Q2 2022 Canadian National Railway Co Earnings Call
Yes.
Now that's on 2% volume growth higher fuel surcharge revenue and a strong yield management.
The operating ratio for the quarter was 59% a 260 basis points improvement over Q2 last year.
The network is fluid and the operating team has done a great job of improving performance.
Across the network the.
The commercial teams had a strong quarter on yield and bringing these together with the work of the rest of the team has enabled us to deliver a record EPS, we achieved $1 93 in the quarter up 30% over last year.
Solid performance by the team.
Now as I reflect on my first few months as CEO of this great organization.
Say that everyday I feel more excited about the future see them.
I spent a lot of time during these last few months meeting with our employees across the system with our customers' conversations with government and with our investors, including many of you and.
And since our Q1 call in April .
Spoken about some of my key priorities and these remain the same.
I am really encouraged with the start that we have.
We're far from done as I said, but I'm seeing a team that is leaning in doing it together focused on bringing <unk> back to being a leader in the industry.
And I'll, let my colleagues today highlight some of the progress, we're making but before I turn it over to them I'll provide a few high level thoughts.
So firstly, we spoke about leaning into a scheduled operation.
This has launched very well and it's leading to improved performance for our customers and across the network.
We continue to build momentum here.
Rob is going to provide you with some more details on the <unk>.
And also on our preparedness to accommodate what we believe will be a very strong volume growth.
I expected in the second half of this year.
Secondly, it's about being thoughtful and intentional about our book of business, our customer service levels are better and we're going to stay focused on this.
We know that we earn our way to grow by running a tight efficient operation and freeing up capacity for growth. This is important as we ready ourselves for the volume coming particularly in the Western network over the remainder of this year.
We've seen over the years a lot of growth in the Western corridor.
This is an important region for us.
And as we move forward, we're going to keep focusing on it but we're also going to lean into more fully utilizing the other parts of the network densify, the eastern region and southern region.
This will strengthen our business.
Our resilience is going to drive stronger returns now Doug is going to provide you with an update on the business environment and double click a little bit on Halifax, which we believe is a gateway that will provide significant opportunities for <unk> in the future.
Third I talked about working in a much more integrated basis we.
We need to sell into the schedule and the operating model that we have in a way that leverages our strength.
Our efforts to do this in a coordinated way are generating results.
<unk>, Rob Doug and I meet on a regular basis and we look at pretty much every contract every pricing decisions. We worked the resource levels, whether it's crews and equipment.
And we work our capital spend where we're investing we know that success is about having all of these levers set in the right places and our decision not always easy, but we do it as a team and I think it's driving the right outcome.
And finally, it's a bone ensuring that we grow the top line.
Same time that we're growing both that were growing the bottom line.
Our results this quarter reflect this effort and I'm pleased with our progress and our momentum here.
We will provide more details of our financial performance in the quarter.
So our plan is working and this team share our full team.
Is focused on delivering solid results as we move into the second half of this year now let me pass it over to Europe .
Thank you Tracy the team delivered a very solid quarter of operational results and I want to thank the employees in the field for their continued dedication and focus as we continue to progress on our plan.
I also want to thank the employees that were on duty during the recent signal and communications employee 16 days strike, who worked hard to keep the railroad running safely.
Amit uninterrupted.
Operating performance improved in the second quarter, when compared to last year as we emphasize running the railroad the plan.
Initial focus was on train departures and we started it or for hump yards in April and then we turned our attention to our key flat switching yards in may.
Since then we've seen solid improvement in our.
Origin on time during departures, which reached over 90% in June up 14% from June of 2021.
So also helped our connection performance, which was up 30% to nearly 80% in June clear.
Clearly the team has made solid progress on executing to the plan.
While the second quarters when the railroad typically gets its footing after coming out of winter. This year's performance is more than your typical improvement and highlights the dedication of the operating team to execute to the plan.
Team achieved performance on a number of operating metrics that we haven't seen since prior to the pandemic, particularly in Western Canada, where car velocity is the fastest since Q2 of 2017 network train speed is the best since Q3 of 2017 and through dwells the lowest since Q3 of 2016.
Team is also delivering for our customers and working closely with the marketing team as we look to densify part of the network, where we do have capacity.
While volumes were down in the west due to lower grain volumes GTS in our southern region delivered all time Daily records for the quarter.
In addition, this quarter to this quarter the team once again set an all time record for fuel efficiency for <unk> and for the industry, which drove the avoidance of approximately 43000 tons of carbon emissions.
We are confident that these operational changes are sustainable and will drive further efficiencies as we get ready for a very busy fall with continued broad demand in a more normalized Canadian grain crop.
We continue to prepare our resources to handle these expected volumes.
Our head count is up 850 from the end of last year with a large part of that increase being conductors as we prepare for a strong Q4.
We purchased 47 locomotives that will all be in service by the end of September we have 500 more additional high capacity hoppers to the Green fleet and continued to add capacity to our western quarter with four additional siding projects.
Finally, a word about safety our safety performance aspirations are anchored on the fundamental belief that all injuries and accidents are preventable.
Our objectives are simple eliminate on the job fatalities and reduce serious injuries to become the safest railroad in North America. We're proud it's been over a year since we've experienced a serious injury in over 18 months since our last tragic fatality, both of which are the longest streaks in our company's history.
With that on mass Doug to provide some color on the marketing side.
Thanks, Rob and kudos to you on the operating team for delivering a solid performance in Q2.
We are working hand in hand, with the operating team to deliver for our customers.
Let me take a few minutes to highlight our solid top line performance in Q2 and expectations for the balance of the year.
We delivered positive volume growth in Q2, with Rpms up 2% and revenues up 21%. Despite a 40% decline in Canadian grain shipments. This is a new Q2 revenue record.
We focused our sales to the eastern and southern parts of our network, where we have more capacity to grow.
We saw solid growth in P&C from refined petroleum products and also crude oil, which is filling available capacity due to lower Canadian grain volumes.
Automotive volumes came back strong with us from a six to 12 month backlog on orders.
U S grain and coal continues to remain strong due to the unfortunate war in Ukraine, and the sanctions on Russia.
Forest products and metals orders remained strong and well above empty car supply.
<unk> car cycles on interline shipments are reducing overall car supply for our customers.
Domestic intermodal remains strong with no slowdown in demand.
International Intermodal volumes were down in June as we are metering flows of western imports desk into Montreal, and Toronto to ensure fluidity of terminals as the industry faces driver shortages and full warehouses.
We remain focused on yield management with inflation plus pricing on renewals as well as other surcharges on older contracts for additional storage and services.
As we think about the second half of the year, we continue to assume low single digit RPM growth for the year.
The current demand remains strong and we continue to dialogue with customers to monitor any signs of weakness.
On Green, we are still expecting our Canadian grain crop over 70 million metric tons versus less than $50 million last year.
We are working with our supply chain partners and customers on solutions to alleviate the challenges with import containers destined to Montreal and Toronto.
We have recently opened up additional storage capacity in each area to add some flexibility to the supply chain.
We will continue to benefit from strong coal prices higher production from Qdoba restart of CST and coal valley mines as well as continued strength in U S coal shipments both domestic and export.
We remain focused on driving strong yields with contract renewals coming in above rail inflation.
Before I pass it onto his lane, let me take the opportunity to highlight an example on how we plan to densify the eastern part of our network.
The port of Halifax, which is solely served by CN has significant opportunities to attract additional container business in the future.
We are working very closely with our partners PSA Halifax to leverage this unique gateway.
PSA now owns both terminals in Halifax, and have made considerable investments over the years.
The port's capacity is about 115 million Teus and is currently operating at about 50% of the capacity.
We see significant opportunities to add incremental business over the next few years on a part of Cn's network that has capacity to grow.
With more production coming to southeast Asia, We view Halifax, as well positioned to accommodate this shift of production that wants to make its way to North America.
Our service out of Halifax has the fastest transit times from the East coast to Montreal, Toronto, Detroit and Chicago.
Last month, we started a second daily service out of Halifax, and after four weeks, we have moved 24% more containers and reduced PSA is ground count by 27%.
I am very excited about the prospects for Halifax, and our partnership with PSA.
So in closing my team's focus is on providing the level of service our customers have come to expect from us and driving top line growth to the bottom line.
With that I will pass it on is just land.
Merci Beaucoup, Doug <unk> entity minutes.
I will talk to page 15 of the presentation, which will provide more visibility on our second quarter performance.
These results highlight the strength of our franchise as we delivered volume growth of 2% in terms of our Tms and 21% growth in revenues, despite a significant headwind from Canadian grain.
The top line performance combined with a solid operating performance drove record earnings in the quarter.
Let me provide you with more details on the quarter.
My comments will reflect adjusted results, which exclude advisory costs related to shareholder matters.
We delivered adjusted operating income of nearly $1 8 billion in Q2 up 29%.
Our Q2 adjusted operating ratio came in at 59%, which was 260 basis points lower than the same period last year.
Our fuel expense was up over 70% as we saw fuel prices continue to rise in the quarter.
We have an effective fuel surcharge program that deals with fuel price fluctuations like this but it does create some noise in the short term.
In the quarter, we were impacted with the unfavorable fuel surcharge lag versus last year.
Adjusted diluted EPS reached a quarter record of $1 93 up 30% versus last year.
We generated free cash flow of almost $1 billion in Q2 up over $250 million from last year, mainly due to higher earnings.
Under our current share repurchase program, which runs from February one 2022 through January 31 of next year, we have repurchased just over 15 million shares for $2 3 billion as at the end of June .
Moving on to page 16, we remain confident on our outlook for the balance of the year and are reaffirming our 2022 financial outlook, including adjusted EPS growth in the range of 15% to 20% with an operating ratio that starts with a five.
We expect volumes in <unk> to be up in the low single digit range for the year with strong growth expected in the second half of the year, including a normalized Canadian grain crop starting in the fall.
We continue to assume that in 2022, the average price of double UTI will be in the range of 90 to 100 U S dollars per barrel and the value of the Canadian dollar and U S currency will average approximately 80 for the year.
We are not modeling any major service disruptions in the second half of the year and our outlook does not assume an economic recession.
That being said, we have a strong bulk franchise, including grain potash and coal that is less impacted by economic fluctuations and a current backlog of lumber traffic.
In conclusion, let me reiterate a few points.
The current demand environment remains strong the.
The network is fluid and running well as we continue to run a scheduled railroad with a focus on car velocity.
While we are seeing some inflationary pressures starting to impact our cost we are closely monitoring the situation and making sure that we control our expenses and continue to price above rail inflation on contract renewals.
We have an advantage network and know what this network can produce.
We have a strong balance sheet that provides us financial flexibility and we will allocate our capital in a manner that drives long term value for our shareholders let.
Let me pass it back to Tracy for some closing comments.
Thanks, James let.
Let me just close our prepared remarks by reiterating a few key points.
We have an advantage three coast network with a balanced book of business.
We have a solid pipeline of growth opportunities across many segments.
Having provided you with one example, Halifax with a significant opportunity to densify the eastern part of our network.
And as highlighted by Rob, we're making some good progress on the operating side the railways fluid.
And we're running faster and more efficiently.
We will invest not only in our capacity to accommodate growth opportunity, but also in our talent to develop the next generation of railroad and we're looking forward to discussing.
More of our growth strategy, when we get together at an Investor day in the spring.
Is a great company with significant potential.
Excited about our future now we're happy to have to pause and take your questions.
Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
As previously mentioned, we ask that you kindly limit yourselves to one question.
The first question comes from Chris Wetherbee from Citi. Please go ahead. Your line is open.
Okay.
Yeah, Hi, guys. Thanks, Thanks for taking the question I guess, maybe I wanted to kind of focus on the operations and the back half of the year. So you've given us the RPM guidance for positive inflection in moving forward from the second cohort quarter I'm curious as you think about sort of the cost opportune.
<unk> or the efficiency opportunity how much do you think you'll have or will be able to be realized in the back half of the year I don't want to get a sense of what's included in the 15% to 20% EPS growth year over year.
Maybe where you see opportunity to either <unk> or may be pressured a little bit by the macro.
Thanks Christi operations team has done a tremendous job of kind of putting our.
A foot to the gas on on this network and this operation certainly it's going to be a different environment in the second half and I'm going to ask Rob to comment on some of where the opportunities are and where the pressures will be Chris. When you look at 2022, it's really a tale of two halves really the first half of this year has been driven by.
The southern portion of our network in GTS in volume, we've experienced some crew delays down there just because of the.
The volumes that we've handled so we look to see that actually improve in the second half of this year as well as <unk>.
As well as eastern Canada, the big volume that we're going to see in Q4, it's really western Canada and with the normalized green crops. So some of the some of the velocity that we're seeing right now may come down a little bit is that volume really starts to pick up but our focus in terms of running the scheduled railroad as we've continued to emphasize here will continue.
Due to pay dividends and we'll continue to press that even in even in the high volume times of the year and we expect to see some some benefits from that.
Our next question comes from Brian Ashton back from J P. Morgan. Please go ahead. Your line is open.
Okay.
Okay.
Hi, good afternoon, thanks for taking the question.
Maybe one for Doug can you talk about yields and can you breakdown in the quarter, perhaps maybe your core price mix fuel FX a lot of moving parts, maybe even some storage fees you mentioned certainly.
That'd be helpful for some context around that and then just the sustainability of events for the back half of the year your visibility there and expectations for next year as well.
Okay. Thanks, Brian It's Doug So listen we don't really we don't guide on what our prices, but we continue to do it well above inflation. So we've had great success on our contract renewals as we go through that and really where the rest of it is coming from is with the supply chain disruptions are out there, we're providing a lot of additional services to customers for stores.
<unk> and for other things that they need done and Thats, where the rest of it's coming from so we're actually able when you combine it all together, we've been able to keep well above rail inflation for our pricing.
And we continue to see that that will happen really for the rest of this year and we even see it into next year right now.
Our next question comes from Ken <unk> from Bank of America. Please go ahead. Your line is open.
Okay.
Hey, Greg congratulations that Tracy and team.
On a great quarter, maybe Doug talk a little bit about the ramp up volumes you noted the opportunity of the east coast, but.
You need a sizable ramp to get to that low double low single digit RPM targets, maybe talk about the the rolling of Green, maybe the downside of economic pressure that you've built into targets.
In terms of getting to that target and maybe also the kind of labor thoughts there.
What you need to get there.
Paul I'll tell I'll talk about the markets and then I'll turn it over to Rob to talk a little bit about the labor, but Ken So I will say listen a lot of this is going to come out of the Canadian grain crop like that's really what we're going to see is a big increase this year, we're seeing well above 70 million metric tons right. Now is what the forecast is but so we're looking we're guy.
Towards that and Thats what were were set for now everything else is remaining strong at the same time I'll say the only little hiccup. We've seen recently is the international intermodal and we've put more.
While we've put solutions in place for that that are taken in effect right away actually so we should see that improve for August with that I'll turn it over to Rob for any thoughts on labor and from a from a labor standpoint, Ken we have been preparing for this more normalized grain crop in Q4 and certainly that's what it appears as we sit here today that we're going to we're going to be.
Back to those levels. So we've been hiring in western Canada.
Other than some of the hard to hire locations that we typically see we're in pretty good shape as we as we go into Q4 some of the crew issues, we experienced in the south where some of the geopolitical issues with Ukraine that really.
Allowed us to move more freight in the south so we've been hiring for that we get much better here as the quarter comes to a close so we will continue to stay after it and as we look into next year, we will continue to plan for attrition as well.
Thanks, Ken.
Our next question comes from Kunal <unk> Gupta from Scotiabank. Please go ahead. Your line is open.
Okay.
Yeah.
Okay.
Good afternoon, and thanks for the question and congrats on a great quarter.
Wanted to ask.
The labor question, a little bit differently here.
In terms of resource level, where you are relative to where the economy is how soon can you adjust the network and resources if demand starts to slow down versus your expectations.
Yes, so we're certainly play in different scenarios as we as we go forward, we've shown the ability to adjust when it comes down to labor, we'll certainly take a look at that and we.
We'll do things like repositioning people into other training or other departments to make sure we hold onto that labor versus.
Versus furloughing and dealing with some of the issues I think some of the U S. Railroads are doing right now, but we walked through a number of scenarios out there growth scenario and also something less than that and we will be nimble obviously with cars locomotives. We can do things very quickly in terms of laying those up and we'll do that as we start to see if.
We see any of those signs.
Okay.
Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is open.
Okay.
Hi, guys. Thanks for fitting me in here so sticking on the intermodal theme, Rob I've heard from some former colleagues in the shipping industry.
You guys are being reserved.
Truck availability was challenging.
Are those challenges right now could you talk a little bit.
Where the level of congestion is and what the risk is to the volume growth on some of those sort of inter linkages. If you will and then do you have any sort of commitment from the two supplies on Halifax longer term I'm. Just wondering if this if this shift of volume off the eastern.
Canada, Northern ports can be tied to some of the backlogs we've seen in some of the U S East coast ports.
Thanks for that question David and.
We're going to turn that one over to Doug he's been leaning into some of the trucking issues as well so Doug why don't you take both of those.
So David so really the issues are I'm going to say more in line. So that's the Montreal Toronto areas for Us and we've also seen it a little bit in Chicago, so with the warehouses being full.
There is no places for the containers to go once they get inland so thats been backing up the terminals, which then backs up at the ports, which backs up ships at the harbor. So what we've been doing is we've been focusing on how do we move that and create extra space at the same time. There's also been a shortage of drayage that we've found out so it's been down roughly 18% from what it was.
Year over year in June so we have been working with the freight forwarders and the different drayage companies to be able to increase that and we have seen it really improve in the month of July . So that's all good news and we've seen dramatic improvement now what we're also doing is we're working on new storage locations in Toronto, which is up and running already and a new facility.
Here, just outside of Montreal, which will be up and running next week now on Halifax, We don't have any customer commitments to give us specific volumes through there we have to build up our service, which we already know is there and that will attract the new business. So we did have already great success over the last four weeks and we expect.
To see more of that with the customer base because of the service that's there.
Okay.
Anything anything from from vessel schedules or category.
That give you confidence in sort of 2020 volume or.
Sorry, David you're breaking up.
Sorry, I was just wondering if there were any commitment from the steamship lines on 2023 inches of alcohol.
No we don't have any commitments as of yet first of all it for solid numbers yet.
Okay. Thank you.
Our next question comes from <unk> <unk> from <unk> capital markets. Please go ahead. Your line is open.
Okay.
Okay.
Yes.
Tracey to decouple.
My question now.
Just wondering with respect due to reduced government climate claim which has focus on reducing nitrous oxide emissions for fertilizer any potential adverse impact in the long term on the grain at FERC Tracy any comments on that.
Massimo.
Sure Mark.
I'm going to turn that one to Doug.
First let me say that.
We've got some pretty strong forecast for fertilizers and green as we look forward. It's one of the unique.
Benefits of Canadian economy, but Doug do you want to comment on the specifics.
Sure Ben also specifically just around the fertilizer market listen we have actually a fairly wet spring. So we actually saw some lower volumes there in the first half we're expecting a normal shipment pattern actually all throughout the fall and into next year. If you want to talk specifically about potash, we're seeing obviously, a very strong market.
For offshore and the domestic market suffered the same as the fertilizer sales. So we see that pickup in the in the.
In the second half as well.
It continues to be a very strong market right across the board.
Okay, and what about the potential desire to reduce by 30% by 'twenty.
Just wondering about the reduction targets, whether you see any impact.
Yeah, Doug longer term.
I'll take that one then what's so this is <unk>.
Thing that this organization has done a great job on we have right now the we're.
Starting on those targets in the right place switches.
The fuel efficiency most environment of course come from locomotives so.
So we have seen I think Rob laid out a 4% improvement in fuel efficiency year over year, which is a tremendous improvement and we continue to be.
I think the best in the railroad sector from a fuel efficiency perspective, so thats phase one.
Beyond that we have.
A plan that will take us toward.
What is the what is a scientific base target corporate team has developed and we're going to lay out a little bit more of our investment to do that as we go forward, but I am pretty pleased with the plan that's in place and with the progress that the team has made on that stage one Pete.
Okay. Thanks for the time and congratulations again.
Okay.
Betsy.
Our next question comes from Amit Mehrotra from Deutsche Bank. Please go ahead. Your line is open.
Yes.
Thanks, Operator, hi, everybody congrats on the results just lane I just wanted to.
Understand the guidance the EPS guidance for this year, if I if I look at the first half.
EPS adjusted EPS is up 20% year over year, So I guess to get to your full year guidance implies a step down in earnings power in the second half relative to what you did in the second quarter. If you can just address that and then Tracey I think I believe the company brought in Ed Harris as an operational consultant.
Just wondering if you could talk about that why did why did you and the team decided to bring them in the scope of this work is at CN and maybe share some of the results that that has occurred since since bringing them in as well. Thank you.
Yes, Thanks, I missed maybe I can start and then pass it onto you Tracey back so listen.
Yes, I mean, you heard a little bit of what Rob talked about in the second half of the year from an operating standpoint, and then Doug talked about what we can do from a from a revenue and volume standpoint. So when you do all of that math.
We come in.
Again, reaffirming our guidance of 15% to 20% now what.
We said in here and.
And we purposely intentionally laid out our assumptions to help you guys understand how we get to those numbers.
The big normal right now is what's going to happen on fuel fuel is up and down quite significantly.
And as you can see as well we are.
Assuming foreign exchange of <unk>, and if you look at it today the current spot the current spot foreign exchange I think a 76 or 77. So there is lots of moving part I think that.
Last year, we did have a couple of service interruptions as well.
And then when you get to the back end of the year remember, where the where the railroad of the north So we get hit on winter, sometimes quite early so when you put all of these in.
Again, we feel comfortable with reaffirming our guidance of 15% to 20% and with a new law that starts with a five so if you remember in Q1, we started a little bit from the bag fees at 166, we did much better this quarter on the 50.
59, we expected that because from a seasonality standpoint, Q2 is always better than Q1, and we're going to we're going to continue to push on our expenses in our operations and on the top line and on this maybe I'll turn it over to you Tracy. Thanks, Jason Let me make a quick comment on that when I came in.
We were looking at what to do with our guidance on the year, we considered a whole range of scenarios.
Building kind of the expectations that we put in front of you last quarter.
Yesterday laid out a number of the assumptions that we've made as we look to the remainder of the year, particularly on those things that we don't controlling just spoke about them now there's a lot of year left.
And <unk>.
Positive we're optimistic we're working hard to get ready for what's coming but theres a lot thats not yet certain so we are comfortable with how we're doing we're comfortable with confirming our guidance and based on where we sit now and what we see coming as to your second question.
We have a few people on the properties that are giving us advice, we're pretty intent on where we're going and getting there as quickly as we can and so one of those folks is as you say Ed Harris Zane on the consulting arrangement largely for <unk> purposes, and maybe Robert.
If you speak to what you've asked it today, yes, Amit very fortunate to have had as a sounding board for the team obviously brings great experience and great knowledge and our goal is really about improving every facet of our business, whether its operations marketing finance et cetera. So when we have opportunities to bring people in that can that can help with that.
<unk> help us continually improve we do it.
Operations is about running a safe efficient operation that continually meets the service.
Our customers expect and need and that's really what it's about in the end the team in the field is what will and is driving the results and Thats really where the credit goes I appreciate the question.
Okay.
Our next question comes from Saudis gentlemen from BMO. Please go ahead. Your line is open.
Yes. Good afternoon, thanks for taking the question.
Maybe I'll do two <unk>, one as well so on the pricing side.
Tracy you talked about the opportunity to revisit pricing on some of the business.
And what inning would you say you are in terms of.
Kind of revisiting the pricing on that business.
My main question really on the auto IC as well.
Talk about kind of bringing sandbox to kind of top tier performance in the industry.
The dialogue in the past have been at around mid teens auto IC than we've seen.
A few of your peers kind of move up into the high teens do you see the scope of that happening kind of in the next couple of years to kind of bring those alloys back too.
Top tier in the industry.
Thanks for the question setting and listen let me start with the first one.
As we think about it.
What we call Curating the book of business are being intentional about the book of business, it's not just pricing without understanding our network and our operating plan and wherever you have capacity. So you heard Doug talk about this where we have available capacity.
It's short term or long term does team sells into that and we want to drive earnings and drive more operating efficiency to that where we have more demand than capacity on we can't operate effectively or deliver for our customers and we make adjustments there as well and in all cases, we ensure that we've got a book that.
Pacey at the appropriate price. So yes, it is about being intentional about what we're putting on our network drives the right service the right philosophy and the right bottom line growth and this isn't something that is I mean, I think this team put a really hard shoulder into that this quarter, we're going to continue to do that and but we get some some of what we need to clean up.
Cleaned up.
So youll see us continue to do this will always be opportunities.
And I expect it's something that we'll be talking about as we go forward as well when it comes to.
Our ROIC.
I'll, just say generally that what we're really focused on and then I'll turn it over to <unk>, but what we're really focused on right now.
Delivering to the goals that we laid out for you for this year and we look forward when we get together next spring at an Investor day to kind of lay out what you think the longer term holds Bret do you want to add anything to that I think you covered it well I think that we've guided that we would hit and a ROIC of 15%. This year I think we're very confident that we will hit that and <unk>.
That will provide more visibility from a longer term standpoint on the on some of these measures. When we have our analyst day that we've always already said that we were shooting for some time in may So we'll provide more visibility on some of these metrics.
At that time, thank you.
Our next question comes from Jon Chapelle from Evercore. Please go ahead. Your line is open.
Yeah.
Thank you good afternoon.
So I wanted to dig a little deeper on with great operational alignment and then the last 90 days, we've definitely taken.
Focus to the operations of the network and it shows a lot of the service metrics you have in your outlook for the back half of the year the double Green arrows. It doesn't all go over slide 12, when you think about positioning them from focusing on the network and the service and then really leaning into that and really pushing for topline growth. What are some of the metrics that youre looking at that gives you the comfort.
You can lean in a little bit more to solve the network.
Thanks for that question Youre kind of getting into where these shorter term needs for longer terms. So we have a pretty clear view of what our book of business looks like for this fall and so most of our focus is making sure.
We manage that well and well means that were doing in a way that delivers to our customers.
Whatever part of the network that we're on.
Where we have opportunity.
Like the west is going to be full where we have other opportunities to different parts of the network.
If we've got more capacity, we'll do more of what Doug and team have done with Rob in the last quarter, which is identify the capacity and look for the opportunities whether they'd be short medium and long term.
To fill that that drive.
Growth to the topline, but as importantly, we do it when we can drive growth to the bottom line.
So youre going to see us working those too.
In.
At the same time and in a way that's connected to each other so right now what we're focused on is making sure that the way that we move this big volume that's coming to us in the second half of the year.
Okay. Thank you Chris.
Our next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.
Thanks afternoon, guys. So to Atlanta, I, just wanted to come back to the guidance I understand there is some moving parts here, but it's worth looking at this right.
<unk> second.
Second half operating ratio and volumes are better than second quarter, but the earnings maybe potentially a little worse is that right or is there any more it's maybe just a little confusing is there any more color to share is there a piece of the guidance the earnings of the <unk> guidance that you feel better about them.
Any help there would be great. Thank you.
Listen Scott, we do provide annual guidance, we don't we typically run away from providing either quarterly guidance or half of the year guidance I think that.
We ran a lot of different scenarios under with.
With Tracey and Doug and the team.
<unk>.
And I think I'll leave it at that we are comfortable to reaffirm our guidance.
As I said intentionally put out our assumptions out there to help you guys.
And.
I'll leave it at that.
Okay.
Okay. Thanks for the question Scott.
Thank you.
Our next question comes from Walter <unk> from RBC Capital markets. Please go ahead. Your line is open.
Yes, thanks very much for taking my question.
I just wanted to just one clarification on the Halifax, I know, Doug you mentioned 600000, Teus and no added a second train Thats led to a 24, 24% increase or does that mean youre running it at $7 50, if you could just clarify that but my main question is on the West coast.
With the labor disruption potential labor disruption in La long Beach historically, that's led to volume increases I know, Eric Wallets adult part isn't indicated that's been as much as.
13% above the norm.
Are you seeing that go up there are you worried about that.
Further clogging your your capacity how comfortable are you at handling.
And any any increase or the increase you might be seeing in la long beach familiar long beach potential labor disruption any visibility as to whether that's happening now as it has in the past when that type of labor disruption.
Right.
Okay. So Walter thanks for the questions. So for Halifax listen, it's we're starting to train out it's a little bit shorter than running a full trained today is at least but were also picking up a lot of freight and Moncton as well and by the time that train is running through the rest of our eastern operations running at full full size. So it's it's a combined train in the end.
But which starts out as a full intermodal train and its so and we've been very successful with it and we're going to try and grow that out to a full train, but we can't do it day, one, but we got to start somewhere and it's been working really well on.
On the West Coast, you're absolutely right. There's been a lot of talk about potentials for our west coast Port strike in the U S. Listen we haven't seen anything come up north yet we haven't had anyone talk to us about it.
And right now we are.
The terminals are kind of fully in Canada already so we're working on bringing those numbers down for them. So they are fluid could we take some extra volume there is some potential but it depends on the supply chain and we would really need to do it before the end of September when granting kicks in because then we won't really have any available capacity to do it.
I appreciate the color there.
And congrats on the great results. Thanks.
Our next question comes from Brandon <unk> from Barclays. Please go ahead. Your line is open.
Yeah.
Okay.
Good afternoon, and thank you for taking my question.
Doug I guess in response to that question.
You talked about your I think still metering into Toronto and Montreal. If that's correct is this a physical.
Physical limitation on your terminals and are these storage positions more a temporary solution or a permanent solution.
And I guess more broadly if I can sneak in a similar follow up is there any signs of weakness in the portfolio today that would point to a softening economic environment. If you don't mind.
Okay. So so the metering it hasnt really went on in June more than anything else and for the first half of July So last week, we put in a new solution in Toronto, and what that's allowing us to do is to vacate the terminals. So the issue was that we would the boxes would arrive in Montreal, and Toronto and no one would pick them up because there were.
Any place to take them.
The warehouses were all full as plus we did have some there wasn't enough.
Capacity.
Now we've created a partnership in Toronto that has its own drayage service and the ability to store boxes. So that's really helped us out in Toronto were back running Toronto at full speed and actually running some extra freight through there to help both the west coast ports.
With respect to Montreal, our solution really starts up next week and will be in the same position there, but Montreal has already started to improve already so so thats, how thats working and we expect to see all of August running at full speed if not higher.
Now with respect to that we have seen no weakness at all in any of our markets and.
We will keep giving that guidance until some of our customers tell us differently.
Thanks for the question.
Our next question comes from Steven Hansen from Raymond James. Please go ahead. Your line is open.
Yeah.
Yes, hi, guys. Thanks for the question.
You referenced some operators to crude by rail movements in your commentary for the period, just curious as to what kind of longevity, you see that business through the back half of the year.
Now it might be interplay with the arrival of the Canadian grain crop.
So Steve we actually really plan around it so be it.
Rob talk about it every month, we go through it with the customers as well and really it's one larger customer who has the opportunity to do it it's moving from the Alberta market down into the Gulf Coast and we've been taking it month by month. So we actually we've agreed to take it I'll say through the rest of partially through the rest of Q3 and probably we will finish.
And it will finish in Q3, so when Grand starts at the end of September we expect that to be using the capacity and we're fully planning for it and we will take the crude off the table at that point.
I appreciate the color. Thanks.
Our next question comes from Ravi Shanker from Morgan Stanley . Please go ahead. Your line is open.
Thanks.
One.
A quick question on Halifax, again build on how excited you guys sound about it and.
It sounds like your port partners and customers as well Doug.
It sounded like you guys expect a meaningful shift in near shoring overtime.
Impacting our volumes coming in North America from Asia. So if you could just unpack what do you think happens with that over time that would be great.
Quick follow up as land I'm, sorry did you quantify what the strike impact was in the quarter.
Okay.
Okay. So I'll start off so with Halifax note, we're seeing lots of volume shift over to southeast Asia for production and for sourcing and Thats coming in to come into the East coast just as easily as go to the West Coast, where we're seeing that diversion into the east coast and I think all of the East Coast ports are seeing at Halifax is greatly positioned to take on more of it and we're working with the <unk>.
Customers to do that but we had to put the service in place to attract the business and really thats. What the focus has been we havent seen a lot of near shoring come into North America, yet, there's a lot of talk and we've seen a little bit of it but nowhere near that anything that will impact the volumes for this year or next.
Yes, maybe.
Thanks, Ravi on the strike impact I would say.
These were 750 unionized folks that were on strike for 16 days I would say the impact was zero minimal to zero and again I want to thank our management team under Rob's leadership, and Tom <unk> leadership that kept the railroad running without any blip.
In the quarter, so I really want to thank all of that team.
Did a wonderful job keeping as I said, the railroad running flawlessly and safely in the second quarter.
Thank you thanks Ravi.
Our next question comes from Tom Waterworks from UBS. Please go ahead. Your line is open.
Yes, good afternoon. So.
I guess a question on the <unk>.
Your modem side revenue per piece was up I think 33%, so a pretty big increase in revenue per piece and intermodal.
And.
I'm guessing maybe a piece of that might be storage fees can you give a sense on kind of is that a meaningful component.
And how might we look at the.
Intermodal revenue per piece in <unk> and then just another on the intermodal side.
Some Walmart news recently that points to softness in the consumer and I guess, that's been a kind of a concern for a while do you see any risk to kind of.
Slowness in international intermodal, when you look to <unk> or even potentially into 2000 22023.
<unk>.
Okay. So Tom so on the on the revenue per unit. So those numbers. We don't we don't really give guidance on that there's a lot of mix in there. So really what we've done is we've seen continued progression, we're taking pricing action.
So on our contract renewals. So we've seen that and we will continue to see that we continue to see like we're seeing in the terminals and one of the things that are the storage charges. So that's a big part of it those will start to go away as the supply chain regulators now when that happens we don't know we still see lots of the bullwhip effect of volumes coming in trying to go with <unk>.
Lockdown volumes drop off, but we're expecting not to see a normalized supply chain and see those storage charges to continue for the rest of this year at least now on the consumer softness on the international we're seeing some small dips here and there, but thats more of it's just the supply chain, we're not seeing anything around the demand side right now and the cut.
Say, we may be soft because of some demand issues. This month, but next month are telling us. It. Please expect a full boat load to come in so we're planning based on what the customers are telling US right now is to keep running what we're doing.
Great. Thank you.
Our next question comes from Ari Rosa from Credit Suisse. Please go ahead. Your line is open.
Great. Thank you.
Wanted to ask about kind of as we think about risks heading into 2023, obviously theres a big merger.
Kind of pending.
You mentioned the uniqueness of Cn's network, obviously being as try coastal network that kind of uniqueness, perhaps erodes a little bit if the CP Casey's deal goes through I wanted to think about I wanted to hear about kind of how you guys are thinking about that potential shift in the competitive landscape.
Conversations youre, having with customers around that and if you think theres any volume that perhaps is exposed.
That deal goes through.
Thanks, Sarah for that question I would say that we're playing our own game and we're pretty focused on it.
Going to stay with Florida.
When this railroad is operating at its best but it's pretty tough to compete with them. We like the opportunities that we see we think we're showing you some of what can we can make this place do and Theres more of this to come we're pretty keen about getting in front of you guys early next year and talking to some of the growth.
What we see coming in the future from the choices that we have there. So we're pretty excited about playing our own game.
As far as the customer front I mean, I think we're always working with our customers to try and ensure that we're positioned properly for the way they see their business going and growing in the future and that continues to be the case and Doug do you want to add anything to that like.
We constantly evaluate risk with our customers and where they want to go with what markets and where we can go so listen we work with all of them.
I will say the case, yes is not a big airline partner CMS. So the risk is very low for us to begin with but we will work with our customers whatever risk. There is there and make sure that they can get their products to market. That's the key thing.
Thanks for the question.
Okay wonderful thank you.
Our next question comes from Justin Long from Stephens. Please go ahead. Your line is open.
Thanks, I was wondering if you could provide any color on the contribution you're expecting from the non rail businesses in the back half of the year and any update on the potential strategic alternatives for these businesses.
Yeah.
Yeah, Justin listen now just for a matter of modeling we have all of those businesses model and they're part of the guidance that we've offered as on watching some of those businesses actually.
Cool Theyre, becoming transits in particular are becoming increasingly efficient and competitive I would put the Matt or.
Near or at the top in their segment as we look at their competitiveness and what they bring to us.
So that's in our model as we go into the remainder of the year and where we go with that longer term, it's something that we'll be contemplating as we look to 2023 and beyond.
Okay understood. Thanks.
Our next question comes from Jason Seidl from Cowen. Please go ahead. Your line is open.
Okay.
Thanks, operator, Tracey and team congrats on the quarter I just wanted to try to dive into how flex a little bit more on the growth that you think that could come there where do you think some of this growth is going to come from in other words, so what other ports of call might be at risk for other people.
Well good question right. So there is ideally it's fully aimed Jason at West Coast volumes first right. We believe with the shift to southeast Asia from a cost and I'll say timing perspective, it's just as easy to come.
Through the canal system Suez Canal over to the East Coast and we think we can get there. So we think we provide a great service that services those key markets and Montreal, Toronto as well as Detroit and Chicago Theres also other markets, we can reach too but those are the key ones. So now will it come from other terminals there is the potential.
For it to come from.
New York, New Jersey, Baltimore, even Savannah, if its not moving at an optimal powder, so, but our key focuses going after that surplus or stock west coast business that can't move today.
Okay that was my one I appreciate the time as always.
Thanks.
Our next question comes from Baskin <unk> majors from Susquehanna. Please go ahead. Your line is open.
Okay.
Okay.
Yes. Thanks, So your U S subsidiaries bargain with the U S rail carriers and Theres, some uncertainty as to what that actual union wage increase is going to be from 2020 forward can you talk a little bit about how you manage that uncertainty with your accruals and is actual wages were to come in different than your expectation window.
You true that up retroactively you communicated to us prospectively.
So I can start and then.
Then Rob can jump in if you want to so.
Yes, so we have accrued for a potential backend wages in the U S and we believe at this point that these accruals are appropriate.
And if and if there is a change from what.
From one negotiation is completed or the mediation completed then then we will we will.
Make that change when that happens but.
I would tell you that we have accrued it and we believe that it's appropriate Rob anything you want to no I think you answered it just from an understanding standpoint, we certainly understand the inflationary pressures are real on all of our workers and all the rail workers in the U S and we look forward as much as they do in.
This thing is settled and done and moving forward so nothing for them. Thanks.
Is there any way to help us size up how much of your labor expenses related to U S. You're in agreement.
Okay.
Well, we're not we're not going to go into that detail, obviously and as I said.
All the railroads in the U S. R R.
Mediation as we speak.
No.
We're not going to give that detail and we're going to let it play out what part of the.
We're sitting at the table and to Rob's point I think we're looking forward to two.
To get this done and move forward.
Okay.
Our last thanks for the question.
Our last question will come from Jeff Kauffman from vertical Research partners. Please go ahead. Your line is open.
Thank you everybody and thanks for squeezing me in.
Just a question more on top down strategic here I think Rob did a great job talking about how you paid attention to the yards and you improved fluidity.
Looking more at the head count in your presentation. You mentioned you brought on about 800 employees I think since the end of last year. It looks like head count could be approaching kind of flattish year on year towards year end as we look at the organization and there was a big cut of about 2000 people and then we're adding back.
How is the distribution of labor different did we call older employees and bring in younger employees have we strategically beefed up.
<unk> count in some areas versus others I understand how the operations have changed I'm trying to understand how the workforce has changed.
Jeff. Thanks for the question that I'm going to start on that one I'm going to give it over to Rob to give you a little more detail. So when we made the cuts last year that was that was not focused on our running trades or anyone off that trend.
Great effort to make sure that we protect that capability even reduction in workforce that were made were focused largely on the center and head office and our management employees and so.
That's important to note as far as how it's changing in the field, Rob I'm going to hand that one over to you really <unk> seen the surge really in conductor hiring and that's really for two things one for volume and secondly for attrition, but thats, what we hire for and we've been preparing for this normalized grain crop here in Q4.
Really where you've seen it.
Rest of the departments have stayed pretty flat in terms of where they ended the year.
Thanks, Jeff Alright, that's my one thank you.
Okay. Thank you all for your interest and for your questions.
We're pretty happy with this quarter, we've been off to a great start and.
Deep into doing the same for the second quarter, our pulse team will be hanging around for a little bit. This afternoon. If you have some additional questions. I know you know all of you had to reach out to him. Thank you and have a great day.
Yeah.
The conference call has now ended thank you for your participation you may now disconnect your lines at this time.
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