Earnings Call Transcript - CNI Q2 2021

Operator, Operator

Well, thank you, Nika. Good afternoon everyone and thank you for joining us for CN's second quarter 2021 financial results conference call. Now, before we begin, I would 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 US and Canadian securities laws. These statements are subject to risk and uncertainty that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement 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 yourselves to one question. The IR team will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. JJ Ruest.

JJ Ruest, CEO

Thank you, Paul, and thank you, Nika. So good afternoon, everyone. And today we have two agenda items for this call. First, we want to highlight our quarter results and also we want to give you an update on our KCS combination. Therefore, the call might be a bit longer than usual today. But first, our thought goes out to the Community and First Nation of Lytton in BC and the terrible fires impacting British Columbia this summer. We are committed to helping our neighbors in crisis and the several CN employees whose lives have been impacted by the natural disaster. Let's go to the Q2 highlights on Page 6. I want to start by saying how proud I am of our dedicated railroaders' performance this year. The hard work and exceptional effort of our people continue to deliver on the business. Our results reflect broad-based strength and forward momentum across all of our business and also the enduring power of our vast and diversified CN network. For three quarters in a row we have delivered year-over-year growth in our EPS. In the last quarter, our adjusted diluted EPS was CAD 1.49, which is up 16% versus last year, but it's also up 25% on a constant currency. Our operating income is up 76% year-over-year and adjusted operating income is up 9%. We help enable the economy with exceptional growth. Volume was up 13%. We diligently work in our combination with KCS and we also stayed focused on our yield management and network operation execution. The freight revenue per carload grew 7% and same-store pricing was up well over 4% in the second quarter.

Rob Reilly, CFO

Thank you, JJ. Our thoughts are with the communities affected by the wildfires in British Columbia, where nearly 300 active fires are still ongoing, particularly focusing on the people of Lytton as they start their recovery from the devastating fires. We unfortunately lost a critical bridge on our route to Vancouver due to these fires. Thanks to the efforts of our engineering team, we were able to restore service last week after a two-week outage, although it will take a few more weeks to fully address the backlog of traffic caused by this outage. Looking at last quarter's results, we achieved a solid performance with 13% volume growth, and we saw improvements in car velocity, dwell time, and labor productivity compared to the previous year. The team set another quarterly record for fuel efficiency, improving by 2% over last year's top industry figures and also establishing an all-time monthly record in June. Year-to-date, we have saved about CAD 20 million through our fuel efficiency initiatives and prevented nearly 100,000 tons of CO2 emissions from entering the atmosphere. Our safety culture is yielding positive results, reflected in an all-time low injury frequency ratio for the quarter. Year-to-date, our injury and train accident ratios have improved by 27% and 30%, respectively. Maintaining a safe railroad for our employees, customers, and the communities where we operate is vital to our company's success. In this quarter, we also made strides in customer satisfaction, as evidenced by our improvements in the Customer Satisfaction Index. Additionally, in April, we achieved our 14th consecutive record month for Canadian grain movements. We are optimistic about the business outlook, and to that end, we have over 500 conductors and engineers in training to meet our needs, as well as the necessary locomotives ready to transport the freight. Now, I will turn it over to James.

James Cairns, Senior Vice President

Thank you, Rob. During Q2 we saw the more balanced demand recovery that we expected with carload volume up 21% beating Q2 in almost all commodity segments. Manifest carload growth was a key driver of our sequential and year-over-year improvement in volume with a 23% increase in lumber, driven by continued record commodity pricing, record propane volumes up over 20%, and a better than 150% increase in frac sand versus last year. In spite of the impact of three mine closures late last year, we saw volume growth in coal as a result of the start-up of our new tech contract and strong U.S. exports. Potash was another bright spot in Q2. On the strength of North American potash market share gains, we increased our average length of haul by over 200 miles and beat last year's Q2 volume by more than 40%.

Keith Reardon, Senior Vice President

Thanks, James. The consumer-based economy continued to generate strong volumes for CN, combined containers moving through the west coast ports of Prince Rupert and Vancouver grew 18% versus 2020 and grew 5% over Q2 2019 to set an all-time quarterly record. The CN business through the ports of Halifax, St. John, New York, New Jersey, Philadelphia, New Orleans, and Mobile combined also set an all-time Q2 record, reflecting our proven track record and industry-leading ability to establish and convert on new products. CN is truly a leader in intermodal execution. Our domestic business continued strong with volume growth of 11% over Q2 2020 and up 3% over Q2 2019. Working with our strategic wholesale IMC partners and through our door-to-door sales channels, grocery, e-commerce, and consumer products purchasing drove the volume. Overall, CN intermodal volumes were up 14% over Q2 last year, a record Q2 for our intermodal business. Our automotive 2021 Q2 results show a 98% increase versus Q2 2020 due to the rebound in demand and the reopening of auto manufacturing facilities. CN is well positioned for the microchip supply chain recovery as we serve both Canadian ports and several large-volume, high-demand model assembly plants.

Ghislain Houle, CFO

Thank you, Keith. My comments will start on Page 12 of the presentation, which will provide more color on our second quarter performance. During the quarter, we recorded CAD 32 million related to the amortization of the bridge financing fees related to the pending KCS acquisition. Recall that in Q2 2020 earnings also included a non-cash charge for non-core branch lines held for sale. Excluding these non-recurring items, adjusted net income was around CAD 1.060 billion, up 17% with adjusted diluted EPS of CAD 1.49, up 16% versus last year. Foreign exchange was a headwind of CAD 0.11 of EPS. In addition, fuel lag negatively impacted the quarter by CAD 0.07 of EPS year-over-year and added around 400 basis points. If we adjust for these two items, our adjusted EPS would have been up 30%, so a solid underlying performance. Other income was up by around CAD 50 million versus last year due to the mark-to-market gain on an equity investment in autonomous driving technology. Turning to Page 13, let me highlight a few of our key expense categories expressed on a constant currency basis. Labor and fringe benefit expense was up 28% versus last year. This was mostly driven by increased wages due to a 9% higher average headcount and higher incentive compensation. Fuel expense was up 86% driven by a 76% increase in price and a 14% higher workload, partially offset by another solid fuel efficiency improvement of 2%. Now moving to cash on Page 14. We generated free cash flow of close to CAD 1.3 billion through the end of June, CAD 300 million lower than 2020 mainly from lower net cash from operating activities, mostly due to cash tax deferrals last year as part of COVID measures, partly offset by lower CapEx. We continue to pause share buybacks in light of our proposal to combine with KCS.

JJ Ruest, CEO

Thank you, Ghislain. And you can now join me on Page 17, the CN-KCS, safer, faster, cleaner, stronger, end-to-end combination and we need all of that. I will start by saying that the deeper we dive into the potential of the combination, the more excited I get about it. The benefit that makes this combination truly a compelling vision for the future. The combination will create a new seamless single operator service while preserving access to all the existing gateways. We will be adding new route choices and enhancing robust price competition with our gateway pricing transparency. The combination will strengthen the North American supply chain and create the first true North-South North American railroad. New direct connections will be created that allow for a more reliable and less expensive supply chain for Canada and Mexico from the American Heartland. There are also very important ESG benefits. Together with KCS, we will shift thousands of long-haul truckloads off the road and onto the rail intermodal network and at the same time create new jobs, different kinds of jobs, better jobs. The CN and KCS combination represents a pro-competitive solution, a new model for the future with unparalleled opportunities for a broad group of stakeholders, and they all have responded with strong support. With every step of the process, we are committed to working with the STB to address concerns that they may have and enable a successful combination with KCS. We will go on Page 18. The combined CN and KCS network present numerous public interest and customer benefits. We will add new single-line routes that will be more reliable and more cost-effective for our customers. Our combined network will enhance the ability to connect with other Class I at major gateways. This is a carload growth story with vibrant gateways. By enhancing pricing visibility to all existing gateways, customers will have enhanced rail competition, greater optionality of choices, and new abilities to shop for the best price and best service combination. That's the model for a better future. The CN-KCS combination will work in partnership with passenger rail service in both the United States and Canada. We are confident that our plain vanilla voting trust meets the STB's insulation from control and public interest requirements as KCS will be fully independent during the voting trust period and continue to grow their business, invest capital, and provide the same high-quality level of service.

Ken Hoexter, Analyst

Great. Good afternoon. Hey, JJ, I'm actually going to start on operations, not on the M&A, but just looking at your train might tick down a bit. You talked about the congestion impacts and getting back to fluidity. Maybe just start with the operations. And Keith noted the west coast congestion driving some volumes to other Canadian gateways. Can you talk about the fluidity around the EJ&E and similarly in the answer kind of talk about labor and ability to get labor to keep pace with the growth? Thanks.

JJ Ruest, CEO

Thank you, Ken, for the question. We love questions regarding operations. So, Rob, do you want to talk a bit about EJ&E and maybe what's happening in Western Canada?

Rob Reilly, CFO

Yes, absolutely. Starting with the fires there, Ken, we lost a bridge between Kamloops and Boston Bar on June 30th and had it restored back on July 13th. And that's a segment of railroad that averages about 25 trains a day. So not moving anything or very little during that time has created a backlog. So we've opened it up. But I would also say it's a very active situation in British Columbia with the fires. So there are starts and stops out there with some 300 fires out there. But the road to recovery is on and will probably be a couple of weeks, as I've mentioned in my remarks before, before we're fully recovered and have this thing reset. Towards EJ&E, we are very fluid. There are no issues there and again EJ&E, while we bring it up, is a true advantage that we have that bypasses the city of Chicago and allows us an advantage that no other railroad has that goes to Chicago. So it remains fluid and we're operating quite well down there. Keith, did you want to say anything as far as the divergence?

Keith Reardon, Senior Vice President

We're working very closely with our supply chain partners in British Columbia, the ports there, to take on any business that has been diverted north. In Q1 and Q2, we've been very, very fluid at our terminals, not only on the West Coast but the East Coast and the Gulf Coast. So, we were ready to handle the business coming to us in this very tragic incident that occurred in BC. We will get back, as Rob said, in a couple of weeks, and we'll be back fluid. Thanks for your question, Ken.

Allison Landry, Analyst

Thanks for taking my question. Hello. I just wanted to ask about the incremental margins in the quarter. They seemed a bit muted at under 30%. I understand the fuel and incentive comp headwind, but with core pricing accelerating to something north of 4%, operating leverage too have been a little bit stronger. So, assuming that the strength in price persists, how should we think about the incremental margins in the back half? And do you expect operating profit to grow faster than the top line? Thank you.

JJ Ruest, CEO

Yes. Good question, Allison. Ghislain will take that. He has the details around the operating margin.

Ghislain Houle, CFO

Yes, thank you, Allison. You're correct about the incremental margin. For this quarter, on a reported basis, the incremental margins were 30%. If you adjust for foreign exchange and fuel, the incremental margins were 60%, which is quite good. Hopefully, the challenges related to foreign exchange and fuel will ease. Currently, foreign exchange is around $0.78, having fluctuated between $0.82 and $0.83 during the quarter. Our guidance assumes an $0.80 foreign exchange rate for the entire year. Fuel prices have also decreased; last week, they were around $72 to $73 WTI, and now they are about $65. Overall, our underlying performance is quite strong. When factoring out these two uncontrollable elements, our earnings per share increased by 30%, and we are very pleased with this performance.

JJ Ruest, CEO

Yes, exactly. We're very pleased with the performance and CN being a railroad has quite a bit of revenue into two currencies. If you look at your Bloomberg screen and look at the Canadian dollars in the second quarter, you will notice that it sort of peaked for May and June, and right now it's back to $0.79, but it was as much as $0.83. So it has an impact on the short term.

Cherilyn Radbourne, Analyst

Thanks very much. Good afternoon. As you know, the market reacted with some concern a couple of weeks ago to the Biden executive order and I was just hoping to get your take on the tone and content of that order.

JJ Ruest, CEO

Yes. So Sean is there. He has been following this very closely. Sean, you want to talk about the STB and the executive order?

Sean Finn, Senior Vice President

Sure, Cherilyn, thank you for your question. One of the best ways to understand the Chair of the STB's response to the order is through the public statement made in a press release. We at CN share the goals of the order, which aims for a fair, open, and competitive marketplace, fundamental to the US economy. The Chairman's comments indicate that the order aims to ensure that the STB provides accessible remedies for shippers, strictly enforces one-time performance standards, and prevents unnecessary delays in passenger rail service. This is the main focus of the Chairman. The press release also acknowledges that consolidation can be beneficial under certain circumstances. Our CN-KCS combination is a prime example of how enhanced competition, alongside various remedies and the potential for open gateways, can provide customers with more choices rather than fewer in this arrangement. We are confident that through the STB's overall control application, we will clearly highlight the advantages of this transaction. We will demonstrate that we are not part of the four railways mentioned in the executive order while showing how this end-to-end combination will foster greater competition and effectively serve customers across all three countries, thereby connecting the continent. We believe the executive order contains valuable points that we can leverage to illustrate that this combination aligns with the objectives outlined in the order.

Cherilyn Radbourne, Analyst

Thank you. That's all for me.

David Vernon, Analyst

Good afternoon everyone. Ghislain or JJ, you are maintaining guidance despite significant challenges from currency and some impact from fuel. There is some support from the mark-to-market factors. Could you explain in simple terms what is performing better than expected as we enter the year and how you plan to sustain that within the 21% to 22% range?

JJ Ruest, CEO

So, I would add and then Ghislain would add some comments. You will notice on our table, we reaffirmed our guidance that we're using an approximately $0.80 versus the $0.75 that we had originally in our guidance. But today the dollar is running at $0.78. It's fluctuating quite a bit. It seems to be following the price of crude, which is also very volatile. On the volume, high-single digit volume; the month of July is affected here by the issue in British Columbia. The network is a bit of a stop-and-go as we have to be mindful of we need to run safely around the communities where we operate, where there are some fires and we also have a bit of a backlog at the Port of Vancouver. On the pricing, I think pricing is a strong story. And before the fire in BC, I think the operating matrix, as Rob described in Q2, they were very solid and I'm sure sometime in August will fall back on our feet on that too. I don't know if Ghislain do you want to add something.

Ghislain Houle, CFO

Yes, JJ, I want to make a couple of points. We are confident in reaffirming our guidance, David. However, there are many factors and variables at play. For instance, while the forest fires are significant, as Rob mentioned, we believe we will be able to recover in the next few weeks. Additionally, there’s the delta variant of COVID in the US, which means we aren't completely out of the woods yet. We hope we are, but we need to be cautious. The fluctuations in foreign exchange and fuel prices have been quite unpredictable. Overall, while things are changing in various directions, we feel optimistic about the broad economic recovery across different sectors. Consumer spending appears robust, but there are still several factors at play. So, to sum up, we're comfortable with our guidance, but we need to navigate through a lot of uncertainties.

Scott Group, Analyst

Yes. Hi, thank you. So I understand some of the quarterly volatility with operating ratio. But it does seem like we're on track for the fifth straight year of the operating ratio getting worse. And I know you've been more focused on operating income, but even if we look at the second quarter, it's down from four years ago on operating income. So I guess, JJ, my question is what do you feel like you need to do differently to sort of get this thing going in the right direction again?

JJ Ruest, CEO

We are not providing guidance on the operating ratio. As mentioned, our focus is on operating income, growing EPS, and increasing free cash flow. We are also concentrating on our balanced scorecard, which includes safety, employee engagement, and customer sentiment. These elements are crucial, along with merger proceedings and our commitment to reducing our carbon footprint. This quarter, EPS at CN has been impacted by exchange rate fluctuations more than usual, and all of us are feeling the effects of diesel prices. Therefore, we are all facing similar challenges. At CN, our aim is to achieve profitable growth with effective pricing while operating efficiently. It's important to note that the bonus structure at CN was different last year, but this year we have reinstated the bonus. Despite these factors, our goal is not to prioritize the operating ratio; we are focused on EPS growth, operating income, and free cash flow, while also considering safety, environmental stewardship, employee engagement, and customer sentiment. Currently, we are also pursuing a long-term strategic proposal to merge with KCS, which has the potential to significantly impact trade in North America, especially with the current economic conditions and heightened tensions with China. While we believe there will be a positive impact between the three USMCA countries, we aim for a network that balances competitive costs without necessarily being the lowest. Our priorities are EPS, operating income, and free cash flow, as well as being responsible stewards of the environment and addressing customer sentiment. We recognize the importance of having a railroad that meets the needs of North American customers. This perspective aligns with the executive order from the President and the feedback from the STB. Additionally, with a tight job market, it's essential to be an appealing employer, which is why operating ratio has become less of a focal point.

Scott Group, Analyst

And can you just talk to if the voting trust doesn't go your way in a couple of weeks, what the plan is with respect to the merger?

JJ Ruest, CEO

Yes. Sean can address that.

Sean Finn, Senior Vice President

Scott, as you know, we filed our final comments on July 6. We remain confident that we're going to meet the public interest test. We have met the public interest when it comes to the offer of control of KCS during the voting trust period as well as the financial integrity at the end result. So we're very confident that we will in the coming weeks, get a positive result from STB. Same voting trust was approved in the CP application. So at this stage, we're really focused on getting the voting trust and proceeding with the KCS shareholder vote on July 19 and getting our Mexican approvals in hopefully October, early November and closing the voting trust with the KCS shareholders in November or early December.

JJ Ruest, CEO

And I know Scott you read all this material and we're talking huge filing. But our timing is very compelling as it comes to the voting trust and the things that we are proposing for the marketplace. And I think you will equally be impressed by the time Rob and his team file the operating plan of the proposed combination and how we're going to address the concern of the shippers and the STB. So we are confident and we are confident because we did the homework. Thank you for your question.

Brian Ossenbeck, Analyst

Hey, JJ. Thanks for taking my question. I wanted to ask about the US truckload conversion opportunity. It's clearly a significant part of the industry moving forward, but it has also presented challenges. Could you share CN's experience in the US with these conversions and how you are ensuring they are successful? How do you think current service levels compare to the desired levels moving forward? Additionally, what kinds of investments do you believe are necessary in the network to achieve that growth and ensure that the conversions are lasting with CN? Thank you.

JJ Ruest, CEO

Thank you, Brian. I think Keith can begin by discussing the commercial efforts. Additionally, Rob will likely give you a broader overview of what we are developing with KCS to create a competitive product against long haul trucks. Let’s start with Keith on the commercial side.

Keith Reardon, Senior Vice President

Sure. Brian, if you speak to any of our customers about the services they receive in the States, you'll find they appreciate the high speed of the trains and their on-time performance. Our unique approach of collaborating with a variety of Canadian wholesale customers and asset-light clients, alongside our retail products, enables us to seize numerous opportunities across different sales channels, which has proven very successful for us. Additionally, we have many interactions with the beneficial cargo owner. We begin with an import load, and we might engage with that load again when it moves from a domestic distribution center to stores or another distribution center. Our track record has been strong, and we expect to maintain that success. The combination with KCS will allow us to expand and achieve even greater success in the future.

Rob Reilly, CFO

Yes. I'd just add when you look at the combination of the two railroads and the opportunities that are there, it's well documented what we've talked about there. But very simply, we're a railroad that goes to the upper Midwest. We go to places like Detroit and Toronto and Southern Ontario. KCS goes to Texas and Mexico. And the opportunity to convert some of that with single line service is a huge opportunity for us, whether it's coming cross border or Texas and go all the way with one railroad, I think is a real advantage to shippers. And that's where we see a significant opportunity. We also see opportunities in single-line service from places like Detroit to Kansas City that really only one railroad does now and increasing those options for shippers. So very excited about the truck to rail conversion that may present itself with the merger. Thanks for the question.

Benoit Poirier, Analyst

Yes. Good afternoon gentlemen. Just looking at the intermodal volume recovery, could you talk a bit about the timing related to inventory replenishment efforts and whether it could last longer than expected given the overall low level of inventory and potential changes related to the just-in-time model?

JJ Ruest, CEO

Yes, I'll start with the retail aspect, but Keith, who is more involved, can provide more detail. Inventories are indeed lower. Retailers and those requiring products from around the world are experiencing supply chain disruptions, which are problematic. They are trying to secure products early and replenish their warehouses, which is a significant concern. I believe this situation may continue at least until the beginning of next year. Keith, would you like to share your thoughts based on your discussions with those seeking products?

Keith Reardon, Senior Vice President

Sure. We mentioned about four years ago that the traditional peak in the fall has really changed, and this shift has affected how companies manage their inventories. When we speak with our customers bringing products from overseas into North America, they anticipate this situation to continue well into 2022. I believe we will see consistent volumes, ensuring our supply chains remain full. It's impressive what our team, along with other railroads, has achieved during this COVID period by keeping products on the shelves and ensuring we have everything we need to maintain our daily lives. Thank you for your question.

Chris Wetherbee, Analyst

Hey. Good afternoon guys. Thanks for taking the question. I want to come back to the executive order for a minute and maybe more broadly, your position on maybe the potential for negotiation from a regulatory perspective with the STB to building trust accomplished. I guess I think there has been some concern that maybe there would be a willingness to accept something from a regulatory perspective that maybe other players in the industry wouldn't be able or wouldn't be willing to accept, for instance something like reciprocal switching in the US. I guess I wanted to get maybe sort of just your position on whether there would be some willingness to kind of negotiate some of those regulatory points that may be brought up in the executive order that might come up as you go through the voting trust.

JJ Ruest, CEO

Yes, let me begin. Just as a reminder, everything we filed and all our commitments regarding this combination were made formally before the executive order was issued. From that perspective, we shared a broad perspective influenced by the executive order because our CN-KCS merger involves filing under the new rule aimed at enhancing competition. We are committed to creating an end-to-end service by divesting the New Orleans to Baton Rouge segment. We've expressed our commitment in writing to favor binding arbitration for dispute resolution, and we will ensure that the gateways remain open. We will not create a bottleneck after our combination and will provide pricing visibility so customers can find the best price and service combination through Rule 11 pricing. All of these points reflect our view, though we’re not claiming that one leads to the other. The executive order emphasizes enhancing competition and mentions Amtrak, which we have also addressed specifically. Many of our offerings align with the spirit of the executive order, and while there are 72 industries mentioned, we are just one of them and remain on track. Regarding reciprocal switching, that isn't solely a CN-KCS issue; it involves all seven railroads and the STB's direction. The merger doesn't change our position on reciprocal switching. Instead, it relates to how the STB envisions the competitive landscape and pricing in the coming years. We'll see if they provide guidance on this later this year. Sean, do you have anything to add?

Sean Finn, Senior Vice President

Yes, I would like to add some context regarding Amtrak. The executive order clearly references this matter. In terms of the application to the STB under the current rules, it's important that we address passenger service concerns in our application and ensure we do nothing that could adversely affect passenger service. At CN, we have a longstanding history of working with Amtrak in the US and providing commuter services. We approach this with a willingness to better collaborate with passenger services, including Amtrak, in the US, and we look forward to discussing this further in the context of the rest of the application. The executive order highlighted this as a key area, and we anticipated that it would be the subject of ongoing conversations with our passenger service partners.

JJ Ruest, CEO

And maybe, Rob, you could expand also on Amtrak and our focus on passenger service. We understand it is one of our important responsibilities to operate in the US. Rob?

Rob Reilly, CFO

Yes. So we work with Amtrak on a daily basis. Amtrak runs between Chicago and New Orleans as interstate service in Illinois and we run a couple of trains east out of Chicago. In our latest report card from Amtrak, we were rated as one of the top railroads in terms of service. So it's a commitment we have to Amtrak and we continue to work with them. And as Sean and JJ talked about, we'll certainly work through the Baton Rouge to New Orleans wishes and desires of line as well.

Jon Chappell, Analyst

Thank you. Good afternoon.

JJ Ruest, CEO

Hi, Jon.

Jon Chappell, Analyst

Rob, can you maybe speak a little bit about the speed restrictions that are in place now through October 31st? How that impacts your ability to kind of dig out of the backlog that's accumulated in Vancouver over the last couple of weeks and also any costs that may be associated with that, whether it's fuel efficiency or labor, equipment, as you kind?

Rob Reilly, CFO

Yes, certainly. You're referring to the ministerial order that took effect at midnight on July 11 following the fires in British Columbia, which affects all railroads in Canada. This order is tied to regions classified as having an extreme fire danger and where temperatures exceed 33 degrees Celsius. Under these conditions, we need to reduce our speed to 25. The impact of this is dependent on the daily and weekly conditions across Canada. If these conditions apply widely, it will have significant effects. Currently, we are managing the situation. Last year, during the winter ministerial order, we collaborated with Transport Canada and Canadian Pacific to implement modifications that allowed us to maintain operations. We are continuing to work with Transport Canada, and at this moment, the existing conditions and backlog have not led to a significant impact. However, if there are severe weather changes along with high fire danger, we could experience an impact.

Jon Chappell, Analyst

To clarify, maintaining high-single digit RTM growth assumes that you won't experience much impact from these restrictions, with a return to normal conditions starting today.

Rob Reilly, CFO

Yes. We are working with Transport Canada and we fully expect to have some modifications on that over time.

Tom Wadewitz, Analyst

Yes, hi JJ. I know you've touched on this a bit, but I'd like to ask for more details. It seems the executive order reflects considerable sensitivity from the administration, particularly regarding passenger rail. There was also the specific Amtrak filing against the voting trust. Is there a possibility for negotiation in the future if that becomes an issue for the STB? Do you think there might be an opportunity to address something on the passenger side in the future? Your current rating is good, but the rating with Amtrak has not been particularly favorable in recent years. I'm curious if there's a way to resolve that issue, even though the time to file something new on the voting trust has passed. Do you think it's feasible to address this if it becomes a focus for the STB?

JJ Ruest, CEO

As you said, your words, not mine, our current rating is good and we are improving and there is room for further improvement and we're focusing on that. Passenger service, including Amtrak, not just Amtrak, but including Amtrak, is one of the stakeholders that one need to recognize and work with in addressing solutions during the merger proceedings just like shipper associations, communities, labor, and all of these stakeholders. So over time we will continue to have dialogs with all of the stakeholders, including passenger service and Amtrak. But I think already we talked about what we could do very specifically to the New Orleans to Baton Rouge corridor if Amtrak was to have the funding eventually to create a service in that corridor. You want to maybe talk about that, Sean?

Sean Finn, Senior Vice President

I think it's important not to dwell too much on the comments regarding the voting trust. It was mentioned in the context of an opportunity to discuss it. If we take a step back, we recognize that Amtrak will have a mandate moving forward to collaborate with the host railways, specifically CN, to address any ongoing concerns they may have about the current service. Rob addressed this proactively by stating that we review these matters daily. We will also look into how the CN-KCS combination impacts passenger service in our STB application. I am confident that we will present this in a way that ensures Amtrak and other passenger services in the US understand our position. While I cannot guarantee their support for the overall transaction, the commitments we make will be included in our filing and will ultimately form part of the conditions imposed. It is crucial that we communicate with Amtrak to understand their needs and what funding, whether federal or state, will be available to meet those needs. For instance, there is a need for funding for the service from Baton Rouge to Louisiana or New Orleans. While establishing service is important, we must ensure that all stakeholders, including customers, state and local governments, and the federal government, are on board.

JJ Ruest, CEO

Yes. As we mentioned earlier, we generally agree with the goals outlined in the executive order. Many of the pro-competitive initiatives proposed by CN-KCS align with suggestions we have made in our awards since April. In many instances, we are closely aligned with the intent behind the requests for increasing competition, providing options, and supporting passenger service, provided that funding is available for those services.

Jason Seidl, Analyst

Thank you, operator. Good afternoon, everyone. I have a quick question regarding pricing. You've mentioned that you're achieving even higher pricing than in the previous quarter. KCS has talked about rising rail cost inflation and the likely need for additional price increases on their part. Do you believe you are adequately addressing the rail cost inflation for the latter half of the year, or do you see the potential to increase your pricing beyond what you've achieved this quarter?

JJ Ruest, CEO

There is rail inflation, and eventually, it will be reflected in the all-inclusive rail index of AAR due to a slight lag in that index. We anticipated this, and you can already see our same-store prices for Q1, as well as the trend for Q2. I'm not certain that we are fully capturing the impact of the current rail inflation because we recognize there may be a lag in these indices. Additionally, as you might know, we have very little business that relies on these indices. Perhaps you would like to discuss pricing, James.

James Cairns, Senior Vice President

Thank you, JJ. Our customers. So our expectation is we will be able to continue to price well ahead of railway cost inflation moving forward. I think our performance in the last two quarters is indicative of what we should expect to see moving forward here, pricing ahead of railway cost inflation.

Konark Gupta, Analyst

Thanks, operator. Good afternoon, everyone. So just a question on BC wildfire. It kind of goes back to the earlier question, but I want to kind of ask you differently. When you're running slower trains and there is a cost to stop running those slower trains who really bears the cost for that? Is it CN or do you share that cost with your shippers? And can you somewhat kind of quantify the impact on Q3 what are you seeing in July, be it in terms of your operations or EPS, what kind of a drag do you expect? Thanks.

JJ Ruest, CEO

Pricing is not related to speed of train. I don't know if Ghislain you want to take a stab at that?

Ghislain Houle, CFO

Yes, let me take a stab at that. So the bridge we just got back was less than a week ago. So it's a bit early to really understand the full impacts of it. So much of the big impacts will be dependent on the weather and the weather fluctuates right now. We haven't seen a lot of 33 plus degree Celsius weather out there that would really trigger that 25. We are running slower and there is a backlog. So we don't have at all calculated in terms of the impact. It will have an impact. But since we have some more clearing in terms of understanding this. And the other thing, I would just say is that it still is a very active situation out there. So speed restriction or not, still very active in British Columbia with fires and we've seen times at night where fires spark up in the mountains and come down towards our tracks and we have to stop for a period of time. So a very fluid situation, but as soon as we have some greater clarity on it, we'd certainly share that.

Rob Reilly, CFO

I would add to that, Konark, that in terms of impact of Q3, we don't offer quarterly guidance. We offer yearly guidance and we're very confident. Again, as I said in my remarks and JJ alluded to, that we are comfortable to reaffirm our yearly guidance of targeting double-digit EPS growth for 2021.

Steve Hansen, Analyst

Oh, yes. Good afternoon, everyone. Just a quick one on the grain outlook, if I may. It sounds like the old crop volumes are getting a little more scarce here, which of course that the drought-like conditions weighing on the current yield prospects out there. And I think we're also even up against a tough comp with respect to the harvest timing this fall. So just maybe James or someone drops a little bit of commentary around for grains in the back half of the year. Thanks.

JJ Ruest, CEO

Yes, James, we had what 14 months, record months in a row. But it's very dry right now.

James Cairns, Senior Vice President

Yes. 14 record months in a row as you know, Steve, and for us that means we're going to finish the crop year in July at an all-time record for CN, an all-time record for Canadian farmers and their ability to get their product to market. So we're very proud of that. But this new supply chain resiliency that we've created is going to be a real benefit to farmers in Q4. Regardless of the size of the crop for next crop year 2021, 2022, we will have a strong Q4. Farmers always want to move their crop as soon as possible when it comes off. So Q4 is going to be strong for us. I would say it's still early days. Yes, it's been hot, it's been dry. There are some difficult growing conditions out there. I would say the conditions are most difficult in the Dakotas and Southern Prairies. So we're a little bit insulated from that. But all in, it's not going to be the record bumper crops for sure that we've seen for the last couple of years. But our job is to make sure that we have the people, the assets, the power, and the resources required to move the grain crop for our Canadian customers and we're going to be there to help make sure that happens in Q4 of this year as we see a very, very strong demand to move an early crop as quickly as possible to market.

JJ Ruest, CEO

So, we'll compete hard. Thank you, Steve.

Jeff Kauffman, Analyst

Thank you very much and thank you for the explanation of where you stand in terms of the transactions. I just wanted to ask you, you have two outstanding transactions right now that the rail is pursuing, smaller deals, line sales, things like that. Can you give us an update on where you stand with the regulators on those?

JJ Ruest, CEO

Yes. Sean is on top of those two. Sean?

Sean Finn, Senior Vice President

Yes, both are pending. One involves us directly and the other concerns the purchaser, which is awaiting approval at the STB. We are in discussions with our partner, also related to the STB, to facilitate the approval of this deal. The other case has just been filed recently. The STB is quite busy with numerous cases, but we are actively pursuing both and hope to have some results in the coming weeks.

Justin Long, Analyst

Hi, good afternoon. I wanted to ask a question about technology. As you think about this proposed merger with KCS, does it change either the magnitude or the pace of your plan, technology investments and if this is something that could accelerate your technology roadmap? Could you speak to some of the incremental opportunities the merger could create?

JJ Ruest, CEO

Yes. Rob is already utilizing much of that on the CN network. Rob, can you elaborate on the impact of technology on the larger network? Certainly, we see this as part of the synergies between our technologies. From a CN standpoint, we’re getting some of our ATIP cars operational across the CN-KCS network and have seen significant improvements in safety, identifying defects before they escalate and minimizing service disruptions. By sharing this technology, KCS has broad plans for similar advancements. We believe that combining our portal technology with theirs can lead to a safer, more efficient network. We see potential in this collaboration. For those unfamiliar with an ATIP car, you can find a picture of one in the earlier slide from Rob's section. It’s a boxcar used for safety inspections, and in the example shown, it operates on an intermodal train, inspecting the network while the train is in motion and generating revenue. Thank you for your question, Justin. Thank you all for joining us today. We want to discuss our quarterly results and provide an update on our merger with KCS. I believe many of you are familiar with the details regarding our merger. We expect to receive feedback from the STB in a couple of weeks, likely in late July or early August, as they review our filings and those from others. We feel very confident in our position, as we meet the requirements for the voting trust and are creating new competition and public benefits. We are looking forward to the summer with optimism and will share more after the decision. Thank you for being here today.

Operator, Operator

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