Canadian National Railway Co Q2 FY2022 Earnings Call

Good afternoon. My name is Julianne, and I will be your operator today. Welcome to CN's Second Quarter 2022 Financial and Operating Results Conference Call. I'd now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Good afternoon, everyone, and thank you for joining us for CN's Second Quarter 2022 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. 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. These statements are subject to risks and uncertainties and that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statements regarding forward-looking statements in our presentation. After the prepared remarks, we will conduct a Q&A session. I do want to remind you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; Rob Reilly, our Chief Operating Officer; Doug MacDonald, our Chief Marketing Officer; and Ghislain Houle, our Chief Financial Officer. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracy Robinson.

Good afternoon, everybody. Very pleased to be here with you all today. Whether you're joining by phone or the webcast, welcome. And I'm very proud of the quarter that this team has delivered in Q2. Now last quarter, we laid out a number of principles that would guide the way that we run our business and the way that we grow. And I'm happy to say that we've advanced on all of these principles. And while we continue to have work ahead of us, as I said last quarter, this is going to take some time. I'm very pleased with the way the team is coming together and the results that they're producing. Now we've leaned into our scheduled operations, improving train performance and service to our customers, and we're seeing the beginnings of improvement in velocity. We've begun the work on our book of business to ensure that we're selling into our operating model in a manner that we can deliver to our customers, and we continue to improve our yield performance. We're growing our bottom line. We're growing our top line. More work to do, but we've got a great start. Now let me highlight a few key points of our Q2 financial performance. We achieved record revenues of $4.3 billion, up 21%. Now that's on 2% volume growth, higher fuel surcharge revenues and a strong yield management. The operating ratio for the quarter was 59%, a 260 basis point improvement over Q2 last year. The network is fluid, and the operating team has done a great job of improving performance across the network. The commercial teams had a strong quarter on yield, and bringing these together with the work of the rest of the team has enabled us to deliver a record EPS. We achieved $1.93 in the quarter, up 30% over last year. Solid performance by the team. Now as I reflect on my first few months as CEO of this great organization, I got to say that every day, I feel more excited about the future of CN. I spent a lot of time during these last few months meeting with our employees across the system, with our customers, conversations with government and with our investors, including many of you. And since our Q1 call in April, I've spoken about some of my key priorities, and these remain the same. I am really encouraged with the start that we have, and we're far from done, as I said, but I'm seeing a team that is leaning in, doing it together, focused on bringing CN back to being a leader in the industry. I'm going to let my colleagues today highlight some of the progress we're making. But before I turn it over to them, I'll provide a few high-level thoughts. Now firstly, we spoke about leaning into a scheduled operation. This has launched very well and it's leading to improved performance for our customers and across the network. We continue to build momentum here. Rob is going to provide you with some more details on this and also on our preparedness to accommodate what we believe will be a very strong volume growth expected in the second half of this year. Secondly, it's about being thoughtful and intentional about our book of business. Our customer service levels are better, and we're going to stay focused on this. We know that we earn our way to grow by running a tight efficient operation and freeing up capacity for growth. This is important as we ready ourselves for the volume coming, particularly in the Western network over the remainder of this year. We've seen over the years, a lot of growth in the Western corridor. This is an important region for us. And as we move forward, we're going to keep focusing on it. But we're also going to lean into more fully utilizing the other parts of the network, densify in the Eastern region, the Southern region. This will strengthen our business, our resilience. It's going to drive stronger returns. Now Doug is going to provide you with an update on the business environment and double-click a little bit on Halifax, which we believe is a gateway that will provide significant opportunities for CN in the future. Third, I talked about working in a much more integrated basis. We need to sell into the schedule and the operating model that we have in a way that leverages our strength. Our efforts to do this in a coordinated way are generating results. Ghislain, Rob, Doug and I meet on a regular basis, and we look at pretty much every contract, every pricing decision. We worked the resource levels, whether it's crews, equipment, and we work our capital spend, where we're investing. We know that success is about having all these levers set in the right places. Now our decision is not always easy, but we do it as a team, and I think it's driving the right outcomes. And finally, it's about ensuring that we grow the top line at the same time that we're growing the bottom line. Our results this quarter reflect this effort, and I'm pleased with our progress and our momentum here. Ghislain will provide more details of our financial performance in the quarter. So our plan is working. And this team, see our full team, is focused on delivering solid results as we move into the second half of this year. Now let me pass it over to you, Rob.

Alright. Thank you, Tracy. The team delivered a very solid quarter of operational results, and I want to thank the employees in the field for their continued dedication and focus as we continue to progress on our plan. I also want to thank the employees that were on duty during the recent Signal and Communications Employee 16-day Strike who worked hard to keep the railroad running safely and uninterrupted. Operating performance improved in the second quarter when compared to last year as we emphasize running the railroad to plan. The initial focus was on train departures, and we started at our four hump yards in April. And then we turned our attention to our key flat switching yards in May. Since then, we've seen solid improvement in our origin on-time train departures, which reached over 90% in June, up 14% from June of 2021. It's also helped our connection performance, which was up 30% to nearly 80% in June. Clearly, the team has made solid progress on executing to the plan. While the second quarter is when the railroad typically gets its footing after coming out of winter, this year's performance is more than your typical improvement and highlights the dedication of the operating team to execute to the plan. The team achieved performance on a number of operating metrics that we haven't seen since prior to the pandemic, particularly in Western Canada, where car velocity is the fastest since Q2 of 2017, network train speed is the best since Q3 of '17 and through dwells, the lowest since Q3 of '16. The team is also delivering for our customers and working closely with the marketing team as we look to densify part of the network where we do have capacity. While volumes were down in the West due to lower grain volumes, GTMs in our Southern region delivered all-time daily records for the quarter. In addition, this quarter, the team once again set an all-time record for fuel efficiency for CN and for the industry, which drove the avoidance of approximately 43,000 tons of carbon emissions. We are confident that these operational changes are sustainable and will drive further efficiencies as we get ready for a very busy fall with continued broad demand in a more normalized Canadian grain crop. We continue to prepare our resources to handle these expected volumes. Our headcount is up 850 from the end of last year, with a large part of that increase being conductors as we prepare for a strong Q4. We purchased 47 locomotives that will all be in service by the end of September. We have added 500 more high-capacity hoppers to the grain fleet and continue to add capacity to our Western Corridor with four additional siding projects. Finally, a word about safety. Our safety performance aspirations are anchored on the fundamental belief that all injuries and accidents are preventable. Our objectives are simple: eliminate on-the-job fatalities and reduce serious injuries to become the safest railroad in North America. We're proud it's been over a year since we've experienced a serious injury in over 18 months since our last strategic fatality, both of which are the longest streaks in our company's history. With that, I'll now ask Doug to provide some color on the marketing side.

Thanks, Rob, and kudos to you and the operating team for delivering a solid performance in Q2. We are working hand-in-hand with the operating team to deliver for our customers. Let me take a few minutes to highlight our solid top line performance in Q2 and expectations for the balance of the year. We delivered positive volume growth in Q2, with RTMs up 2% and revenues up 21% despite a 40% decline in Canadian grain shipments. This is a new Q2 revenue record. We focused our sales to the eastern and southern parts of our network where we have more capacity to grow. We saw solid growth in P&C from refined petroleum products and also crude oil, which is filling available capacity due to lower Canadian grain volumes. Automotive volumes came back strong with us from a 6 to 12-month backlog on orders. U.S. grain and coal continues to remain strong due to the unfortunate war in Ukraine and the sanctions on Russia. Forest Products and metals orders remain strong and well above empty car supply. Elongated car cycles on interline shipments are reducing overall car supply for our customers. Domestic intermodal remained strong with no slowdown in demand. International intermodal volumes were down in June as we are metering flows of Western imports destined to Montreal and Toronto to ensure fluidity of terminals as the industry faces driver shortages and full warehouses. We remain focused on yield management with inflation plus pricing on renewals and as well as other surcharges on older contracts for additional storage and services. As we think about the second half of the year, we continue to assume low single-digit RTM growth for the year. The current demand remains strong, and we continue to dialogue with customers to monitor any signs of weakness. On grain, we are still expecting a Canadian grain crop over 70 million metric tons versus less than 50 million last year. We are working with our supply chain partners and customers on solutions to alleviate the challenges with import containers destined to Montreal and Toronto. We have recently opened up additional storage capacity in each area to add some flexibility to the supply chain. We will continue to benefit from strong coal prices, higher production from Kanuma, restarts of CST and Coal Valley mines as well as continued strength in U.S. coal shipments, both domestic and export. We remain focused on driving strong yields with contract renewals coming in above rail inflation. Before I pass it on to Ghislain, let me take the opportunity to highlight an example on how we plan to densify the eastern part of our network. The Port of Halifax, which is solely served by CN, has significant opportunities to attract additional container business in the future. We are working very closely with our partners, PSA Halifax, to leverage this unique gateway. PSA now owns both terminals in Halifax and has made considerable investments over the years. The port's capacity is about 1.15 million TEUs and is currently operating at about 50% of the capacity. We see significant opportunities to add incremental business over the next few years on a part of CN's network that has capacity to grow. With more production coming to Southeast Asia, we view Halifax as well positioned to accommodate this shift of production that wants to make its way to North America. Our service out of Halifax has the fastest transit times from the East Coast to Montreal, Toronto, Detroit, and Chicago. Last month, we started a second daily service out of Halifax. And after 4 weeks, we have moved 24% more containers and reduced PSA's ground count by 27%. I'm very excited about the prospects of Halifax and our partnership with PSA. So in closing, my team's focus is on providing the level of service our customers have come to expect from us and driving top line growth to the bottom line. With that, I will pass it on to Ghislain.

I will talk to Page 15 of the presentation, which will provide more visibility on our second quarter performance. These results highlight the strength of our franchise as we delivered volume growth of 2% in terms of RTMs and 21% growth in revenues despite a significant headwind from Canadian grain. The top line performance, combined with a solid operating performance, drove record earnings in the quarter. Let me provide you with more details on the quarter. My comments will reflect adjusted results, which exclude advisory costs related to shareholder matters. We delivered adjusted operating income of nearly $1.8 billion in Q2, up 29%. Our Q2 adjusted operating ratio came in at 59%, which was 260 basis points lower than the same period last year. Our fuel expense was up over 70% as we saw fuel prices continue to rise in the quarter. We have an effective fuel surcharge program that deals with fuel price fluctuations like this, but it does create some noise in the short term. In the quarter, we were impacted with the unfavorable fuel surcharge lag versus last year. Adjusted diluted EPS reached a quarter record of $1.93, up 30% versus last year. We generated free cash flow of almost $1 billion in Q2, up over $250 million from last year, mainly due to higher earnings. Under our current share repurchase program, which runs from February 1, 2022, through January 31 of next year, we have repurchased just over 15 million shares for $2.3 billion as at the end of June. Moving on to Page 16. We remain confident on our outlook for the balance of the year and are reaffirming our 2022 financial outlook, including adjusted EPS growth in the range of 15% to 20% with an operating ratio that starts with a 5. We expect volumes in RTMs to be up in the low single-digit range for the year, with strong growth expected in the second half of the year, including a normalized Canadian grain crop starting in the fall. We continue to assume that in 2022, the average price of WTI will be in the range of USD 90 to USD 100 per barrel, and the value of the Canadian dollar in U.S. currency will average approximately $0.80 for the year. We are not modeling any major service disruptions in the second half of the year, and our outlook does not assume an economic recession. That being said, we have a strong bulk franchise, including grain, potash and coal that is less impacted by economic fluctuations and a current backlog of lumber traffic. In conclusion, let me reiterate a few points. The current demand environment remains strong. The network is fluid and running well as we continue to run a scheduled railroad with a focus on car velocity. While we are seeing some inflationary pressures starting to impact our costs, we are closely monitoring the situation and making sure that we control our expenses and continue to price above rail inflation on contract renewals. We have an advantaged network and know what this network can produce. We have a strong balance sheet that provides us financial flexibility, and we will allocate our capital in a manner that drives long-term value for our shareholders. Let me pass it back to Tracy for some closing comments.

Thanks, Ghislain. Now let me just close our prepared remarks by reiterating a few key points. We have an advantaged three-coast network with a balanced book of business. We have a solid pipeline of growth opportunities across many segments. Doug provided you with one example, Halifax, with a significant opportunity to densify the eastern part of our network. And as highlighted by Rob, we're making some good progress on the operating side in the railroad is fluid, and we're running faster and more efficiently. We will invest not only in our capacity to accommodate those growth opportunities, but also in our talent to develop the next generation of railroaders. And we're looking forward to discussing more of our growth strategy when we get together at an Investor Day in the spring. This is a great company with significant potential, and I'm very excited about our future. Now we're happy to pause and take your questions.

The first question comes from Chris Wetherbee from Citi.

I guess maybe I wanted to kind of focus on the operations in the back half of the year. So you've given us the RTM guidance for positive inflection and moving forward from the second quarter. I'm curious, as you think about sort of the cost opportunity or the efficiency opportunity, how much do you think you'll have or will be able to be realized in the back half of the year? I want to get a sense of what's included in the 15% to 20% EPS growth year-over-year? And maybe where you may see opportunity to either exceed or maybe be pressured a little bit by the macro?

Thanks, Chris. The operations team has done a tremendous job of putting their foot to the gas on this network in this operation. Certainly, it's going to be a different environment in the second half. And I'm going to ask Rob to comment on some of where the opportunities are and where the pressures will be.

Yes, Chris, when you look at 2022, it's really a tale of two halves. Really, the first half of this year has been driven by the southern portion of our network in GTMs and volume. We've experienced some crude delays down there just because of the volumes that we've handled. So we look to see that actually improve in the second half of this year as well as Eastern Canada. The big volume that we're going to see in Q4 is really Western Canada and with the normalized grain crop. So some of the velocity that we're seeing right now may come down a little bit as that volume really starts to pick up. But our focus in terms of running a scheduled railroad, as we've continued to emphasize here, will continue to pay dividends, and we'll continue to press that even in the high-volume times of the year, and we expect to see some benefits from that.

Our next question comes from Brian Ossenbeck from JPMorgan.

Maybe one for Doug. Can you talk about yields? And can you break down in the quarter, perhaps maybe your core price, mix, fuel, FX, a lot of moving parts, maybe even some storage fees you mentioned, certainly would be helpful for some context around that? And then just the sustainability of that into the back half of the year, your visibility there and expectations for next year as well.

Okay. Thanks, Brian. It's Doug. So listen, we don't really guide on what our price is, but we continue to do it well above inflation. So we've had great success on our contract renewals as we go through that. And really where the rest of it is coming from is with the supply chain disruptions that are out there, we're providing a lot of additional services to customers for storage and for other things that they need done. And that's where the rest of it is coming from. So we're actually able when you combine it all together, we've been able to keep well above rail inflation for our pricing. And we continue to see that it will happen really for the rest of this year, and we even see it into next year right now.

Our next question comes from Ken Hoexter from Bank of America.

Congratulations, Tracy and team, on a great quarter. Doug, could you discuss the increase in volumes? You mentioned the opportunity on the East Coast, but reaching that low single-digit RTM target requires a substantial ramp. Could you also address the rolling of grain and the economic pressures you’ve considered in setting those targets? Additionally, what are your thoughts on the labor requirements to achieve this?

I will discuss the markets and then hand it over to Rob to address labor. Ken, a significant portion of this increase will come from the Canadian grain crop, which is projected to exceed 70 million metric tons this year. We are guiding towards this expectation. Overall, everything else is holding strong. The only slight challenge we've encountered recently is in international intermodal, but we've implemented solutions that should take effect immediately, leading to improvements in August. Now, I’ll turn it over to Rob for his insights on labor.

Yes. And from a labor standpoint, Ken, we have been preparing for this more normalized grain crop in Q4. And certainly, that's what it appears as we sit here today that we're going to be back to those levels. So we've been hiring in Western Canada. Other than some of the hard-to-hire locations that we typically see, we're in pretty good shape as we go into Q4. Some of the crew issues we experienced in the South where some of the geopolitical issues with Ukraine really allowed us to move more freight in the South, so we've been hiring for that. We get much better here as the quarter comes to a close. So we'll continue to stay after it. As we look into next year, we'll continue to plan for attrition as well.

Our next question comes from Konark Gupta from Scotiabank.

Congrats on a great quarter. I just wanted to ask the labor question a little bit differently here. In terms of resource level where you are relative to where the economy is, how soon can you adjust the network and resources if demand starts to slow down versus your expectations?

Yes. So we're certainly playing different scenarios as we go forward. We've shown the ability to adjust when it comes down to labor. We'll certainly take a look at that. And we'll do things like repositioning people into other training or other departments to make sure we hold on to that labor versus furloughing and dealing with some of the issues. I think some of the U.S. railroads are doing right now. But we've walked through a number of scenarios out there, growth scenario and also something less than that and we'll be nimble. Obviously, with cars, locomotives, we can do things very quickly in terms of laying those up, and we'll do that as we start to see if we see any of those signs.

Our next question comes from David Vernon from Bernstein.

So sticking on the intermodal theme, Rob, I've heard from some former colleagues in the shipping industry that you guys did metering service off of cost. Truck availability was challenged in Montreal. Are those challenges kind of looking right now? Could you talk a little bit to where the level of congestion is and what the risk gives to the volume growth on some of those sort of interlinkages, if you will? And then, Doug, do you have any sort of commitment from the sea ship lines on Halifax longer term? I'm just wondering if the shift in volume up to the Eastern Canada, Northern Port could be tied to some of the backlogs we're seeing in some of the U.S. East Coast ports.

Thanks for that question, David. And we're going to turn that one over to Doug. He's been leaning into some of the trucking issues as well. So Doug, why don't you take both of those?

Yes. So David, the issues are going to stay more in line. So it's the Montreal, Toronto areas for us, and we've also seen it a little bit in Chicago. So with the warehouses being full, there's no place for the containers to go once they get in land. That's been backing up the terminals, which then backs up at the ports, which backs up ships at the harbor. So what we've been doing is we've been focusing on how do we move that and create extra space. At the same time, there's also been a shortage of drayage that we found out. So it's been down roughly 18% from what it was year-over-year in June. So we've been working with the freight forwarders and the different drayage companies to be able to increase that, and we have seen it really improve in the month of July. So that's all good news, and we've seen dramatic improvement. Now what we're also doing is we're working on new storage locations in Toronto, which is up and running already and a new facility here just outside Montreal, which will be up and running next week. Now on Halifax, we don't have any customer commitments to give us specific volumes through there. We have to build up our service, which we already know is there, and that will attract the new business. So we did have already great success over the last 4 weeks, and we expect to see more of that with the customer base because of the service that's there.

Anything from vessel schedules or services that would give you confidence in the volume for 2023.

No, we don't have any commitments as of yet for solid numbers.

Our next question comes from Benoit Poirier from Desjardins Capital Markets.

My question now, just wondering with respect to the Toronto government climate plan, which has focused on reducing nitrous oxide emission for fertilizer, any potential adverse impact in the long term on the granted fertilizer? Tracy, any comments on that?

I'm going to turn that one to Doug. But first, let me say that we've got some pretty strong forecasts for fertilizers and grain. As we look forward, it's one of the unique benefits of our Canadian economy. But Doug, do you want to comment on the specifics?

Sure, Benoit. So specifically, just around the fertilizer market, listen, we had actually a fairly wet spring, so we actually saw some lower volumes there in the first half. We're expecting a normal shipment pattern actually all throughout the fall and into next year. If you want to talk specifically about potash, we're seeing obviously a very strong market for offshore, and the domestic market suffered the same as the fertilizers, so we see that pick up in the second half as well. But it continues to be a very strong market right across the board.

Okay. And what about the potential desire to reduce the deferred by 30% by 2030? I'm just wondering about the reduction target, whether you see any impact here, Doug, longer term?

I'll take that one, Benoit. This organization has done a great job in this area. We're currently focusing on fuel efficiency, where most of our emissions come from our locomotives. Rob mentioned a 4% improvement in fuel efficiency year-over-year, which is a significant gain. We continue to lead the railroad sector in fuel efficiency. That's Phase 1. In addition, we have a plan to achieve scientifically-based targets developed by our team. We will provide more details on our investments for this plan as we move forward. Overall, I'm very pleased with the plan in place and the progress the team has made on Stage 1.

Next question comes from Amit Mehrotra from Deutsche Bank.

Just laying, I just wanted to understand the guidance, the EPS guidance for this year. If I look at the first half, adjusted EPS is up 20% year-over-year. So I guess to get to your full year guidance, it implies a step down in earnings power in the second half relative to what you did in the second quarter. If you can just address that? And then, Tracy, I believe the company brought in Ed Harris as an operational consultant. I just was wondering if you could talk about that, why did you and the team decide to bring him with the scope of his work is at CN and maybe share some of the results that have occurred since bringing him as well.

Thank you, Amit. I'll start and then pass it on to you, Tracy. As Rob mentioned regarding the second half of the year from an operational perspective, and Doug discussed our revenue and volume, we reaffirm our guidance of 15% to 20%. We laid out our assumptions to clarify how we arrived at those numbers. The key factor right now is fuel prices, which fluctuate significantly. We are assuming a foreign exchange rate of $0.80, while the current rate is around $0.76 or $0.77. There are many variables at play, and we also experienced a few service interruptions last year. Additionally, as the railroad that operates in the north, we often face winter impacts earlier in the year. Considering all of these factors, we feel confident in reaffirming our guidance of 15% to 20% with an operating ratio starting with a 5. In Q1, we faced challenges with a ratio of 66, but we improved to 59 this quarter, as we expected better performance in Q2 due to seasonality. We will continue to focus on managing our expenses and improving our operations and top line. Now, I'll turn it over to you, Tracy.

Thanks, Ghis. I want to briefly address that. When I arrived and we were assessing our guidance for the year, we took into account a variety of scenarios while building the expectations we shared with you last quarter. Today, we've outlined many of the assumptions we've made as we look at the rest of the year, especially regarding factors beyond our control that you mentioned. There’s still a lot of the year ahead, and we maintain a positive outlook and are optimistic. We are diligently preparing for what’s to come, although much remains uncertain. We are confident in our current performance and in reaffirming our guidance based on our present situation and what we anticipate. Regarding your second question, we have some advisors on the property assisting us, and we’re focused on progressing as swiftly as possible. One of those priorities is Ed Harris's consulting role, mainly to support Rob's objectives. Rob, perhaps you can elaborate on what you’ve asked Ed to handle.

Yes, Amit. Very fortunate to have Ed as a sounding board for the team. He obviously brings great experience and great knowledge. Our goal is really about improving every facet of our business, whether it's operations, marketing, finance, etc. So when we have opportunities to bring people in that can help with that and continue to help us continually improve, we do it. Our operations is about running a safe, efficient operation that continually meets the service our customers expect and need. And that's really what it's about. In the end, the team in the field is what will and is driving the results, and that's really where the credit goes. I appreciate the question.

Our next question comes from Fadi Chamoun from BMO.

Maybe I'll do two on one as well. So on the pricing side, Tracy, you talked about the opportunity to revisit pricing on some of the business. In what inning would you say you are in terms of kind of revisiting the pricing on that business? And my main question really on the ROIC as well. You talk about kind of bringing CN back to kind of top-tier performance in the industry. The dialogue in the past has been at around mid-teens ROIC, and we've seen a few of your peers kind of move up into the high teens. Do you see the scope of that happening kind of in the next couple of years to kind of bring that ROIC back to top tier in the industry?

Thank you for the question, Fadi. Let me address the first part. When we discuss curating our book of business, it involves more than just pricing; it also requires understanding our network and operating plan, as well as our available capacity. Doug highlighted where we have capacity, whether short-term or long-term, which his team capitalizes on. Our goal is to enhance earnings and improve operating efficiency through this approach. In situations where demand exceeds capacity, we make necessary adjustments to ensure we can effectively serve our customers. We aim to maintain a book that generates revenue at the right price. This process involves being deliberate about what we add to our network, ensuring we provide the right services, appropriate speed, and solid growth. The team has worked diligently on this quarter, and we plan to keep it going. We will also address any necessary cleanups. There will always be opportunities, and I anticipate this will be a recurring topic for us moving forward. Regarding our ROIC, I want to emphasize that we are focused on meeting the goals we set for this year. I look forward to discussing our long-term vision when we meet next spring for Investor Day. Ghis, would you like to add anything?

I think you covered it well. I think that we've guided that we would hit an ROIC of 15% this year. I think we're very confident that we will hit that. And I think that we'll provide more visibility from a longer-term standpoint on some of these measures when we have our Analyst Day that we've always already said that we were shooting for some time in May. So we'll provide more visibility on some of these metrics at that time.

Our next question comes from John Chappell from Evercore.

Tracy, I wanted to dig a little deeper on the freight operational alignment. And in the last 90 days, you've definitely taken a focus to the operations of the network, and it shows in a lot of the service metrics, even your outlook for the back half of the year, the double green arrows that Doug has all over Slide 12. When you think about positioning them from focusing on the network and the service and then really leaning into that and really pushing for top line growth, what are some of the metrics that you're looking at that gives you the comfort that you can lean in a little bit more to solve the network?

Thank you for your question. You're touching on the intersection of short-term and long-term strategies. We have a clear understanding of our business outlook for this fall. Our main focus is to manage it effectively, ensuring we deliver excellent service to our customers across the network. In regions like the West, we anticipate full capacity, while in other areas, we'll leverage the additional capacity to pursue opportunities as identified by Doug and his team over the last quarter. This approach will help us grow our top line, but equally important is that we also foster bottom line growth. You'll witness our efforts to balance these two objectives in a mutually supportive manner. Currently, our priority is to manage the significant volume expected in the second half of the year.

Our next question comes from Scott Group from Wolfe Research.

So Ghislain, I want to revisit the guidance. I see there are some variables involved. But if I understand correctly, it suggests that the operating ratio and volumes in the second half will improve compared to the second quarter, but earnings might be slightly lower. Is that accurate? Or is there more to consider? Is there any aspect of the guidance, whether it's related to earnings or the operating ratio, that you feel more optimistic about? Any clarification would be appreciated.

We do provide annual guidance, but we generally avoid giving quarterly or half-year guidance. We have explored various scenarios with Tracy, Doug, and the team. We are comfortable reaffirming our guidance and have shared our assumptions to assist you. That's all I have to say on the matter.

Our next question comes from Walter Spracklin from RBC Capital Markets.

I just need some clarification regarding Halifax. Doug mentioned 600,000 TEUs and with the addition of a second train that led to a 24% increase. Does that mean you're now running at 750,000? My main question, however, is about the West Coast. With the potential labor disruption in LA Long Beach, there have historically been volume increases. Eric Wallace at Deltaport noted that this can be as much as 13% above the norm. Are you experiencing a similar increase there? Are you concerned that this may further clog your capacity? How prepared are you to manage any increases that might arise from the potential labor disruption in LA Long Beach? Do you have any visibility on whether this increase is occurring now as it has in the past during similar disruptions?

Thank you for the questions, Walter. Regarding Halifax, we are beginning our training process. It's slightly shorter than operating a full train at this time, but we are also increasing freight operations in Moncton. Eventually, when the train is fully integrated with our Eastern operations, it will be running at its full capacity. Initially, it starts as a complete intermodal train, and we have seen significant success with this approach. Our goal is to expand it to a full train, which we cannot achieve immediately, but we are making progress. On the West Coast, you are correct that there has been considerable discussion about the possibility of a port strike in the U.S. We have not encountered this situation in Canada yet as no one has communicated any concerns to us. Currently, Canadian terminals are quite full, and we are focused on reducing those numbers to improve fluidity. While there is some possibility of handling additional volume, it is contingent upon the supply chain, and we will need to make these adjustments before the end of September when grain operations commence, as we will likely have no capacity available after that point.

Our next question comes from Brandon Oglenski from Barclays.

Doug, in response to that question, you mentioned that you are still metering into Toronto and Montreal, if that's correct. Is this a physical limitation on your terminals? Are these storage positions more of a temporary solution or a permanent one? Additionally, if you don't mind, I would like to ask if there are any signs of weakness in the portfolio today that might indicate a softening economic environment.

The metering has really increased in June and the first half of July. Last week, we implemented a new solution in Toronto that allows us to clear the terminals. The issue was that when the boxes arrived in Montreal and Toronto, no one could pick them up due to lack of available space in the warehouses, which were full, along with insufficient grade capacity. We have now partnered in Toronto with a drayage service that can also store boxes, and this has significantly improved our operations there. We're operating in Toronto at full capacity and even moving extra freight to support the West Coast ports. Our solution for Montreal will be starting next week, and we anticipate similar improvements there, as Montreal has already begun to show progress. We expect to maintain full operations throughout August, possibly even exceeding that. Importantly, we have not observed any weakness in any of our markets, and we will continue to provide this guidance until we receive different feedback from our customers.

Our next question comes from Steven Hansen from Raymond James.

You referenced some opportunistic crude by-rail movements in your commentary for the period. Just curious as to what kind of longevity you see of that business through the back half of the year and how it might interplay with the arrival of the Canadian grain crop?

Steve, we are actively planning for this. Rob and I discuss it every month, and we review it with our customers as well. There is one significant customer that has the potential to move from the Alberta market to the Gulf Coast, and we have been approaching it on a monthly basis. We have decided to proceed with this through part of the remainder of Q3, and we expect it to conclude within that quarter. When the grain harvest begins at the end of September, we anticipate utilizing that capacity and we are fully prepared for it, at which point we will take the crude off the table.

Our next question comes from Ravi Shanker from Morgan Stanley.

A quick question on Halifax. Again, based on how excited you guys sound about it, and it sounds like your port partners and customers as well, it doesn't sound like you guys expect a meaningful shift in near-shoring over time impacting volumes coming in to North America from Asia. So if you can just unpack what do you think happens with that over time, that would be great. And as a quick follow-up, Ghislain, I'm sorry, did you quantify what the strike impact was in the quarter?

Okay. So with Halifax, no, we're seeing lots of volume shift over to Southeast Asia for production and for sourcing. And that's coming into the East Coast, just as easily as it goes to the West Coast. So we're seeing that diversion into the East Coast. And I think all the East Coast ports are seeing that. Halifax is greatly positioned to take on more of it, and we're working with the customers to do that. But we had to put the service in place to attract the business. And really, that's what the focus has been. We haven't seen a lot of near-shoring come into North America yet. There's a lot of talk, and we've seen a little bit of it, but nowhere near that, anything that will impact the volumes for this year or next. Ghislain?

Yes. Maybe on the strike impact, I would say these were 750 unionized folks that were on strike for 16 days. I would say the impact was minimal to zero. And again, I want to thank our management team under Rob's leadership and Tom Hillier's leadership that kept the railroad running without any blip in the quarter. So I really want to thank all that team that did a wonderful job keeping, as I said, the railroad running flawlessly and safely in the second quarter.

Our next question comes from Tom Wadewitz from UBS.

Yes, I have a question regarding intermodal. Revenue per piece increased by about 33%, indicating a significant rise in intermodal revenue per piece. I'm wondering if storage fees could be a factor in that increase. Can you provide insight into how much of a role storage fees play? Additionally, how should we expect intermodal revenue per piece to look in Q3? On another note, recent news about Walmart suggests a potential weakness in consumer spending, which has been a concern for some time. Do you foresee any risk of a slowdown in international intermodal services as we approach Q4 or even into 2023?

Tom, regarding revenue per unit, we don’t provide specific guidance on that. There's a lot of variability involved. We have seen ongoing improvements in our pricing strategies, particularly during contract renewals, and we expect this trend to continue. We're observing similar patterns in terminals, especially concerning storage charges, which are significant. These charges should diminish as the supply chain stabilizes, but we cannot predict when that will occur. Currently, we are noticing fluctuations in volumes due to recent lockdowns, and we anticipate that storage charges will persist for at least the rest of this year. On the international front, while we're experiencing slight dips in consumer activity, this is primarily linked to the supply chain. Customers have indicated that although they might experience some demand challenges this month, they expect a significant uptick next month. Therefore, our plans are based on our customers' feedback, and we intend to continue our current operations.

Our next question comes from Ari Rosa from Credit Suisse.

I wanted to ask about the risks we may face heading into 2023, particularly with the pending merger. You mentioned the distinctiveness of CN's tri-coastal network, which might diminish somewhat if the CP-KCS deal is finalized. I'm curious about how you perceive this potential change in the competitive landscape. Have you had discussions with customers regarding this? Do you anticipate any volume that could be affected as the deal progresses?

Thanks, Ari, for that question. I would say that we're playing our own game, and we're pretty focused on it. You've heard us say before that when this railroad is operating at its best, that it's pretty tough to compete with. And we like the opportunities that we see. We think we're showing you some of what can we can make this place do. And there's more of this to come. We're pretty keen about getting in front of you guys early next year and talk about some of the growth that we see coming in the future and some of the choices that we have there. So we're pretty excited about playing our own game. As far as the customer front, I mean, I think we're always working with our customers to try and ensure that we are positioned properly for the way they see their business going and growing in the future, and that continues to be the case. And Doug, do you want to add anything to that?

Yes. Like we constantly evaluate risk with our customers and where they want to go, what markets and where we can go. So listen, we work with all of them. I'll say the KCS is not a big interline partner of CN's. So the risk is very low for us to begin with, but we'll work with our customers whatever risk there is there and make sure that they can get their products to market. That's the key thing.

Our next question comes from Justin Long from Stephens.

I was wondering if you could provide any color on the contribution you're expecting from the non-rail businesses in the back half of the year? And any update on the potential strategic alternatives for these businesses?

Yes. Justin, listen now, just for a matter of modeling, we have all of those businesses in the model, and they are part of the guidance that we've offered. As I'm watching some of those businesses, actually, it's kind of cool there becoming TransX in particular, becoming increasingly efficient and competitive. I would put the math or nearer at kind of the top in their segment as we look at their competitiveness and what they bring to us. So that's in our model as we go into the remainder of the year and where we go with that longer term is something that we'll be contemplating as we look to 2023 and beyond.

Our next question comes from Jason Seidl from Cowen.

Tracy and team, congrats on the quarter. I just wanted to try to dive into how Halifax a little bit more in the growth that you think that could come there. Where do you think some of this growth is going to come from? In other words, what other ports of call might be at risk for other people?

Great question, Jason. Our primary focus is on volumes from the West Coast first. With the shift to Southeast Asia, we see it being just as feasible to route through the Suez Canal to the East Coast. We believe we can effectively serve key markets in Montreal, Toronto, Detroit, and Chicago. There are additional markets we can access, but those are our main targets. As for other terminals, there is a chance to receive shipments from New York, New Jersey, Baltimore, and even Savannah if they are not moving optimally. However, our main focus is on capturing that stock from the West Coast that is currently unable to move.

Our next question comes from Bascome Majors from Susquehanna.

So your U.S. subsidiary is bargain with the U.S. rail carriers, and there's some uncertainty as to what that actual union wage increase is going to be from 2020 forward. Can you talk a little bit about how CN has managed that uncertainty with your accruals? And if actual wages were to come in different than your expectation, when do you true that up retroactively and communicate it to us, respectively?

I can start and then Rob can add if he wants. Yes, we have set aside funds for potential back-end wages in the U.S., and we currently believe these reserves are justified. If there are any changes once the negotiation or mediation concludes, we will adjust accordingly. However, I can assure you that we have made these accruals, and we think they are valid. Rob, do you have anything to add?

No, I think you answered it. Just from an understanding standpoint, we certainly understand the inflationary pressures are real on all of our workers and all the rail workers in the U.S. And we look forward as much as they do in getting this thing settled and done and moving forward. So nothing further.

Our last question will come from Jeff Kauffman from Vertical Research Partners.

Just a question more on top-down strategic here. I think Rob did a great job talking about how you paid attention to the yards and you improved fluidity. I was looking more at the head count. And your presentation, you mentioned you brought on about 800 employees, I think, since the end of last year. It looks like headcount could be approaching kind of flattish year-on-year toward year-end. As we look at the organization, and there was a big cut of about 2,000 people and then we're adding back, how is the distribution of labor different? Did we call older employees and bring in younger employees? Have we strategically beefed-up employee count in some areas versus others? I understand how the operations have changed. I'm trying to understand how the workforce has changed.

Jeff, thanks for the question. I'm going to start on that and then I'm going to give it over to Rob to give you a little more detail. So when we made the cuts last year, that was not focused on our running trades or anyone who operates the trains. It was a great effort made to make sure that we protected that capability. The reductions in workforce that were made were focused largely on the center on head office and on management employees. And so that's important to note. And as far as how it's changing in the field, Rob, I'm going to hand that one over to you.

Yes. Really, you've seen the surge really in conductor hiring. And that's really for two things. One, for volume; and secondly, for attrition. That's what we hire for. And we've been preparing for this normalized grain crop here in Q4, and that's really where you've seen it. The rest of the departments have stayed pretty flat in terms of where they ended the year.

Okay. Thank you all for your interest and for your questions. We're pretty happy with this quarter. We've been off to a great start and are deep into doing the same for the second quarter. Paul's team will be hanging around for a little bit this afternoon. If you have some additional questions, I know you know all of you how to reach out to him. Thank you, and have a great day.

The conference call has now ended. Thank you for your participation. You may now disconnect your lines at this time.