Q2 2021 Kansas City Southern Earnings Call
Good morning, and welcome to the Kansas City, Southern second quarter, 'twenty 'twenty, 1 earnings conference call.
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Please note. This event is being recorded it is now my pleasure to introduce you to Ashley Thorne, Vice President Investor Relations for Kansas City Southern.
Thank you Jason Good morning, and thank you for joining Kansas City, Southern second quarter 2021 earnings call before we begin I want to remind you that this presentation contains forward looking statements within the meaning of the Securities Exchange Act as amended.
<unk> results could materially differ from those anticipated by such forward looking statements as a result of a number of factors for a combination of factors, including but not limited to the risks identified in our annual report on form 10-K for the year ended December 31, 2020, and then other reports filed by us with the SEC.
Forward looking statements reflect the information only as of the day. They are made Acs does not undertake any obligation to update any forward looking statements to reflect future events developments or other information and with that it is now my pleasure to introduce Kansas City, Southern President and CEO.
Sure.
Okay. Thank you Ashley and good morning, everyone. Thank you for joining us for our second quarter 2021 earnings presentation I'll start on slide 4.
We're going to change the format a bit.
This morning and Mike.
Mike Upchurch and I will go through.
Brief presentation.
I'm told that this is a record for us in terms of brevity of our formal remarks.
But given the assumption that there will likely be a lot of question related to matters other than our quarterly earnings were going to change the format go through the.
The prepared material fairly quickly and expand the time for Q&A the.
On the comp other comment that I'll make on this slide is we have included Adam daughters, Adam is our chief legal officer, given the fact that we have a proxy statement out and.
Shareholders' meeting set for August 19.
After the Adam the join US in the event there are any technical or specific questions related to that moving on to slide 5 I am going to start with 3 slides just to touch on and speak.
About the proposed merger with Canadian National.
Obviously most of you have heard this before but given the timeline for events going forward specifically the KSU special stockholders meeting, which is now set for August 19th.
I wanted to spend just a few minutes and reiterate some of the more significant characteristics and benefits of this transaction.
Again, just looking at some of the highlighted comments here on this slide.
We believe this is a pro competitive deal and.
And we will deliver more choices more single line service options too.
2 shippers than than exist currently.
There has been a commitment to keep all gateways open on commercially reasonable terms and provide greater price transparency, specifically through rule of 11 rates 2 of those gateways to.
To satisfy any potential.
Competitive concerns that debt.
That might arise.
This this merger of this combination is driven by growth and the opportunity for growth across North America.
It is not a.
The combination that is.
That is focused on consolidation or <unk>.
Eliminating options or facilities. It is all about growth and.
As you see in some of the appendix material, we have been blessed with a very strong and widespread support for the merger.
For 1700 close to 8 hundreds of letters now.
Supporting the transaction we.
We are confident that the voting trust that we're proposing meets the STB.
The requirements for insulation from control in the public interest requirements and specifically the financial viability of both Canadian National and Kcbs during the voting trust period.
Moving on to slide 6 this is a very brief.
Timeline path to completion, you can see the first items on the left are completed the next milestone as I mentioned a few minutes ago is the August 19th special meeting of Kansas City Southern stockholders.
And.
The proxy materials has been circulated we will fall back and refer to that proxy statement on.
A number of questions.
And we'll be happy to to.
Explain anything thats in the proxy further.
As far as other milestones. These are really expectations as you know the the surface transportation Board will take whatever time, they need and we respect that requirement.
As far as the completion of their review and a determination regarding the voting trust.
Our expectation is the debt will come in the second half of this year and then beyond that again. It is our expectation that the decision on the merger would be the second half of 2022 and of course of the voting Trust would remain in place until we have full STB approval.
<unk>.
And then wrapping up the merger discussion on slide 7 just reiterating again this combination is pro competitive.
And we believe will yield significant public benefits.
Of those benefits are stated on the slide I won't read them and and then importantly.
The the.
C N case, yes.
The filings on July 6.
In response to public comments and in opposition to the merger of.
We think are very strong and powerful.
And are available on our website as well as the web.
Website for our transaction, which is connected continent dot com.
And the voting trust approval, which is the stage that we're in now we.
We are very confident that the voting trust satisfies the requirements for independence and in public interest.
And the financial viability of both the CN in Acs during the voting trust period as the shirt moves.
Moving on just to the out to a few slides on the quarter.
The second quarter revenue increased by 37%.
From the previous year.
Gross ton miles of 30% volumes of 21%.
On slide 31%, obviously, the the headline here is the <unk>.
The comps.
As a result of the Covid.
Collapsing business that occurred in the second quarter of 2020.
Our results were clouded by the accounting treatment of the 700 million dollar of termination fee for the Canadian Pacific transaction, Mike Upchurch will get into some of those details later on.
I would like to draw your attention for purposes of our.
Really representation of our underlying performance to the adjusted numbers shown on this slide second quarter adjusted operating ratio of 61, 4 which was of 380 basis point improvement the improvement versus last year and adjusted diluted earnings per share of $2.6.
Which was a 79% improvement from last year.
Again on an adjusted basis moving on to slide 9.
Our outlook there are a couple of changes to this slide from what you saw in January and April <unk>.
Revenue growth, we're confirming our guidance from previous quarters of double digit revenue growth in 2021 for the full year on.
Operating ratio, we are changing our.
Full year operating ratio guidance to about 60% approximately 60% for the full year.
That is the revised from 57.5 guide.
<unk> guidance that we had provided earlier.
The headlines to that revision.
The number of factors that you all are very aware of in general.
The chip shortages that have affected the auto industry and certainly our automotive business.
As has been affected by that.
As evidenced as recently as earlier this week, we have been informed of 3 new planned plant outages in Mexico, Mike Matt is here to answer any questions about that.
That in greater detail.
But as you all know that chip shortage, that's really plagued many industries across North America has been a bit of a moving target and difficult to predict how long that's going to last.
In addition to that in our case there have been.
Disruptions in the flow of refined products into Mexico due to some regulatory developments and other factors that are more unique to Kansas city southern that of affected both our performance and our outlook for the full year.
Debt as.
Those developments have created some additional congestion in addition to other factors. So there is a bit of an increase in congestion related cost and then.
In addition to those factors the.
The extended impact on the expense side of our business on the related to the polar vortex.
The other delayed plant openings, all contribute to our revised guidance here and the operating ratio for the full year and Mike Upchurch will provide more color.
Regarding the path to our 2022 guidance in a few minutes earnings per share. We have made a slight revision to our guidance there for the full year at approximately $9 of share in 2021 versus in the prior 2 quarters, our guidance was greater than $9 of share.
So a slight revision to that.
That guide.
And then beyond that.
Our longer term EPS guidance as well as our capital expenditure and free cash flow guidance remains unchanged from the previous 2 quarters moving on to slide 10.
The key operating metrics.
Which the this.
This chart had a little more green on it but.
Again, there is some explanations that go behind the numbers looking at train velocity and terminal dwell on.
Those numbers are considerably below at.
At worse than a year ago for the second quarter, but remember what had happened a year ago.
With the coal with the rapid.
Down downturn in business volumes during the second quarter of 2020.
The good way to think of that is.
There werent many cars on the free way at this time last year, so our speed and our dwell were were at very high levels.
This year, our volumes recovered and we had other issues to deal with including some of the.
Weather related issues and the.
Of the regulatory developments in refined products that I mentioned, a couple of minutes ago. So our network was much busier and the statistics reflect a combination of those factors.
In the second quarter of 2020.
I'll draw your attention to the for boxes in yellow at the bottom of this page that are highlighted.
And.
These are some of the things that we've done intentionally to support the service recovery as well as the increase in volume and outlook that we have for the rest of the year.
We are proactively brought additional power online.
Leading to a 39% increase in active locomotives we have.
We've also proactively added crew starts and hired additional crews in the transportation and mechanical areas, leading to the year over year head count increases that you see on this slide again all of this is to support our service recovery and to be prepared for golf.
And the growth we see for the rest of the year and beyond.
And then finally on slide 11, you can see the the impact that some of those moves have.
Have have resulted in in terms of the additional resources and other initiatives.
And the impact they're having on our most recent velocity and dwell trends, which are very encouraging I called out a number of things on this slide including the Monterrey team engagement effort and the Sanchez team engagement effort I would encourage someone to ask the question.
<unk> of John or later about what's what's behind that and some of the things that.
That we are doing and John and his team are doing to 2.
We really heightened the focus and accountability on our performance measures.
A lot of those are built around the infrastructure and aligning processes org structures and resources.
For a more precise service delivery product.
With that I will turn the presentation over to Mike Upchurch.
Thanks, Pat and good morning, everyone on this.
Starting my comments.
On the quarter here.
I'll cover revenue and volumes of little bit more detail on the next slide but you can see revenue grew 37%.
On 31% volume growth.
Our reported the operating ratio of 157, 6% does include $721 million of merger costs, we incurred during the second quarter.
Including the break fee of $700 million.
We paid when we officially terminated the merger agreement with Canadian Pacific on May 21.
As you might remember of CN paid us $700 million to reimburse us for this break fee.
But because there are certain potential repayment obligations, we have recorded the <unk> reimbursement as a liability on the balance sheet.
Once shareholders vote for the merger the break fee received from CN will no longer be reimbursable and accordingly, we would record to income the <unk>.
$700 million reimbursement of.
Secondly, offsetting the break fee that we paid the CP in the second quarter. So you have the expense in the second quarter. The offsetting income we would expect.
To be recorded in the third quarter and as Pat mentioned, our shareholder vote is currently August 19.
Excluding merger costs, adjusted or was 61, 4% of 380 basis point improvement over prior year, we did incur several headwinds during the quarter.
Which I will discuss in more detail on the expense slide but generally included an approximately 200 basis point headwind from network congestion.
<unk> higher overtime and re crews.
Our higher increases from the elongated cycle times and incremental costs from resources, we put in place to improve our service and support our future growth.
We also recorded 120 basis point of 1 time nonrecurring contract dispute during the quarter.
Our reported diluted EPS was a loss of $4.17.
However, adjusted for FX and the previously mentioned merger costs, our adjusted diluted earnings per share was $2.6.
79% from a year ago.
And then finally, we had about a 40 basis point.
Headwind from fuel surcharge lag where price increases create a negative lag.
For we can recover those in our fuel surcharge program.
So turning to the next slide let me cover revenue.
Revenue for the quarter was up 37% on a volume increase of 31%.
Excluding fuel prices and foreign exchange revenue was up 30%.
All business segments saw year over year volume and revenue growth.
Let me address the negative mix you see in the revenue per unit table on the top right of the slide we did see core pricing gains in the quarter. However, lower revenue per unit segments like energy saw growth rates, creating higher growth rates, creating some negative mix in the quarter.
We've been very pleased with the revenue growth. So far this year and our results continue to be on track with our guidance established earlier this year, despite what happened with the polar vortex in the first quarter the <unk>.
To the chip shortage that is severely impacted auto production.
Across the entire globe and increased regulations in Mexico related to the importation of refined products.
Our franchise has shown remarkable resiliency.
Despite some of these exogenous factors debt.
Of suppressed some of our growth potential, but again, we expect the lead the industry in volume growth during the <unk>.
Cross border volumes grew 42% in revenues 53%.
Our performers for us in cross border was intermodal growth revenue at 49% and Mexican energy reform grew 121%.
Core pricing contract renewals were essentially in line with the first quarter, but we're clearly seeing inflationary pressures that will need to be addressed going forward.
As we look into the back half of 'twenty..1 we would expect the auto chip shortage to continue to negatively impact our growth.
With the strong bounce back late in the year and into 'twenty 2 as auto demand continues to be extremely high and dealer inventories at all time lows.
We will also begin shipping western Canadian crude into the new Port Arthur crude terminal in the second half of July.
And we would expect that terminal will gradually ramp up.
Whereby we will be moving approximately 15 to 20 trains per month by the end of the third quarter, So a fairly rapid acceleration of volumes.
Turning to expenses on the next slide.
Adjusted operating expenses increased 29%.
Some of that do the comps relating to the pandemic from a year ago as we saw significantly higher volumes, but we also saw higher fuel prices.
Foreign exchange impact and significant cost increases as a result of network congestion.
As Pat mentioned, we were clearly not operating as well as we expect and saw productivity declined during the quarter as.
As we in service new locomotives and had added head count the stabilize our service and prepare for what we believe to be substantial increases in volume starting here in the third quarter.
The key expense drivers were fuel expense increased 19%.
$13 million from volume and <unk> increases.
The $16 million increase to expense from foreign exchange.
Which of course is largely offset in.
In revenue.
$10 million from higher over time and higher re crews as we deploy the additional transportation resources to stabilize service head.
Head count declined 1% year over year.
The grew 2% sequentially still well below the 5% sequential volume increase that we saw for of <unk>.
We also had a 9 million dollar expense from the 1 time contract dispute.
$6 million increase in materials and parts due to a larger locomotive fleet and the GTS growth that we saw year over year.
$6 million and increased equipment of rents, which is split roughly equally.
Due to volume and car cycle times.
$6 million from wage and benefit of inflation and $4 million from higher year over year incentive comp.
Due to the fact that we greatly reduced our incentive comp expense.
During the pandemic and <unk> a year ago.
As we look into the second half, we do expect better productivity and we will be extremely focused on better execution of the <unk>.
Our principal of CME has instilled at Tcs over the past 2 years.
As a reminder, we have successfully reduced expenses by an annual run rate of approximately $150 million going into 2022 as the result of these <unk> initiatives and continue to target.
$250 million run rate now by 2023.
The 1 cost increase too.
And for me about in the second half of 2021, and we've discussed this at length in prior quarters, but we do not expect an approximate $8 million of the incremental compensation expense related to the profit sharing from the passage of the labor reform in Mexico. However goes.
Into 2022, we would expect any expense increases associated with the new labor law to be negligible.
So let me wrap up with a little perspective on our outlook for the rest of the year and 2022 we.
We expect the demand environment to hold up quite well.
The key macroeconomic factors feedback from our customers and new business opportunities continued to give us confidence in delivering superior growth and that's despite all of the challenges around the vortex and chip issues et cetera that we've mentioned.
During the first half of the year, we had a couple of challenges, but essentially are on plan on guidance with what we provided early in the year.
We think that that revenue outlook is certainly supportive of some of the supply chain challenges, we are seeing across the board and pent up demand that's being built for vehicles appliances household goods and a variety of raw materials as we look at a variety of economic factors going into the rest.
Of the year on into 2022.
We really believe.
We're going to see tremendous top line growth that we think going into 'twenty, 2 will allow us to deliver somewhere in the range of 150 to 200 basis point improvement to the operating ratio.
And then turning to the cost side, we can clearly execute better than we have in consistent with our <unk> success in 2019 and 2020.
We recently deployed some incremental resources, namely locomotives and transportation FTE to improve our network fluidity and prepare for continued growth in our business.
This improving improvement in congestion.
Plus favorable expense comparisons relative to the unplanned cost around the Mexican labor reform and the onetime contract dispute that I mentioned should allow us to achieve another.
150 to 200 basis points of of or improvement. So collectively youll see our guide continues to believe we've got some substantial opportunities to improve operating ratio.
So with that I will turn the call back to Pat for final remarks, Okay. Just a couple of comments before we open the lineup for questions.
The as I mentioned on the entire executive team here happy to answer any questions about our performance our outlook for business on.
Our outlook for operating efficiencies and those types of the questions.
Actually advises me that we get a lot of questions about the.
Additional details.
Background and other things.
Debt.
We will not.
<unk> not be able to answer the proxy statement is available and while we're happy to provide any Claire.
Clarification on certain things in the proxy leading on to the shareholder vote.
But a lot of questions that I know are out there, we're just going to rely on the proxy disclosure that's out there. So you might want to steer away from those kind of questions. If you only have limited time and then in.
In that vein as well I know theres a lot of question about the.
The likelihood of various outcomes and.
In response was from the STB.
We will also not be in a position to answer those questions. As I said, our expectations are that the STB will reach the decision in the second half of this year, but.
As I also mentioned the STB will take whatever time, they deem as necessary.
To make a full and complete evaluation before making that decision.
We're just not going to speculate on.
On timing or outcomes beyond that so with those sort of the <unk>.
Earnings I suppose.
Happy to answer I will open the lineup for questions.
We will now begin the question and answer session.
Asking the question you May Press Star then 1 on your Touchtone phone if.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then 2 due to the number of participants on this morning's call management will limit you to 1 question and 1 follow up question at this time, we will pause momentarily to assemble our roster.
Our first question comes from Jon Chapelle from Evercore ISI. Please go ahead.
Thank you good morning, everybody.
Good morning.
Maybe this doesn't matter in the months based on the left the STB says, but if I can focus on the fundamentals and the operations of.
A little bit here and maybe it pats encouragement of all go to John or first that there is a lot of.
The optimism about the back half of the year on the guidance I mean to get to the or number for the full year, you need about 300 basis points improvement to get to the EPS number or do you need $5. After $4 on the first half of the year. Yet there is a lot of challenge is still out there whether it's the planned outages in the auto plants in Mexico. The reduction of the flows in the Mexico the refined products.
But maybe speak to us a little bit about the exit rate of some of your Kpis on your service metrics that gives you the confidence that youll have that fluidity and that service to be able to meet these kind of lock the financial expectations for the second half of the year.
Yes. Thank you.
Youre absolutely right, we have a lot of momentum and we have for lot of challenges with the team is is certainly up to those challenges.
There's a couple of fronts first and foremost is the field activity and the engagement in the field and second is the network structure that and the organizational structure.
Better aligned for process improvement and asset management and accountability and that's what supports the the effectiveness of our service the use of our plant and the.
The.
The plan itself.
As part of that we have gone through a network reorganization.
With the with our network Vice President both accountable for the plan development and the planning execution and we've.
We've improved our service visibility and awareness.
At all levels, including the.
The new delivery of of asset levers that we can now see in order to create more resiliency and more precise fit for both our capacity and the resources. So.
Sort of the the the architecture.
We've developed underneath of our service plan to support it and create a balance of strategic and tactical of deployment of assets.
The velocity is 1 of the key drivers that everyone on the team, whether it's Mike nuts, Sami family or myself.
Really focusing on the daily basis, and the willingness to get into the weeds and drive performance with the team.
It's showing the results and if you look at.
Where we see network performance, improving and the impacts of the initiatives that are taking hold our velocity is improving and in fact, our velocity today is in line within 3 to 4 year average taking the outlier of the.
Comp of.
Covid the COVID-19 year on.
The equation U S is recovering at a quicker pace.
We are.
I'm very comfortable where the pieces and the path for on and I see that returning to close to close to the challenging number of of Covid target.
Through Q3, Mexico velocity is showing the right trends, we still have some headwinds with COVID-19 recovery not being as for as.
Complete as it is in the U S. So we still deal with those realities.
Today, but but with the initiatives that we focused in in Monterrey and Sanchez.
Or are we.
Our team engagement to bear.
It wasn't.
And the integrated multifunctional team to decongest significant yards like Monterrey, which is primarily service yard.
So that we can implement.
Our.
View influent, better customer service and the effectiveness.
Not only do we we roll up our sleeves and work 24 hours a day 7 days of week to create a better plan increase the better.
Better visibility, but we're also addressing.
The skills development of the local teams.
And the network support to build the organizational structure and create that.
Better asset alignment and service visibility and it comes down to the accountability that we're driving across all of all of our departments in the case of.
Monterrey and Sanchez.
The heightened focus created more fluidity.
It created more search resilience.
And these are again key service areas that really.
Drive, how Mexico goes and drives our ability our ability to do cross border.
1 of the key indices that I really looked at was our green performance because it is really in the end to end.
The market for us so the market segment that has handoffs with the railways.
Of the spans most of the length of our network and it Hasnt really good sense of where our end to end supply chain.
The ability to looks like in those numbers for green in the last 2 months of picked up tremendously and we're we're.
Closing in on some some record performance.
And even bench, marking against some of the best times from a capacity and fluidity perspective.
No.
I would say, it's the reorganization and the architecture of that supports growth.
It is the heightened accountability and visibility and leading indicators the support and education of our of our frontline and the entire management staff.
At the same time, we are underpinning everything with our safety values on our customer service.
That's what gives me a lot of confidence that we're on the right path and the leading indicators that we look at every day are pointing in that direction.
Hey, John just real quickly I mean, clearly we have an assumption here, we're going to work our way out of some of the congestion and lower our operating costs, but don't forget that the first half of the year was pretty challenging with the polar vortex and chip issues and we're still sticking with our guidance for the full year on the topline implying that.
We're going to have a really terrific back half of the year from a revenue perspective, including new business from this port Arthur crude terminal so.
On that top line, certainly going to help significantly here.
Right.
Super helpful answer John I, almost feel bad asking a follow up but I know anyone else on this call at <unk>. So Mike since I have you you guys have been talking about.
On the refined product opportunity in the Mexico and the huge numbers you can put around it for a quarter upon quarter, but now we have this new regulatory issue and some of the congestion, it's causing is there any way to to frame either of the lost revenue or the cost impact of this of these regulatory issues in the Mexico and also kind of the duration.
How long do you think this loss.
Well I think it's a temporary situation John.
Let me, let me kind of back up to the macro environment here. The bottom line is 2 thirds of.
Mexico's demand has to be imported and most of that is coming from the U S. And there is nobody better position the <unk> to bring that from the U S Gulf Coast.
In the Mexico, So that gives us a lot of confidence that this is still a great business for us in fact, when you look of the share data third parties share of importation.
Of total demand has actually increased from high teens to 25%. This year. So there is more product being shipped by companies like Acs.
Yes, I think what's happening here, we've got kind of half of our business in unit trains half of it in manifest its the manifest side of this that the government is doing a little more sampling to make sure that products are getting a label properly.
And it's created a little bit of of backlog, but just here recently, we cleared up a lot of that backlog.
Working with the regulators that down in Mexico and.
The demand dynamics are such that we think this is going to continue to be of really good business for us. So maybe just the short term dislocation versus any kind of permanent.
The impact of that business for us.
Got it thank you Mike and thanks John.
The next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead.
Hey, Thanks, operator, hi, everybody.
Pat I, just there's obviously a lot of headlines on the rail sector for the last couple of weeks around.
Regulatory on the by then.
<unk> order.
I'm wondering what you can talk about that I mean the.
Obviously, you mentioned consolidation not specifically at least.
But then also the idea of reciprocal switching.
You've obviously had the.
Time to think about it and what the what the impact of your business and the industry as a whole I'm wondering if you can comment at all in terms of what you think the implications of RFID.
I'll do my best but it's really sort of unclear and.
If you think back last week, we had.
Headline based upon a rumor that came out a day before the executive order, which was pretty shocking to everyone.
And then when we saw the details in the executive order I think people calm down quite a bit.
1 thing to remember and I'm actually looking at the executive order here as I'm answering your question.
And I've highlighted a few things here. This is literally a guidance to the STB the.
The executive order includes language like the chair of the surface Transportation Board is encouraged to work with the rest of the board.
Due to the following consider rulemaking on on <unk>.
Reciprocal switching.
Consider rulemaking on other relevant matters of competitive assets.
And then jumping ahead, specifically the mergers in the process of determining whether a merger acquisition or other transaction.
Involving rail carriers.
With the public interest.
And.
To consider for.
Fulfillment of other rules that are already existing I think if you look at the.
The path that has been laid out by the Canadian national using the the current rules of the STB for mergers and the language is in this executive order.
1 could conclude there 1 of the same so I don't I don't think theres any different standard for evaluating of merger in the executive order.
<unk>.
Inconsistent with what the current rules the so called new rules of the STB already involved.
But the.
As always the case in situations like this.
We really won't know the full impact on some of these things until time plays out.
But we also know that the STB has the very full.
Backlog in docket of activities, including.
Rules on the reciprocal switching debt.
But I think theyre going to be.
On priorities of the STB in the near future. In addition to the merger activity that the.
They have on their plate, including ours.
Okay. I appreciate you answering that question the <unk>.
Follow up from me I guess from for Mike.
I think I think you guys have done a phenomenal job over the last couple of years I mean, you've knocked the cover off the ball operationally quarter after quarter. So I don't want to extrapolate too much from a 1 quarter blip.
Chip, if you will especially in the backdrop of.
On the congestion that we're in but Mike the incremental margin.
Assumed by your guidance next year is like north of 80%.
As a huge number I understand some of the cost items in the first half, particularly in the first quarter, but a lot of these things of that youre expecting to revert as a little bit difficult to have a lot of visibility on.
And so why is why is the 85% Incrementals next year the right number given all that's going on today and especially all of the resources, you're throwing at trying to fix a lot of the issues. If you can just help us get some comfort and confidence around how youre thinking about the framework for next year as implied by the guidance. Thank you.
Sure sure.
Take a stab and as I said in my prepared comments, we think we can get roughly half of this for from the revenue.
The line and roughly half of it for from the cost side, but.
If you think about just.
Really incredibly strong demand environment in all of the macroeconomic indicators.
Whether it's GDP or PMI or corporate investment industrial production inventories being at all time lows gives us a lot of confidence around the top line.
Yes.
The 2 thirds the 70.
The percent incremental margins you get a couple of hundred basis points out of that so yeah.
I think we feel pretty good about where we're at with demand and being able to deliver that and then clearly we need to improve in the operating side of the house.
That's costing us.
Combined with fuel and congestion and a couple of these 1 time costs couple of hundred basis points, and you get rid of that and.
You see your way to I think some really nice improvement in operating ratio year over year.
So, yes, I realized we yes it is.
Bit of a show me story of how we're from Missouri. The show Me State and we've got some credibility here from having delivered as you acknowledged the over the last few years and we will get the swing back on track.
Got it okay very good. Thank you very much have a great weekend everybody I appreciate it.
Thank you.
The next question comes from Jason Seidl from Cowen. Please go ahead.
Thank you operator, Pat Mike team good morning, everybody.
2 quick questions here, 1 in terms of pricing it sounds like there were some clearly some pressures on the cost side that are going to cause you to be more aggressive in the back half of the year.
Should we expect higher contract renewals and how should we think about the spread of those contract renewals and release in relationship to the rail cost inflation that youre going to see.
Well I think generally.
No surprise inflation is picking up and as contracts come up for renewal, we're going to have to take that into consideration as we re price that business.
The good news is we've seen an environment, where all of last few quarters price increases of roughly been the same.
We've now got a step up in inflation, so we need to kind of deal with that going forward because of our long term strategy has always been the price above the cost of inflation.
But the interesting dynamic and even the fed.
Looking at their long term projections around inflation would suggest inflation is going to come back down in 2022, So the interesting discussions with customers to have an.
We're going to do our best to continue to make sure we cover our cost increases in our business there.
But in terms of the spread might do you think that that's going to change that much between your price increases in your cost.
Well.
We've kind of moved away over the last year from giving specific numbers there but.
Early in the quarter, you would've seen of negative spread but that doesn't mean over the course of the year.
As you go through contract renewals that we cant keep that in a positive level.
Okay Fair enough and my follow up question is going to be looking at sort of the margins on some of the types of business that sort of may have been deferred or maybe coming on line in the back half of the year. Because you guys are obviously looking for a strong rebound going forward how should we think about the margins on some of those businesses that have been delayed from either chip shortages or on plants coming on.
On line in relationship to your overall business.
Jason <unk> been doing this for 25 years right we net.
Talk about the segment profitability I keep trying.
Can't blame a girl.
But no I would tell you this.
It probably wouldn't be surprising to see us Miss our auto planned by by $50 million because of this chip issues.
For all of that we're going to deliver on it.
Okay.
Okay.
Yes.
Pardon me, ladies and gentlemen, it appears the speaker line has dropped please standby while we reconnect. Thank you for your patience.
[music].
Pardon me, ladies and gentlemen, we have reconnected with the speakers. Please go ahead.
Alright, Jason I think your question was around segment profitability and I'm not exactly sure where you got dropped there but I.
I was just commenting.
You know as we look into the back half of the year and going into 2022.
Segments like auto, where we're probably going to be $50 million short of our original plans because of the chip issue youre going to have the opportunity to make that up and.
Yes.
We're not going to go through segment by segment, giving you of the profitability, there and whether that's accretive or are not to our overall business, but I think you should generally just assume continued strong demand that generates great incremental margins and that's really our focus is.
The continued to deliver that top line growth and so Mike debt assumption is that that 50 million that was lost.
Being pushed out that youre going to make up most of that in 'twenty 2.
Yes, listen I don't think anybody knows exactly when this chip shortage is going to be fully resolved.
It's kind of an amazing issue.
Read an article the other day that the total value of the chips for these cars or lessen the dollar, but we can't get any so you can't.
The.
The production process of putting of vehicle together.
You'd like to think this gets resolved for.
Fairly soon and we're being told by the Oems. Despite some incremental shutdowns here in the third quarter the debt.
We will begin to subside in the fourth quarter and going into 2022, we're going to see really strong auto production second third shifts.
Demand is incredibly high right now.
They were driven by a deal a lot lately, but youll see more bear asphalt and you will cars.
Yes.
It's pretty tough to order a car of these days long long lead items and so the demand environment is pretty strong. We think this is going to begin to really deliver some outsized growth for us late in the year and into 2022.
Appreciate the updates on the knocking on wood, the the supply chain to get the fix there.
I appreciate the time guys.
Net.
Our next question comes from Justin Long from Stephens. Please go ahead.
Thanks, and good morning.
Just circling back to the service challenges that we're faced in the quarter. How much of this would you say is related to issues that are specific to your network. So refined products and some of the regulation there the plant outages lots of ROE versus a kind of broader rail network issue.
With some of your interchange traffic.
Okay.
Yes go ahead.
The.
Some of the the descriptions you had in your question Justin.
I think answer that question.
There are of a number of.
Issues that are on our network and particularly.
But the the conditions that exist.
Exist outside of that I think are more global issues, where we have been very successful in for example, finding.
The new employees of hiring new employees, we have been very successful and recalling our furloughed employees that were furloughed in 2020 in 2021.
Where we see.
<unk> and some of the execution that the creep into some of our performance like re crews and other things like that.
Problematic across the entire.
Employment base in the United States.
Taxes and fuel.
Fuel trucks and other services that are happening across.
A lot of industries, but the.
The performance issues that were finding that are isolated onto our own network, we're addressing very well Oscar and the team for example on the refined fuel products combined with Mike and the.
The rest of the operating team.
Worked tirelessly for 40.40, plus days to work with the.
Officials in the <unk> in Mexico to resolve that and as Mike said earlier in the call we are breaking through that.
We're doing as much as we Kansas support the customers in the auto business.
<unk> ready to service them as soon as those chips come over as they are moving.
Equipment around in order to be prepared for that so I would say there is there are a number of issues on our localized on our network that are of.
Condition of the broader global issues on supply chain.
And for those that are really isolated to us working.
As the team to resolve them as efficiently as possible and in fact, some of our recoveries are.
Disproportionately quicker than others. If you look at even some of the improvements we're making on our intermodal velocity.
Intermodal supply chains in the U S.
Order of magnitude some of our trip plans are in the.
Plus plus 6 hours in the 95% range.
Over the last 2 weeks trending very well in the recovery so.
I think where we have network performance challenges that are isolated to our network, we're addressing them very aggressively and based on service and how the customer sees our service.
Capacity and capability.
On other side influence, we're doing our best to mitigate those things and in some cases we.
As we said we've gone a little long on our locomotives.
Hi.
The purchasing them in anticipation of.
Problems in that supply chain for locomotive availability as we see the growth across the whole for the.
The transportation systems.
And pre pre positioning employees in our critical areas.
We know that the employment basis, theyre going to be tough and growth.
As aggressively as we can to hire.
A little bit long on that so that we're ready for that growth that's coming.
I would say that Thats my take on how we have kind of of both the macro and micro challenge and we're addressing the volt.
Okay. That's helpful. Thanks.
My follow up I wanted to ask about the guidance. So despite the change to the or outlook on the EPS outlook was only tweak this year the outlook for 2022 wasn't changed so is the right read here that your revenue guidance has actually gotten a little bit better and Thats ops.
Setting a weaker margin outlook or is there anything else Mike below the line that's influencing that.
You got it exactly right.
We're looking at revenues at the high end of of our guide that we provided back in January So that's certainly helping the flow through the net income and EPS and just as a reminder for everyone.
We've talked about this before we have stopped our share repurchases, which was in our original guidance.
But it has kind of a limited impact on 2021, and so as we kind of reset things at the end of the year for 2022 gross.
Going forward.
That could potentially be.
Of changing variable, depending on where we're at with the merger, but your debt youre spot on.
Better revenue.
Helpful. Thanks for the time.
But.
The next question comes from Tom <unk> from UBS. Please go ahead.
<unk>.
Yes, good morning, Pat.
I know you gave us some kind of parameters about not asking certain things and that sort of fits into it or not but I think it's more factual.
Can you explain to us what happens if the STB says no.
The devoting trust.
And did the merger deal doesn't expire till February so what's your obligation if they say no.
And what happens if the.
They know Andrew shareholders still.
Voted in favor of the deal.
What happens if they say no and the shareholders.
For the management share.
Holder of boat is going through whether it occurs before or after the STB decision is going to be conditioned on.
And our closing into of voting trust.
So the shareholder vote.
We will we will assume.
That the.
It will be of closing into the voting trust.
And then your other question really is is hard to answer because it.
It will really.
It'll be the decision on our part of our board's part.
On the <unk> Park and <unk>.
Including taking into consideration all of the information that will be available at that time, including any.
Color or or <unk>.
Explanations from the STB as to what's behind their decision.
Including the possibility that there would be technical reasons. The remember that the CN original CN voting trust. The application was turned down and for sent back on the technical matter because.
The fact that there wasn't.
On a merger application.
Associated with the voting trust the application.
I remind everyone of that just to make sure you remember.
There are.
Any number of reasons.
Factors that we cannot begin the anticipated at this point as to what might be included in the vote in an STB decision and all of the S&P taken into consideration.
Our board and sort of of Ics.
Net forward.
Okay.
What about with respect to <unk>.
Break fees and other obligations do you get out of some of the break fees if youre of shareholders approve the deal I'm just trying to think about the.
Obviously, there is the <unk>.
Hence you can end up going down a different path break fees be of consideration. So I just want to make sure I fully understand your obligations.
If you continue to deal doesn't expire till February but its possible STB you could say no. So could you give a thought on net.
How break fees.
Would change in your obligations during.
During that period.
Well again, I'm not going to speculate on the conditions and circumstances.
STB decisions I think the break fees the mechanics of the break fees are pretty thoroughly.
Detailed in the merger agreement, which was part of the proxy so I will fall back on my statement that.
I'll just refer to those documents.
Oh.
Okay. So it sounds like its pretty unclear of what happens on that.
If the voting for US is rejected okay. Thanks, thanks for answering the questions.
Okay.
The next question comes from Chris Wetherbee from Citigroup. Please go ahead.
Hey, Thanks, good morning, guys.
Maybe just following along a little bit on that last line of questions.
I don't know if the board or you Pat had contemplated the prospects of potentially pursuing the merger without of voting trust is that simply just a logo as it stands right now of what something that would yes.
There could be circumstances that could lead to that being the potential option for you.
Chris I'm going to probably disappoint you with my answer, but we are totally focused on getting voting trust approval.
And think that we have a very strong case and application and.
And then beyond that it really is not.
It wouldn't be appropriate for me to comment on what the.
With the STB is going to say and what our board's response would be.
Okay, that's fair.
And then when you think about the equity of order.
The order.
1 of the things that we've been getting questions on is maybe how some of the potential scrutiny relates to the relative service that the industry at large is sort of providing the customers and obviously you guys have had some struggles of some service here on the short term as you've acknowledged.
How how much of a remedy in service improvement you've seen for the potential sort of regulatory scrutiny or maybe if there is the incremental regulatory scrutiny coming from the executive order I guess.
Is there something other than a little bit more controllable from your perspective in terms of improving service in the shorter term has the potential to push.
On a stronger footing in terms of this regulatory dynamic.
I don't I don't.
Certainly see them as being tied together I know the STB.
Before the executive order has been very focused on service the hold hearings.
There is a.
And the advisory group of the FTB.
All of our stack, we have an employee of <unk> on that committee.
Over time, they have gone from probably monthly meetings the quarterly meetings when the service levels were improved 2 weekly meetings.
And I think.
Recently, they have scaled that back.
A little bit I believe from weekly to monthly.
But that is an organization that is intended to be sort of a clearinghouse of information and feedback from shippers and railroads and the STB.
So there's a very high level of interest and scrutiny for.
From the STB on service levels.
We have all received I know you've seen this.
All of the CEO of all of the railroads have received requests from the STB for.
Comment some detail about what we're doing to prepare for service recovery normally these things these letters come to us.
Prior to.
The seasonal peak.
But this time they came to us a little bit early so I see the ftb's interest in service level and recovery and resource commitments.
Certainly predating the executive order.
And I know from just the interactions that we've had with the STB, including comments the chairman over minutes made publicly.
That will continue to be a very heightened focus so we are taking those rigs.
The request and that net interest level very seriously as you can.
Can see from the materials that we presented we are proactively brought back resources. We've brought back crews, we've got crews and training.
We think we are.
On a good path to make sure that we have adequate resources to complete our service recovery and handle our growth.
In the U S and Mexico, So I would say.
We're taking those those.
The inquiries and the concern that the STB has over service.
Seriously and responding in ways that we think are necessary and appropriate.
And don't see the executive order is necessarily changing any of that.
Okay got it.
The color thanks for the time I appreciate it.
Okay.
The next question comes from Ken <unk> from Bank of America. Please go ahead.
Hey, great good morning.
So Pat on maybe a question for Sami, but Union Pacific suspended international intermodal traffic for a week last night I guess, we've seen this before.
El Paso Phoenix, maybe the the West coast ports in the early to mid 2 thousands after the Mega mergers of the late nineties, what's your thought on the ability for contagion on some of the supply chain shortages is there any impact for your network given the interaction with you Pete from Mexico.
And then just my follow on question I'll throw them. Both at you, but maybe can you provide any details on that contract dispute.
Well I'll take the first 1 no.
The latter.
Yes.
And just the comment on on the for on the first part obviously we.
Can't comment on what's what's going on specifically of QP, but theres no doubt.
You would use the word contagion and.
The.
On the North American Rail network is a network and particularly given.
Our inter dependence with other carriers.
And obviously <unk>.
Elevated in cross border traffic when other railroads have difficulty on their network, we feel it and a lot of cases, we help them.
There are detour options and other things that we can do to.
Serve our joint customers and that's very much the way we think of it is.
Particularly given the fact that we interchange so much traffic at the border with other carriers. These are joint customers. We're not we're not we have no no nothing to gain from.
Fully cooperating with the other carriers to make sure that our customer sees.
On adequate level of service, but yes. It is it is a interconnected network.
The level of of coordination and communication with the other carriers is very high so.
On a very.
Daily basis.
We try to find ways to help each other to relieve congestion to improve the the.
The utilization and efficiency of assets and different gateways and different routes.
But.
Particularly being among the smallest it's hard for.
When the rest of the industry is.
Tight and struggling with service and the capacity issues, we are definitely going to notice.
And Ken this is Sami.
Out of the supply chain issues.
Have been across the.
The real industry, the trucking industry, a lot of industries and a lot of it is bringing people back.
Like we have been talking about congestion on all of the rest here the role.
All of our coaster of volume drops and increases.
Down about 30%, 40%. This time last year, then you go up about 30%, 40% after and you have you have to bring people back.
It's not it's not a trivial exercise on trying to bring back also of the assets like a lot of locomotives of our stores, we have to activate them and when you look at let me look at the numbers.
The Etfs as an example in Q2 compared to Q2 last year, they want the pump by 30%.
The counting of transportation went up by 8%, so 8% against 30% volume increase the mechanic on head count went up by 3% so.
Bringing people back is not a trivial exercise and it did contribute for sure and also some of some of this congestion but at the same time. It does provide a nice productivity, saying because if you recall when we said.
Sort of phase II, which was last year.
We are very much oriented obviously at the large making up for the lost revenue and we said that in phase III, which is 2021, we don't want to lose all of the gains that we made so we did concern of a lot of the gains because the head count so im not going up at the same level as the volume increases.
And the train lengths is not built on very much it went down by about 2%, which means that the train starts on all of the rest we have conserved the lot of what we did last year. So the game really is how can you absorb the volumes how can you improve the service at which was the thrust of the phase 1 of <unk>.
2019, and we have done a lot of work in that area, we have ease of <unk>.
The envelope on the local.
The local service in the industry jobs on the spotting on pulling percentages, which went up from like 70% to 87% so in other.
Of the game is how can you improve the service absorb the volumes and still maintain some of the efficiency gains that we have done.
Finally on locomotives actually 69 locomotives are going to leave on network in the next 3 weeks leave the network now growing storage. They are leaving the network because of lot of of the locomotives are actually demo locomotives that were working on was the vendor so.
The efficiency of still there, but at the same time. The service is primordial and this is this is really the balancing act that way of trying to do and this is a challenge through the supply chain dealer field of questions.
Okay Sami just to wrap up on the is it hard to get the employees in terms of the labor market right now for the rail network.
I would say that initially it was again a couple of months ago. When we started the training classes.
It was tough to get to get people back on actually approach even people that we had net lumped it to bring back and they said they are no longer interested in obviously a lot of a lot of the the payments they had been receiving BK.
Became the.
He became a hindrance.
Why you like come back when they were getting 1 day were getting checks.
At home so.
Initially it was now recently, we have had much more success and we.
We have.
We have about the 140 people in classes for.
40 of them now have marked up meaning we can we can actually use them. So that is that it's still a honda the autonomy of the pipeline and when you talk about productivity on cost while you're on.
100 people here that have not gone into productive service yet but.
But they are counted in the head count so.
We say that the head count of 8% higher but it includes people who are still in training.
1 measure 1 measure we use I look at the lot is compared to pre pandemic not compared to Q2 last year, because Q2 last year of everything was was not really.
It is what it needs to the but the crews right now are still 5 percentage lower than pre pandemic and the volumes are 3% higher than other.
The strength of some higher so that is productivity and all happening and.
We are facing the challenges that are finding people now and.
And we expect that in total of 3 months.
Will be completely back on track and you know what John talked about the velocity and dwell we have very very clear plans now and we expect dollar on velocity to go back up to 16.17 miles per hour.
The next I would say months of too.
Wonderful. Thanks appreciate the Tim Okay.
Thanks.
The next question comes from Allison Landry from Credit Suisse. Please go ahead.
Hi, Thanks, Good morning, I. Appreciate you squeezing me in I'll, just ask 1 but I just wanted to go back to the topic of.
Switching, but you're sort of asking the question in a different way.
Obviously, it's difficult.
Can you estimate the potential impact for the industry never mind, what actions the STB might take on the path of any but Pat.
Is there an argument to be made that case, yes.
It would be less impacted on a relative basis.
Versus some of your peers I'm, just sort of thinking about the fact that you probably have less on the way up of captive captain profit more interchanges et cetera. So.
Just do you think that this is a fair way to think about it.
The fair way to think the Casey's would be less.
Impact yes.
Right.
It just really depends on what the rules are and without knowing kind of specifically.
How because there are many different proposals many different.
Options for how reciprocal switching would be actually implemented.
Just impossible to know how it would impact us Allison this is Mike.
Half of our business is in Mexico, which wouldn't be impacted so I think it's safe for you to conclude that but what the impact is in the U S relative to the others would be difficult to answer until we really understood. What the specific proposal is.
Okay understood I'll just leave that 1 thank you.
Thanks Al.
The next question comes from Brian Austin back from Jpmorgan. Please go ahead.
Hey, good morning, Thanks for giving me on on the call here at the end I appreciate it.
2 quick ones 1 on the network performance Jerry if you could just give us an update on the the <unk>.
For our border window change going from 6 to for how did that work any was there any benefit improvement when you. When you made that switch and what's the visibility to going to maybe 2 or.
No more fluid border crossings.
And then again back on the executive order. If you can just comment briefly on I think Sami just mentioned it on spotting and pulling if we do get more data on for first mile last mile.
Do you think we should interpret that as can be sort of hard to to put into context, because every network is different.
Customers really asking for this level of disclosure. So maybe since I think we can hear more about that potentially in the future.
Pat or someone can give us some on some thoughts on first and final mile that would be helpful. Thanks a lot.
As far as the first mile last mile.
I don't see I don't see any issue and on getting giving numbers like you also gave some numbers of the non.
<unk> learned from the 74% to 87%.
The.
John on the team have been unbelievably focused.
The size of Monterrey that John talked about was very intense and we have a lot of customers are on the Monterey area and and.
You can have the trip as fast as you can from origin to destination, but if you don't get it to the industry when they need it.
And then it doesn't make any difference so now.
We provide about 550 cars on the regular basis of the reliable basis every single day in the month of the area. We swapped 550 colors and the other thing of supplying.
The MTS also which is which is another thing that is important to know when the customer orders 50 empties that you give them 50 empties when you're giving them the right.
Type type of cars. So so that aspect has has really really improved on it's not mentioned in any of the slides here. So to your point, we should we should make that we should make that more of a public as far as the windows for our windows that has been a great success and we work the actually handing.
Handle the union Pacific on that because not all of our trains that go to <unk>.
From the bridge and now of train instead of waiting 6 hours. If you Miss the window you have to wait $6 for the next 1 now you with on the 4 hours of few minutes now obviously, we don't want to mess up all if we can help it but.
But that has been that has been a nice improvement, but the debt improvement is all changed was the rest because it's the network. So.
John on the team did a lot of work on in the Laredo yard, which has received the trains okay.
To plan ahead, 1 of the train our eyes, so everything is ready.
But the fact that now you send for hours worth of trains for a lot of it coming from Mexico, North bound is much better than sending for a lot of other than 1 shop 6 hours of our soft range.
If you don't love the yard. So these are these are benefits on they are all coordinated with the rest of the odds on the on the other side of the board on on the South side and on the level of lot of it essentially as of Monterrey and it all goes hand in hand on there is a white boarding is our size of it we don't even talk about here that just took place.
John was the new structure of that he talked about the new organizational structure.
And there is a lot of good things that are going to happen.
A lot of work was being done in yards that are not the best yards like no level of it was a nice.
<unk> total is doing work for <unk>, which is a very big yard at Sanchez was affected by the refined products, Okay, which grew by 100%.
From Q2 last year for Q2. This year. So all of these things are connected but to answer. Your main question. The bridge now of the Windows went from 6 hours for $4 and then the intention eventually the still go down to zero hour windows and to build the second bridge in which case I don't know windows of.
And then you will direction on northbound goes on southbound goes at the same time without having any any sequencing between trains and therefore do magic and ultimately the so the velocity of the case, yes network with a lot of cross border is what's growing the most on cross border rule by 50% from Q2 last year for Q2 this year.
And I think refined product across that is 100% increase right Mike.
Yes, yes over that.
Alright, Thank you Sammy.
The next question comes from Scott Group from Wolfe Research. Please go ahead.
Hey, Thanks morning, guys. So quickly can I just clarify if if for whatever reason the voting trust is blocked before August 19th does the shareholder vote still happen and then the executive order of focused a bunch on passenger service and Andrew can you just talk about like how much passenger serve.
This exposure you guys have in on what you guys are planning there.
First answer for.
Question, Yes shareholder vote will take place on August 19.
If there is the decision prior to.
And regardless of the decision.
Yes.
We <unk>.
The does not actually host any Amtrak we have I think.
A couple of.
For 1 location around the.
St. Louis technically the Amtrak rent over our tracks, but we don't control of it we don't dispatch it.
So we really have no.
The relationship with Amtrak.
There has been.
Talk obviously from from time to time.
With the with Amtrak and with other passenger.
The commuter metro type.
Organizations to bring passenger service onto our network.
That's really the extent of our relationship with Amtrak So we don't have a history with Amtrak.
And if you.
Familiar with the.
Amtrak response, I think they talked about.
The Baton Rouge, New Orleans route that has been identified as a divestiture candidate.
But there is no passenger service on that route today.
And by the way Scott there Hasnt been passenger service on that in over 50 years.
Okay. So so amtrak shouldn't be a big issue there just the real quick follow up if for whatever reason, we don't get a.
Voting Trust decision by August 19 does the shareholder vote get delayed until there is a decision.
No.
Again as I mentioned earlier, the intention is that the shareholder vote would be subject to share.
The shareholder approval would be subject to STB approval for of voting Trust.
So if there is no decision it would be our intention to proceed with the shareholder vote.
Okay. Thank you guys appreciate the time debt.
The next question comes from David <unk> from Barclays. Please go ahead.
Okay. Thanks for taking my question.
Maybe for Mike.
As you've had the opportunity to review some additional data.
With respect to potential additional traffic that you can convert the for lung CN line KFC aligned.
Has that changed.
Changed your opinion on the potential benefits of.
Converted traffic.
Due to the merger.
Yeah.
Is that of questions specific to the synergies.
I guess I'm thinking more broadly on how much.
Long term do you think is convertible just as yet.
Yes.
I think <unk> done a really good job of evaluating the various market opportunities that for.
Present themselves to the combined company here.
And.
We've done a terrific job growing our business over the years.
Often use the cross border intermodal business at Laredo, depending on how you measure that we think we of somewhere around 5% to 6% share, which that's interesting but that's.
That's far short of of the possibilities and the challenge that we've always had is we don't go to any interesting places and single line service.
Not to say, Kansas City is an interesting place it is but it's not a market like Chicago or of Detroit, or Toronto, which is the attraction of combining with CN and we think we can dramatically increase the share of that cross border business that is being moved.
By truck.
And move that business off of the highway systems more environmentally friendly we can establish premium intermodal service that we think will compete very effectively with other modes of the hopper.
Opportunities are out there for shippers and provide a new services bottomline doesn't exist in the market today. So I think that's a great example of beyond that we've looked at it segment by segment and think there are tremendous opportunities for the 2 companies to provide new single line service the.
The pro competitive and offer shippers more options.
Thanks.
Okay.
Your capital plan at least the level has not changed I guess have you changed.
Any composition of the capital plan.
In response to kind of preparing for the potential merger and maybe some additional growth of terminal facilities that.
You might want to put in place or is that kind of planning not kind of in pen yet.
No not really I would say, we're executing against our plan I mean, you always have some pluses and minuses and John was recently added on the railroad with his team and a.
A few projects here and there. So you add a few you take a few way, but generally we're still on plan. We don't see any reason why we would scale that back.
We've got to continue to operate as the.
Independent company.
Obviously, both before voting trust closing and after voting trust closing in the <unk> offered us.
The opportunity in the merger agreement to spend more than what we've guided externally in the event that there are additional growth opportunities or projects of Johns team needs to execute on so so yes, our plans of really not changed and we've got lots of flexibility going forward under the merger agreement.
Thanks, Bob.
You bet.
This concludes our question and answer session I would like to turn the conference back over to Mr. Ottens items Meyer for any closing remarks.
Okay. Thank you all thank you for your questions, obviously, the challenging environment.
For us as well as for the.
The supply chains across North America and beyond.
Hopefully 1 of the things that you heard today is that.
We are very focused on improving our service.
And the operational performance, we feel very confident about the growth opportunities that are in front of us and working very hard to realize those opportunities. So thanks again for your attention and look forward to seeing you all again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].