Q2 2024 Canadian National Railway Co Earnings Call
Good afternoon. My name is Julianne, and I will be your operator today. All participants are now in a listen-only mode.
Operator: All participants are now in a listen-only mode. At this time, I would like to turn the call over to Stacy Alderson, CIAN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson. Thank you, Julianne. Bonjour à tous et merci de vous rejoindre à notre conférence sur les résultats du deuxième trimestre 2024-2021. Good afternoon, everyone, and thank you for joining us for CN's second quarter 2024 Financial and Operating Results Conference call.
Stacy Alderson: At this time, I would like to turn the call over to Stacy Alderson, CN's Assistant Vice President of Investor Relations. Ladies and gentlemen, Ms. Alderson.
Stacy Alderson: Thank you, Julianne. Bonjour à tous et merci de vous joindre à notre petite conférence sur les résultats du deuxième trimestre 2024 du CN.
Speaker Change: Good afternoon, everyone, and thank you for joining us for CN's second quarter 2024 Financial and Operating Results Conference call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation.
Operator: Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of U.S. and Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. These risks and uncertainties are more fully described in the forward-looking statements section of the presentation. After the prepared remarks, we will conduct a Q&A session with our analysts. As usual, we would ask that you please limit yourself to one question.
Speaker Change: As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian securities laws.
Speaker Change: These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. They are more fully described in the forward-looking statements section of the presentation.
Speaker Change: After the prepared remarks, we will conduct a Q&A session with our analysts. As usual, we would ask that you please limit yourselves to one question.
Stacy Alderson: Joining us on the call today are Tracy Robinson, our President and CEO; Derek Taylor, our Chief Field Operations Officer; Patrick Whitehead, our chief network operations officer; Remy Lalonde, our chief commercial officer; and Ghislain Houle, our chief financial officer. It is now my pleasure to turn the call over to CMS President and CEO, Tracy Robinson. Merci et bienvenue à tous.
Speaker Change: Joining us on the call today are Tracy Robinson, our President and CEO , Derek Taylor, our Chief Field Operations Officer,
Speaker Change: Patrick Whitehead, our Chief Network Operations Officer, Remy Lalonde, our Chief Commercial Officer, and Ghislain Houle, our Chief Financial Officer.
Speaker Change: It is now my pleasure to turn the call over to CMS President and Chief Executive Officer, Tracy Robinson.
Tracy A. Robinson: Thank you everyone for joining our call today. I'll turn to the quarter in just a moment. But first, I'll make a few comments on the broader landscape. Now, at the macro level, the economy is shaping up to be in line with what we expected when we developed our plan, with North American industrial production trending slightly positive, some mixed signals in consumer areas that are mostly timing issues related to interest rates, and continued strength in the bulk portfolios.
Tracy A. Robinson: Merci, c'est si, et bienvenue à tous. Thanks everyone for joining our call today.
Tracy A. Robinson: I'll turn to the quarter in just a moment, but first I'll make a few comments on the broader landscape.
Tracy A. Robinson: At the macro level, the economy is shaping up to be in line with what we expected when we developed our plan.
Tracy A. Robinson: With North American industrial production trending slightly positive, some mixed signals in consumer areas that are mostly timing issues related to interest rates, and continued strength in the bulk portfolios. So at a high level, pretty much what we expected.
Tracy A. Robinson: So, at a high level, pretty much what we expected. Outside of the macro, I remain very encouraged with the progress we're making with our CN specific growth initiatives, which are coming online very nicely. We are building a portfolio of business that works for us, fits our network, and enables us to efficiently provide strong customer service. Recent Strengths in our Petroleum and Fuels Business The growth of our SAN franchise and the rebuild of our international portfolio are all part of this.
Tracy A. Robinson: Outside of the macro, I remain very encouraged with the progress we're making with our CN specific growth initiatives, which are coming online very nicely.
Tracy A. Robinson: We are building a portfolio of business that works for us, fits our network, and enables us to efficiently provide strong customer service. The recent strength in our petroleum and fuels business
Tracy A. Robinson: The growth of our SAN franchise, the rebuild of our international portfolio are all part of this.
Tracy A. Robinson: Now, I know you're looking forward to hearing from Remy today, and he'll give you more insight in a few minutes on both the base business and our more specific customer efforts, which will continue to be a key driver of our growth, and on operations. The scheduled model continues to serve us well.
Tracy A. Robinson: Now I know you're looking forward to hearing from Remy today, and he'll give you more insight in a few minutes on both the base business and our more specific customer efforts, which will continue to be a key driver of our growth.
Speaker Change: And on operation?
Tracy A. Robinson: The East and South regions this year are posting velocity and on-time numbers that are better than last year. The West had some issues in Q2, which we will discuss today, but they have lifted out of that in Q3. And customer service levels continue to be very strong across the entire network.
Speaker Change: The scheduled model continues to serve us well. The East and South regions this year are posting velocity and on-time numbers that are better than last year.
Speaker Change: The West has had some issues in Q2, which we will discuss today, but have lifted out of that in Q3. And customer service levels continue to be very strong across the entire network.
Tracy A. Robinson: The fundamentals of our business are good. The question for this quarter is leverage. And for the remainder of the year, it's more about the labor situation in Canada. And we'll get into both of these in our comments today. So first, on labor and the status of our TCRC situation in Canada. Now, as you know, the CIRB has now advised that they will release the decision on or about August 9th on the question of the essential service designation.
Speaker Change: The fundamentals of our business are good. The question in this quarter is leverage, and for the remainder of the year, it's more about the labor situation in Canada.
Speaker Change: And we'll get into both of these in our comments today.
Speaker Change: So first on labor and the status of our TCRC situation in Canada. Now as you know the CIRB has now advised that they will release the decision on or about August 9th on the question of the essential service designation.
Tracy A. Robinson: Now, there cannot be a work stoppage until they render a decision, and subject to any direction they provide on the cooling-off period, the parties are then required to give 72 hours' notice of a strike or a lockout.
Speaker Change: Now, there cannot be a work stoppage until they render a decision.
Speaker Change: and subject to any direction they provide on the cooling off period. The parties are then required to give a 72-hour notice of a strike or a lockout.
Tracy A. Robinson: Now, the prolonged nature of this process, which prior to the CRRB referral was to conclude in May, is impacting our customers, and it's impacting our business, particularly in international intermodal, where customers have taken actions to reroute vessels away from Canadian ports until the labor question has been resolved. Now, our intent with the TCRC has not changed. We prefer a negotiated agreement that would do two things.
Speaker Change: Now the prolonged nature of this process
Speaker Change: which prior to the CRRB referral was to conclude in May, is impacting our customers.
Speaker Change: And it's impacting our business, particularly in the international intermodal, where customers have taken actions to reroute vessels away from Canadian ports until the labour question has been resolved.
Speaker Change: Now our intent with the TCRC has not changed.
Speaker Change: We prefer a negotiated agreement that would do two things.
Tracy A. Robinson: Create a structure for work scheduling that would be positive for current employees and our ability to attract the next generation, and improve crew availability, which has been significantly impacted by the Canadian duty and rest period rules issued by the federal government last year. We need better availability provisions so that we're able to move our customers' volumes safely, cost-efficiently, and on time. The offers that we've made to the TCRFC have been consistent.
Speaker Change: Create a structure on work scheduling that would be positive to current employees and our ability to attract the next generation.
Speaker Change: and improved crew availability, which has been significantly impacted by the Canadian duty and rest period rules issued by the federal government last year.
Speaker Change: We need better availability provisions so that we're able to move our customers' volumes safely, cost-efficiently, and on time. The offers that we've made to the TCRFC have been consistent with this.
Tracy A. Robinson: So now, overall volumes came in on plan, but not exactly in the way that we expected. We were tracking well ahead of plan overall up until the third week in May, driven by growth in international, as well as fracking stand, petroleum, and chemicals, and a late rush on Canadian grain to Vancouver. Starting late May, we saw a sharp reduction, primarily in our international volumes, due to concerns of a work stop.
Speaker Change: So now in a quarter, overall volumes came in on plan.
Speaker Change: but not exactly in the way that we expected.
Speaker Change: And we were tracking well ahead of plan overall up until the third week in May, driven by a growth in international, as well as frack stand, petroleum and chemicals, and a late rush on Canadian grain to Vancouver.
Speaker Change: Starting late May, we saw a sharp reduction, primarily in our international volumes, on concerns of a work stoppage.
Tracy A. Robinson: Now this is volume destined for the U.S. that has shifted to U.S. ports. So we had lighter volumes in the Rupert Corridor than expected. And at the same time, the heavy grain flows mean it's much busier in Vancouver. In fact, we moved record volumes in this corridor during a period of a very heavy work block program on our system and in the directional running zone in which both Canadian rails operate. The team got it done, but it wasn't efficient.
Speaker Change: Now this is volume destined to the U.S. that shifted to U.S. ports.
Speaker Change: So we had lighter volumes in the Rupert corridor than expected.
Speaker Change: And at the same time, the heavy grain flows mean it's much busier in the Vancouver corridor.
Speaker Change: In fact, we moved record volumes in this corridor during a period of a very heavy work block program on our system and in the directional running zone in which both the Canadian rails operate.
Tracy A. Robinson: We saw this in our velocity metrics in the West and in labor productivity. Now, it's important to note that the velocity issue has been temporary, and the operation in the West has returned to normal levels as the work blocks have moved to other parts of the network. In the quarter, we delivered on the overall volume level, but we lost traction on leverage. Now Derek and Pat will take you through the details and how we're responding.
Speaker Change: The team got it done, but it wasn't efficient. We saw this in our velocity metrics in the West and in labor productivity.
Speaker Change: Now, it's important to note that the velocity issue has been temporary, and the operation in the west has returned to normal levels as the work blocks have moved to other parts of the network.
Speaker Change: So on the quarter, we delivered on the overall volume level.
Speaker Change: But we lost traction on leverage. Derek and Pat will take you through the details and how we're responding. Here's where it is though at a high level. The mix of business was different than what we planned, with more bulk and intermodal and less manifest traffic where we had the most leverage opportunities.
Tracy A. Robinson: Here's where it is at a high level. The mix of business was different than what we planned, with more bulk and intermodal and less manifest traffic where we had the most leverage opportunity. We had more demand in the west than expected and less demand than planned in the south and the east. And as a result, we had more unproductive labor, particularly in the south, given lower grain and coal volumes through the corridor.
Speaker Change: We had more demand in the west than expected and less demand than planned in the south and the east.
Speaker Change: And as a result, we had more unproductive labor, particularly in the South, given lower grain and coal volumes through the quarter. And we had lower labor productivity in the Vancouver Corridor as we managed record volumes through a heavy work block period.
Tracy A. Robinson: And we had lower labor productivity in the Vancouver corridor as we managed record volumes through a heavy work block period. We also had a headwind on fuel in the corner of about 10 cents, which Jiz will take. So as we move through July, the velocity in the West is back to normal levels, and we're taking actions on unproductive labor. We continue to monitor international volumes to ensure that we are positioned well for their return once we have labor stability.
Speaker Change: We also had a headwind on fuel in the corner of about 10 cents, which Jiz will take you through.
Speaker Change: So as we move through July , the velocity in the West is back to normal levels and we're taking actions on unproductive labor. We continue to monitor the international volumes to ensure that we are positioned well for their return once we have labor stability.
Tracy A. Robinson: So with Q2 in mind, and with the anticipated continued rerouting of international volumes for a period, we are revising our full-year guidance to mid- to high-single-digit EPS growth. This assumes no labor disruptions on the rails or at the ports, and it assumes the current traffic diversions do not increase. And while there's no doubt that 2024 has and will continue to have its fair share of challenges, our longer-term outlook and growth agenda remain intact.
Speaker Change: So with HUCHU in mind and with the anticipated continued rerouting of international volumes for a period, we are revising our full year guidance to mid to high single-digit EPS growth.
Speaker Change: This assumes no labor disruptions on the rails or at the ports, and it assumes the current traffic diversions do not increase.
Speaker Change: While there is no doubt that 2024 has and will continue to have its fair share of challenges, our longer-term outlook and growth agenda remain intact, and we remain confident that our operating model will drive leverage as our volumes normalize post-labor uncertainty.
Tracy A. Robinson: And we remain confident that our operating model will drive leverage as our volumes normalize post-labor uncertainty. So I'll hand it over to the team to provide more details, then you're up first there. Thanks, Tracy. Good afternoon, everyone.
Speaker Change: So I'll hand it over to the team to provide more details, and you're up first, Derek. Thanks, Tracy. Good afternoon, everyone. I'm on slide 7 for reference.
Derek Taylor: I'm on slide seven for Overall, the railroad ran relatively well in the second quarter, which bears out with overall car velocity at 210 miles per day, which is down 3% from last year. Some of our other operating metrics, like network train speed and 32-hour cars, aren't quite where they were last year, but are still demonstrating a fluid railroad that is handling the growth. Notably, the southern and eastern regions continue to perform well operationally throughout the entire corridor.
Derek Taylor: Overall, the railroad ran relatively well in the second quarter, which bears out with overall car velocity at 210 miles per day, which is down 3% from last year.
Speaker Change: Some of our other operating metrics, like network train speed and 32-hour cars, aren't quite where they were last year, but are still demonstrating a fluid railroad that is handling the growth.
Speaker Change: Notably, the southern and eastern regions continue to perform well operationally throughout the entire corridor.
Derek Taylor: The western region was quite busy, with growth weighted more towards intermodal than bulk. To give you a sense of how busy we were, Q2 was the all-time highest average daily GTMs through the Vancouver Corridor in CN's history. We added train starts to accommodate the growth as we had planned and have been successful in onboarding those volumes overall. However, our operating metrics reflect the fact that we were impeded by ongoing track maintenance work in the critical Vancouver corridor throughout the entire corridor. There wasn't a single week in the second quarter where there wasn't some form of planned or unplanned maintenance in the directional running zone or DRZ.
Speaker Change: The western region was quite busy, with growth weighted more towards intermodal and bulk.
Speaker Change: To give you a sense of how busy we were, Q2 was the all-time highest average daily GTMs through the Vancouver Corridor in CM's history.
Speaker Change: We added train starts to accommodate the growth as we had planned and have been successful in onboarding those volumes overall.
Speaker Change: However, our operating metrics reflect the fact that we were impeded by ongoing track maintenance work in the critical Vancouver corridor throughout the entire corridor.
Speaker Change: There wasn't a single week in the second quarter where there wasn't some form of planned or unplanned maintenance in the directional running zone for DRZ.
Derek Taylor: Recall that this is the area where CN and CPKC run on each other's tracks to effectively create double track capacity. But when this work is being done, it squeezes capacity because we can't run trains for four to eight-hour blocks at a time. We also know that any type of maintenance work in the DRZ has a disproportionate impact on CN because we run more trains through that specific corridor. As work blocks wrapped up on the DRZ, fluidity returned.
Speaker Change: Recall that this is the area where CN and CPKC run on each other's tracks to effectively create double track capacity.
Speaker Change: When this work is being done,
Speaker Change: It squeezes capacity because we can't run trains for four to eight hour blocks at a time.
Speaker Change: We also know that any type of maintenance work in the DRZ has a disproportionate impact on CN because we run more trains through that specific corridor.
Speaker Change: As work was wrapped up on the DRZ, fluidity returned.
Derek Taylor: In July, car velocity has been trending toward 220 miles per day, and our network train speed is trending toward 20 miles per hour. That is right where we want them to be. I am confident these health of the network metrics will continue to trend favorably.
Speaker Change: In July , car velocity has been trending toward 220 miles per day, and our network train speed is trending towards 20 miles per hour.
Speaker Change: That is right where we want them to be.
Speaker Change: I am confident these health of network metrics will continue to trend favorably.
Derek Taylor: We had good terminal performance in the second quarter. Our yards were quite fluid throughout the entire network, and our local service commitment performance approached an all-time high of 94%, topping last year's excellent 91% result. This performance also enabled us to really deliver for our customers in first and last mile execution. Great rarity by the entire team in the field.
Speaker Change: We had good terminal performance in the second quarter.
Speaker Change: Our yards were quite fluid throughout the entire network, and our local service commitment performance approached an all-time high of 94%, topping last year's excellent 91% result.
Speaker Change: This performance also enabled us to really deliver for our customers in first and last mile execution.
Derek Taylor: As you heard Tracy mention in her remarks, we have taken action in terms of operating leverage when it comes to both labor and physical assets. In terms of labor, we stopped hiring in both the southern region and eastern region. We have also offered voluntary furloughs in both of those respective regions that employees have been utilizing. Another action has been offering permanent transfers from the eastern region to the western region where more of the demand has been to balance out our workforce requirements.
Speaker Change: Great rarity by the entire team in the field.
Speaker Change: As you heard Tracy mention in her remarks, we have taken action in terms of operating leverage when it comes to both labor and physical assets.
Tracy A. Robinson: In terms of labor, we stopped hiring in both the southern region and eastern region.
Tracy A. Robinson: We have also offered voluntary furloughs in both of those respective regions that employees have been utilizing.
Tracy A. Robinson: Another action has been offering permanent transfers from the eastern region to the western region.
Tracy A. Robinson: where more than demand has been to balance out our people requirements.
Derek Taylor: In terms of physical assets, we have put down both locomotives and specific car fleets to adjust to the current demand profile that is out there. I'll just wrap up by saying that the rarity is running well and will continue to run well, especially with some of these short-lived challenges behind us as we deliver for our customers. Now, I'll turn it over to Pat.
Tracy A. Robinson: In terms of physical assets, we have put down both locomotives and specific car fleets to adjust to the current demand profile that is out there.
Tracy A. Robinson: I'll just wrap up by saying that the rarity is running well and will continue to run well, especially with some of these short-lived challenges behind us as we deliver for our customers.
Tracy A. Robinson: Now, I'll turn it over to Pat.
Patrick Timothy Whitehead: Thanks Derek, and good afternoon. I'd like to start today by talking about safety. We are committed to building a safety culture where zero serious injuries and fatalities are possible. In the quarter, we saw a 22% improvement in the accident frequency ratio, though, as Ghislain will speak to, the accidents were more consequential, which drove higher costs in the quarter. We continue to work with our leaders and unionized teammates and invest in and leverage technology and training to drive improvement in our access to railways.
Pat: Thanks, Derek, and good afternoon. I'd like to start today by talking about safety. We are committed to building a safety culture where zero serious injuries and fatalities is possible.
Speaker Change: In the quarter, we saw a 22% improvement in the accident frequency ratio, though as Ghislain will speak to, the accidents were more consequential, which drove higher costs in the quarter.
Ghislain: We continue to work with our leaders and unionized teammates and invest in and leverage technology and training to drive improvement in our accident metrics.
Patrick Timothy Whitehead: We are currently providing training for managers focusing on behavior-based safety best practices to reduce human factor incidents and accidents. We saw a 13% deterioration in our injury frequency ratio, driven by our leading cause of injury: blips, trips, and falls while walking.
Ghislain: We are currently providing training for managers focusing on behavior-based safety best practices to reduce human factor incidents and accidents.
Ghislain: We saw a 13% deterioration in our injury frequency ratio driven by our leading cause of injuries.
Patrick Timothy Whitehead: We have taken note that there has been a 30% reduction in these injuries with employees that have been trained on our walking circuit. We will be investing in additional mobile simulators to train our folks in the field across all of our operations. I also want to mention our real-time hazard and near-miss reporting app, and Abe Longo. We have had great adoption of the tool amongst our employees.
Ghislain: Blitz, trips, and falls while walking.
Ghislain: We have taken note that there has been a 30% reduction in these injuries with employees that have been trained on our walking simulator.
Ghislain: We will be investing in additional mobile simulators to train our folks in the field across all of operations.
Ghislain: I also want to mention our real-time hazard and near-miss reporting app, Enable On Go. We have had great adoption of the tool amongst our employees.
Patrick Timothy Whitehead: This is a huge asset in reducing hazards and injury prevention. We have already resolved over 1,000 walking conditions received by employees utilizing Now, as Derek mentioned, we were impacted in the quarter by work blocks in the Vancouver Corridor. But when we say the plan is sacred, that also applies to engineering maintenance. Across much of Canada, we have a finite window to perform a significant amount of mission-critical track maintenance. Work blocks mean we do not operate trains when the work is happening, which reduces our capacity.
Speaker Change: This is a huge asset in reducing hazards and injury prevention.
Speaker Change: We have already resolved over 1,000 walking conditions received by employees utilizing the tool.
Speaker Change: Derek mentioned we were impacted in the corridor by work blocks in the Vancouver Corridor.
Derek Taylor: But when we say the plan is sacred, that also applies to the engineering maintenance plan.
Speaker Change: Across much of Canada, we have a finite window to perform a significant amount of mission-critical track maintenance work.
Speaker Change: Work blocks mean we do not operate trains when the work is happening, which reduces our capacity.
Patrick Timothy Whitehead: These plans and disruptions are factored into the train plan. What made Q2 particularly challenging from a planning perspective was the complexity arising from both the amount of maintenance work that was done and that a lot of this work happened in close proximity, in and around the directional running. As a rule, we do not schedule work blocks so close together because it requires trains to stop for two work blocks within a short time. This leads to congestion and crewing challenges during startup operations. The urgent nature of some of the unplanned work meant that we had to do it anyway.
Speaker Change: These plans and disruptions are factored into the train plan. What made Q2 particularly challenging from a planning perspective was the complexity arising from both the amount of maintenance work that was done and that a lot of this work happened in close proctivity in and around the directional running zone.
Speaker Change: As a rule, we do not schedule work blocks so close together because it requires trains to stop for two work blocks within a short distance.
Speaker Change: This leads to congestion and crewing challenges during startup operations.
Speaker Change: The urgent nature of some of the unplanned work meant that we had to do this anyway.
Patrick Timothy Whitehead: As Derek mentioned, with the maintenance issues in the B.C. South now behind us, we have seen strong improvements in overall core velocity and train reliability. I want to add a final point which bears repeating. The government-mandated duty and rest period rules in Canada, which have now been in place since the end of May 2023, have made crew scheduling very complicated. It amplifies the challenges to crew availability and productivity when we have disruptions, which include work. This was even more so in the quarter because we didn't go a single week without some work being done in the B.C. South.
Speaker Change: As Derek mentioned, with the maintenance issues in the B.C. South now behind us, we have seen strong improvements in overall car velocity and train speed.
Speaker Change: I want to add a final point which bears repeating.
Speaker Change: The government-mandated duty and rest period rules in Canada, which have now been in place since the end of May 2023, have made crew scheduling very complicated. It amplifies the challenges to crew availability and productivity when we have disruptions, which include work blocks.
Speaker Change: This was even more so in the quarter because we didn't go a single week without some work being done in the B.C. South.
Patrick Timothy Whitehead: In closing, we're looking at all levers to be able to increase crew availability, including looking for additional opportunities to extend crew runs. Our plan continues to produce positive results. Ordnance train performance remains solid at 93% quarter-to-date, and destination train performance is approaching 70% quarter-to-date, in line with our expectations. You've already heard Derek talk about what we're doing in the east and the south. In the west, we're resourcing for strong volumes, and the network is well-positioned moving into the third and fourth quarters. I'll now turn the call over to Remy. Remy, your turn. Hey, thanks, Pat. Bon après-midi. It's a grand plaisir d'être with you.
Speaker Change: In closing, we're looking at all levers to be able to increase crew availability, including looking for additional opportunities to extend crew runs.
Speaker Change: Our plan continues to produce positive results. Ordnance train performance remains solid at 93% quarter-to-date, and destination train performance is approaching 70% quarter-to-date, in line with our expectations.
Speaker Change: You've already heard Derek talk about what we are doing in the east and the south. In the west, we are resourcing for strong volumes and the network is well positioned moving into the third and fourth quarter.
Speaker Change: I'll now turn the call over to Remy. Remy, your turn. Hey, thanks, Pat. Bon après-midi. C'est un grand plaisir d'être avec vous.
Remy Lalonde: CN's revenues grew by 7% in the second quarter compared to last year on stronger pricing, higher volume, and favorable foreign exchange, offset in part by lower fuel surcharges. Our RTMs were 7% higher, in line with plan, mostly from shipments of international intermodal, Canadian grain, and refined petroleum. Revenue per RTM was down slightly on account of mix, specifically the longer average length of haul for these products. I'll emphasize that we are delivering same-store prices ahead of our cost inflation.
Speaker Change: CN's revenues grew by 7% in the second quarter compared to last year on stronger pricing, higher volume, and favorable foreign exchange, offset in part by lower fuel surcharge.
Speaker Change: Our RTMs were 7% higher, in line with plan, mostly from shipments of International Intermodal, Canadian Grain, and Refined Petroleum. Revenue per RTM was down slightly on account of mix, specifically the longer average length of haul for these products.
Speaker Change: I'll emphasize that we are delivering same-store price ahead of our cost inflation.
Remy Lalonde: Before turning to the individual business units, I want to underscore some of the CM-specific growth initiatives that appear in the results. Selling service reliability for international intermodal through western gateways by leveraging the strategic benefit of the Rupert option in our train plan design and building our book of business supporting, Moving FRACFAN from Wisconsin to Western Canada and hauling the resulting propane for export through Prince Rupert, delivering incremental volume growth through Canadian and U.S. crushed plants with inbound grain and outbound renewable feedstocks and protein, and inaugurating, with our partners, the first phase of the Greater Toronto Area Fuel Facility.
Speaker Change: Before turning to the individual business units, I want to underscore some of the CN-specific growth initiatives that appear in the results.
Speaker Change: Selling service reliability for international intermodal through Western Gateways by leveraging the strategic benefit of the Rupert option in our train plan design and building our book of business accordingly.
Speaker Change: Moving Fraxan from Wisconsin to Western Canada and hauling the resulting propane for export through Prince Rupert.
Speaker Change: delivering incremental volume growth through Canadian and U.S. crushed plants with inbound grain and outbound renewable feedstocks and protein and inaugurating with our partners the first phase of the Greater Toronto Area Fuel Facility.
Remy Lalonde: So, overall, the business is growing on plan, except for some headwinds around lumber and labor uncertainty. Let's take a sector by sector look at the corridor. On an FX adjusted basis, Intermodal revenues grew by 6%, with a 13% increase in overall RTMs, reflecting international up by 19%, but domestic down by 1%. Year-over-year growth in international traffic is due to higher traffic through Western Gateways and key customer wins as we push to sell service reliability, but also the 2023 impact of the then imminent ILWU port strike.
Speaker Change: So, overall, the business is growing on plan, except for some headwind around lumber and labor uncertainty.
Speaker Change: Let's take a sector-by-sector look at the corridor on an FX-adjusted basis.
Speaker Change: Intermodal revenues grew by 6%, with a 13% increase in overall RTMs, reflecting international up by 19%, but domestic down by 1%.
Speaker Change: Year-over-year growth in international is due to higher traffic through Western gateways and key customer wins as we push to sell service reliability but also the 2023 impact of the then imminent ILWU port strike.
Remy Lalonde: The domestic business, on the other hand, faces more pressure due to market softness combined with an oversupply of truck capacity. The resulting change in mix caused a 3% increase in average length of haul and therefore pushed revenue per RTM down by 6%.
Speaker Change: The domestic business, on the other hand, faces more pressure due to market softness combined with an oversupply of truck capacity.
Speaker Change: The resulting change in mix caused a 3% increase in average length of haul and therefore pushed revenue per RTM down by 6%.
Remy Lalonde: It's worth noting that intermodal is the most sensitive to the ongoing uncertainty around the labor situation with the TCRC. Accordingly, we saw volumes soften toward the end of the quarter as ocean lines and domestic shippers activated contingency plans, including port diversions and modal shifts. Grain and fertilizer revenues and RTMs each rose by 7%, reflecting a stronger-than-expected 24% increase in Canadian grain shipments, which was partially offset by lower shipments of export potash and U.S. corn. The strength of Canadian grain comes from de-stalking and farm optimism toward the new crop grows after low moisture levels earlier this year.
Speaker Change: It's worth noting that intermodal is the most sensitive to the ongoing uncertainty around the labor situation with the TCRC.
Speaker Change: Accordingly, we saw volumes soften toward the end of the quarter as ocean lines and domestic shippers activated contingency plans, including port diversions and modal shifts.
Speaker Change: Grain and fertilizer revenues and RTMs each rose by 7%, reflecting a stronger than expected 24% increase in Canadian grain shipments, which was partially offset by lower shipments of export potash and U.S. corn.
Speaker Change: The strength of Canadian grain comes from de-stalking, as farm optimism toward the new crop grows after low moisture levels earlier this year.
Remy Lalonde: Indeed, as the 2023-24 crop year draws to a close, I'm pleased to note that we move more grain in a smaller crop year, increasing our share. Our potash volumes were lower, on the other hand, as some of the business has largely, but not entirely, naturally reverted to the Western Terminal that experienced a lengthy outage last year. Revenues for petroleum and chemicals were 14% higher in the quarter on a 12% increase in RTM.
Speaker Change: Indeed, as the 2023-2024 crop year draws to a close, I'm pleased to note that we move more grain in a smaller crop year, increasing our share.
Speaker Change: Our potash volumes were lower, on the other hand, as some of the business has largely, but not entirely, naturally reverted to the Western Terminal that experienced a lengthy outage last year.
Speaker Change: Revenues for petroleum and chemicals were 14% higher in the quarter, on a 12% increase in RTMs.
Remy Lalonde: This includes strong domestic demand for gasoline, diesel, and jet fuel in Ontario and Quebec, higher shipments of polyethylene, and more export NGL shipments from northeast DC, mostly through Rupert. Metals and Minerals revenues grew by 6% on 12% higher RTMs, which reflects a 36% increase in FRAXAM due to the robust drilling activity in Northeast BC and Alberta and the shorter breakup period. On the other hand, steel product shipments have been softer due to production inconsistencies, a weaker market, and volume leakage to oversupplied trucks.
Speaker Change: This includes strong domestic demand for gasoline, diesel, and jet fuel in Ontario and Quebec, higher shipments of polyethylene, and more export NGL shipments from northeast BC, mostly through Rupert.
Speaker Change: Metals and Minerals revenues grew by 6% on 12% higher RTMs, which reflects a 36% increase in FRAXAM for the robust drilling activity in Northeast BC and Alberta and the shorter breakup period.
Speaker Change: On the other hand, steel product shipments have been softer due to production inconsistencies, a weaker market, and volume leakage to the oversupplied truck market.
Remy Lalonde: Revenues in the automotive sector grew by 9% and RTMs by 12%, due mainly to an increase in long-haul imports through Vancouver and North American origins into Western Canada, offset by lower short-haul due to Canadian plant retooling. Forest product revenues improved by 4% in the quarter despite flat RTM. While RTMs were 4% higher in pulp and paper, they slipped by 3% in lumber. Given the ongoing Coal business lagged in the quarter with revenues down by 8% on an 11% drop in RTM.
Speaker Change: Revenues in automotive grew by 9% and RTMs by 12%, due mainly to an increase in long-haul imports through Vancouver and North American origins into Western Canada, offset by lower short-haul due to Canadian plant retooling.
Speaker Change: Forest Product Revenues improved by 4% in the quarter despite flat RTMs.
Speaker Change: While RTMs were 4% higher in pulp and paper, they slipped by 3% in lumber given the ongoing demand slump.
Speaker Change: Indeed, shipments were particularly soft in June .
Speaker Change: The coal business lagged in the quarter with revenues down by 8% on an 11% drop in RTMs.
Remy Lalonde: Shipments fell in both Canada and the U.S., reflecting lower available-to-ship inventory in western Canada and throughput challenges in that corridor, as well as lower thermal coal demand in the U.S. As we turn to the outlook, let me say first that our comments assume that we will have certainty around our labor situation by the end of summer and that there is no other Canadian labor disruption, rail or port. We expect to carry intermodal momentum through our western gateways in the second half of the year and to come in higher over the strike-affected same period last year.
Speaker Change: Shipments fell in both Canada and the U.S., reflecting lower available-to-ship inventory in western Canada and throughput challenges in that corridor, as well as lower thermal coal demand in the U.S.
Speaker Change: As we turn to the outlook, let me say first that our comments assume that we will have certainty around our labour situation by the end of summer and that there is no other Canadian labour disruption, neither rail nor port.
Speaker Change: We expect to carry intermodal momentum through our western gateways in the second half of the year, and to come in higher over the strike-affected same period last year, but we will face headwinds with the overhang of uncertainty around further potential labour disruptions in the Canadian supply chain.
Remy Lalonde: We will face headwinds with the overhang of uncertainty around further potential labor disruptions in the Canadian supply chain. We also see rising pricing pressure with domestic intermodal in light of the less than strong consumer and business sentiment in Canada and the oversupplied truck. While the prospects for the 2024-25 Canadian crop year are brighter than expected, that will show up more with the Q4 fall harvest. The U.S. crop looks good overall, despite some excess rain in certain areas, but the outlook for export demand is soft.
Speaker Change: We also see rising pricing pressure with domestic intermodal in light of the less-than-strong consumer and business sentiment in Canada and oversupplied truck markets.
Speaker Change: While the prospects for the 2024-25 Canadian crop year are brighter than expected, that will show up more with the Q4 fall harvest.
Speaker Change: U.S. crop looks good overall, despite some excess rain in certain areas, but the outlook for export demand is soft.
Remy Lalonde: Fertilizer volumes will be lower than last year, given the 2023 opportunistic potash spot moves, but we should continue to see good momentum with crush capacity on both sides of the board. Our expectation is for continued growth in petroleum and chemicals during the second half, mainly from refined products to the GTA fuel facility and a new distribution platform in Prince Rupert, and continued growth in propane exports through. With active drilling in the B.C.
Speaker Change: Fertilizer volumes will be lower than last year, given the 2023 opportunistic potash spot moves, but we should continue to see good momentum with crush capacity on both sides of the border.
Speaker Change: Our expectation is for continued growth in petroleum and chemicals during the second half, mainly from refined products to the GTA fuel facility and a new distribution platform in Prince Rupert, and continued growth in propane exports through Rupert.
Remy Lalonde: With the Northeast and growing torque terminal capacity, we expect fracked hand shipments to stay strong. We also expect incremental minerals shipments, mainly lithium and gypsum, to offset softer metals, especially for steel, on commodity prices and excess trucks. Automotive RTMs should be flat in the second half of the year based on the mix of business as market fundamentals trend back toward pre-pandemic levels.
Speaker Change: With active drilling in the BC Northeast and growing torque terminal capacity, we expect fracked hand shipments to stay strong.
Speaker Change: We also expect incremental minerals shipments, mainly lithium and gypsum, to offset softer metals, especially for steel, on commodity prices and excess trucks.
Speaker Change: Automotive RTMs should be flat in the second half of the year based on the mix of business as market fundamentals trend back toward pre-pandemic levels.
Remy Lalonde: The underlying market for lumber is weak and is likely to remain that way through the end of the year, which will drag on forest products volumes. We expect to see the same run rate in U.S. thermal coal shipments due to high domestic stockpiles and soft export demand, but there should be incremental production gains at various Western Canadian sites for metallurgical coal. So, overall, the business is growing on plan, except for some headwinds around lumber and labor uncertainty.
Speaker Change: The underlying market for lumber is weak and is likely to remain that way through the end of the year, which will drag on forest products volume.
Speaker Change: We expect to see the same run rate in U.S. thermal coal shipments due to high domestic stockpiles and soft export demand, but there should be incremental production gains at various Western Canadian sites for metallurgical coal.
Speaker Change: So, overall, the business is growing on plan, except for some headwind around lumber and labor uncertainty.
Remy Lalonde: For RTMs in the second half compared to last year, we should see a good uptick in the merchandise business, especially for petroleum products, chemicals, and plastics, despite softer forest products, flat to slightly positive in bulk, with Q4 grain offset by lower potash, and incrementally positive consumer products thanks to international intermodal despite the headwind from the labor situation. Before I pass it over to Ghislain, I'd like to say that I'm very excited to join the CM team on this journey.
Speaker Change: And for RTMs in the second half compared to last year, we should see a good uptick in the merchandise business, especially for petroleum products, chemicals, and plastics, despite softer force products.
Speaker Change: flat to slightly positive and bulk with Q4 grain offset by lower potash and incrementally positive consumer products thanks to international intermodal despite the headwind from the labor situation.
Speaker Change: Before I pass it over to Ghislain, I'd like to say that I'm very excited to join the CM team on this journey.
Remy Lalonde: The first couple months have been a lot of fun as I've plunged deep into the inner workings of the business to learn how the railroad runs, get to know the team, and start to build crucial relationships with our customers, business partners, and community.
Speaker Change: The first couple of months have been a lot of fun as I've plunged deep in the inner workings of the business to learn how the railroad runs, get to know the team, and start to build crucial relationships with our customers, business partners, and communities.
Remy Lalonde: I look forward to working with my colleagues and contributing my diverse experience to make a difference here and to drive value for the company and its shareholders. CN is an amazing business, and the path ahead is very exciting. Over to you, Ghislain. Merci beaucoup, Rémi. J'ai le plaisir de parler des résultats de notre deuxième semester.
Speaker Change: I look forward to working with my colleagues and to contribute my diverse experience to make a difference here and to drive value for the company and its shareholders. CN is an amazing business and the path ahead is very exciting. Over to you, Ghislain.
Ghislain: Merci beaucoup Rémi. J'ai le plaisir de parler de nos résultats du deuxième trimestre.
Ghislain Houle: Turning to slide 14, Q2 diluted EPS was down 1% versus last year but up 5% on an adjusted basis after removing the impact of the loss on assets held for sale related to the transfer of the Quebec Bridge to the federal government. Adjusted OR increased by 160 basis points to 62.2%, mainly due to higher costs, versus Q1. OR improved by 140 basis points. While volumes were very strong up until the third week of May, we saw some meaningful softening in June as some intermodal international business diverted to U.S. ports due to the possibility of labor disruption in Canada. At the same time, lumber prices plummeted to historical low levels and below breakeven.
Ghislain: Turning to slide 14, Q2 diluted EPS was down 1% versus last year, but up 5% on an adjusted basis after removing the impact of the loss on assets held for sale related to the transfer of the Quebec Bridge to the federal government.
Ghislain: Adjusted OR increased by 160 basis points to 62.2% mainly due to higher costs.
Ghislain: versus Q1 OR improved by 140 basis points.
Ghislain: While volumes were very strong up until the third week of May, we saw some meaningful softening in June as some intermodal international business diverted to U.S. ports due to the possibility of labor disruption in Canada.
Ghislain: At the same time, lumber prices plummeted to historical low levels and below break-even.
Ghislain Houle: Overall, revenues were up 7% year-over-year. Let me provide you with more details in the quarter. Fuel was a headwind of around 10 cents of EPS and was diluted to the operating ratio by 130 bases per hour.
Ghislain: Overall, revenues were up 7% year-over-year.
Ghislain: Let me provide you with more details in the quarter.
Ghislain: Fuel was a headwind of around 10 cents of EPS and was diluted to the operating ratio by 130 basis points.
Ghislain Houle: As for the fuel impact, the operating ratio from the underlying operations slipped 30 basis points year over year on account of the challenges mentioned by Pat and Derek. We continue to monitor fuel prices very closely. Applicable OHD rates, which drive fuel surcharge revenue, decreased by 5% versus last year, while average fuel price for expenses increased 6% year-over-year in Q2.
Ghislain: Absent the fuel impact, the operating ratio from the underlying operations slipped 30 bases pointy over year on account of the challenges mentioned by Pat and Derek.
Speaker Change: We continue to monitor fuel prices very closely.
Speaker Change: Applicable OHD rates which drive fuel surcharge revenue decreased by 5% versus last year, while average fuel price for expenses increased 6% year-over-year in Q2.
Ghislain Houle: In terms of expenses, which I will speak to on an exchange-adjusted basis, starting with labor, which was 13% higher versus last year, on a 2% higher average headcount, general wage increases, and higher current service pension costs. We also saw higher short-term unproductive costs in the quarter related to deadheading, re-cruise, and held-away costs in the Vancouver Corridor, which was amplified by the impact of the government-mandated work rest. Fuel expense increased 11% versus the same period last year, mostly due to a 7% increase in gross ton miles, combined with a 6% increase in price per gallon that I just mentioned, partly Equipment rents were up 20% driven by higher intermodal car hire, and other costs increased 22% on higher incident costs.
Speaker Change: In terms of expenses, which I will speak to on an exchange-adjusted basis, starting with labor, which was 13% higher versus last year, on 2% higher average headcount, general wage increases, and higher current service pension costs.
Speaker Change: We also saw higher short-term unproductive costs in the quarter related to deadheading, re-cruise, and held-away costs in the Vancouver Corridor, which was amplified by the impact of the government-mandated work-press rules.
Speaker Change: Fuel expense increased 11% versus the same period last year, mostly due to a 7% increase in gross ton miles, combined with a 6% increase in price per gallon that I just mentioned.
Speaker Change: partly offset by a 2% improvement in fuel efficiency.
Speaker Change: Equipment rents was up 20% driven by higher intermodal car hire and other increased 22% on higher incident costs.
Ghislain Houle: In other income, we benefited from roughly $30 million in higher earnings from the sale of property within a subsidiary. We generated around $1.5 billion of free cash flow year-to-date at the end of June, about $200 million lower than last year, mainly due to lower net cash from operating activities and higher capital expenditures. Under our current share repurchase program, which runs from February 1, 2024 to January 31, 2025, we have repurchased close to 10 million shares for almost $1.7 billion as of the end of. Moving to slide 15, let me provide some visibility to our revised guidance for 2024.
Speaker Change: In other income, we benefited from roughly $30 million in higher earnings from the sale of property within a subsidiary.
Speaker Change: We generated around 1.5 billion dollars of free cash flow year-to-date at the end of June , about 200 million dollars lower than last year, mainly due to lower net cash from operating activities and higher capital expenditures.
Speaker Change: Under our current share repurchase program, which runs from February 1st, 2024 to January 31st, 2025, we have repurchased close to 10 million shares for almost $1.7 billion as of the end of June .
Speaker Change: Moving to slide 15, let me provide some visibility to our revised guidance for 2024.
Ghislain Houle: Note that our revised guidance assumes that we do not have a labor disruption and that the labor uncertainty is behind us by the end of August. Our revised guidance accounts for our year-to-date actuals as well as several unforeseen headwinds. From a volume outlook perspective, the mere potential for rail and port labor disruptions dampened overseas moral volume starting in June, and we expect that to continue until the labor uncertainty is resolved.
Speaker Change: Note that our revised guidance assumes that we do not have a labor disruption and that the labor uncertainty is behind us by the end of August .
Speaker Change: Our revised guidance accounts for our year-to-date actuals, as well as several unforeseen headwinds.
Speaker Change: From a volume outlook perspective, the mere potential of a rail and port labor disruptions dampen overseas in a modal volume starting in June , and we expect that to continue until the labor uncertainty is resolved.
Ghislain Houle: We've also adjusted our outlook for lumber and now expect a 2025 recovery given current commodity prices. More broadly, overall industrial production remains slightly positive, but tepid, in part because inflation has been persistent and interest rate cuts have yet to come or have been more modest than expected.
Speaker Change: We've also adjusted our outlook for lumber and now expect a 2025 recovery given current commodity prices.
Speaker Change: More broadly, overall industrial production remains slightly positive, but tepid, in part because inflation has been persistent and interest rate cuts have yet to come or been more modest than expected.
Ghislain Houle: On the other hand, we're encouraged that early concerns about moisture levels for the Canadian grain crop have abated. We also continue to advance on our CN specific growth initiatives in line with our expectations. Overall, we now expect to deliver RTM growth in the range of 3% to 5% versus 2023 compared to our previous assumptions of mid-single-digit growth. On cost, we are already seeing the positive impacts of improved fluidity in Vancouver, the rational running corridor, and expect year-over-year operating ratio improvement in the back half of the year. Our foreign exchange and WTI assumptions continue to be around $0.75 and $80 to $90 USD per barrel, respectively.
Speaker Change: On the other hand, we're encouraged that early concerns about moisture levels for the Canadian grain crop have abated.
Speaker Change: We also continue to advance on our CN specific growth initiatives in line with our expectations.
Speaker Change: Overall, we now expect to deliver RTM growth in the range of 3% to 5% versus 2023 compared to our previous assumptions of mid-single-digit growth.
Speaker Change: On cost, we are already seeing the positive impacts of improved fluidity in Vancouver directional running corridor and expect year-over-year operating ratio improvement in the back half of the year.
Speaker Change: Our foreign exchange and WTI assumptions continue to be around $0.75 and $80 to $90 USD per barrel respectively.
Ghislain Houle: Putting it all together, we are now targeting to deliver mid to high single-digit EPS growth in 2024. Our 2024-26 financial outlook of 10-15% CAGR remains unchanged. In conclusion, let me reiterate a few points. Our CN-specific growth opportunities are coming online as expected. The network is fluid with car velocity and well suited to seasonal traffic.
Speaker Change: Putting it all together, we are now targeting to deliver mid to high single-digit EPS growth in 2024.
Speaker Change: Our 2024-26 financial outlook of 10-15% CAGR remains unchanged.
Speaker Change: In conclusion, let me reiterate a few points.
Speaker Change: Our CN-specific growth opportunities are coming online as expected.
Speaker Change: The network is fluid with car velocity and well at seasonal levels.
Ghislain Houle: We are delivering industry-leading service to our customers, and we remain intently focused on delivering growth at low incremental cost. Back to you, Tracy. Thanks, Josiah.
Speaker Change: We are delivering industry-leading service to our customers.
Speaker Change: and we remain intently focused on delivering growth at low incremental costs.
Operator: And over to you, Julianne. We'll take questions now. Thank you. We will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourselves to one question. The first question will come from Chris Wetherbee from Wells Fargo. Please go ahead.
Speaker Change: Back to you, Tracy. Thanks, Suzanne. And over to you, Julian. We'll take questions now.
Speaker Change: and others.
Speaker Change: Thank you. We will now begin the question and answer session. As previously mentioned, we ask that you kindly limit yourselves to one question.
Christian F. Wetherbee: Your line is open. Yeah, hey, thanks. Good afternoon, guys. Maybe, Ghislain, I could pick up where you left off on the operating ratio as you think about the second half of the year. So I guess I'm just curious how much of what you saw in the second quarter related to some of the cost and congestion around maintenance carries over, if any, into the third and fourth quarters? And I guess, thinking in that context, how would we expect that OR to progress relative to normal seasonality?
Speaker Change: The first question will come from Chris Weatherbee from Wells Fargo. Please go ahead, your line is open.
Christian F. Wetherbee: In other words, is there some cost embedded in 2Q that we could see naturally come out and think more about things seasonally from there? I just want to get a sense of how to think about profitability. Hey, Chris. It's Tracy.
Christian F. Wetherbee: Yeah, hey, thanks. Good afternoon, guys.
Christian F. Wetherbee: Maybe, Ghislain, I could pick up where you ended there on the operating ratio as you think about the second half of the year. So I guess I'm just curious, how much of what you saw in the second quarter related to some of the cost and congestion around maintenance?
Speaker Change: carries over, if any, into the third and fourth quarters.
Speaker Change: Thinking in that context, how would we expect sort of that OR to progress relative to normal seasonality? In other words, is there some cost embedded in 2Q that we could see naturally come out and think more about things seasonally from there? I just want to get a sense of how to think about profitability.
Tracy A. Robinson: I'll start on that, and then I'll hand it over to Ghis. So this was the issue with the work blocks; the maintenance program in the Vancouver corridor where the grain was moving, was something that largely happened at the tail end of Q2. And so those work blocks have moved off now, and as you heard Derek say, you know, that the railroad's back to operating at normal levels from an on-time performance and from a velocity perspective. In fact, I think in the last seven days or so, the railroad is overall now running about 216 car miles per day versus about 210 last year.
Tracy A. Robinson: Hey Chris, it's Tracy. I'll start on that and then I'll hand it over to Gilles. So this was the issue with the work blocks, the maintenance program in the Vancouver corridor where the grain was moving was something that largely happened at the tail end of Q2. And so those work blocks have moved off now, and as you heard Derek say,
Derek Taylor: You know, the railroad's back to operating at...
Speaker Change: normal levels from an on time performance and from a velocity perspective. In fact, I think in the last seven days or so, you know, the railroad overall is now running about 216
Tracy A. Robinson: So the railroad's operating well right now. If we think about, you know, OR and where we'll end up in the quarter, Now, assuming that there is, as you heard Jen say, no labor outage this year and no significant impact from fires, we are watching this Jasper situation that we've got going on right now closely. But if there's no major impact from fires, then you'll see us come in in the second half of Q3 and Q4 and an operating ratio of, as you would expect. Yeah, maybe.
Gilles: Carmel for Day versus the last year about 210. So the railroad's operating well right now. If we think about, you know, OR and where we'll end up in the quarter now, if we assume that there is
Gilles: As you heard Jen say, no labor outage this year and no significant impact from fires.
Speaker Change: We are watching this Jasper situation that we've got going on right now closely, but if there's no major impact from fires...
Speaker Change: Then you'll see us come in, in the second half, Q3 and Q4, in an operating ratio of sub-60.
Ghislain Houle: First of all, by the way, Chris, congratulations on your new position. And let me give you a few examples of some of the costs that we're referring to, and this is mostly related to what we call the Mountain South sub-region, which is really the Vancouver Corridor that Pat was referring to. So our recruit cost per GTM over Q2 was as high as 130%, our deadhead cost per GTM was up 37%, and our held-away cost per GTM was up 74%.
Speaker Change: as you would expect us to do.
Speaker Change: Do you have anything to add on that? Yeah, maybe. First of all, by the way, Chris, congratulations on your new position.
Speaker Change: And let me give you a few examples of some of the costs that we're referring to. And this is mostly related to what we call the Mountain South sub-region, which is really the Vancouver Corridor that Pat was referring to. So our recruit cost for GTM...
Speaker Change: over Q2 was as high as 130%. Our deadhead cost per GTM was up 37%, and our held-away cost per GTM was up 74%.
Ghislain Houle: So, obviously, these costs are coming way more in line now as some of this work is behind us in terms of the unplanned work blocks and so on, so you'll see, you should see a much better Q3 than what we saw in. Thanks for the question. Our next question comes from Cherilyn Radbourne from TD Cowan. Please go ahead, your line is open. Number one, should investors feel comfortable that the Vancouver-Edmonton corridor otherwise has enough capacity to handle the record volumes that you saw in the corridor? And, I guess, number two, are you pleased with how the team managed the disruption and the pace of the recovery, or Okay, I'll take that one.
Speaker Change: So, obviously, these costs are coming way more in line now as some of this work is behind us in terms of the unplanned work blocks and so on, so you should see a much better Q3 than what we saw in Q2.
Speaker Change: Thanks for the question.
Speaker Change: Our next question comes from Cherilyn Radbourne from TD Cowan. Please go ahead, your line is open.
Cherilyn Radbourne: Thanks very much. Good afternoon.
Cherilyn Radbourne: My question is for the operating team.
Cherilyn Radbourne: Could you speak to, number one, if we set aside the planned and unplanned maintenance outages?
Cherilyn Radbourne: Should investors feel comfortable that that Vancouver-Edmonton corridor otherwise has enough capacity to handle the record volumes that you saw in the corridor?
Cherilyn Radbourne: And I guess, number two, are you pleased with how the team managed the disruption and the pace of the recovery, or is there something that, in hindsight, you think you could have done differently? Thanks.
Tracy A. Robinson: And I would say, first of all, that when you look at the volume that moved to Vancouver, we talk about record volume, and our share of that volume was two-thirds of the trains running through the DRZ. We're seeing trains, a much bigger impact to see through this corridor. I am pleased with as we plan work blocks. We coordinate with our partners, we plan the material to be distributed, we plan the maintenance employees, the engineering department employees, and the gang to be in place to do this work. So as you look at this, the way we do the planning, we try to keep work blocks separated where they're not in such close proximity to one another.
Speaker Change: Okay, I'll take that one. And I would say, first thing is that when you look at the volume that moved to Vancouver, we talk about
Speaker Change: record volume, and our share of that volume was two-thirds of the trains running through the DRZ were CN trains, so much bigger impact to CN through this corridor. I am pleased with, as we plan work blocks, we
Speaker Change: We coordinate with our partners, we plan the material to be distributed, we plan the
Speaker Change: Maintenance employs, the engineering department employs the gang to be in place to do this work, so as you look at this
Speaker Change: In the way we do the planning, we try to keep work blocks separated where they're not in such close proximity to one another.
Tracy A. Robinson: We did a lot of that work. We had some unplanned... We did a lot of that work, work that needed to be done. And we had these work blocks closer to one another than we would have liked to see as it relates to our network. What I would do differently, I would say.
Speaker Change: We did a lot of that work. We had some unplanned work that needed to be done, and we had these work blocks closer to one another than we would have liked to see as it relates to our network and getting into the DRZ. What I would do differently, I would say...
Tracy A. Robinson: A lot of the work that we are doing and where we're investing is to get ourselves out of unplanned work blocks. We're doing the work in a manner where we want to minimize unplanned work blocks. We had an emergent rail issue that we had to deal with that was right adjacent to the DRZ. That's a takeaway for us to make sure that as we plan our work, we do our best, stick to the plan, and not have unplanned work blocks. That would be one thing that we would change.
Speaker Change: We a lot of the work that we are doing and where we're investing is to get ourselves out of
Speaker Change: Unplanned Work Blocks. We're doing the work in a manner that we want to minimize the unplanned work blocks. We had an emergent
Speaker Change: Rail issues that we had to deal with, that was right adjacent to the DRZ. That's a takeaway for us, is to make sure that as we plan our work, that we're doing our best to stick to the plan and not have unplanned work blocks.
Tracy A. Robinson: I am pleased with the capacity. In that corridor, though, as we see as we lift it out of the work block to make Season, we have seen a significant uptick in speed and velocity, in fact. We're approaching last year's levels of both train speed and car velocity. Please, before we're trending, and yeah, we would certainly not plan to have those blocks and such. I'll just add a little bit to that, Cherilyn.
Speaker Change: That would be one thing that we would change. I am pleased with the capacity in that corridor, though, as we see, as we've lifted out of the work block, the maintenance.
Speaker Change: season, we have seen a significant uptick in the speed and velocity. In fact, we are
Speaker Change: We're approaching last year's levels of both.
Speaker Change: Train Speed and Car Velocity. So pleased with where we're trending and we would certainly not plan to have those blocks in such close proximity to wrap it up.
Tracy A. Robinson: So we're being quite thoughtful. We don't sell capacity that we don't. And so we've been thoughtful in how we've constructed this portfolio. You know, as Remy's put together this international portfolio, you know, we know that whatever grains are coming, what the grain crop is, this corridor can handle that capacity. We have turned away business in the Vancouver Corridor that wouldn't fit either our network or our capacity.
Speaker Change: And I'll just add a little bit to that, Cherilyn. So we've been quite thoughtful. We don't sell capacity that we don't have.
DREMI: And so we've been thoughtful in how we've constructed this portfolio. You know, DREMI's put together this international portfolio. You know, we know what grain's coming, what the grain crop is.
Speaker Change: This corridor can handle that capacity. We have turned away business in the Vancouver Corridor that wouldn't fit either a network or a capacity. And so the work blocks in this particular corridor were significant enough.
Tracy A. Robinson: And so the work blocks in this particular corridor were significant enough, particularly the unplanned work blocks, that they had an unexpected impact. Thanks for this. Go ahead. Thank you. Our next question comes from Scott Group from Wolf Research. Please go ahead.
Speaker Change: particularly the unplanned work walks that it had an unexpected impact. Going forward, we've sold the capacity that we have.
Speaker Change: Our next question.
Speaker Change: Go ahead. Thanks.
Scott H. Group: Your line is open. Hey, thanks. This afternoon. So I just want to clarify that the guidance now assumes continued diversions, but no strike. Is that right? And then, just for the bigger picture, I just want to understand what's going on with price. You guys talked about price above inflation, but since PRRTM is down slightly, why aren't we seeing better yield growth, given what you're talking about is still inflation plus price? When will we start to see that? I'll take the first one.
Speaker Change: Our next question comes from Scott Group from Wolfe Research. Please go ahead, your line is open.
Scott H. Group: Hey, thanks afternoon. So I just want to clarify that the guidance now assumes continued diversions but no strike. Is that right? And then just...
Speaker Change: Take your picture. I just want to understand what's going on with price. You guys talked about price above inflation, but since PRRTM are down slightly, why aren't we seeing better yield growth given what you're talking about is still inflation plus price? When do we start to see that? Thank you.
Tracy A. Robinson: First, Scott, and so what we're doing for the guidance going forward, we are assuming, as you said, that there's no labor outage. So there's no strike or lockout. As far as diversion is concerned, there are diversions taking place now. We're assuming that we get certainty on labor by, say, the end of August and that those diversions continue at the level that they are; they don't come back immediately, but they don't get any worse.
Speaker Change: I'll take the first one.
Speaker Change: First, Scott, and so what we're, what we're, for the guidance going forward, we are assuming, as you said, that there's no labor outage.
Speaker Change: So there's no strike or lockout. As far as the diversions, there are diversions taking place now. We're assuming that we get certainty on labor by, say, the end of August .
Speaker Change: and that those diversions continue at the level that they are. They don't come back immediately, but they don't get any worse. And so, we are expecting that it will take a period of time.
Tracy A. Robinson: And so we are expecting that it will take a period of time to get that international business back routed to the Canadian ports, hopefully not as long as it did after the strike at the ports last year. But that's what we're assuming.
Speaker Change: to get that international business back routed up to the Canadian ports. Hopefully not as long as it did after the strike.
Speaker Change: on the ports last year. But that's what we're assuming when we reverted to guidance.
Speaker Change: and I'm sorry, I don't recall the first one. It was on revenue for RTM, so I can take that. So I did mention and you pointed out, Scott, that we are delivering same store price.
Tracy A. Robinson: And when we reverted to guidance, and I'm sorry, I don't recall, it was on revenue for a TM. So I can take that. And I did mention, and you pointed out, Scott, that we are delivering same store prices ahead of rail inflation. What we see, though, is that the mix of business has changed in favor largely of bulk.
Speaker Change: ahead of rail inflation.
Speaker Change: What we see, though, is that the mix of business has changed.
Remy Lalonde: So in this case, it was a lot of frac sand and Canadian grain, in particular, and more international business for the intermodal stuff. So that shows up as a drag on RTM because our average length of haul has gone up across the business by five. Thanks for your question. Our next question comes from Steve Hansen from Raymond James. Please go ahead.
Speaker Change: in favour largely of bulk. So in this case, it was a lot of frac sand and Canadian grain in particular, and more international business for the intermodal stuff. So that shows up as a drag on RTM because our average length of haul has gone up across the business by 5%, so the denominator widens and that dilutes.
Speaker Change: The Eel. Simple answer.
Speaker Change: Thanks for your question.
Steven Hansen: Your line is open. Yeah, good afternoon. Thanks, guys. Appreciate the time.
Speaker Change: Our next question comes from Steve Hansen from Raymond James. Please go ahead, your line is open.
Tracy A. Robinson: As you contemplate this new grain harvest that's coming in, we've seen revisions to the upside now at least once, and probably another to come. We'll see. You know, how do you think about preparing for that, you know, relative to some of these constraints that have existed? It sounds like you feel confident and will be able to handle the volumes, but are there any additional preparations you'll need to make to handle this harvest if it is indeed a big one?
Steven Hansen: Yeah, good afternoon. Thanks guys. Appreciate the time. As you contemplate this new grain harvest that's coming in, we've seen revisions to the upside now.
Steven Hansen: at least once and probably another to come, we'll see. How do you think about preparing for that relative to some of these constraints that have existed? It sounds like you feel confident in being able to handle the volumes, but is there any additional...
Speaker Change: Preparations will need to make to handle this harvest if it is indeed a big one.
Tracy A. Robinson: Well, we hope it is a big one, and we're ready for that. Steve, thanks.
Speaker Change: Well we hope it is a big one and we're ready for that. Steve, thanks.
Steven Hansen: I would say this, that there's more than one port that the grain moves through.
Speaker Change: You know, so we've got Vancouver, which is an important port for grain. We've also got Rupert, Thunder Bay, and then into Eastern Canada. So as we think about how we're going to put that portfolio together, we'll use all of those are great ways to use our network, and we'll make sure that we focus on getting the right volumes in the right corridors.
Tracy A. Robinson: I would say this, that there's more than one port that the grain moves through, you know. So we've got Vancouver, which is an important port for grain; we've also got Rupert, Thunder Bay, and then into Eastern Canada. So as we think about how we're going to put that portfolio together, we'll use all of those as great ways to use our network. And we'll make sure that we focus on getting the right volumes in the right places. Thanks for the questions. Our next question comes from Ken Hoexter from Bank of America. Please go ahead; your line is open. Hey, great. Good afternoon,
Speaker Change: Thanks for the questions.
Speaker Change: Our next question comes from Ken Hoexter from Bank of America. Please go ahead, your line is open.
Ken Hoexter: Just thinking about the outlook shifting to mid single-digit to high single-digit earnings. You've obviously got a big uptick coming in the third quarter, but maybe some concern on yields with better grain. What are the upside and downside risks in that target?
Ken Hoexter: Hey, great. Good afternoon. Just thinking about the outlook shifting to mid-single-digit to high-single-digit earnings.
Ken Hoexter: You've obviously got a big uptick coming in third quarter, but...
Speaker Change: Maybe some concern on yields with better grain.
Speaker Change: What are the upside downside risks in that target and then does the Unproductive costs that you talked about do they accelerate as business returns and labor gets more stretched or or not necessarily?
Speaker Change: Thanks Ken, I'll start that off and then I'll hand it over to Jiz or Remy if you have some comments.
Tracy A. Robinson: And then do the unproductive costs that you talked about accelerate as business returns, and labor gets more stretched, or not necessarily? On the unproductive costs, we experienced them, as we said earlier, in a couple of ways. One is that we did have lighter coal and grain down in the U.S. We were resourced to handle more volume, so we had some unproductive costs there, a little bit less in the east, but a little bit in the east, and so we're taking some action on those.
Speaker Change: On the unproductive costs, we experienced them, as we said earlier, in a couple of ways. One is that we did have lighter coal and grain down in the U.S. We were resourced to handle more volume.
Speaker Change: So we had some unproductive costs there, a little bit less in the east, but a little bit in the east, and so we're taking some action on those, and as Derek went through, we stopped hiring, we're offering voluntary furloughs, and we're coming, and we'll continue to adjust as we look forward to make sure that the resources
Tracy A. Robinson: As Derek went through, we stopped hiring, we're offering voluntary furloughs, and we'll continue to adjust as we look forward to make sure that the resources, crews, but also all the equipment are matched for the volumes that we are expecting. If we look at the west, the unproductive labor productivity issue was more related to the work blocks and so the lumpiness of how that volume was moving through the corridor.
Derek Taylor: crews, but also all the equipment.
Derek Taylor: are matched for the volumes that we are expecting. If we look at the West.
Derek Taylor: The unproductive labor or labor productivity issue was more related to the work blocks and so the lumpiness of how that volume was moving through the corridor. You heard Gis go through kind of the re-cruise.
Tracy A. Robinson: You heard Giz go through the recruits and some of the deadhead issues that we had, so as the work blocks have come off there, then that is adjusting back. We do have an ongoing structural issue with the duty and work rest rules that have come in. As you know, we've said that this is costing us in Canada. In the year that it's been in place, about 100 plus million annualized.
Derek Taylor: and some of the deadhead issues that we had. So as the work blocks have come off there, then that is adjusting back. We do have.
Derek Taylor: an ongoing structural issue with the duty and work rest rules that have come in. As you know, we've said that this is costing us in Canada, in the year that it's been in place, about a hundred, hundred plus million annualized.
Tracy A. Robinson: We're working through how this basically affects us in crew availability, and this is something that we've been attempting to address in collective bargaining. If we can't do that, then there's some self-help that we're going to do with some of the local agreements that would address some of the redundancy that's been created there. The temporary issues of labor productivity, we're all over those. The more structural ones around the work rest rules, then we'll deal with them as we go forward in our labor negotiations.
Derek Taylor: We're working through how, basically, this is appearing for us in crew availability.
Derek Taylor: And this is something that we've been attempting to address in the collective bargaining, and if we can't do that, then there's some self-help that we're going to do with some of the local agreements that would address some of the redundancy that's been created there.
Derek Taylor: So, the temporary issues on labor productivity, we're all over those. The more structural one around the work rest rules, and we'll deal with them as we go forward in our labor negotiations.
Tracy A. Robinson: Tracy, I think you covered it well. Maybe just one more point, Ken, is when you look at fuel. I mean, we've talked about fuel impact in this quarter of about 10 cents, and we had an even bigger impact in Q1. So if fuel prices, i.e.
Tracy A. Robinson: Tracy, I think you covered it well. Maybe just one more point, Ken, is when you look at fuel, I mean, we've talked about fuel impact.
Ken: in this quarter of about $0.10, and we had an even bigger impact in Q1, as you know.
Ghislain Houle: If OHD and WTI remains where it is, then you can expect a fuel headwind on a year-over-year basis in the second half in the same order as the first half of this year, but probably more skewed to Q4 versus Q3. So that's something else for consideration in our revised guide. Thanks for the question. Our next question comes from Konark Gupta from Scotiabank. Please go ahead, your line is open
Speaker Change: So if fuel prices, i.e. OHD and WTI, remains where it is, then you can expect a fuel headwind.
Speaker Change: on a year-over-year basis and the second half in the same order as the first half of this year but probably more skewed to Q4 versus Q3. So that's something else to take into consideration in our revised guidance.
Speaker Change: Thanks for the question.
Speaker Change: Our next question comes from Konark Gupta from Scotiabank. Please go ahead, your line is open.
Konark Gupta: Thanks for taking my question. I just wanted to understand what drove the increase in the number of unplanned workloads during the second quarter. And where are you performing the planned workloads now?
Konark Gupta: Thanks for taking my question. I just wanted to understand what drove the increase in the number of unplanned workloads during the second quarter, and where are you performing the planned workloads now?
Patrick Timothy Whitehead: So they were unplanned work blocks, both in the DRZ and just adjacent. The DRZ and the way we plan the work is I mentioned we have this finite window of time where as the weather breaks we typically start in Western Canada where the weather breaks first we move our way east across the network and we distribute the material and we align the engineering gangs work schedules around that progression, As we've made that progression, we continue east, and our plan is, we're now east of Edmonton, with one return cycle to the west that we have to make, and our plan is to get off of that, corridor before the fall rush and the grain harvest.
Speaker Change: I'll take that. So there were unplanned work blocks, both in the DRZ and just adjacent to the DRZ, and the way we planned the work is...
Speaker Change: I mentioned we have this finite window of time where, as the weather breaks, we typically start in Western Canada, where the weather breaks first, we move our way east across the network, and we distribute the material, and we align the engineering gang's work schedules around that progression.
Speaker Change: As we've made that progression, we continue east, and our plan is we're now east of Edmonton with one return cycle to the west that we have to make.
Patrick Timothy Whitehead: We want to be off of the core route in Western Canada. That's the way that we planned it. We had rail issues, as I said before, we had to deal with on our sub just adjacent to the DRZ.
Speaker Change: And our plan is to get off of that corridor before the fall rush and the grain harvest. We want to be off of the core route in western Canada. That's the way that we plan it.
Speaker Change: Rail issues, as I said before, we had to deal with on our sub just adjacent to the DRZ, and we had some unplanned work blocks in the DRZ as well.
Patrick Timothy Whitehead: We had some unplanned work blocks in the DRZ. Thanks. And just a quick clarification question.
Tracy A. Robinson: What are you assuming just for wage inflation related to the pending TCRC deal in the new guidance? Listen, we're in the middle of, as you know, negotiations and a process there. So it's probably inappropriate for us to comment directly.
Speaker Change: Thanks, and just a quick clarification question. What are you assuming just for wage inflation related to the pending TCRC deal and the new guidance?
Speaker Change: Listen, we're in the middle of, as you know, negotiations and a process there, so probably...
Tracy A. Robinson: But I, you know, we have settled a number of agreements in Canada this year. And I think you're looking at a pattern that looks somewhere in the, you know, 3% range. So, you know, that wouldn't be a bad number either.
Speaker Change: It's inappropriate for us to comment directly, but I, you know, we have settled a number of agreements in Canada this year, and I think you're looking at a pattern that looks somewhere in the, you know, 3% range, so.
Tracy A. Robinson: Thanks for the question, Conor. Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is: Hey, good afternoon, team.
Speaker Change: That wouldn't be a bad number to expect here. Thanks for the question, Conor. Thank you.
Speaker Change: Our next question comes from David Vernon from Bernstein. Please go ahead, your line is open.
David Vernon: Thanks for taking the question. So, you know, I just wanted to press on that issue of the three-year guide kind of keeping the target at 10 to 15 compound. That seems like you have to be kind of toward the higher end for two years in a row to get to the midpoint of that range.
David Vernon: Hey, good afternoon, team. Thanks for taking the question. So, you know, I just wanted to press on the issue of the three-year guide kind of keeping the target at 10 to 15 compound. That seems like you've got to be kind of toward the higher end for two years in a row to get to the midpoint of that range. You know, what's the thinking behind kind of keeping the bar that high? And maybe as a follow-up to that, like, how much of the
Speaker Change: How much of the, have you quantified the exact dollar cost of some of the maintenance delays and some of the book around stuff? Just trying to figure out like how much of 25 jump up is just getting past what we've had in bad guys in 24.
Speaker Change: Just trying to get my head around the cadence for that three-year guide holding up the 10 to 15 compound. Thanks.
Tracy A. Robinson: You know, what's the thinking behind kind of keeping the bar that high? And maybe as a follow-up to that, like, how much of the – how much of the – have you quantified the exact dollar cost of some of the maintenance delays and some of the bookkeeping stuff? Just trying to figure out, like, how much of a 25 jump up is just getting past what we've had in bad guys in 24?
Speaker Change #100: Thanks, David. So our three-year plan remains in place, and I, you know, what I'm really happy about
Tracy A. Robinson: Just trying to get my head around the cadence for that three-year guide and holding up the 10 to 15 compound. Thanks. Thanks, David. So our three-year plan remains in place. And, you know, what I'm really happy about is how the growth plan is coming along, particularly the CN initiatives that Remy went through that are progressing very well. And I know that he and his team are continuing to fill that pipeline.
Speaker Change #101: is how the growth plan is coming in, particularly.
Speaker Change #101: You know, the CN initiatives that Remy went through that are progressing very well, and I know that he and his team are continuing to fill that pipeline.
Tracy A. Robinson: The economic recovery, you'll remember that we said that it was, you know, the growth was 50% in the organic, underlying economy, and 50% in the CN-specific initiatives. The economic recovery is, you know, advancing a little bit more slowly. We're seeing that in a few of the sections that Remy spoke about, but it's going to come.
Speaker Change #102: The economic recovery, you'll remember that we said that it was, you know, the growth was 50 percent.
Speaker Change #102: The Organic, the Underlying Economy, and 50% and the CN specific initiatives. The economic recovery is advancing a little bit more slowly. We're seeing that in a few of the sections that Remy spoke about, but it's going to come.
Tracy A. Robinson: And once we get through this labor issue, you'll see the full impact of the growth plan. And beyond that, the railroad's running really well. What happened with the workbox in Vancouver aside, Pat and Derek are working on the next level of efforts on network operations, on transportation, on engineering productivity, and they're going to continue to advance the performance on this. We do have, so we look forward. The plan is coming, it's working, it's looking good. The one structural issue that we have is this, you know, the duty and rest period rules and the redundancies that we have there.
Speaker Change #102: And once we get through this labor issue, you'll see the full impact of the growth plan. Beyond that, the railroad's running really well. What happened with the work blocks in Vancouver aside, and Pat and Derek are working on the next level of efforts on network ops.
Speaker Change #102: on transportation, on engineering productivity, and they're gonna continue to advance the performance on this. We do have, so as we look forward, the plan is coming, it's working, it's looking good. The one structural issue that we have is this.
Ghislain Houle: And so, you know, we are dealing with that this year, as we look at either through the collective agreements or through some of the self-help that I talked about. So we're remaining pretty comfortable with the plan. Jiz, do you have anything to add to that? You've covered it well. Okay. Thanks, David.
Speaker Change #102: You know, the duty and rest period rules and the redundancies that we have in there. And so, you know, we are dealing with that this year as we look at either through the collective agreements or through some of the self-help.
Speaker Change #102: that I talked about. So we're remaining pretty comfortable with the plan. Gilles, do you have anything to add? No, you've covered it well. Okay, thanks, David.
David Vernon: Just a quick follow-up. I mean, just thinking about that duty and rest stuff, like that'll be in the base for next year, but how much of the incremental leverage did it absorb this year? Well, you know, as we quantified, if you remember when it came in, we said that this could have an impact of as much as $100 million on their yearly basis. I would tell you that, in reality, it's probably a little higher than that, and as Tracy mentioned, the team is working very hard to, you know, alleviate some of this, and this is really about crew availability.
Speaker Change #103: Just a quick follow up, think about the duty and rest stuff, that will be in the base for next year, but how much of the incremental leverage did it absorb this year?
Speaker Change #104: Well, you know, as we quantified, if you remember when it came in, we said that this could be an impact as much as $100 million on a yearly basis.
Speaker Change #105: I would tell you that in reality it's probably a little higher than that.
Speaker Change #105: And as Tracy mentioned, the team is working very hard to, you know, alleviate some of this and this is really about crew availability. That's really what we're trying to work and we're trying to work with our unions to do exactly that.
Speaker Change #106: All right, thank you for that, Erika. Thank you.
David Vernon: That's really, that's really what we're trying to do, and we're trying to work with our, All right, thank you for that, Adit Kaur. Thank you. Our next question comes from Fadi Chamoun from Bebo Capital Markets. Please go ahead, your line is open. Thank you. Good afternoon.
Speaker Change #107: Our next question comes from Fadi Chamoun from Bebo Capital Markets. Please go ahead, your line is open.
Fadi Chamoun: I just want to go back to this issue on the Western Corridor. I mean, you'll have the volume opportunity that I think is the envy of most of your peers. And again, this quarter, on 185 million of revenue, we saw $36 million drop in operating income.
Fadi Chamoun: Thank you. Good afternoon. I just want to go back to this issue on the Western Corridor. I mean, you have the
Speaker Change #109: volume opportunity that I think are the envy of most of your peers.
Speaker Change #110: And again, this quarter, on 185 million of revenue, we saw 36 million drop to operating income. And it sounds like the Vancouver-Edmonton corridor was your biggest headwind this quarter, but
Tracy A. Robinson: And it sounds like the Vancouver-Edmonton corridor was your biggest headwind this quarter, but, Kind of, if you think about this over the next three years, is there a kind of structural bottleneck in that corridor? Is there, because it feels like every cycle we get into some problem in that corridor, and ultimately, you get into these issues. Is there a kind of more durable solution that is required to allow that corridor to perform better in terms of expansion and capacity? Maybe a different way of how you block the traffic with customers. I'm just wondering, is this really just an isolated Q2 issue?
Speaker Change #111: If you think about this over the next three years, is there a kind of structural bottleneck in that corridor? Is there, because it feels like every cycle we get into some problem in that corridor and ultimately you get into these issues.
Speaker Change #112: Is there a kind of more durable solution that is required to
Speaker Change #112: allow that corridor to perform better expansion and capacity, maybe maybe a different way of how
Speaker Change #113: , I'm just wondering, is this kind of really just an isolated Q2 issue? Volumes, you know, usually, you know, sometimes they come as planned, but most of the time,
Tracy A. Robinson: Volumes usually, you know, sometimes they come as planned, but most of the time, they don't come as planned. Like, how are you gonna solve for that over the medium term? Thanks, Fadi, for the question. I think there are two ways to think about this. One is that, you know, part of our program, our capital program this year is focused on this, this corridor. We continue to put money into this corridor to make sure that where we can improve capacity and capability, we do, and both railroads are working very well together to make sure that we can make the most by cooperating, getting them to get the next level of capacity. I know you've been in the Vancouver area, and you understand some of that.
Speaker Change #114: They don't come as plans, but how are you going to solve for that over the medium term?
Speaker Change #115: Thanks, Fadi, for the question. I think there's two ways to think about this.
Speaker Change #116: One is that, you know, we continue, part of our program, our capital program this year is focused on, you know, this corridor. We continue to put money into this corridor to make sure that where we can improve capacity and capability that we do, and both railroads.
Speaker Change #116: are working very well together to make sure that we can make the most by cooperating, get the next level of capacity. I know you've been in.
Tracy A. Robinson: The other piece of this is that there are practically limitations on how much more that corridor in Vancouver can grow. And so the benefit that we have is a very open Rupert corridor that can handle not only grain but a lot of other commodities. And we've got a lot of our growth focused in that area. If it comes to grain, we talked about, you know, and you would well know the various corridors that that could travel into Thunder Bay and Eastern Canada as well.
Speaker Change #116: the Vancouver area, and you understand some of that.
Speaker Change #116: The other piece of this is that there are practically...
Speaker Change #116: The benefit that we have is a very open group of corridor. They can handle not only grain but a lot of the other commodities and we've got a lot of our growth.
Speaker Change #116: focused in that area. If it comes to grain, we talked about, you know, and you would well know the various corridors that that can can travel into Thunder Bay and Eastern Canada as well.
Tracy A. Robinson: So I think we'll continue to make Vancouver very important. We're going to continue to work on productivity so that we will not oversell our capacity in that corridor, and we have options for where we grow. We're very fortunate in that.
Speaker Change #116: Vancouver is very important. We're going to continue to work on the productivity in that. We will not oversell our capacity in that corridor, and we have options for where we grow. We're very fortunate in that regard.
Tracy A. Robinson: Thanks for the question. And just a quick follow-up. I mean, given what you just described.
Speaker Change #117: Just a quick follow-up. Given what you just described, the supply-demand situation in that corridor, is there a pricing lever that you can lean on a little bit more going forward?
Fadi Chamoun: The supply-demand situation in that corridor, is there a pricing lever that you can lean on a little bit more going forward? I would say that Remy and his team are all over that. You know, we're being very thoughtful around how we sell our capacity to all. Thanks for... Oh, sorry.
Speaker Change #117: I would say that Remy and his team are all over that, you know, we're being very thoughtful around how we sell our capacity to all of our customers.
Speaker Change #117: [inaudible]
Tracy A. Robinson: Our next question comes from Brian Ossenbeck from J.P. Morgan. Please go ahead. Your line is open. Yeah, thanks. Good afternoon.
Speaker Change #117: Our next question comes from Brian Ossenbeck from J.P. Morgan. Please go ahead, your line is open.
Brian Ossenbeck: I just wanted to maybe ask you a follow-up on the western part of the network. Maybe it's for Remy, but you certainly need to invest to keep up with the growth there. But in the east and maybe in the south, you need to invest to sort of attract growth. So anything that you would highlight as being up and coming or something that's a little more exciting in the east and the south, I know it's been an area the company's been trying to grow for some time, and the volume will only go where it will go.
Brian Ossenbeck: Yeah, thanks. Good afternoon. I just wanted to maybe ask a follow-up on the Western...
Speaker Change #119: Part of the network, maybe it's for...
Speaker Change #120: Remy, but you certainly need to invest to keep up with the growth there, but in the east and maybe in the south, you need to invest to sort of attract the growth. So anything that you would highlight as being up and coming or something a little more exciting on the east and the south, I know it's been an area the company's been trying to grow for some time and the volume will only go
Brian Ossenbeck: And this is a quick follow-up, maybe for Tracy. Can you give us a sense as to whether or not you get that same structural relief for the work rest rules if it's negotiated or if it's self-help?
Speaker Change #120: And this is a quick follow-up maybe for Tracy. Can you give us a sense as to whether or not you can get that same structural relief for the work rest rules if it's negotiated or if it's self-help? Thank you.
Remy Lalonde: Thank you. Remy, do you want to make some comments first and then I'll come in behind? Thanks. Maybe I'll just start.
Remy Lalonde: So a couple of things that I think are interesting. The Gulf option for us is a good one for the intermodal business. So I think that there's headroom there. The corridor from Chicago to the Gulf is very efficient the way that my operating colleagues run it.
Remy: Remy, do you want to make some comments first and I'll come in behind? Thanks, maybe I'll just start. So a couple of things that that I think are interesting. The golf option for us is is a good one.
Speaker Change #122: for the intermodal business. So I think that there's headroom there. The corridor of Chicago to the Gulf is very efficient the way that my operating colleagues run it.
Remy Lalonde: We also are in the process of integrating the INR to extend our reach and bring more volume on our rails, so I think there's upside to chase there as well. Yeah, thanks.
Speaker Change #122: We also are in the process of integrating the INR to extend our reach and bring more volume on our rails. So I think there's upside to chase there as well.
Tracy A. Robinson: I mean, I would also say that we are hopeful and expecting this week that we will get some good news on the Iowa Northern acquisition. And so, you know, that also is going to add to our southern quarter efforts. You know, Remy talked about the Gulf.
Speaker Change #122: Yeah, thanks everyone. I would also say that we are hopeful and expecting this week that we will get
Speaker Change #122: Some good news on the Iowa Northern Acquisition.
Speaker Change #122: And so, you know, that also is going to add to our Southern Corridor efforts.
Speaker Change #122: You know, Remy talked about the Gulf.
Speaker Change #123: We've got some good chemical business down there. We've got the Falcon business that we're continuing to grow. So lots of effort on the sales. Really the impact in this quarter.
Tracy A. Robinson: We've got some good chemical business down there. We've got the Falcon business that we're continuing to grow. So lots of effort on the south. The impact in this quarter is that we would normally be moving grain and coal. And we had a resource to move grain and coal.
Speaker Change #124: We would normally be moving green.
Speaker Change #125: and Coal, and we had resource to move grain and coal, and that's kind of the gap. Nonetheless, building the density in the South remains one of our key strategic initiatives. As far as the duty arrest period rules,
Tracy A. Robinson: And that's kind of the gap between them. Nonetheless, building the density in the south remains one of our key strategic initiatives. As far as the duty of rest period rules go, you know, all of what we are contemplating, whether it is within the collective bargaining, whether it's some efforts that we can take outside of that, would keep us fully compliant with both the spirit and the rules that the federal government put out when it comes to rest and safety and everything else.
Speaker Change #125: All of what we are contemplating, whether it is within the collective bargaining, whether it's some efforts that we can take outside of that,
Speaker Change #125: It would keep us fully compliant with both the spirit and the rules that the federal government put out when it comes to rest and safety and everything else.
Tracy A. Robinson: What we've experienced as all of this has happened is a high level of redundancy in the stacking of our collective agreements with the local agreements, with the duty, and with the new rules issued by the federal government last year. And so we need to make this simpler. And there are things that we can do to reduce that redundancy. But as I said, in all cases, we'll stay compliant with federal regulations.
Speaker Change #125: What we've experienced as all of this has happened is a high level of...
Speaker Change #125: Redundancy in the stacking of our collective agreements with the local agreements with the duty and with the new rules.
Speaker Change #125: Issued by the federal government last year, and so we need to make this simpler, and there's things that we can do to reduce that redundancy, but as I said, in all cases, we'll stay compliant with the federal regulations, and there are scenarios that we can do this
Tracy A. Robinson: And there are scenarios that we can do this through collective bargaining at the table. And that's what we would like to do. We are hopeful, and it's still our base plan, that we will get a negotiated outcome, a negotiated agreement. That is the best way for us and for the union to kind of deal with the issues that each one of us wants to deal with. So we're ready for those discussions when they're ready to start up. Thanks for your questions. Thanks, Tracy. Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open. Yeah, thanks very much.
Speaker Change #125: Through the collective bargaining at the table, and that's what we would like to do. We are hopeful, and it's still our base plan, that we would get a negotiated outcome, a negotiated agreement. That is the best way.
Speaker Change #125: for us and for the union to kind of deal with the issues that that each one of us wants to deal with so We're ready for those discussions when they're ready to start up again. Thanks for your question
Speaker Change #125: Thanks Tracy. Our next question...
Speaker Change #126: Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead, your line is open.
Walter Spracklin: I wanted to come back to a prior question that I don't know if was was was answered directly. And that relates to your decision to maintain your your three year CAGR of 10 to 15%. But obviously, with the 2024 decline to mid to high, it puts it puts up quite significantly the 2025 and 2026, kager. And as we know, as we set our 25 and 26 estimates, I just wanna make sure you're comfortable with , , , , , , , , , , , , , , Are you comfortable with that kind of growth in 2025 and 2026, because that's just mathematically what that implies.
Walter Spracklin: Yeah, thanks very much, operator. So I wanted to come back to a prior question that I don't know if was answered directly, and that relates to your decision to maintain your three-year CAGR of 10 to 15%, but obviously with the 2024 decline amid the high,
Speaker Change #128: It puts it puts up quite significantly the 2025 and 26
Speaker Change #129: Kager. And as we set our 25 and 26 estimates, I just want to make sure you're comfortable with
Speaker Change #130: The kind of growth that's going to be in that 12%, 13%, 14%, 15% range to just get back into that 10% to 15% CAGR over a three-year period is
Speaker Change #130: Are you comfortable with that kind of growth in 2025 and 2026? Because that's just mathematically what that implies, right?
Walter Spracklin: So let me share with you how we're thinking about it. What's going very well and exactly on plan is the growth that we're driving through the CN specific initiatives. And if you'll recall, we said this was 50%, and this was an effort that was less or not related at all to the underlying strength of the economy and economic growth. What is much slower than the assumptions that we laid out when we invested it last year.
Speaker Change #131: So let me share with you how we're thinking about it.
Speaker Change #131: What's going very well and exactly on plan.
Speaker Change #131: is the growth that we're driving through the CN-specific initiatives. And if you'll recall, we said this was 50% and this was efforts that were less or not related at all to the underlying strength of the economy and the economic growth.
Speaker Change #131: What is much slower than the assumptions that we laid out?
Speaker Change #131: in when we investor date last year is the the pace of economic growth and so that without a doubt is slower and we are feeling
Walter Spracklin: And so that, without a doubt, is slower, and we are feeling that as we look at our growth plan. But we do believe that it will come back. And so if we're wrong about that, then yes, this could be a little bit slower. So the top line kind of story goes like this. From an operations perspective, the way that you drive efficiency into a railroad operation is with velocity.
Speaker Change #131: feeling that as we look at our growth plan. We do believe that that will come back and so if we're wrong on that then yes this could be a little bit slower. So the top line kind of story goes like that.
Speaker Change #132: From an operations perspective, the way that you drive efficiency into a railroad operation is with velocity.
Tracy A. Robinson: And so I'm really happy with the way that our plan is coming together, and the kind of velocity that the guys are running through it is because, you know, we build a plan, and Remy sells it. And if the volume shows up as we expected, this is a highly efficient operation. So as we look forward, you know, pending some assumptions, you know, the jizz is laid out, then we're pretty comfortable that we can... Thank you very much.
Speaker Change #132: And so I'm really happy with the way that our plan is coming together, is running, and the kind of velocity that the guys are running through it is because
Remy: We build a plan and Remy sells it, and if the volume shows up as we expected, this is a highly efficient operation. So as we look forward, pending some assumptions, the jizz is laid out, then we're pretty comfortable that we can reach those numbers.
Tracy A. Robinson: Thanks for the question. Our last question will come from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open. Thanks for joining me here.
Speaker Change #133: Okay, thank you very much.
Speaker Change #134: Thanks for the questions.
Speaker Change #134: Our last question will come from...
Speaker Change #134: Ravi Shanker from Morgan Stanley . Please go ahead, your line is open.
Ravi Shanker: Just a couple of follow-ups. One is, in your conversations with your customers, are you seeing them pull forward peak season demand into basically now? And is there a risk that you may be potentially missing out on volumes?
Ravi Shanker: Thanks for suiting me in here. Just a couple of follow-ups. One is, in your conversations with your customers,
Ravi Shanker: Are you seeing them pull forward peak season demand into basically now and is there a risk that
Remy Lalonde: I mean, just when you kind of resolve the labor things kind of later this summer, early fall, kind of does that drop off and back off the air? And also, apologies if I missed this, but did you quantify the OR impact of the network blockages in Tokyo? Maybe I'll start on the pull forward.
Speaker Change #136: You may be potentially missing out on volumes. I mean, just when you kind of resolve the labor things kind of later this summer, early fall, kind of does that drop off and back off the air? And also, apologies if I missed this, but did you quantify the OR impact of the network blockages in Tokyo?
Remy Lalonde: Thanks for your question. So, yeah, for sure, we do see part of that there. Obviously, the biggest impact of the labor situation is on intermodal and the international business because our customers are planning vessels, and they have to plan them quite a bit further out. On the domestic side, we think customers have largely proved out their truck contingencies and then more rapidly come back to the rails. But on the vessel side, it's a little trickier.
Speaker Change #137: Maybe I'll start on the the pull forward. Thanks for your question. So yeah, for sure. We do see part of that There's obviously the biggest impact of the labor situation is on intermodal And the international business because our customers are planning vessel They have to plan them quite a bit further out on the domestic side We think customers have largely proved out their truck contingencies and then more rapidly came back To to the rails, but on the vessel side, it's a little trickier So so we think there has been a bit of pull forward of that volume
Remy Lalonde: So we think there has been a bit of a pull forward of that volume. What we're sort of focused on, though, is how quickly, once we put this behind us, we can recover it. And we think that ports in the U.S. on the West Coast are more congested than they were last year when we had the ILWU strike. So ideally, that volume will come back more quickly. And indications are, as I said, on the domestic market that we'll be able to bring the volume back to our rails quicker also.
Speaker Change #137: What we're sort of focused on, though, is how quickly, once we put this behind us, we can recover it.
Tracy A. Robinson: and we're thinking that ports in the U.S. on the West Coast are more congested than they were last year when we had the ILWU strike, so ideally that volume will come back more quickly, and indications are, as I said, on the domestic market that we'll be able to bring the volume back to our rails quicker also. I just want to add to an earlier question on the Iowa Northern acquisition that both Tracy and I talked about, obviously that is pending STB approval, so we're hoping that comes through in the next couple weeks here, but that is an important caveat. Maybe, Ravi, on your second piece of the question in terms of if we quantify...
Remy Lalonde: I just want to add to an earlier question on the Iowa Northern acquisition that both Tracy and I talked about. Obviously, that is pending STB approval, so we're hoping that comes through in the next couple weeks. But that is an important caveat.
Ravi Shanker: Maybe, Ravi, on your second piece of the question in terms of whether we quantified the impact of the network Vancouver corridor issues on OR, we did not, but I did give some specific examples of recruit costs or deadhead costs and held-away costs that were much higher than what we've seen in the past, in the range of 130% on the first one, like I said, close to 40% on Deadhead, and about 75%, 74%, on the last Thanks for the question, Ravi. Thank you. This concludes the question and answer session. I would like to turn the call back over to Tracy Robinson. Thanks so much.
Unknown Executive: So that's what we did.
Ravi Shanker: Thanks for the question, Ravi. Thank you.
Tracy Robinson: I would like to turn the call back over to Tracy Robinson. Thanks so much.
Tracy A. Robinson: So we will wrap it up here. This has been a challenging quarter for us. But we understand the issues, and we're on them. In the immediate term, we're working through the uncertainty of labor here in Canada, which we hope to resolve in the coming weeks. The railroad's running well, and I'm excited about the future, particularly the efforts and the successes that we've had in driving new business to the railroad and advancing our customer initiatives, and Remy is all over this.
Unknown Executive: Well, we will wrap it up here.
Unknown Executive: This has been a challenging quarter for us. But we understand the issues, and we're on them. In the media term, we're working through the uncertainty on labor here in Canada, which we hope to resolve in the coming weeks.
Unknown Executive: The reverence running well and I'm excited about the future, particularly the efforts and the success and the successes that we've had in driving new business, the railroad and advancing our customer initiatives and Remi is all over this. The team is doing exactly what they need to do, and we're continuing to deliver to our customers, and this, this model is working.
Tracy A. Robinson: The team is doing exactly what they need to do, and we're continuing to deliver to our customers, and this model is working. Thanks so much for your time; the conference call has now ended. Thank you for your participation. You may now disconnect your line.
Unknown Executive: Thanks so much for your time today.
Unknown Executive: The conference call has now ended. Thank you for your participation. You may not disconnect your line.
Tracy A. Robinson: Yes.
Tracy A. Robinson: Okay.
Tracy A. Robinson: Sure.