodians of environment by reducing our carbon footprint. The EPS at CN has an impact.
On the exchange this quarter more than another quarter because of the fluctuation all of us having an impact related to the price of diesel so I think where all of the same both so I think at CN.
The profitable growth with good pricing running of good railroad and.
Taking to account that we have the.
Things that last here of the bonus at CN was less this year and the second quarter. We are actually we finished the bonus you got all of these things.
But definitely no we're not aiming we're not running the company for the or what any of the company for EPS growth operating income of free cash flow as well as balanced scorecard of has taken into account safety the environment and.
The engagement and the customers of sentiment.
And that's really where we're at and the key thing right. Now is this long term very long term strategic.
The proposals that we have out there in front of the SCB and the front of our shareholders to come back and with Tcs and really exploit what the future of North America would be in terms of trade at the time, where the economy is growing at the time also with tension with China, and increasing port business will always be solid for CN, but.
They will be probably a very nice tailwind at least its our view between.
The tweak the true use CMC of country and.
And I think creating a network that has good costs.
Competitive cost what others, but we're not aiming for the lowest cost we're aiming for this combined balanced scorecard of it. We're just talking about earlier, starting with EPS operating income free cash flow, but also of being good custodians of the environment.
Customer sentiment, we need to we need to railroad for customers and North America, I think thats basically the essence I'm getting from the executive order from the president as well as the not so subtle message from the STB and.
And and employees engagement at a time, where the job market is tight and you need to be and attractive and Florida.
So I think it's we're putting all of that in and this is part of the way you Youll see what the relative weight of our operating operating ratio of fall in.
And can you just talk to if the voting trust doesn't go your way and a couple of weeks what the what the plan is with respect to the merger.
Yes, Sean Sean can address that.
And we filed the.
Our final comments on July 6 we remain confident that.
We're going to meet the public interest test we have met the book addressed when it comes to on the off of control of <unk> during the blow and trust period as well as the financial integrity at the end results. So.
Very confident that we will in the coming weeks get a positive syndrome. The STB same board and trust that was approved.
And the CP.
Applications. So at this stage, we're really focused on getting the voting trust and proceeding with the case the of shareholder vote on July 19th and getting our Mexican approvals in the.
And hopefully October and November and closing the building trust with the case the of shoulders shareholders of November early December.
And I know Scott you read all of these materials.
We're talking huge filing, but our filing is very compelling as it comes to the voting to us and the things that we are proposing for the marketplace and I think you and you will equally be impressed by the time of Robin and his team filed the.
Operating plan of the proposed combination and how we're going to address.
<unk> of the shippers and the STB, so where we are.
Confident and we're confident because we do the homework.
Thank you for your questions. Thank you.
Your next question comes from the line of Brian <unk> from Jpmorgan. Your line is now open.
Hello, Brian.
Hey, J J, thanks for taking the question.
Wanted to ask about U S truckload conversion opportunities, obviously, the biggest big part of the industry.
Gross debt going forward, but has also been of challenge so.
Keith can you just walk us through the CNS and experienced so far and the U S with making these conversions happen and making them stick where do you think service levels are relative to where you think they need to be going forward and what sort of investments do you think can you make on the network it's really.
And to really get that growth and to see it convert and they stay with the C and thank.
Thank you.
Thank you. Thank you, Brian So maybe Keith can start talking about the commercial effort, but I think Rob probably is can also probably you a good sense of what we broadly speaking that we will put together with Tcs and Tim of.
Comparing.
Competitive products to compete with the long haul truck. So it will start with key commercially.
Sure and.
And the Brian if you talk to any of our customers about the service that they get in the states that I think when you serve and they talk about the great. The great velocity of the trains and the on time performance. So.
I would say that our.
Our unique.
Our model of having working with a lot of Canadian wholesale customers IMC customers, so non asset asset light.
Customers as well as our own retail product allows us to dip into a lot of opportunities with customers and a lot of different sales channels and.
And we've been very very successful for that we also are able to.
To have a lot of.
Multiple touch points with the beneficial cargo owner, we start with the import load and we may touch that we may touch that low the second time when it moves from.
The domestic DC onto stores or onto another DC. So we've been very successful and we will continue to be successful and the case, yes.
Combination allows us to take that show on the road and be even more successful and the future.
Rob I would just add when you look at the combination of the 2 railroads and the opportunities that are there, it's well documented and what we've talked about there, but very simply we're a railroad that goes to the upper Midwest. We go to places like Detroit, and Toronto, and Southern Ontario, Casey's goes to Texas, and Mexico, and the opportunity to convert some of that.
The single line service is a huge opportunity for us whether it's coming cross border of Texas and go all the way with with 1 railroad I think is a real advantage to shippers and that's where we see a significant opportunity. We also see opportunities and single line service from places like Detroit, Kansas City.
Of the only 1 railroad does now and increasing those options for shippers. So we're.
We're excited about the truck to rail conversion that.
Presented itself with the merger.
Thanks for the question.
Thanks for the question more options and more competition.
Thank you Brian.
Your next question comes from the line of Jan Wald Poirier from Desjardins. Your line is now open.
Yes, good afternoon, gentlemen, just looking at the intermodal volume recovery could you talk a bit about the timing related to and then sort of replenishment efforts and whether it could last longer than expected given the overall low level of inventory and potential changes related to the <unk>.
Just in time model.
Yes, so I'll stop refit and but Keith who is much closer so definitely and eventually our lower retailers and people we need the product coming from other parts of the world or the supply chain of disrupted.
Things are not working out so the <unk>.
Try and get the product early they try to replenish the warehouse and.
And it is a significant concern and I think it's going to last maybe all of the way to the beginning of next year, but.
Keith do you want to add some color and your dialogue with the those web product sure I think we mentioned this about 4 years ago that the traditional peak of everything being kind of in the fall.
Has really changed and.
That's changed as you point out and then what was the how folks are managing their inventories and when we talk to our customers that are bringing products from overseas into North America.
They see this continuing on well into 2022.
And.
And I think that.
I think we won't see this whole peak thing anymore. I think this is going to be kind of the same way. The same volumes all the time kind of kind of structured making sure that the supply chain sort of filled.
Unbelievable, what our folks and the other railroads to have been able to do through this COVID-19 period, keeping products on the shelves and keeping us all.
Keeping us all full of the things that we need to run our lives.
Thanks for your question.
Thanks.
Thank you.
Your next question comes from the line of please wetherbee from Citi. Your line is now open.
<unk>.
Hey, good afternoon guys.
Thanks for taking the question I wanted to come back to the executive order for a minute and then maybe more broadly.
And your position on maybe the potential for negotiation from a regulatory perspective with the STB and voting trust. The accomplished I guess I think there's been some concern that maybe there would be of willingness to accept something from a regulatory perspective, and maybe other players and the industry wouldn't be able and wouldn't be willing to accept.
For instance, something like reciprocal switching and the U S. I guess I wanted to get maybe sort of sure.
Sort of your.
Position on whether there would be some willingness to kind of negotiate some of those regulatory points and we did brought up.
And the executive order that might come up as the.
It goes through the voting trust.
Yes, and maybe I can start so the just maybe a reminder, everything that we've filed and all of the commitment that we made and some of how we wanted to do this combination actually was done formulated before the executive order came out so from that point of view, we share the broad golar expressed as expressed by executive order.
Because of the CN Tcs the merger is actually you're talking about we file of the while the new rule to enhanced computation, we committed to the <unk>.
And 2 and by divesting of the New Orleans Baton Rouge.
You are talking seriously and.
Maintenance and commitment and writing that we are in favor of binding arbitration to resolve dispute that.
And that we are there.
We will remain open that the bottleneck and we will not create bottleneck when we become single line service post combination that we will provide pricing visibility piece of customers can better shop best price best service combination by providing rule of and pricing. So all of these things are really in all of you.
The things, which maybe we're not we're not saying that 1 needs to the other but the executive order and talk about enhancing competition and you also talked about Amtrak and we have also and I'll talk specifically and Shawn can comment so a lot of the things that the is the <unk>.
At least if thats been offered to <unk>.
The executive order and there was 72 industries. We were just 1 of them I mean, we're on track as regarding reciprocal switching that's not of CN and <unk> issue I mean, thats really is in front of the STB. It involves all 7 of railroad and it's not because to railroad merged that you actually can continue to position the risk vehicles switching has nothing to do.
Do with or without a merger it has to do with all of the STB Walter the landscape of competition as it relates of specific point and the new used to come and we will see the actually the provider.
<unk> later this year.
And what kind of about Amtrak and will clearly again referenced and that.
And the executive order, but in the context of the.
Application to the STB under the new rules of the current rules require that we address passenger service.
Concerns and the obligation or and ensure that we don't do anything that will negatively impact passenger service.
And have a.
<unk>.
Our long track history of having via run us and Canada, having abstract munis and the U S. We have several commuter services. So we come into this with a with an open mind of how we can better partner with the passenger service as well as the Amtrak and the U S and we look forward in the context of the rest of the application. They are a good example, where the executive board of referred to it but we knew from the <unk>.
That would be an area of where we'd have conversations with our passenger service partners going forward.
And maybe Rob you could expand also and Amtrak and things.
We're focusing on the Amtrak we're focusing on the passenger service we understand it is 1 of our.
A few wish of social license to run and the U S.
Rob, Yes, so we work with Amtrak on a daily basis.
Amtrak runs between Chicago, New Orleans, as Interstate service, and Illinois, and we run a couple of trains east out of Chicago and our latest report card from Amtrak were rated as 1 of the top railroads in terms of service. So.
It's a commitment we have the Amtrak and we continue to work with them and as Sean and JJ talked about and certainly work through the Baton Rouge, New Orleans wishes and desires the lab as well.
Thanks for the question.
The cruising.
Your next question comes from the line of Jon Chapelle from Evercore ISI. Your line is now open.
Thank you good afternoon.
And maybe speak a little bit about the speed restrictions that are in place now through October 31, how the.
And that impacts your ability to kind of dig out of the backlog.
And so accumulated and Vancouver over the last couple of weeks and also any costs that may be associated with that whether it's fuel efficiency or labor and equipment.
As you kind of work.
The loss of 14 days.
Yes, absolutely so you're referring to for the rest of the that don't know ministerial order that went into effect at midnight July 11th following the fires and BC.
For all railroads and Canada.
So part of that is related to not to get too far into the weeds as related to areas that have.
The labeled as extreme fire danger, and where the temperature is above 33 degrees Celsius. So when those conditions are met we have to reduce speed to 25. So it is somewhat.
Tien tsin on where those conditions.
And.
Or are on a daily basis weekly basis. So if it's for a wide swath of of Canada and that applies to all of Canada will be impactful.
Right now we're able to work through it but just as we saw last year with the Ministry of order in winter, we're able to work with transport, Canada, along with the Canadian Pacific to make some modifications of that that actually allows us to operate and do the things that we need to do so we have been working with transport, Canada and we'll continue to.
The work with them.
But right now with some of the conditions out there and the backlog, we're not seeing a huge impact right now, but if we see big big spikes and weather along with that extreme fire danger. It will have an impact.
Okay. So it will be clear the <unk>.
<unk> of the high single digit RPM growth assumes that youre not going to have any much impact whatsoever from these restrictions kind of return to normalcy starting today.
Yeah, We're we're working with transport, Canada, and we fully expect to have some modifications on that overtime.
Alright, thanks, a lot of them.
Thank you.
Thank you John.
Your next question comes from the line David Xu from Barclays. Your line is now open.
Yes.
Hey, Rob just a question for you and it looks like based on the guide Youre going to need to have 2 big quarters in terms of volume acceleration coming up I'm. Just wondering what the plan is for locomotives to built the support that volume increase whether youre, taking the amount of kind of.
The storage or external.
That's kind of of potentially affect the fuel efficiency gains you made this quarter. Thanks.
Thanks for the question and.
The answer short answers were well prepared for it we have about 225 and storage as we sit today. So we were able to adjust centers of the quarter went on and we're preparing here for the third and fourth quarter. As we also mentioned last quarter, we took where.
We're in the process of taking on 75, new locomotives are newer locomotives and 25 of those we've received the other 50, and we will take and the second half of this year. So we feel like we're well positioned to handle the growth here and the second half. Thanks for the question.
And maybe also I mean, we have take or a question came up as to whether or not railroads or prepare for the fall peak and the U S and the winter coming up to that and as we file the.
To the.
And the regulators and the U S. We have the crews we have the locomotive whether the rolling stock. We can go chase to meet the needs of economy. This fall and the next winter.
Thank you.
Alright next question comes from the line Tom why the rights from UBS. Your line is now open.
Hello, Tom.
Yes, Hi, Jay Jay.
So I know you have talked about this a bit but and just wanted to ask you a little bit more on it.
It does seem like the executive order. It shows a lot of sensitivity from the administration are or I don't know if since to drive growth, but focus maybe on passenger rail and there was that specific Amtrak filing against the voting trust is there.
Is there time to negotiate something or is there and the future if that was an issue for STB.
There'd be an opportunity to.
Come up with something and the passenger side and the future because it seems like the potential point.
Point of focus where.
And your current rating was good but the last couple of years the rating with the Amtrak wasn't.
Particularly good so I just wonder if there is the way I know kind of the.
Time to file something new on voting trust is over but do you think there's any way to finish that issue if it.
Ends up being a focus for STB.
As you said your words not mine of our current rating is good and we are.
Our improving and as.
There is room for further improvement and we're focusing on that.
Passenger service, including Amtrak and Thats, just Amtrak to Thanksgiving Amtrak is part of the stakeholders that 1 needs to recognize and work with and the.
Addressing the so.
And with solutions during the merger proceeding just like shape of our association communities Labor and all of these stakeholders over time.
We will continue to have dialogue with all of the stakeholders include the passenger service and Amtrak, but I think already we don't we talked about what we could do as it relates specifically to the New Orleans to Baton Rouge corridor Amtrak was to have the funding eventually to run the <unk>.
Date of service and that corridor, you want and maybe talk about that the Sean I think no I wouldn't focus too much on the voting trust comments, obviously, it was and the context of.
And the opportunity to weigh into the voting Trust I think we take a step back and understand that.
Amtrak and I'll have a mandate going forward and it will be up to the host railways and this case CN to work with the Amtrak both to address their ongoing.
Concerns they might have with the current service. So I think Rob of the address it and the very proactive fashion and saying we work of them every day and again, we will address the the impact of the <unk>.
And <unk> CN and Tacs combination has it applies to passenger service in the STD application and very confident that when we do so we'll raise it and the way that we will be talking to Amtrak and to other parts of our services in the U S and make sure understand what we're talking about and I won't go as far as saying they will be supportive of the overall transaction, but the commitments.
We'll make will be.
Part of the filing and ultimately be part of the conditions being and post. So it's important that we have that dialog and we understand what the exactly Amtrak is looking for and then what is available when it comes to funding both federally or state to achieve that so a good example would be baton Rouge to.
<unk>, the New Orleans affect the where you need to have the required funding to put that in place. So it's great to put 1 of the service in place, but then you have to make sure that.
Both the customers on the line the state and local governments are supportive as well of the federal government.
Yeah, and again as we said earlier broadly speaking, we do share of the goal of expressed by executive order and a lot of the things, which are pro competitive and very positive that's the C.
And <unk>, we're actually of proposed.
And writing as part of our work since April.
And I think the in many case, we're very much in line to the spirit of what was being asked in terms of creating competition, creating option.
And enabling passenger service when the passenger service of the.
<unk> available.
Yes.
But I guess just to be clear in terms of coming up with an agreement with them. It's too late to do that to have any influence on devoting trust you really need to get that decision first and then then you could negotiate with them afterwards, if you get the decision.
Yes, it's important to remember and the context of the voting trustees her comments on our petition. So it's not really an area, where you would enter into a settlement agreement and the context of the overall application of what you would do so in this case it was.
Open for comments that was 1 of the day 1 of the conditions of the end of the current rules that was normal people make comments and we responded to all of those comments and our response on July 6 including the Amtrak response, but obviously in the context of the overall control application and that's where you get into settlement agreements with various parties. So it was not.
Really in the context of the voting trust is not really in the area where that gives rise.
Type of agreement is done and the overall control applications.
Right. Okay. Thank you for the time.
Thank you.
Your next question comes from the line of Jason Seidl from Cowen. Your line is now open.
Thank you operator, good afternoon gentlemen.
Quick question I wanted to go back to the pricing side. You noted that once again, you were able to get even higher pricing and the previous quarter.
Casey's noted rising rail cost inflation into the future and the need to probably get even.
Further price increases on there and do you think youre getting enough for what Youre seeing and the rail cost inflation from the back half of the year do you think there is and the Italy and year end to get even to garner more than when you have this quarter.
So there is rail inflation eventually you will see it and the all inclusive of rail index of the AAR, because theres a bit of a lag and that index, but we all saw it coming and the already and you saw the same store price for Q1 and the trend of the same store price and Q2 I'm not sure I think we are getting what we need and some of the rail.
The inflation that we're seeing right now because we are conscious that they might be it will probably be a lag and these index and as you may know, we have very little business that work with index.
Talk about the pricing.
James Yes.
And at the end of the day.
Value.
Of course.
Very good.
And so.
And the marketplace.
Supported.
By our customers. So our expectation is we will be able to continue to price well ahead of railway cost inflation moving forward and I think our performance of the last 2 quarters is indicative of what we should expect to see moving forward here pricing ahead of railway cost inflation.
That's good color I appreciate the time that was my 1 thanks.
Thank you Jason.
Your next question comes from the line of <unk> Gupta from Scotiabank. Your line is now open.
Thanks, operator, good afternoon, everyone. So just a question on Btu wildfire.
And it kind of goes back to the earlier question, but I want to kind of ask you differently.
When you are running slower cleans and there is cost of running those lower trains, who really bears the cost per that at CN or do you share that cost for the shippers and Kenny somewhat kind of quantified the impact on Q3, what are you seeing in July.
And in terms of operations, our EPS and what kind of impact do you expect thanks.
We <unk>.
Pricing is not related to speed of train.
I don't know of.
Yes, So let me take a stab of that so the.
The.
And the bridge, we just got back was less than a week ago. So it's a bit early to really understand the full impacts of it. So much of it is the big impact will be dependent on the weather and the weather fluctuates right now we haven't seen a lot of 33 plus degrees Celsius weather out there that would really trigger of that 25%.
We are running slower and areas of backlog. So we don't have it all calculated in terms of the impact it will have impact.
But as soon as we have some more clearing in terms of understanding this and the other thing I would just say is that it still is very active out there so speed restriction or not still very active and British Columbia with fires and we've seen times at night.
The fire spark up and the mountains and come down towards our tracks and we have to stop for a period of time, so very fluid situation, but as soon as we have some greater clarity on it.
Certainly share of that.
I would add the corner in terms of impact of Q3, we don't offer the quarter.
Quarterly guidance, we offer of yearly guidance and we're very confident again as I said in my remarks, and JJ alluded to that we are comfortable to reaffirm our yearly guidance of the targeting double digit EPS growth for 2021.
Thank you Corinna.
Thank you.
Your next question comes from the line of Steve Hansen from Raymond James Your line is now.
Good afternoon, everyone. Just a quick 1 on the grain and it looks if I may.
It sounds like the old crop volumes are getting a little more scarce here because of it.
Of course got the drought like conditions weighing on the current yield prospects out there and I think we're also moving up against the tough comp with respect to the harvest timing of this fall sort of just maybe james or someone perhaps a little bit of commentary around lipid range of the back half of the year.
Yes, James and we had what 14 months record months in the role but the.
It's very dry right now and again.
Yes, 14 record months of neuro as you know Stephen and <unk>.
For us that means we're going to finish the crop year end of July at an all time record for <unk> and an all time record for Canadian farmers and their ability to get there and their product to market. So we're very proud of that.
But this new supply chain resiliency that we've created is going to be of real benefit to farmers and Q4 <unk>.
Regardless of the size of the crop for next crop year 2021, and 2022, we will have a strong Q4 of farmers always want to move the crop as soon as possible. When it comes off so Q4 is going to be strong for us I would say, it's still early days, yes, it's been hot it's been dry theres some difficult growing conditions out there I would say that the conditions are most.
Difficult and the Dakotas and southern Prairie's, So we're a little bit insulated from that but all in it's not going to be the.
The record bumper crops for sure that we have seen for the last year last couple of years, but our job is to make sure that we have the people of the assets of the power and the resources required to move the grain crop for our Canadian customers and we're going and we're going to be there to help make sure that happens in Q4 of this year.
As we see of very very strong demand to move and early crop as quickly as possible the market.
And I think James you continue to invest into a long term of that business true.
Some of our Hopper cars and we have some customers also building the elevators on the CN network.
Yes, it's been very successful this grain supply chain.
Seen over the last year and a half of it of 50% increase and export capabilities over the port of Vancouver, very robust ability to handle more grain over the port of Prince Rupert lots of investment by our customers and inland elevators and high throughput elevators of loop tracks and of course on our side of very significant investment in new Hopper cars.
New high capacity Hopper cars that allow us to ship more product with fewer resources just put it in context based on the new Hopper cars that we bought we can ship and.
And the equivalent of 4 extra trains a week of grain products to the coast without adding any additional resources. So it's very good for <unk> and very good for our customers and again Q4 is going to be solid look forward to it.
So we will compete hard the thank you Steve.
Actually the color.
Your next question comes from the line of Jeff Kauffman from vertical research. Your line is now open.
Thank you very much and thank you for the explanation of where you stand in terms of the transactions.
I just wanted to ask do you have 2 outstanding transactions right now that the rail pursuing.
Smaller deals line sales things like that can you give us an update on where you stand with the regulators on those.
Yes, Sean is on top of those 2.
Both of our pending 1 is.
The us directly and 1 is the purchaser.
Of that case pending at the STB and obviously the.
We're we're in the case of the machine line, we're in conversations with our partner also on the STB to see how we can get this deal approval ultimately, but and the other 1 has just been filed recently so those.
And those of the case there are pending the STB is very busy they have quite a few.
And the cases pending a lot and theyre down there on.
And their plate, but we are pursuing both of them and.
Hopefully, we'll have some outcomes of the coming weeks.
Okay and that's my 1 thank you very much thank you Jeff.
Your next question comes from the line of Justin Long from Stephens. Your line is now open.
And of the Justin Hi.
Hi, and good afternoon.
And wanted to ask a question about technology as you think about this proposed merger with kcl.
Does it change either the net magnitude or the pace of your plan technology investments and if this is something that could accelerate your technology roadmap could you speak to some of the incremental opportunities the merger could create.
I think Rob tend the Rob is actually using.
Quite a bit of that already 1 of the CN network, Rob you want to expand on the power of technology and the bigger network and certainly we do see that as part of the synergies comparing both of our technologies, but certainly from the <unk> perspective, and getting some of our.
A tip cars running across the CN CN Casey's network combined we've certainly seen.
Big results in terms of the type cars running across the sea and network.
In terms of making our railroad safer finding defects before they become urgent defects and and really reducing some of the service interruptions that we have out there so sharing that kind of technology Casey's has some.
Broad plans as well in terms of portals and that and just combining what we have in place with our portal technology with theirs and we hope we think and can make a.
A safer stronger network. So we do see that as an opportunity here.
And for those of you have never seen and native car. There is a picture of 1 of them.
And the preceding slide from Rob section and it's so boxcars and beige and so safety inspection and in that example, it's running on the intermodal trains. So as the train is moving freight and generating revenue the.
The boxcar of the safety of cars also of inspecting the network.
Making sure that we're running safety.
Thank you for your question Justin.
Thank you.
Yes.
This concludes the question and answer session I would like to turn the call over back to Mr. J J <unk>.
Well. Thank you. Thank you for all of you to joining US today, we wanted to cover of both our quality of results and giving you an update on the combination with Tcs I know most of you are quite up to date with all of the detail of where we're at.
Some of our combination but.
And we should know and a couple of weeks sometime in the late.
And they July early August when the STB has the time to reflect on all of the things that we.
We have filed and the other people that file too, but we're very confident that we have a very solid case, we are meeting the test of the voting trust and.
We are creating definitely and new competition and new public benefit. So we're looking with the the the.
And the answer this summer with optimism and.
And then.
We'll talk after the decision so.
So thank you for joining us today.
The conference call has now and thank you for your participation you may now disconnect your lines at this time.
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