Q2 2021 Canadian National Railway Co Earnings Call
Thank you Paul and thank you and kneecap. So good afternoon, everyone and today, we have 2 agenda to iPhone for this.
But this call first we want to highlight our quality result, and also we want to give you an update on our Tcs combination and therefore, the call might be a bit longer than usual today.
But first I want to.
That goes out to the community and first nation of Lithia, and NBC and the payable fires impacting British Columbia. This summer we.
We are committed to helping our neighbors and crisis and several of <unk> employees was light has been impacted by the national disaster.
Let's go to the Q2 highlights on page 6.
I want to start by saying how proud I am of our dedicated <unk> performance. This year, the hard work and exceptional effort of our people and continue to deliver on the business.
Our results reflect broad based strength and forward momentum across all of our business and also the and doing power, our vast and diversified and network.
For 3 quarters and a role we have delivered year over year growth and our EPS and.
And the last quarter, our adjusted diluted EPS was $1.49, which is up 16% versus last year, but it's also up 25% at constant currency.
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 are diligently working our combination with Tcs and we also stayed focused on our yield management and network operation and execution.
Revenue per carload grew 7% and same store pricing was up well over 4% and the second quarter.
Safety performance and employee engagement index customer sentiment index have all sequentially and improve.
We are focused and our customers on our safety and on the combination with case, yes, 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 Rob Alright. Thank you J J and as you mentioned, our thoughts are with the communities and.
<unk> by the wildfires and British Columbia with nearly 300 active fire is still burning and more specifically with the people of Lytton and as they begin the road to recovery from the devastating fires.
With those fires, we did lose and 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 and we will be a few weeks more before we are fully recovered from the backlog of traffic of the outage.
Turning to 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 has saved approximately $20 million from our fuel efficiency initiatives alone and avoided nearly 100000 tons of cotwo emissions into the atmosphere.
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 a 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.
Commodity is ready to pull that phrase that I will turn it over to James.
Thank you Rob during Q2, and we saw a 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.
And 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.
And despite 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.
And strong U S exports.
Potash was another bright spot in Q2 on the strength of North American potash market share gains and 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 a different story.
After 14 consecutive months of record performance grain was an outlier and.
And we lost a 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 a result of our aggressive push towards system fleet renewal.
We will benefit from continued strong demand for lumber and <unk> and escalating demand for frac sand and seasonally adjusted drilling activity continues to improve.
And could and Q2, we saw continued volume ramp up through the Watson Island propane export facility.
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 that's been accelerating each quarter since mid last year.
We expect this pace to continue through 2021 as customers look to secure valuable capacity.
As JJ stated Q2 same store price was again well over 4%.
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 and <unk>.
Tumor based economy continued to generate strong volumes for CN combined containers moving through the West coast ports, and Prince Rupert and Vancouver grew 18% versus 2020 and grew 5% over Q2.2019 to set an all time quarterly record the CN business through the ports of Halifax and St. John.
New York, New Jersey, Philadelphia, New Orleans, and mobile combined also to set an all time Q2 record for collecting our proven track record and industry, leading ability to establish and convert on new products <unk> is truly a leader and 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.
Items were up 14% over Q2 last year, a record Q2 for our intermodal business.
Our automotive 2021, Q2 results show, a 98% increase versus Q2.2020 due to the rebound in demand and the reopening of auto manufacturing facilities.
<unk> is well positioned for the micro chip supply chain recovery as we serve both Canadian ports and several large volume high demand model 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.
<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.
With the ongoing strong job creation and both the United States and Canada. We are focused on the optimized use of our capacity and the value creation of our customer focused services and our unique 3 coast network and will now pass it on the <unk> line for the financial perspective.
And keep 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.
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.
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 or.
If we adjust for these 2 items, our adjusted EPS would have been up 30%, so a solid underlying performance.
Other income was up by around $50 million versus last year due to day 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 a 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.
If you will expense was up 86% driven by a 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 activity, mostly due to cash tax deferrals last year as part of Covid measures, partly offset by lower capex.
We continue to pause 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.
Thank you.
And.
Joining me on page 17.
And safer faster either.
And to win.
Compensation and we need all of that.
That will stop that day that the deeper dive into the potential of the combination.
We're excited.
And it will grade.
Right.
And we.
And the net.
Compensation and benefits.
That makes this combination and truly a compelling vision of the future.
The combination will create a new seamless single operator service, while preserving access to all the existing gateways.
We'll be adding new route choice and enhancing the robust price competition, what are gateway pricing transparency.
The combination will strengthen the north American supply chain and create the first true north South and North American Railroad.
New direct connection will be created that allow for more reliable and less expensive and supply chain for Canada, and Mexico from and the American Heartland.
They are also a very important ESG benefit.
So again with Tcs, we will shift thousands and thousands of long haul and truckload off the road and onto the rail intermodal network 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 they all have responded with strong support.
And with every step of the process. We are committed to work with the STB to address concern 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 presents numerous public interest and customer benefit.
We will add new single line route.
And that will be more reliable and more cost effective for our customers.
Our combined network will enhance the ability to connect with other class 1 at major Gateway. This is a carload growth story with vibrant gateway.
By enhancing pricing visibility to all existing gateways customers will have enhanced rail competition, greater optionality of choices and new ability to shop with a best price Best service combination that's the model for a better future.
<unk> combination will work in partnership with passenger rail service and both United States and Canada.
We are confident that our plain vanilla avoiding truss meets the STB insulation from control and public interest requirement as Tcs will be fully independent during devoted and stress period and continue to grow their business and invest capital and provide the same high quality level of service.
Together, <unk> and <unk> will be able to recognize great synergies targeting $1 billion of EBITDA synergies primarily from growth. This is a merger 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 next.
And page 19.
Our customers the communities and all of other stakeholders evident they share the same view as we have at the end of day common period over 17, and 150 letters of support were filed with the STB and including more than 1000, which requested the approval of the volume to us.
Notable support came from more than 30 elected official the former STB Commissioner and Vice Chairman, William flavor, and junior and shareholders, such as Cascade and CDP Q.
Industry experts, including Dr. William and any key former director of the office of economy, and farmer Chief economist of the STB also recognize a competitive benefit of our combination and 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 a decision from the STB and we made a solid filing on the merit of our submission.
And then the next key milestone is a <unk> special shareholders meeting, which will be held on August 19 sub.
Subject to approval from <unk> shareholders.
SPD rewarding 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, <unk> shareholders will be able to receive their consideration from CN.
We are targeting obtaining these approval and closing and 2 according to us and the second half of this year.
Our full force transaction does not require and shareholders' approval and does not require approval by the Canadian regulators.
And the second half of 2020, 2 we expect to obtain come and control approval from the STB and other regulatory authorities.
Westfield STB approval is received the.
Volume to us will be terminated and CN will acquire avoiding rate 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 option.
We are keeping all of the existing gateway available.
We are enhancing rail true competition with other class 1 we.
We are committed to divest beyond 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 finding to the STB on July 6 we demonstrated our proposal proposed voting trust satisfies the board tests.
Adding to our volume to us and our Tcs to maintain control during the trust period and the approval of avoiding to ask caused no arm and us and know and is and the public interest to <unk>.
We are looking forward to a positive ruling of the volume trust from the STB and we are fully committed to this highly strategic transaction that will create significant value for all of our stakeholders swap.
So operator, we will now turn it into the collection period Paul.
Thank you we will now begin the question and answer session.
As previously mentioned, we ask that you call day, making yourself to 1 question.
The first question comes from the line of Kimco share from Bank of America.
Right.
Great good afternoon, and a J.
Hey, Jim I'm actually going to start on kind of operations and not on the M&A, but.
Just looking at your train line ticked down a bit you talked about the congestion impacts and getting back to fluidity and maybe just start with the operations and.
And Keith noted the west coast congestion and driving some volume to other Canadian Gateway can you talk about the fluidity around the Jamie and.
And similarly, and the answer just kind of talk about labor and ability to get labor to.
Keep keep pace with the growth. Thanks for thank you can't answer that question and without question regarding the operations. So Rob you want to talk a bit about <unk> and <unk>.
Maybe what's happening and Western Canada, yes, absolutely starting with the fires there Ken.
And we lost a bridge.
And tween Kamloops and <unk>.
Boston and bar on June 30, and.
And had it restored back July 13th and that's.
And then 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 situations and British Columbia and with the fires and so there are starts and stops out there with with some 3.
<unk> hundred buyers 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 Janie.
We're very fluid and there's no issues, there and again EJ and any way you bring it up is a true advantage that we have that bypasses the city of Chicago and allows us and advantage that no. Other railroad has it goes to Chicago. So it's day it remains fluid and we are operating quite well down there.
Keith did you want to say anything and as far as and conversions.
We're working very closely with our supply chain partners in British Columbia, and the ports there to take on any businesses 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.
Handle the business coming to us and this very tragic.
Incident that occurred and PC 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.
Okay.
Your next question comes from the line of Allison Landry from Credit Suisse. Your line is now open.
So my question Hello.
I just wanted to ask about the incremental margins and the quarter.
And that new day under 30% and I understand that that's fuel and incentive comp headwind back.
Yes, corn pricing accelerating to something north of what percentage.
And the operating leverage to be.
And a little bit further so yes.
The strength and price per cent.
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 saying, we'll take that he has the detail around the operating margin and the incremental thank you Alison and the incremental margin you're right I think and the quarter on a reported basis.
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.
Headwinds on FX and fuel can dissipate a little bit when you look at it today.
FX is around 78.
And at Harvard.
And between 80% to 82% and 83 during the quarter. Our guidance is supported by an 80 to FX for the full year and fuel as well. It came down we were talking together here before the call.
Used to be last week around 70 to $73, a and UTI and.
And now it's down to about 65, so again I think that there are 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.
Pleased with that performance.
We're very pleased with the performance and.
And <unk> been a railroad that has quite a bit of revenue into 2 currency. If you look at your Bloomberg.
Screen and look at the Canadian dollars and the second quarter, you will notice that at 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 and 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.
And concerning a couple of weeks and go to them and the executive order and I was just hoping to get your take on net ton and content.
Sure.
Yes, So Sean has always been following this very closely Sean you want to talk about the SPV and <unk>.
Active order share Cheryl and thanks for the question and I guess the best.
Indications are that see how the chair of the STB on a day was issued responded that publicly and the press release and then.
Obviously, we share at sea and the goals of these big order about a fair open and competitive marketplace.
The cornerstone of the U S economy, but if you look at what the Chairman said.
Clearly indicate that the order and tours dish TV 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 chairman and Anne and.
And that same press release, he recognizes that under certain conditions consolidations.
But it can be beneficial and I think this is a good example, where our Ccs combination.
Combination with enhanced competition and obviously the remedies that.
The possibilities are setting forth and it comes true 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 true. The STB overall control application will clearly demonstrate the benefits of this transaction and we think.
And we'll do so and a way that the rec.
And 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 you've got a order, we're not net and <unk>.
That group and I think we have an opportunity to show how.
This end to end the combination will create more competition, but also really serve customers and a very strong fashion.
And through all 3 countries and really connect the continent. So we think that the.
And because of order is.
And some very strong comments that we can build off to show that this this combination as a solution to what's being set out and the order itself.
Thank you all from me.
Thank you Sharon.
Your next question comes from the line of David Vernon from Bernstein. Your line is volume.
Hi, David.
Hey, how are you good afternoon, everyone.
Your line is J J you guys are holding guidance into what is it pretty steep steep.
And on currency and a little bit of a headwind on fuel and a little help there from a mark to market could you just kind of tell us kind of in very simple terms.
What's doing better than we would have come in and of the year and then how do you think about bringing that into the 'twenty 1 to 'twenty 2 time frame.
So with other than just saying would add some comments.
You'll notice on our payable 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 quite a 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 that is <unk>.
And yet the network is a bit of a stop and go as we have to.
Be mindful of what we need to run safely around the communities, where we operate where there's some fires and.
And we also have a bit of a back of the port of Vancouver on the pricing and I think pricing is a solid strong story.
And before the fire and D C at the operating metrics.
Rob described it in Q2, it and were very solid and I am sure sometime in August we will pull back from those from that too.
You want to add something.
And maybe JJ just a couple of points. So we are and we are very comfortable with reaffirming our guidance and 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.
And 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 are out of the woods, yet we'd like to I hope it is.
And then obviously, the FX and fuel and that's more like a yo Yo so.
At the end of the day things are moving.
And 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 there are things that are moving out there so.
And that's what I would add Jay Jay that.
We're comfortable 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.
Thank you. Thank you David.
Your next question comes from the line of comp growth.
Of Wolfe Research your line is now okay and lets.
Yes, hi, Thank you so I understand some of the quarterly volatility with 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, Jay Jay and 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 are guiding on operating ratio as you mentioned, we're focused on operating income.
Focus on growing EPS and focus on the free cash flow growth.
And so focus on balanced scorecard with safety and employee engagement customer sentiment, which is key and things like our merger proceedings as well as.
And being good custodians and environment by reducing our carbon footprint. The EPS at CN has an impact.
On ex change this quarter more than other quarter because of the fluctuation all of us have an impact related to the price of diesel. So I think we're all in the same boat so I think at CN.
Profitable growth with good pricing running a good railroad and.
Take into account that we have.
Things that last year the bonus at CN was less this year and the second quarter, we are actually be replenishable and as you add all these things.
But definitely we're not aiming we're not running the company for the whole or whatever and the.
Company for EPS growth operating income free cash flow as well as balanced scorecard has taken into account and safety the environment and.
<unk> and engagement and the customers of sentiment, but that's true anywhere where app and the key thing right. Now is this long term very long term strategic.
Proposal that we have out there in front and <unk> and in front of our shareholders to combine with <unk> and really exploit what the future of North America will be in terms of trade at a time, where the economy is growing at the time also with tension with China, increasing port business will always be solid for CN, but.
And they will be probably a very nice tailwind at least that's our view between.
The true USC empty of country, and and and I think creating a network that has good costs.
Competitive costs with others, but we're not aiming for the lowest cost we're aiming for this combined balance core kind of we're just talking about earlier, starting with EPS operating income free cash flow, but also being good custodians of 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 employees engagement at a time, where the job market is tight and you need to be and attractive employer.
So I think it's we're putting all of that and this is partly why you see weather relative weighted we're operating operating ratio will fall in.
And can you just talk to 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.
We filed.
Our final comments on July 6 we remain confident that.
We're going to meet the public interest test we have met the dilute interest when it comes true on offer control of case gesture and the growing trust period as well as.
And financial integrity at the end results so.
Very confident that we will in the coming weeks get a positive from the STB same boat and trust that was approved.
And the CP.
Applications. So at this stage, we're really focused on getting a voting trust and proceeding with the case to a shareholder vote on July 19th and getting our Mexican approvals.
And hopefully October and November and closing the building trust with the case his shoulders shareholders and November early December.
And I know Scott you read all of these materials.
We're talking huge filing, but our timing is very compelling as a company devoted to us and the things that we are proposing for the marketplace and I think you and you were.
And equally be impressed by the time and Robin and his team filed the.
Operating plan of the proposed combination and how we're going to address.
Concern of shippers and the FTB, so where we're confident and we're confident because we do the homework.
Thank you for your question. Thank you.
Your next question comes from the line of Brian <unk> from boss from Jpmorgan. Your line is now live.
Hello, Brian.
Hey, J J, thanks for taking the question.
I wanted to ask about U S truckload conversion opportunity and it's obviously, a big big part of the industry.
Gross net going forward and that's all spent a challenge so.
Can you just walk us through the CNS and experienced so far and the us 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.
Trying to get that growth and to see it convert and stay stay with the <unk>.
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 a good sense of what we broadly speaking that we will put together with <unk> and some of the.
Comparing.
Competitive products to compete with a long haul truck so we'll probably keep commercially.
Sure and.
And Brian if you talk to any of our customers about the service that they get and states I think when you survey and they talk about the great day greater velocity of the trains and the on time performance. So.
I would say that our.
And 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 products allows us to dip into a lot of opportunities with customers 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 and import load and we may touch that we may touch that low the second time when it moves from.
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.
Just add when you look at the combination of the 2 railroads and the opportunities that are there and 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, Kgs goes to Texas, and Mexico, and the opportunity to convert some of that with single line serve.
This is a huge opportunity for us, whether it's come and cross border or Texas and go all the way 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 and it really.
The only 1 railroad does now and increasing those options for shippers so.
We're excited about the truck to rail conversion that.
It may present itself with the merger.
Thanks for the question. Thanks.
Thanks for the question more option ex against competition.
Thank you Brian.
Okay.
Your next question from from the line of Jan Wald quantity from.
James Your line is now open.
Yes, good afternoon, gentlemen, just looking at the intermodal volume recovery could you talk a bit about.
About the timing related to and then server replenishment efforts and whether it could last longer than expected given the overall low level of inventory and potential changes related to the just in time model.
Yes, so I'll stop refit and but Keith who's a much closer so definitely and eventually our lower retailers and people who needs products coming from other parts of the world or the supply chain and disrupted.
Things are not working out so.
Try and get the product early to try to replenish their warehouse and.
And it is a significant concern and I think where it's going to last maybe all the way from the beginning of next year, but.
Keith do you want to add some color and your dialog with those web products 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 <unk> with the.
Folks are managing their inventories when we talk to our customers that are bringing in products from overseas into North America.
And they see this continuing on well into 2022.
And.
And I think that I.
I think we will.
Any more 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 chains are filled.
It's 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 and.
Keeping us all full of things that we need to run our line. So thanks for your question Pamela.
Okay.
Thank you.
Your next question comes from the line of Chris Wetherbee from Citi. Your line is now open.
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.
Your position on may be the potential for negotiation from a regulatory perspective.
Building Trust and accomplished I guess I think there's been some concern that maybe there would be a willingness to accept something from a regulatory perspective, and maybe other players in the industry.
And wouldn't be able and wouldn't be willing to accept for.
For instance, something like reciprocal switching and the U S. I guess I wanted to get maybe sort of your cash or use.
Your line.
And on whether there would be from willingness to kind of negotiate some of those regulatory points that we just brought up.
And the executive order that might come up and.
Supervoting Trust.
And maybe I can start so just maybe a reminder, everything that we've filed and all the commitment that we made from apart and we wanted to do this combination actually was done formulated before the executive order came out so from that point of view and we showed a broad global xpress as expressed by indicative order.
Because I see and Tcs that merger is actually you're talking about we file on the on the new rule to enhance competition, we committed to make the end to end by divesting the New Orleans Baton Rouge, we are talking seriously and with.
Maintenance and commitment and writing that we are in favor of binding arbitration to resolve dispute that.
And that we are that we have.
We will remain open at the bottleneck and we will not create bottleneck when we'd become single line service post combination that we will provide pricing visibility piece of customers and better shop best price Best service combination by providing grew 11 pricing. So all these things are really in our view.
Things, which maybe we're not we're not saying that 1 needs to the other but the executive order talk about enhancing and competition and you also talked about Amtrak and then we have also and I'll talk specifically and Sean can comment so a lot of the things that is the spirit at least at that.
And then what.
Offered to.
The executive order and it wasn't 72 industries. We were just 1 of them I mean, we're on track as regarding reciprocal switching that's not a C and K CSC issue I mean, thats really is in front of the STB and involves all 7 railroad and it's not because to railroad merge that you actually can continue to position and reciprocal switching has nothing to do.
And with or without merger and has to do with.
All of the SPV, what's the landscape of competition as it relates to a specific pricing and it used to come and we'll see if they actually provide us.
And acquisition later this year.
And I.
And 1 comment about Amtrak and clearly again referenced and net and the executive order, but in the context of the.
Application to the STB under the new rules the current rules require.
Requires that we address passenger service.
Concerns and the application and ensure that we don't do anything that will negatively impact passenger service.
And.
<unk>.
Our long track history of having via around 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 and how we can better partner with the passenger service as well as Amtrak and the U S and we look forward and the context of the rest of the application and there are a good example, where the Canadian morry referred to it but we knew from the <unk>.
And that that would be an area, where we would have conversations with our passenger service partners going forward.
And maybe Rob you could expand and also and Amtrak and things.
We're focusing on Amtrak, we're focusing and passenger service we understand it is 1 of our.
If you wish a social license to run and the U S.
Rob So we work with Amtrak on a daily basis.
Amtrak runs between Chicago, and 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.
Yeah.
It's a commitment we have to Amtrak and we continue to work with them and and as shown and JJ talked about and certainly worked through the Baton Rouge, New Orleans wishes and desires and will have as well.
Okay.
Thank you Chris.
Your next question comes from the line of Jon Chapelle from Evercore ISI. Your line is now open.
Thank you good afternoon.
And then.
We speak a little bit about the speed restrictions that are inputs now through October 31, and how that impacts your ability to kind of dig out of the backlog.
Accumulated and Vancouver over the last couple of weeks and also any path that may be associated with volume, whether it's fuel efficiency or labor and equipment.
And the work load off 14 days.
Yes, absolutely so you're referring to for the rest and that don't know ministerial order that went into effect at midnight July 11, 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.
Labeled as extreme fire danger, and where the temperature is above 32 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 Canada and that applies to all candidates will be impactful.
Right now we are able to work through it but just as we saw last year with the ministerial order and winter where aid.
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 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 to be clear the maintaining of the high single digit RPM growth assumes that youre not going to have any much impact whatsoever from these restrictions and kind of return to normal team starting today.
Yes, we are.
We are working with transport, Canada, and we fully expect to have some modifications on that overtime.
Alright, Thanks, a lot Rob.
Thank you.
Thank you John Good question.
Your next question comes from the line BBB and <unk> from Barclays. Your line is now open.
Yeah.
Hey, Rob just a question for you and it looks like based on the Dod youre going to need to have 2 big quarters in terms of volume acceleration coming up I'm, just wondering what the plan and as for locomotive and to be able to support that volume increase whether you're taking the model.
Storage or ex terminal.
Thats kind of a potentially affect our fuel efficiency gains you made this quarter. Thanks.
Thanks for the question and.
To answer short answers were well prepared for it we have about 225 and storage as we sit today. So we were able to adjust that as the quarter went on and we're preparing here for the third and fourth quarter. As we also mentioned last quarter, we took.
We're in the process of taking on and 75, new locomotives are newer locomotives and 25 of those we have 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.
Thanks for the question.
And maybe also I mean, we are.
I think our question and came up with where they are not railroads or prepare for the fall peak and the U S and the winter coming after that and as we file.
To.
The regulators and the U S. We have the crews we have the locomotive whether rolling stock. We are in good shape to meet the needs of the economy. This fall and next winter.
Thank you.
Our next question comes from the line Tom <unk> 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 shows a lot of sensitivity from the administration are or I don't know sensors, but focus maybe on passenger rail and there was that specific and crack filing against devoting trust is there.
Is there time to negotiate something or is there and the future if that was an issue per STB.
There'd be an opportunity to.
Come up with something on the passenger side and the future because it seems like a potential point.
Point of focus where.
Your current rating was good but the last couple of years the rating with Amtrak wasn't.
Particularly good so I'm just wondering if theres a way I know kind of that.
Time to file something new on voting trust is over but do you think there's any way to finesse that issue if it ends.
Ends up being a focus for STB.
As you said.
And where it's not mine our current rating is good and we are improving and there's room for further improvement and we're focusing on that.
Passenger service and including Amtrak Metro centric, but including Amtrak and as part of the stakeholders that 1 needs to recognize and work with and addressing with solution. During the merger proceeding just like shape Our association.
And we Netease labor and.
And all of these stakeholders over time.
We will continue to have dialogue with all of the stakeholders, including passenger service and Amtrak, but I think already we know we talked about what we could do as it relates specifically to the New Orleans Baton Rouge corridor, Amtrak, which they have the funding eventually to run creative service and that corridor, you want to maybe talk about that Sean.
No I wouldn't focus too much on the building trust comments, obviously it was in a context of.
I have an opportunity to weigh in and devoting Trust I think we take a step back and understand that.
Track and all will have a mandate going forward and it will be up to the host railways and this case CN to work with Amtrak both to address their ongoing.
Concerns they might have with the current service I think Rob and address it and are very proactive fashion and saying we work with them every day and again, we will address the.
And the impact of the Casey's CN tacs combination as it applies to passenger service and the STB application and very confident that when we do so we will raise it and the way that.
We will be talking to Amtrak and to other products or services and the U S and make sure that's not what we're talking about and now we will go as far as saying that will be supportive of the overall transaction, but the commitments will 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 exactly like Amtrak is looking for and.
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.
Louisiana, where new Orleans correctly, where you need to have the required funding to put that in place. So it's great to put to marketing service and place, but then you have to make sure that.
Both the customers on the line the state and local governments are supportive as well as the federal government.
Yeah, and again as we said earlier broadly speaking, we do share their goal and expressed by executive order and a lot of the things, which are pro competitive and very positive that the <unk> were actually proposed.
And writing as part of our awards since April.
And I think and in many case, we're very much in line to the spirit of what was being asked and timber creating competition, creating option and.
Enabling passenger service when the passenger service the funding available.
But I guess just to be clear in terms of coming up with an agreement with them.
And do that to have any influence on devoting trust you really need to get that decision first and then then you could negotiate with and afterwards, if you get the decision.
Yes, it's important to remember and the context of the loading 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 what you would do so in this case it was yes.
Open for comments that was 1 of the day 1 of the conditions of the under the current rules that was normal people made comments and we responded to all of those comments and our response on July 6 including the Amtrak response, but August and the context of the overall control.
Application and Thats, where you get into settlement agreements with various parties. So it was not really and the context of the board and trust is not really an area where that gives rise.
Type of agreement has done and the overall control application.
Right. Okay. Thank you for it and time.
Thank you.
Your next question comes from the line of Jason Seidl from Cowen. Your line is now open.
Thank you operator.
And gentlemen.
Question I wanted to go back to the pricing side and you noted that once again, you were able to get even higher pricing and the previous quarter.
Tcs noted rising rail cost inflation, and the future and the need to probably get even further.
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 and do you think theres about Italy and year end to give you and to garner more than when you had this quarter.
So there is rail inflation eventually you will see it and the all inclusive rail index of var, because there's a bit of a lag and that index, but we all saw it coming and already and you saw same store price for Q1, and the trend and the same store price and Q2 I'm not sure I think we are getting what we need and some of the range.
Inflation that we're seeing right now because we are conscious that they might be it will probably be a lagging. These index and as you may know, we have very little business that work with index.
Moving on to talk about the pricing.
James.
Yes.
Value.
Alright.
Okay.
Right.
So.
And the marketplace.
And it.
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 and the last 2 quarters is indicative of what we should expect to see moving forward here pricing net of railway cost inflation.
That's good color I appreciate the time that was about 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 wanted to and allow us to differentially.
And then you are running slower trains and.
And comp start running those military and who bears the cost per that it's at CN.
Sure that costs will be our shippers and Kenny from what kind of quantify the impact on Q3, what are you seeing in July.
And you didn't themselves operations, our EPS and what kind of a <unk> ex thanks.
We.
Pricing is not related to speed up train.
I don't know.
Yes, let me take a stab at that so.
<unk>.
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 degree Celsius weather out there that would really triggering that 25.
We are running slower and there is a 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 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 and at times at night.
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 that.
I would add that on our debt and tons of impact of Q3, we don't offer quarter.
Quarterly guidance, we offer a 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 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 open.
Elliot and good afternoon, everyone cyclic 1 on the grain outlook if I may.
It sounds like the old crop volumes are getting a little more scares here and with 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. This fall and just maybe James or someone perhaps a little bit of commentary around deferred range in the back half of the year.
Changed and we had what 14 months record months in a row.
It's very dry right now and again.
Yes, 14 record months in a row as you know Stephen and.
For us that need and we're going to finish the crop year and in July and an all time record for foresee 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 a real benefit to farmers and Q4, regardless of the size of the crop for next crop year 2021, and 2022, we will have a strong Q4 farmers always want to moving to 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 yeah.
It's been hot and dry.
And difficult growing conditions out there I would say the conditions are most difficult and the Dakotas and southern prairie's, So a little bit insulated from that but all in it's not going to be.
The record bumper crops for share that we've seen for the last year last couple of years, but our job is to make sure that we have the people the assets the power and the resources required to move the grain crop for our Canadian customers and we're going to we're going to be there to help make sure that happens in Q4 of this year.
As we see a very very strong demand to move and early crop as quickly as possible in the market.
And I think James you continue to invest into a long term and that business through.
Some more hopper cars and we have some customers also building their elevators and the CN network.
Yes, it's been very successful with grain supply chain.
Seen over the last year and a half about a 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 in line and elevators and high throughput elevators and loop tracks and of course on our side, a very significant investment and new Hopper cars.
New high capacity Hopper cars that allow us to ship more product with fewer resources just put it into context based on the new Hopper cars that we bought we can ship.
And the equivalent of 4 extra trains a week of grain products to the coast without adding any additional resources. So it's a very good foresee and very good for our customers and again Q4 is going to be solid look forward to it.
So we will compete hard thank you Steve.
Got it.
Sure.
Your next question comes from the line of Jeff Kauffman from vertical research. Your line is now open.
Okay.
Thank you very much and thank you for the explanation of where you stand in terms of those transactions.
Just wanted to ask do you have 2 outstanding transactions right now that the real and 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 categories.
Both our pending 1 has us directly and 1 is the purchaser of that case pending at the STB and honesty.
We're we're hit the machine line, we're in conversations with our partner also the STB to see how we can get this deal approved ultimately, but and the other 1 has just been filed recently so.
Those are case dependent STB is very busy they have quite a few.
And our cases pending and a lot and theyre down there on their plate, but we are pursuing both of them and hopefully we'll have some outcomes in the coming weeks.
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 come from.
And adjusted.
Hi, and good afternoon.
Wanted to ask a question about technology as you think about this proposed merger with Casey's does it change either the net magnitude or the pace of your planned 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.
Yes, I think Rob and the Rob is actually using co.
Quite a bit of that already on the CN network, Rob you want to expand on the power of technology and the bigger network certainly we do see that as part of the synergies comparing both of our technologies, but certainly from a <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 chip.
ZIP 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 and <unk>.
Broad plans as well in terms of portals and that and just combining what we have in place with our portal technology with theirs, we hope we think and can make a.
A safer stronger networks, so we do see that as an opportunity here.
And for those of you who have never seen and Afib car. There is a picture of 1 of them.
And the preceding slide from Rob section and it's a boxcar debate so safety inspection and in that example, that's running on an intermodal train so as the train is moving freight and generating revenue.
The boxcar the safety car is also inspecting the network for making sure that we're running safety and.
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 both our quality results and giving you an update on our combination with Tcs I know most of you are quite up to date with all the detail of where we're at and some of our combination but.
And we should know and a couple of weeks sometime in late.
Late July early August when the STB has a time to reflect on all the things that we.
We have filed and other people that file too, but we're very confident that we have a very solid case, we are meeting the test for the avoiding trust and.
We are creating definitely new competition and new public benefit so we're looking with the.
To answer this summer with optimism and.
And then.
And we'll talk after the decision to.
So thank you for joining us today.
The conference call has now Andres and thanks for your participation you may now disconnect your lines at this time.
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