Canadian National Railway Co

TSX:CNR

Earnings Call Transcript 2019-Q2

[Operator]

CN Second Quarter 2019 Financial Results Conference call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable security laws. Such statements are based on assumptions that may not materialize and are subject to risks described in the CN Second Quarter 2019 Financial Results press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please standby, your call will begin shortly. Welcome to the CN Second Quarter 2019 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President of Investor Relations. Ladies and gentlemen, Mr. Butcher.

[Paul Butcher, Vice]

Well, thank you, Eric. Good afternoon, everyone, and thank you for joining us for CN's Second Quarter 2019 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is: J.J. Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Keith Reardon, our Senior Vice President Consumer Product Supply Chain; James Cairns, our Senior Vice President, Rail-Centric Supply Chain; and our recently appointed Executive Vice President and Chief Operating Officer, Rob Reilly. [Operator Instructions] It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, J.J. Ruest.

[Jean-Jacques Ruest]

Thank you, Paul. And good afternoon, everyone, and welcome to our second quarter earnings call. We delivered solid results from top line revenue growth of 9%, which is actually our best ever quarter in the company history and from adjusting our cost to the slower pace of growth we experienced in selective markets during the quarter. We produced adjusted EPS growth of 15%; revenue growth of over $200 million, and the operating ratio was a solid 57.5%. I'm going to do a quick review of the last quarter operation. Our GPM production, our production rate was up 3% over last year, but more important, it was up 5% in our key Western region, a record production for the West. Our operating matrix also continued to improve on a year-over-year basis. For example, car velocity was up a strong 9% and railcar dwell time was down a solid 11%. During the quarter, we reduced active rolling stock and parked or returned lease or scrap the least productive of our rolling stock for a total of roughly 8,700 railcars and 60 locomotives. We currently have about 200 qualified train crews on temporary layoff in our Western region waiting for the crude-by-rail volume opportunity to pick up higher. And we continue to progressively tighten down our overall management headcount. As a result of these actions, our operating ratio sequentially improved every month during the quarter, and stood at a solid 57.5% for Q2, which is 70 basis points better than last year. Now a quick review of the second quarter top line, which, as I said earlier, was our best ever quarter in the company history with nearly $4 billion of revenue. Carload and revenue -- carload and RTM were both up 2%, and the price continued to be solid and above rail inflation. Intermodal revenue was up 15%, reflecting the addition of the TransX intermodal product into our suite of product. Automotive revenue was up 5% in line, and we have line of sight on future new business. Coal revenue grew 1% as our Canadian coal export franchise did offset the current weak U.S. coal market, and we like our position in Canadian coal over the midterm. Canadian grain revenue was up 11%. CN Canadian grain export tonnage is now up 2.1 million ton ahead of last year and yet, the Chinese ban on Canadian canola is pushing some of last year's crop into a higher carryover opportunity into the next year's crop. U.S. revenue of grain was also positive, up 21%, mostly from export. On crude, we moved on average 150,000 barrels a day in April, 180,000 barrels a day in May and 200,000 barrels a day in June. We estimate our capacity can support a total of about 300,000 barrels a day with ability to generate more revenue ton mile growth than carload growth because of our unique long haul reach into Louisiana. Lumber production in British Columbia is facing some recent cyclical downturn. So we parked or returned lease of 16% of our least efficient lumber car. Frac sand demand did not turn out to be nowhere near what our customers had indicated that their market would require. Looking to the balance of this year and next, we are cautiously optimistic. We had a diverse pipeline of organic growth and line of sight on some market win ahead of us. We are also integrating TransX and the unique product that we now have in the less than truckload Intermodal marketplace, our first market win using our more sophisticated suite of product is the Canadian retailer, Hudson's Bay. In regard to 2019, we are reaffirming our guidance with continued focus on cost, focus on our PSR operation, and focus on growth, but staying very mindful of market volatility. With that, I would like to introduce Rob Reilly, our Chief Operating Officer, as of July 1 and will have Rob give you some comments. Rob?

[Robert E. Reilly, Executive VP & COO]

Thank you, J.J. and I'm very excited to join the CN team under J.J.'s leadership and his vision of 1 team after 30 years of railroading with the Santa Fe and BNSF Railway companies. In the short time that I've been here, I have had the opportunity to spend the majority of my time out in the field seeing the operation, meeting the key players, and I've been very impressed with the leaders I've met. Really there is no better example of the CN team working together as 1 than what I personally witnessed at the Sarnia tunnel derailment a couple of weeks ago with the team working tirelessly around-the-clock to restore service to our tracks. Not only restoring service to our track, but most importantly completing that complex undertaking injury-free. It was very impressive to see the CN professionals in action out there. It is clear to me that this is a well-run organization, and it's a privilege to be part of it. However, our work is not done here, as I believe we have opportunities to improve in safety, become more efficient at leveraging the technology, as you were able to see at our Investor Day in June, and still continue to grow with our customers. And not only grow, but grow profitably for our shareholders. That is where my focus will be, is in running a safe, efficient railroad for our customers and shareholders. Again, very glad to be part of this team. With that I'll pass it over to James for the marketing outlook. James?

[James Cairns, Senior Vice]

Thanks, Rob. So looking at the second half of the year, we still see volatility in a few markets, including grain, lumber, U.S. coal and crude. Fundamentals for crude remain strong for the second half of 2019. August spreads are challenging for rail, but we have a few new contracts starting in August that will ramp up to the balance of 2019. A change in government curtailment policy could impact demand moving forward. U.S. coal could recover in Q3 as water levels in the Mississippi River subside. The API2 U.S. coal benchmark pricing has shown some improvement recently. We're watching this closely. Canadian coal will continue to ramp-up through H2 as Coalspur's new mine increases production. We're very happy to see the announced sale of RTI to AMCI and Riverstone. With the right level of investment, Ridley can double its coal handling capacity, and this bodes well for CN bulk export opportunities via Prince Rupert. Propane volume will continue to be strong with sequential growth from Q2 to Q3 driven by full ramp-up of the AltaGas facility in Prince Rupert. Next up for propane will be the Pembina project at Watson Island in the Prince Rupert area, which is scheduled to start up in the second half of 2020. We have the capacity to move more grain products than there is current demand. Uncertainty around the ban of canola exports in China will push a larger-than-expected grain carryover into the new crop year. New export facilities on the West Coast combined with new built loop track elevators in the country will help us continue to move record volumes into new crop year. Refined products revenue was up 20% in Q2, and we expect to see continued growth in this segment through the balance of 2019. We handled significant majority of refined products originating in Alberta, and over 90% of greater Toronto area destined refined petroleum products carloads. Full impact of BC mill closures and production curtailments will be a headwind for forest products volume for the balance of 2019. We're rightsizing our fleet and resources accordingly. Thank you. And I'll now pass it over to Keith Reardon who will provide a brief overview of the consumer products market outlook. Keith?

[Keith Reardon, Senior Vice]

Thanks, James. And good afternoon, everybody. While the consumer products market is more tied to consumer spending in North America, we have also been faced with some softness in this segment. On the international Intermodal front, trade tensions between the U.S. and China created a pull-forward of traffic late last year and early this year, which eventually led to a slowdown in volumes in Q2. As we start heading into the traditional peak season, we do expect volumes to recover. It is currently difficult to assess the size of this year's peak, however, we are seeing volumes improving over Q2. We're seeing this at the Port of Prince Rupert, for example, where in June, the volumes were up 3%, and up more than 24% so far in July. Rupert is running at an annualized run rate of 1.25 million TEUs. I'm also very pleased to announce that we have renewed several of our long-standing customer contracts in this segment, including Hapag Lloyd and Evergreen. When appropriate, we will also announce the other overseas customers that we have successfully concluded negotiations with. This once again highlights the strong relationships with and commitments from our partner steamship lines that benefit from our strong service offering, our unique market reach, and our key competitive advantages. We are also very excited to have teamed up with Hutchison Ports, a world-class port operator from Hong Kong in a JV to build a container terminal in Québec City, which is connected to CN and many destinations across our respective networks. While this is still a few years out, we're committed to continue to grow in the international Intermodal segment. We're also looking forward to working with PSA, the new owner of Halterm terminal in Halifax in developing that long-term relationship to attract more business to Halifax.Moving over to the domestic intermodal market. We've been working very closely with our operating team to continue to build on the service improvements that we've been seeing. These improvements have enabled us to regain more share of business back from our existing customers and it has led to new business wins. As J.J. mentioned, we continue to work on cross-pollinization opportunities between CN and TransX. These efforts are also translating into new business, such as recently signing a deal to handle all of the domestic intermodal business of the Hudson's Bay Company, a major retailer in Canada. We're also progressing with opportunities in new markets such as the West Coast transload model, full partnership in the EMP program, the new intermodal terminal in Regina opening in September, as well as our continued growth in the cargo coal segment. Let me finish off by talking briefly on our automotive franchise. While motor vehicle sales in North America remain pretty muted, we are seeing new product launches moving via see-and-serve locations and also seeing continued growth in the SUV segment. Our new Autoport facility in Vancouver is now open and we expect to see volumes begin to move there in a substantial way in October. We have been recently renewing contracts of several of our automotive customers. In time, and when appropriate, we will be able to make those individual announcements. But for now, I would like to announce that we have reached an extension agreement with GM that will also see us increase our business with them in October in Vancouver at the new auto compound, and in 2021, at our new auto compound in Minneapolis, which will be open in the fall of 2020. Thanks for your time today. Looking forward to answering any of your questions during the Q&A. With that, let me pass it on to Ghislain, who will provide an update on the financials, Ghislain?

[Ghislain Houle, Executive VP & CFO]

Thanks, Keith. Starting on page 9 of the presentation, I will summarize the key financial highlights of our record second quarter performance. Let me start by highlighting that this is the first quarter fully integrating TransX into our financials, impacting intermodal revenues and on the expense side, mostly labor and purchased services. As J.J. previously pointed out, revenues for the quarter were up 9% versus last year, just shy of $4 billion. Fuel lag on a year-over-year basis represented a tailwind of $17 million or $0.02 of EPS driven by an unfavorable lag this quarter of $11 million versus an unfavorable lag of $28 million for the same period last year. Operating income came in at $1.682 billion, up $163 million or 11% versus last year. Our Q2 operating ratio is 57.5% or 70 basis point lower than last year. On a comparable basis, with every railroad that have reported, excluding the benefit of any land sales, this represents the lowest OR in the industry for the quarter. Also the inclusion of TransX increased our Q2 operating ratio by 110 basis points. Net income is $1.362 billion or $52 million higher than last year, with reported diluted earnings per share of $1.88 versus $1.77 in 2018, up 6%. Excluding the impact of a deferred income tax recovery from the enactment of a lower provincial income tax rate this quarter and gains on surplus asset sales in 2018, we achieved record adjusted diluted EPS of $1.73, up 15% versus last year. The impact of foreign currency was favorable by $28 million on net income in the quarter or $0.04 of EPS. Turning to expenses on page 10, our operating expenses were up 8% versus last year at $2.277 billion. Expressed in a constant currency basis, this represented a 6% increase. At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were $681 million, 4% higher than last year. This was mostly the result of higher wages driven by increased headcount and U.S. payroll tax credit in 2018 of roughly $15 million partially offset by lower incentive compensation expense. Looking at headcount, the year-over-year increase was mainly attributable to the onboarding of approximately 1,400 TransX employees in March. We also adjusted our work force in the second quarter in light of weaker volumes in certain markets and have recently been recalling those employees mainly to replace attrition. Purchased services and material were $571 million, 18% versus last year. This was mostly the result of the addition of TransX business and higher material expenses. Fuel expense came in at $442 million or 2% lower than last year. Lower fuel prices accounted for $20 million of the reduction, while higher volumes were at $13 million on favorable variance versus 2018. Fuel productivity improved by approximately 2.5% this quarter as our track infrastructure investments enable increased network fluidity. Depreciation was $363 million or 8% higher than last year, mostly a function of net asset additions. Equipment rents were 10% lower than last year driven by reduced locomotive lease expense as we have returned approximately 100 leased locomotives over the past year. Finally, casualty and other costs were $116 million, which was 5% higher than last year, mostly due to higher incident cost from the derailment in our Sarnia tunnel at the end of the quarter, which was shut down from over 10 days. Now moving to cash on page 11. Free cash flow was $799 million through the end of June. This is $497 million lower than 2018, and mostly the result of higher capital expenditures due to the upfront delivery of new locomotives partly offset by higher net cash from operating activities. Finally, let me turn to our 2019 financial outlook on page 12. While volumes in Q2 came in below our expectations and while trade and geopolitical issues are creating significant volatility, unemployment levels are still at record lows and consumer spending remains resilient. In the second half of the year, we're counting on CN's specific revenue growth opportunities that continue to ramp-up such as the new Coalspur thermal coal mine and the new propane terminal in Prince Rupert, both of which started shipping in Q2. In addition, as James mentioned earlier, our crude oil shipments have increased significantly in the quarter. And we're optimistic that the Alberta government will enable that momentum to continue for the balance of the year. We are therefore continuing to expect mid-single digit volume growth in terms of RTMs for the full year versus 2018, implying a step up in the second half of the year from the 3% RTM growth that we experienced in the first half, along with favorable pricing. In addition, we now expect our full year effective tax rate to be approximately 25% versus the roughly 26% that we discussed last quarter. The updated estimate reflects a more thorough understanding of the draft regulations related to the U.S. tax reform that were issued last December, as well as the implementation of effective tax strategies to mitigate the unfavorable impact of those regulations for 2019. We are maintaining our EPS guidance of low double-digit growth versus 2018, adjusted diluted EPS of $5.50 and will continue to right size our resource base, as needed. This guidance maintains our assumptions for the Canadian dollar at $0.75 versus the U.S. dollar. However, should foreign currency remain at our current spot rate of approximately $0.76 to $0.77 for the second half of the year, this would create a headwind for us. On the capital front, we are advancing on our large capacity track expansion program, which are expected to be substantially completed by the end of the third quarter ahead of our busy fall period. We have received so far around 125 new locomotives out of the 140 expected, and we are taking the opportunity to return expensive, less reliable leased ones. Furthermore, we continue to reward our shareholders with consistent dividend returns, and we are on track with our current share buyback program of $1.7 billion, having repurchased 6 million shares at a cost of roughly $725 million since the end of January. In closing, we remain committed to our agenda of operational and service excellence and we continue to manage the business to deliver sustainable value for today and for the long term. On this note, back to you, J.J.

[Jean-Jacques Ruest]

Well, thank you, guys. So to wrap this up where we stand right now our operating metrics are at PSR railroading level, and we are in good position to have good results going forward. For example, in the last 4 weeks, the last 28 days, our RTM are running at 6% growth so far. In the next 3 years, as you know, as for the -- what we've mentioned at the Investor Day, we are aiming for low double-digit diluted EPS growth, normalizing our capital intensity, producing high 50s operating ratio with ROIC in the range of 15% to 17%, free cash flow that is growing faster than earnings and dividend per share growth in line with earnings. So operator, Eric, we will now turn it back to you for questions from the people on the call.

[Operator]

[Operator Instructions] The first question is from Ravi Shanker with Morgan Stanley.

[Ravi Shanker, Executive Director]

One, Rob, if I can ask you now that you're -- you've been in the seat for a while, unlike the Analyst Day when you were new. CN obviously has a long and proud history of scheduled railroading in its blood. Maybe your former employer didn't have that, but can you just talk about some of the -- outside of scheduled operations, may be some of the best practices or what your former employer did really well that maybe you can bring to CN?

[Robert E. Reilly, Executive VP & COO]

Yes, Thanks, Ravi, and look forward to seeing you again. Certainly not here to compare and contrast rank and look at the BNSF, great run company and had great experiences there. What I've seen at CN, I've been very impressed with in terms of how they make their decisions, the speed in which they make their decisions. Great example was in the second quarter, before I got here, some of the decisions were made in terms of reacting to the volumes out there. How quickly they laid up locomotives, how quickly they reacted in terms of assets. Very impressive that their finger is on the pulse. It is very obvious that this is a seasoned group of scheduled railroaders. And they do a lot of things really, really well, and I've been very impressed in my few weeks here.

[Operator]

The next question is from Cherilyn Radbourne with TD Securities.

[Cherilyn Radbourne, Analyst]

So you knew you're going to get a question on crude-by-rail, so I'll go ahead and ask it. Can you just give us your thinking as to when the Alberta crude contract could transition to the private sector? And how quickly thereafter you would expect to see a ramp-up in volumes?

[Jean-Jacques Ruest]

I think, James is the expert, will take that up.

[James Cairns, Senior Vice]

Yes. Thank you, Cherilyn. So tough to say when government is involved. But I think they stated publicly that they fully intend to have the contracts transferred in the private sector by the fall. We're ready to go as soon as those contracts get transferred over. I think the real determining factor, Cherilyn, is going to be -- the pace of scale of ramp-up is going to depend on whether the transferred contract is timed with the reduction of curtailment or exclusion of curtailment for crude-by-rail barrels. We're very hopeful that is going to happen and could see some very positive news here this summer.

[Jean-Jacques Ruest]

Hopeful and ready -- got the resource.

[Operator]

The next question is from Benoit Poirier with Desjardins Capital.

[Benoit Poirier]

Keith, could you provide maybe more color on the Yang Ming contract loss? And also how that will impact your service at Deltaport, given that your competitor's market share is expected to go from 20% to 70%?

[Keith Reardon, Senior Vice]

Sure. Sure. So it is kind of 2 questions, but I will take them. Benoit, thank you. So the first about the Yang Ming contract. We were sitting at the negotiating table. And it got to the point where we said, no. And that's pretty much the end of that story. With regard to the transfer of the contract over at Vancouver to Deltaport, it's a very complicated thing because you have multiple alliances, multiple carriers, slot charter agreements and that type of thing. I can tell you within the last 4 years, there's been anywhere between 12 and 13, I'll look at my notes, but 12 and 13 times that the market share of who was handling the business there has gone up and down for us and back-and-forth. It's been a long time though since we've had a significant, significant share, I think, 2015. I think the share right now is right around 50/50. So we know that there will be a lot of changes. I think there's 4 or 5 different scenarios about what could play out over the next 6 months with different alliances talking to us and talking to the terminal operator about moving some vessels around the strings, that type of thing. So I don't think we can call who is going to have what type of market share and what that is going to do with regard to how much footage gets dropped on a weekly basis. So we're going to wait and see how it all plays out there.

[Operator]

The next question is from Chris Wetherbee with Citi.

[Christian F. Wetherbee, Vice President]

Maybe, James and Keith, maybe you could give us a little bit of rundown of the specific drivers that you sort of have the most confidence in, in terms of building the RTM growth, as we move into the second half of the year? Sounds like crude-by-rail is likely to be 1, and I think, coal and maybe a couple of others are sort of the key drivers there. But can you sort of break them out a little bit and go into a bit of detail there?

[James Cairns, Senior Vice]

Well, I think, Chris, if you hit on the first 2, it's going to be crude, it's is going to be coal. It's going to be grain and it's going to be propane and Intermodal, key drivers of our RTM growth going into the second half of the year.

[Operator]

The next question is Allison Landry with Crédit Suisse.

[Allison M. Landry, Director]

Just wanted to follow up on the international intermodal. It sounds like you've had some good success there. And I think you said that you had won some new contracts. So just wondering if you could give us a sense of the potential magnitude and timing of these new contracts? And if we should expect any of that volume to flow through in the second half of the year?

[Ghislain Houle, Executive VP & CFO]

So most of those contracts are renewals, Allison. We are working on some of the other, I'll call them, open contracts there or renewal for our competitors as well. We're always looking at that. They're looking at ours. But the renewals that we had, Evergreen and Hapag, I can announce, we have renewed some other contracts. It's just, I am not, is not the appropriate time to do that -- to give that announcement out per our customers, but we have renewed some, yes.

[Operator]

The next question is from Jason Seidl with Cowen and Company.

[Jason H. Seidl, MD & Senior Research Analyst]

Wanted to touch on pricing a bit. Your outlook is to continue to have pricing above rail inflation. But how would you categorize sort of the pricing environment now? And into the back half of the year compared to how it came into the year?

[James Cairns, Senior Vice]

Yes. Thank you, Jason. I would characterize it a stable. We continue to have success pricing out of a railway cost inflation. That's been our model for many years now. And we see no reason to deviate from that and we're having success in the marketplace.

[Jason H. Seidl, MD & Senior Research Analyst]

And if I can follow up on -- in the back half of next year, obviously, the truckers are going to get some curtailments by the governments with the devices being put in there -- in their cars. Do you see that as an opportunity to maybe push up pricing on the domestic Intermodal a little bit more?

[Jean-Jacques Ruest]

So maybe -- you want to pick that up, Keith?

[Keith Reardon, Senior Vice]

Sure. So we saw that path in the state. The ELDs come in line June of 2021, right? So we've already seen a significant amount of large trucking firms and large intermodal firms in Canada have already begun using those devices because a lot of them do some trans-border work as well. So I don't think you're going to see the big bang that you saw in the States. But there will be some of the smaller firms and some of the -- maybe some of the midsized firms that will be impacted a little bit more. We see good pricing power now. I don't know that that's going to increase at the ELDs.

[Jason H. Seidl, MD & Senior Research Analyst]

So more of a muted response than we saw in the States then?

[Keith Reardon, Senior Vice]

It's not going to be the big bang, I don't think so.

[Jean-Jacques Ruest]

Just because of the cross the border, a lot of the companies are already equipped, yes.

[Operator]

The next question is from Steve Hansen with Raymond James.

[Steven P. Hansen, Senior Vice President]

Just a quick one here on the coal side. The Coalspur facility ramp-up is encouraging, but I think it has been a little bit slower than expected. Can you maybe just give us a sense of the cadence through the back half of this year and into next year? And any specific issues that you see as accelerating or slowing that down?

[James Cairns, Senior Vice]

Yes. I won't speak to any kind of challenges that Coalspur has had. Anytime you start up a new facility or mine like that, you're going to have bumps and starts, kind of we've seen that. Talking with our good customer Coalspur, we see a continued ramp-up going through the balance of this year, Q3 and then into Q4. All signs are very positive for continuing growth in the carload volume that we see out of that facility.

[Jean-Jacques Ruest]

And we also see the fact that there are -- the RTI coal terminal in Rupert is now finally being sold. It's is in the hands of good private investors, who have intent to invest. And that's what create opportunity midterm to see some growth in Rupert because of the new ownership.

[Operator]

The next question is from David Vernon with Bernstein.

[David Scott Vernon, Senior Analyst]

Just a quick question on the intermodal RPU. Is there a way you can separate out kind of what the growth was from TransX versus what the core growth was in the business?

[Keith Reardon, Senior Vice]

Specific to -- you want me to bring just TransX and then our intermodal business and what the growth was?

[David Scott Vernon, Senior Analyst]

In terms of the RPU growth of 14% or whatever it is year-over-year. I'm just trying to get a sense for what it was for rail versus TransX.

[Keith Reardon, Senior Vice]

I believe -- I am going to give you a roundabout number, how about this? The numbers for TransX were about $100 million.

[Jean-Jacques Ruest]

In total revenue.

[Keith Reardon, Senior Vice]

In total revenue. Should be able to back up into the rest of it from there.

[Operator]

The next question is from Walter Spracklin with RBC Capital Markets.

[Walter Noel Spracklin, Analyst]

So when I look at your operating performance on a sequential quarterly basis, we -- barring last year, it's very typical. You're getting -- summer railroading in Canada tends to be a lot easier. So your operating ratio historically has been a lot better in the third quarter versus Q2. Just wondering, if there's anything -- as you I say, if we -- maybe if you're flagging anything in the operating side that might pop up? Or any thing that would indicate that historical trend -- albeit barring last year, that historical trend wouldn't continue into the summer period here for CN this year?

[Ghislain Houle, Executive VP & CFO]

Yes, Walter, thanks for the question. Listen, I think it's steady as she goes. Obviously, we're not going to give any guidance on the OR on a quarterly basis. But as you can see, we're continuously improving our OR on a year-over-year basis as the capacity is there and as we have the right infrastructure, so that's exactly our game plan. And I think over the next couple of years as we provided guidance at our Analyst Day that you've attended, I think that we're comfortable that we'll get into the Highway 50 OR, which is what we've said to the market. And you know on a quarterly basis, you can make your own assumptions. We're not going to go there on a quarterly basis. Just be careful, when you look at it on a quarterly basis, there is sometimes timing. So OR, you need to look at it and we look at it over the next few years. And we're right on our game plan and we're very pleased this quarter because we actually delivered what we said we were going to deliver. So we are very pleased about this. And when you adjust per asset sales, as I said in my remarks, than we have the lowest OR in the industry, so we're pretty pleased about that.

[Operator]

The next question is from Brandon Oglenski with Barclays.

[David Michael Zazula, Research Analyst]

This is David Zazula on for Brandon. Just had a quick question. What we saw at the Investor Day was the infusion of some outside talent that you had brought in. We've heard from Rob already. We noted you had hired a new Chief Digital Officer. I was wondering if you can talk about some of the experiences and things he'll bring to the table as they apply to the digital initiatives and technology initiatives you had highlighted at the Investor Day?

[Jean-Jacques Ruest]

Yes. Yes. So It's J.J. Maybe I can pick this one up. So David comes from a big Canadian industrial company, which is also -- has a lot of remote location -- been in business with companies and been in business for a long time, heavily unionized. So he brings -- he comes from a background that's similar to what we experience here in the rail industry at CN. And also his role is to help us out, apply technology -- advanced technology to our operation. But also to help us automate regular administration process. We still have in the rail industry and at CN a lot of jobs, which are repetitive, combining data, going to spread sheet, and we can automate those through RPA. But also we're looking, as we saw in the Investor Day, to automate track inspection, train inspection, and him and Michael Foster and Mike Farkouh basically are mandated to bring a new level of skill and efficiency into scheduled railroading that takes into account what's now a readily available to any large industrial company, like CN. So it's time for us to really as an industry, CN to really put forward on that. And David was the last piece of the talent that we're looking to add to our team. In fact, he already bought his house, but he's going to be with CN sometime in mid-August. So it's all coming up together nicely. The rail industry can automate just like any other industry.

[Operator]

The next question is from Seldon Clarke with Deutsche Bank.

[Seldon T. Clarke, Associate Analyst]

Can you just talk about some of the maintenance projects that you're undertaking in the third quarter? And whether we should expect the same type of network disruption that we saw in 2018?

[Jean-Jacques Ruest]

Yes. Maybe, Rob, it's a combination of maintenance but also a capital program, yes.

[Robert E. Reilly, Executive VP & COO]

So we're in the middle of work block season right now, obviously, putting rail and tie in during the summer months. We do have our expansion plan well underway. We got a couple of those projects completed in the first half of this year. And the rest that are planned to be completed in the third and fourth quarter, are all on track and should be completed as well.

[Ghislain Houle, Executive VP & CFO]

And just to add on, I mean we did learn from our deployment of our basic CapEx maintenance and also our capacity from last year. Obviously, this is a big program this year similar to last year. So the team did a good postmortem, starting the season. And so the way that we're deploying our capital is actually better, so that you should not expect to have some of the impact that you had last year in the third quarter. We did learn. So stay tuned. But as Rob said, we're on track, and this capacity will help us when we get to the busy fall season, which is coming up.

[Operator]

The next question is from Konark Gupta with Scotiabank.

[Konark Gupta, Analyst]

Just wanted to follow up on the volume outlook for the second half. So like you -- you pointed out a few commodities and segments, which are obviously clearly ramping up and then, you also have easier comps in frac sand and autos, I guess, in the second half. I just wanted to understand the 6%, 6.5% RTM growth we've seen so far in July. And with the contracts that you have mentioned that you've just won or renewed, what do you think the second half volume outlook should be in that upper sort of mid-single-digit range? Is that sustainable? Or you think there is this further acceleration you can expect?

[Jean-Jacques Ruest]

While I think we're -- just to make a point before I pass it on to Keith and James, all we're talking about is 2019. We're not at 2020 at this point. But in the contract win, we're talking about the case of General Motors starting in October.James or Keith, do you want to add to what you said earlier?

[Keith Reardon, Senior Vice]

So -- and J.J. just pointed out the contract win that we have with General Motors in Vancouver is in October. And we feel confident with the numbers that all line up to the mid-single digits.

[James Cairns, Senior Vice]

Yes. I can talk a little bit more about kind of what we see, that sequential ramp-up in H2 compared to H1. So if you think about what we did with -- on the coal side of things, we've got the full ramp-up of Coalspur that we talked about. Then we have the full ramp-up of our propane export facility with our good friends at AltaGas. On the grain side, we're looking very positive on grain. Could be a crop in the range of the average for the last 3 years. But big carryover from this crop season to new crop season, and potential to have a 10 or maybe 2-week earlier start-up compared to last year's late start of the crop. I mean these are easy times to execute when you can guide and get the grain crop started a couple of weeks early there. And I think the last one I talked about was coal, propane, Intermodal you did...

[Keith Reardon, Senior Vice]

Yes. Maybe we should talk a little bit about the follow-up on the press release on the new stuffing facility in Prince Rupert where will be moving some resins that way. And it'll be about 400 containers a month that will be stuffing there with our Charlie Raymond and his team. That not only add to the revenues for James, but it's very helpful to our steamship line folks that are looking for a ride back -- revenue ride back to Asia. So it's a really, really great thing that the team has been working on and it will come to fruition here very shortly.

[Jean-Jacques Ruest]

And if there is some further market shift or contract shift, if you wish, we will only talk about those things when our customers are comfortable that we can talk about them.

[Operator]

The next question is from Jordan Alliger from Goldman Sachs.

[Jordan Robert Alliger, Research Analyst]

Just a quick follow up. I just want to make sure I heard right. You talked I think about the frac sand markets. And I think you said that perhaps customers were suggesting something and then maybe it wasn't coming in quite as expected. I know that was an opportunity set for you guys you talked about. And I just want to get a little color around that to make sure I heard that correct.

[Jean-Jacques Ruest]

So it's J.J talking. So these are my comments. It's basically we were geared up in the second quarter to a much more frac sand than what we did. And much more than -- we're basically -- to be in line with our customer's own prediction. And the combination of -- I guess they were too optimistic, but also that marketplace is maybe a little tough or tougher than what they thought, plus they're also competing with local sand in different areas. So we have the resource ready. And you may remember that winter of 2018, there was a lot of public comment made that CN wasn't ready for frac sand. Well, we got geared up, with people, track, locomotive and whatnot, but the second quarter here -- that was the reverse, what the industry was talking that would happen did not quite happen. So that's what it was.

[Jordan Robert Alliger, Research Analyst]

Would you say -- I mean do you anticipate sort of shorter term or just not clear yet?

[Jean-Jacques Ruest]

This is all related to how much drilling activity that there is right now related to -- I think the frac sand industry in North America is maybe not quite getting the volume across the border we're hoping for and CN is experiencing the same thing. So in terms of how much sand will be required in the future, again, it will be back to the basic that James was talking about. What's the price of natural gas? What's the price of crude? And where -- how much drilling activities will there be?

[Operator]

The next question is from Kenneth Hoexter with Bank of America Merrill Lynch.

[Kenneth Scott Hoexter, Managing Director and Co]

J.J. maybe, if you can just revisit some of your opening comments. You talked about balanced growth and parked capacity, and it sounds like you're bringing some employees back from furlough. Looks like employees were up 5% normalized for the TransX. Maybe you can just talk about the kind of what's going on, on the employee side? And how you balance that out with the 6, I guess, mid-single digit growth you're looking for in the second half?

[Jean-Jacques Ruest]

Yes. So maybe I'll start and maybe Ghislain can add some color. But on the head count side, on the people side, we're doing 3 things. One is we've had -- since we've had last year quite a few -- remember we used to talk paycheck and employee. And really paycheck is really what matters the most. And we are trying to reduce the number of contractors -- consultants we have at CN because those paychecks are more expensive than the people who work full time. So on one hand, we're in-sourcing work because that work is more -- is done more cost effectively with full-time employees and also, we retain the skill that's mostly in the world of IT, in the world of PTC, for example. And on the other hand, on the operating side we want to size up the size of our labor to the workload. And we were prepared for more workload this summer than what we had, crude-by-rail for example, is even -- it's a growth story, maybe not quite what it was. So we had some layoff in the second quarter, 500, and 500 is now down to 200 because of attrition. And we're at -- and the third leg is on the management side. When I say management I mean headquarter, but all non-unionized jobs at CN. And to give you a reference point, in October 16, 2018, we had 6,900 management jobs at CN. And now in July, we're roughly at 6,030, to be precise. And we want to finish and end the year at 5,700. So we are streamlining our management structure. We are sizing our crews based on volume and attrition. And also by the same time, we are in-sourcing some work on a consultant -- mostly in IT, to these consultants that are too expensive, and also we end up training people for their next consulting job, as opposed to the next project at CN. And Chris, Ghislain, do you want to add?

[Ghislain Houle, Executive VP & CFO]

You covered it very well. I think what the, Ken, you need to be mindful of again is attrition is a good lever for us because there's quite a few people that go, that retire. And therefore, when we're a little bit up on the headcount side, it only takes a couple of months and the attrition eats into it. So that's really a good lever that we have and that we use. So -- but otherwise, J.J. you covered it very well.

[Jean-Jacques Ruest]

So Ken, rest assured, we're very focused on headcount. But remember the discussion that we learned back in the days with Hunter. It's more about the paycheck than the headcount. So sometimes you have to increase your headcount to reduce the cost of these outside -- outsourced services that we buy from outside.

[Operator]

The next question is from Scott Group with Wolfe Research.

[Scott H. Group, MD & Senior Transportation Analyst]

So 10,000 carloads accrued in June. What's the run rate you're assuming for third quarter? And then separately, Ghislain, if I look, comp per employee is down 2% year-over-year in the quarter. How much of that is the incentive comp? How much is just the mix of TransX? I'm just trying to understand is that -- if we should think that, that continues to fall year-over-year in the back half of the year?

[Jean-Jacques Ruest]

James, do you want to add some more color on the crude-by-rail?

[James Cairns, Senior Vice]

Yes. Looking at our crude, we're going to see a slight ramp-up from our June volume as we go into the third quarter and into the fourth quarter.

[Jean-Jacques Ruest]

And this is all based on our own gut feel of the spreads and what the government of Alberta may or may not do and how really they will do it.

[Ghislain Houle, Executive VP & CFO]

I'm not sure I got your question, Scott, on the second piece you -- I know there's one on incentive comp. So yes, incentive comp helped us, absolutely, on the labor side this quarter. And this just demonstrates that some of our incentive model is working. And I mean on the people side, I think we've answered it and we're going to try to right size our resources. What we're proud about this quarter is we -- obviously, our volumes are lower or softer than what we expected, but we were very quick to react, and this is partly why we have the quarter we have. So again, while we've talked about in our opening remarks that the markets are changing very quickly, very volatile. So we're -- our pulse is very close to the demand, and we can react very quickly to what's happening out there in terms of the cost side. So we're very pleased about that. And I think stay tuned. We are -- our business line is working, and we're delivering what we said we're going to deliver.

[Scott H. Group, MD & Senior Transportation Analyst]

Maybe I didn't ask right. If I can just ask it more directly. The comp per employee for the TransX people, is that lower than the overall average? Meaning, as we add that into the model, does that bring comp per employee lower?

[Ghislain Houle, Executive VP & CFO]

TransX is part of CN. I wouldn't start commenting on their comp model versus our comp model. I think comp is comp and the numbers are there. And I'm going to let you make your assumptions.

[Jean-Jacques Ruest]

Yes. So maybe they may not have as many senior positions. And they're all based in Canada, and so all their salaries are in Canadian funds. Maybe that could help because on the rail operation, we've quite a few people who are based in United States.

[Operator]

The next question is from Brian Ossenbeck with JPMorgan.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

Just wanted to go back to the resource allocation. It sounds like you've obviously made some adjustments to where it seems a little softer. If you could just give us a sense of which areas you are watching closely that could be a little bit weaker into the back half of the year? And also give us a little bit of context as to how the digital twin that you're rolling out. I believe, at year-end, I imagine you'll have a decent working model for that. Is that starting to show some benefits in terms of adjusting more in real-time? Or is that something you don't expect to get a lot of mileage out this year versus next when it's fully ramped out?

[Jean-Jacques Ruest]

Yes. So if may I start on the digital twin or the tool that we want to have in terms of first to model the -- our capital plan and resource plan, we're not using it yet and today, I would -- in term of a day-to-day tool. That's not where we're at. But we're still building that tool, and we want to use that tool at this point for the first use to be modeling the network and making just a capacity decision, more kind of a month-by-month -- it's kind of a midterm tool. And ultimately, eventually, we'll go from midterm to more short term to more and more short term. So that's work in progress, but huge payback in what we might be able to extract as incremental capacity by using the network much smarter. I think I forgot what was your first question within the 2 questions.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

Yes. Just asking if you could give us a sense of -- where you were looking at the second half that might be a little softer, you kind of hit the highlights in terms of coal, crude, propane?

[Jean-Jacques Ruest]

James?

[James Cairns, Senior Vice]

Yes. We keep an eye on all of our markets. We try and keep tight control over that. Make sure that we're rightsizing our resources continually. Some of the markets that we're watching very closely, forest products for example, U.S. coal and of course crude. Need to make sure that we're able to react either way. Crude, could have to react up. Could have to react down. So it would be very interesting to see what happens in the fourth quarter here.

[Jean-Jacques Ruest]

Yes, forest product itself and the Mississippi River is still high and the API in Europe is always -- we need to stay very close to that.

[Operator]

The next question is from Justin Long with Stephens.

[Justin Trennon Long, Managing Director]

So I was wondering if you could help us understand the quarterly cadence of RTM growth that's baked into the guidance for third quarter and fourth quarter, just given some of the moving pieces with new contracts, the comps, et cetera. And then, Ghislain, on the tax rate, even after the adjustment, it was lower than the 26% you guided to last quarter. So curious if that assumption in the guidance has changed as well?

[Ghislain Houle, Executive VP & CFO]

That I can talk -- I can start with the tax adjustment. So I did, last quarter, as you know, we discussed the -- and I did provide some visibility that our effective tax rate for the full year would be 26%. I just said in my remarks -- prepared remarks that now we see 25% of effective tax rate for the full year, and that's mainly due to tax strategies that we are employing to reduce some of the unfavorable impact that the U.S. tax reform has on CN. So this is good news. And on the -- I can comment and then if my colleagues in marketing want to jump in on the RTM. I mean, if you look, we're still guiding for -- and it's not a guidance, it's an assumption. So our assumption is still mid-single-digit volume growth in terms of RTMs. So I mean that is mid. So you can decide what you decide what mid is, but -- and in the first half of the year, we delivered 3%. So you can -- but just do the math and you can see that, and that's what I said in my remarks as well that we need an uptick in RTM growth in the second half. But at the end of the day, volumes are volumes. What we're focused on is to protect earnings. That's what we're focused on. At the end of the day, if volumes come at 4 instead of 5 or 6 or whatever it is and whatever your midpoint is, we want to protect earnings and what's important for us is to deliver our guidance on earnings, which is low double digit EPS growth. I think that's what our investors wants to see and that's what this team is committed to deliver.

[Jean-Jacques Ruest]

That's right. It's about modulating the resource to the volume. Slower growth means slower increase in resource. And as the network is also becoming more efficient, we need to bring that to the bottom line. So rolling stock, headcount either permanent headcount like in management, as I said earlier that we're progressively bringing down, and you can see operations side is to go from week-to-week, month-to-month so see how many people we need to have, and make sure we have enough people. But at the same time, not more than what we need. So it's almost basically now a weekly exercise in terms of how much rolling stock we have out there, and how many people we have on the furlough board on lay off. It's very dynamic. We keep it tight.

[Operator]

The next question is from Tom Wadewitz with UBS.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

There were some comments, I think, about peak season -- some optimism. And I think your comments on Intermodal in general in the second half showing some -- expecting some growth. How much visibility do you have at this point? What kind of underpins the -- the view you have at this point on peak season?

[Jean-Jacques Ruest]

Keith?

[Keith Reardon, Senior Vice]

Yes. So a couple of different things. We have the ability to talk to our domestic customers who have the inventories in the warehouses. And what they see is going to be their needs. But we also have our discussions with the lines and what they're doing with the vessel calls and the size of their ships. And where they're calling if they're moving some stuff around. And we can see out. I mean we know what's on the vessel 3, 4 weeks out anyway. So that's the guidance or that's the visibility that we have, and we make the best decisions we can with it.

[Jean-Jacques Ruest]

Yes. We have more and more better systems and also cooperation with some of the terminal operator who have the visibility of what's coming for CN, right, for CN Rail to go interland as the vessel has orders. So we kind of see 3 weeks out. I mean what's loaded today will get to us 3 weeks from now. So we have at least a better visibility on what's loaded in their ship, which are destined to CN -- CN port and CN cities. So that's helpful.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

And what about you -- you commented a bit on the inventories, is that something that's -- is there much visibility in terms of -- do you think inventories have actually come down or coming down? Or is that kind of a broader macro data that you're looking at?

[Keith Reardon, Senior Vice]

Well, it's also, what I said earlier, we can't say how big the peak is going to be. But we do feel that there will be volume growth over Q2. There will be a peak season, we just don't know how big of a peak it will be, right? So can't regulate what the answer is. But we do make a lot of phone calls and lot of visits to our domestic sites to triangulate the information to see if we can figure that out. And it is probably not an exact science, but we do our part and we do a lot of work to try and figure that out.

[Operator]

There are no further questions registered at this time. So I'd like to turn the meeting over to Mr. Ruest.

[Jean-Jacques Ruest]

Okay. Thank you, Eric...

[Operator]

I'm sorry, we have one just, Mr. Scott Group pop up from Wolfe Research.

[Scott H. Group, MD & Senior Transportation Analyst]

Just big picture, the guidance you've got, you're assuming accelerating volume growth, but decelerating earnings growth to get to low double-digit earnings growth? May be help walk us through that. Or do you think that there's potentially upside on the low double digit for earnings growth based on the first half?

[Ghislain Houle, Executive VP & CFO]

Yes. Listen, the guidance is there. I mean there's a lot of, Scott, as you know, there's a lot of moving parts to the equation. And I mean there's pricing, there is volume, there are various commodities, et cetera, et cetera. So and then there are comparables as well, what we did versus last year -- what we -- in Q2, Q3. So all in all, our best foot forward right now, and what I can tell you is, we are maintaining our mid-to-single digit volume growth in terms of RTM. But we need an uptick to get there as an assumption because we did 3% in the first half. And with our math, and you can do your math, obviously but with our math, and we are confident at this point that this will result in low double-digit EPS growth for the year, and we're proud of that and we're confident that we will deliver on that.

[Operator]

There are no more questions registered at this time so I would like to turn the meeting over to Mr. Ruest.

[Jean-Jacques Ruest]

Okay. Thank you every one for joining us today. We are very proud of our results, but the race goes on and we have -- we're already working on the third quarter. So thank you for all joining us today and this is the end of our call. Thank you.

[Operator]

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