Canadian National Railway Co

TSX:CNR

Earnings Call Transcript 2020-Q2

[Operator]

CN's Second Quarter 2020 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 securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's second quarter 2020 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 CN's Second Quarter 2020 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

[Paul Butcher, Vice]

Well, thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's Second Quarter 2020 Earnings Call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is JJ Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; Keith Reardon, our Senior Vice President, Consumer Product Supply Chain; and James Cairns, our Senior Vice President, Rail Centric Supply Chain. [Operator Instructions] 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.

[Jean-Jacques Ruest]

Well, thank you, Paul, and good afternoon, everyone, and welcome to our second quarter earnings call. In keeping with our commitment to safety and essential services, our people have quickly pivoted to working safely under the new normal of COVID-19. In Q1, we told you about our proven ability to be resilient to any challenges. In Q2, we proved that again, and CN's operation never slowed down for the pandemic. And we will be ready and prepared if there is a second wave. As we look back, this was among the toughest quarter of my career, with heightened pandemic concern of our employee and a sharp drop in volume of 18% in revenue ton mile. But thanks to our people and our leaders, we performed very well. We take pride in delivering an essential services to our national economies. Our perennial financial strength is serving us very well in these current times. CN generated $1 billion of free cash flow during a quarter of severe recession. We delivered an adjusted operating ratio of 60.4%, and we continue to aim for a minimum of $2.5 billion of free cash flow this year. CN is built to last. And even in this challenging time, I'm proud that we continue to demonstrate why ESG is a hallmark of CN. Namely, our carbon footprint continued to decrease, having delivered another record of fuel efficiency. Today, we will speak to the short term, our costs and our resiliency to last this pandemic. And today, we will also speak to our investment in the long term in our contribution to the economic recovery. Rob will walk you through the strength of our operation in this new normal. He will highlight progress we are continuing to make in cost takeout in bringing technology to the railroad industry and in the safety culture at CN. He will also highlight its outstanding performance in fuel efficiency. James and Keith will speak to the expected sequential volume trend for the quarters ahead. And we know also, by now, you know our long-term commitment to the grain business and the major investment that we've announced here today. Ghislain will give you color on our solid balance sheet and the special noncash charge that we are using to push PSR further by trimming noncore part of our network. So in summary, a good quarter in the middle of a recession. We quickly learned how to operate under the new normal of COVID-19 for quarters to come. We proved again our cost resiliency that will help us deliver in the near term. And we reaffirm our confidence in the future by maintaining our dividend policy, reaffirming our $2.9 billion CapEx in 2020 and announcing a new $150 million investment for 2021 targeting the long-term grain export business. On that note, I will pass it on to Rob. Rob?

[Robert E. Reilly]

All right. Thank you, JJ. Our results in the second quarter are showing you the strength of our CN team and of our operating model. In these extraordinary times, the team reacted quickly and aggressively. We adjusted resources to declining volumes, increased productivity and efficiency, and served our customers, all of that while improving our overall safety record with less injuries and less accidents on a year-to-date basis. Finally, we will see some lasting structural changes following COVID-19, and I'll provide you with some of those examples. I'm very proud of the CN team that proved again our culture of operational resiliency as we are leading the industry on many fronts. Now let me walk you through some of the details. During the quarter, the team responded accordingly to the significant volume drops in rightsizing our resources by idling 4 locomotive shops as well as 4 additional switching yards. We laid up 1 out of every 3 locomotives, over 20,000 railcars were stored, while our active online car inventory was down 20% and approximately 4,000 employees were furloughed this year. From a productivity standpoint, for the second quarter, the team set an all-time best ever fuel efficiency record while avoiding an additional 29,000 tons of CO2 emissions and saving an additional $7 million in fuel expense directly from our fuel efficiency initiatives and execution. Sequentially, fuel efficiency improved 8% from last quarter. That means we moved 8% more tonnage the same distance with the same amount of fuel. We continue to be the North American Class 1 railroad leader in fuel efficiency using a little more than eight-tenths of a gallon of fuel per 1,000 gross ton miles. Train weight and train lengths reached all-time historic levels as we were able to move more freight on every train start. Crew starts were reduced 21%, while RTMs were down 18%. Crew productivity exceeded all-time record levels, and train speed was up 5% year-over-year. As I noted last quarter, we also took advantage of the additional time on our tracks with fewer trains operating to strengthen our infrastructure. As a result, we've seen our rail and [ tagging ] productivity improve up to 25% year-over-year. Also, as I've mentioned previously, from a mechanical standpoint, we reacted with a plan and a purpose by laying up our least reliable locomotives first and laying them up in good order status that allows us to get them back into service quicker when needed. During the quarter, we've seen locomotive reliability and availability percentages improve year-over-year, while locomotive dwell was reduced, fully utilizing our assets while doing it with fewer shops and less head count. You can see that we once again demonstrated our culture of operational resiliency even during a tough quarter, and we continue to look ahead to further improve our efficiency through challenging times. Now let me highlight some of the initiatives we are building on and that will provide lasting structural changes. The idled locomotive shops and switching yards will remain closed. We will continue to improve train size year-over-year. Fuel efficiency initiatives will continue to produce record outcomes. More of our training will be performed virtually, and we continue to advance the capability of our handheld mobile devices that all train crews have now. Through this digitization process, we have and are eliminating some 30 million printed pages of paper annually at CN, removing hundreds of shared printers and kiosk terminals while reducing the COVID-related exposures associated with them. Further, on a technology forefront, our automated track inspection program and automated inspection portals continue to provide benefits with our train accident ratio reduced 22% year-over-year. Finally, our operations team is tied very closely with James and Keith's teams, matching resources to projected sequential volume return, and we are ready and prepared for additional waves of COVID. With that, I'll turn it over to James.

[James Cairns, Senior Vice]

Thank you, Rob. Like all Class 1 railways, we saw a significant decrease in demand related to the pandemic. At the same time, thanks to our unique geographic reach, we set all-time records in the quarter for Canadian coal, Canadian grain, West Coast propane and wood pellets. Prince Rupert gives us a structural advantage that cannot be replicated and creates supply chain resiliency that helps our customers win in their end markets in good times and bad. We set new records for grain for the last 4 consecutive months. Our customers have invested heavily in new country elevators on CN, a new export capacity in Vancouver. In order to support these investments, we will be acquiring 1,500 additional high-capacity hopper cars for 2021 that would create capacity for us to continue to set new records for Western Canadian grain through next year. These new high-capacity cars allow us to ship up to 20% more wheat and 40% more canola, using the same train resources, creating an overweighted benefit for CN given the commodity mix of our business. Wood pellets, in particular, was a good new story in Q2. Our year-over-year volume growth of about 15% has come from expansion projects across British Columbia and Alberta, with more production coming online through the end of 2020. We set an all-time record for West Coast export propane volume in the second quarter and reached a new sustainable run rate of 70 cars per day, working with our partners, AltaGas and Ridley Terminals. The CN Prince Rupert supply chain offers propane producers access to the best netback markets in Asia, and we expect to see continued growth in West Coast propane exports via Prince Rupert through the balance of this year and next as AltaGas continues to set new records and Pembina starts up their new facility early in 2021. Coal unloads at Ridley terminals of 3.2 million tons for the quarter was an all-time record as well. West Coast coal volume was up over 22% in Q2 compared to the previous year. There is a slow sequential recovery in our manifest franchise, and we expect that May was the low watermark for our carload business. Our lumber franchise, in particular, started to recover late in Q2, with commodity pricing improving by around 40% from April to June. We expect to see sequential growth for the balance of the year and now seeing demand at pre-COVID levels. The crude oil price war and demand destruction caused by the pandemic severely impacted our crude, frac sand and fuels business, much more than our general manifest and bulk business. We are seeing demand come back for diesel, ethanol and frac sand, with sequential growth from Q2 into Q3. We continue to invest in lockstep with our customers to facilitate carload growth. This is made possible by our continued ability to price ahead of railway cost inflation across all business units at CN. I'll now turn it over to Keith.

[Keith Donald Reardon, Senior Vice]

Thanks, James. The reach and scale of our network and the variety of products and services that we offer have allowed for our consumer businesses to be resilient in the face of volatile demand. The acquisitions of H&R and TransX have amplified our industry-leading refrigerated services. This allowed us to grow in the consumer and grocery freight waves that we saw in Q2. CN's wholesale partners were also able to drive growth in these segments. Our Q2 overseas business fared well in the face of lower consumer demand and significant transpacific blank sailings by the ocean shipping industry. We see significant volumes for July and August on the West Coast, and Prince Rupert could see a record in July as carriers reinstitute vessel calls previously scheduled for blanking in Q3. We also see additional vessels being scheduled for ad hoc service as containers sitting on the docks in Asia require more capacity. Strong customer relationships and our extensive network reach has helped CN to win a large portion of these reinstituted and ad hoc vessel calls for Q3. Grain records were not only set in James' carload segment. In June, we moved [ 60% ] more containerized grain versus Q2 of last year. The success of the grain container terminal in Regina has been a great addition to the network. Our CSX steel wheel interchanges from the ports of New York, New Jersey and Philadelphia sequentially grew in Q2. In automotive, we are now seeing a welcomed rebound in volumes, with the majority of the plants we service continuing to produce during what would otherwise be the traditional summer shutdown. As JJ said, we are focusing on the long term even as we deliver results during challenging times. We are focusing on costs, rightsizing resources and assets in our multimodal operations. Initiatives are underway in intermodal terminals, our auto ports as well as our subsidiary operations. Our supply chain partners continue to invest in the long-term future of our ecosystem. For example, in Vancouver, DP World's Centerm is bringing on more rail capacity as we speak. And in Halifax, the super Post-Panamax crane was delivered to PSA a few weeks ago. CN's reach and network scale, the diversity of service offerings and the structural and capacity improvements that we and our supply chain partners are implementing will produce mid- to long-term growth from the consumer businesses. I'll now pass on to Ghislain for the financial perspective.

[Ghislain Houle, Executive VP & CFO]

Yes. Thanks, Keith. Overall, the point I'd like to make is that our strong balance sheet and disciplined cost management allowed us to manage well during a challenging time while continuing to invest for the future. Starting on Page 12 of the presentation, I will summarize the key financial highlights of our second quarter performance as we continue to provide essential services to move the North American economy. Revenues for the quarter were down 19% versus last year at just over $3.2 billion. As part of our continued efforts on PSR and asset rationalization, we recorded a noncash charge of $486 million in the quarter, resulting from the decision to market for sale certain noncore lines for ongoing rail operations. Our adjusted operating ratio is 60.4%, up 290 basis points versus last year. Adjusted net income was $908 million or $342 million lower than last year, with adjusted diluted EPS of $1.28, down 26% versus last year. The impact of foreign currency was favorable by $13 million on net income in the quarter or $0.02 of EPS. Turning to Page 13. Let me highlight a few of our key expense categories on a constant currency basis. Labor and fringe benefit expense was 18% lower than last year. Overall head count at the end of the second quarter was down 5,100, a 19% decrease year-over-year. Purchased services and material expense was 11% lower than last year. This was mostly the result of lower outsourced services, trucking and transload, and material expenses. Fuel expense was 49% lower than last year driven by a 39% decrease in price, 20% lower workload and an all-time record fuel efficiency. Now moving to cash on Page 14. Despite a very challenging demand environment, I'm extremely pleased that we generated over $1 billion of free cash flow in the quarter and close to $1.6 billion through the end of June, nearly double the amount generated for the same period last year. We are the best railroad to go through this unprecedented pandemic with the highest investment-grade credit rating in the industry. And in late June, Moody's reaffirmed CN's credit rating of A2 with stable outlook. In fact, our leverage in terms of adjusted debt to adjusted EBITDA at the end of June was lower versus what we reported at the end of Q1. We have plenty of liquidity, and we continue to issue commercial paper at rates that are lower than LIBOR. We opportunistically priced on April 29, a $600 million 30-year bond at a coupon of 2.45%, the lowest rate achieved by a Class 1 railroad and the second lowest ever by any corporate in the U.S. debt capital markets. The company will continue deposit share repurchases in these economic circumstances and will reassess on an ongoing basis. Let me finish by saying that, as you know, we withdrew our guidance for the year on our last earnings call. We are still not providing guidance at this time, which is consistent with most companies in North America. Our scenario analysis for free cash flow that we provided in Q1 still holds. So to sum up, during this quarter, from a financial perspective, we have clearly demonstrated the resiliency of our franchise, delivering value to our long-term shareholders. On this note, back to you, JJ.

[Jean-Jacques Ruest]

Well, thank you, team, and thank you, Ghislain. Let me wrap this up before the Q&A. So as we speak here, our operations are fluid. Volume is sequentially slowly improving, and we are carefully recalling some train crews and about to resume some training for the 2021 demand. As we look ahead, we remain bullish, and we also have a culture of resiliency. This quarter should give you no doubt that we are ready for anything, whether or not the world goes back to normal in 6 months or we have a prolonged pandemic. We have the team to get this done. With that, Patrick will now will take it over to get questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Fadi Chamoun from BMO.

[Fadi Chamoun, MD & Analyst]

Just quickly, if you can give us some insights into the yield and the petroleum, and the materials segment were up 23%. What's kind of behind this? And if you can maybe help us to identify that there were liquidated damages on the crude by rail business and kind of how should we think about the rollout of these liquidated damages as we go into 2021?

[Jean-Jacques Ruest]

Yes. So I think James will put that in more -- in detail. But broadly speaking, I'm not sure exactly what data you're referring, but we are collecting liquidated damage, and it's going into our revenue. So James?

[James Cairns, Senior Vice]

Yes. Yes, Fadi, as you recall, when we got back in the crude by rail segment in 2018, secured long-term contracts with associated liquidated damages that pay out over the life of the contract. So these payments come in, kind of every month, every quarter until these contracts run out, or hopefully, the customer starts shipping at their prescribed contract levels. On the yield mix question, Fadi, what were you driving at there? Maybe provide more detail on that question.

[Fadi Chamoun, MD & Analyst]

I'm just looking at the freight revenue per RTM that you've reported for the petroleum and metals -- minerals that were up pretty significantly on a year-over-year basis. What's kind of behind those increases that you had in the quarter?

[James Cairns, Senior Vice]

Well, we had a significant change of mix on the frac sand and crude oil side. These tend to be very, very long-haul moves, very heavy RTM moves that just are not with us at this time of time because of the -- primarily because of the crude oil price crash associated with the demand destruction and COVID.

[Jean-Jacques Ruest]

Yes. So I mean we're not doing as much crude. We're not doing as much as long-haul crude, not doing as much frac sand. And we're still collecting the take-or-pay portion of some of the contract commitment customers made with us. Hopefully, this helped you with your question, Fadi.

[Fadi Chamoun, MD & Analyst]

Yes.

[Operator]

The next question is from Ravi Shanker from Morgan Stanley.

[Ravi Shanker, Executive Director]

JJ, international intermodal has really been a growth engine for the company for the last several years. Can you help us understand how you're thinking of near-shoring as a potential -- maybe even a risk to the growth of international intermodal over time? How does CN and your port partners kind of continue to add value? And maybe if you can share kind of what kind of discussions you're having with your shipper customers on potentially moving their supply chains to North America?

[Jean-Jacques Ruest]

Okay. So let me start. So we are very bullish on the strength of the consumer in North America, even more so on the consumer living in the U.S. in the big city, because we have a 3 course network, and we can access some highly populated area, and the consumer disposable income is very key to CN's future. And the product that's most suited to exploit the consumer spending and disposable income is intermodal. And the business coming in by the port is definitely one of our mid- and long-term strategy to increase our business in that space in 2 ways. One is to try to earn market share. It is a North American market. The border does not exist when it comes to supply chain. And therefore, we're looking to outperform the economy, which would be outperform the part of the GDP that's related to the consumer, and play a bigger role in the U.S. market and competing hard with the East Coast and West Coast railroad at East Coast and West Coast port. I don't know if you want to add some color to some feedback you're getting from, specifically customers, Keith?

[Keith Donald Reardon, Senior Vice]

Sure. Those that supply their needs, whether it's retail or manufacturing in North America, they've been not only looking to China over the years, but they've also been sourcing products from Southeast Asia. And that is still growing. Those plants are still being built. And what we're seeing is the further south you go, the more economically feasible it is to maybe go through the Suez Canal and then going to the East Coast. So that is one of our strategies, as you know, is the 3 coast access that we have at CN, which is unique to -- than -- any other railroad does not have that. And that is why we have the strategies in place of Halifax, Québec City. That's why we see all of these infrastructure projects on the East Coast for us as risk mitigation, I guess, and as an aggressive standpoint to go attract that business to North America through the gateways that we service on our 3 coasts.

[Jean-Jacques Ruest]

So maybe to wrap this up, Ravi, to answer your question directly, I suppose, regarding near-shoring, I think the reality is there will be in-country sourcing for all the stuff that's deemed to be essential to a country, medical device, eventually vaccine and anything related that's bought by our government who are going to be willing to pay more for those goods that are essential to the current time. But when it comes to consumer product, it's still going to be quality price. And the consumer is going to look at the price tag, number one; their quality, number two; and the country of origin maybe sometime and maybe most of the time, probably not. So I think near-shoring of day-to-day consumer goods, especially the lower value one, that's not going to happen. But if it's a very high-value of goods, something electronic or a computer chip, yes, the labor cost, you could do that. Remember, because the U.S. dollar is very strong, and that's a bit of a challenge to bring in manufacturing back in North America.

[Operator]

The next question is from Cherilyn Radbourne from TD Securities.

[Cherilyn Radbourne, Analyst]

So on your Q1 conference call, we talked about how, at that time, you were recalibrating resources weekly and, in some cases, even twice a week. So I was just curious whether that's still the case or whether at this stage, shippers are able to give you a bit more visibility than that.

[Jean-Jacques Ruest]

Rob is on top of that. Rob?

[Robert E. Reilly]

Yes. We continue to be very tight with James' and Keith's teams in terms of the expectations out there, and that's been part of our success here in the second quarter and how we've been able to quickly rightsize our resources. We are doing it weekly, biweekly in terms of keeping our employees cut in, that are on furlough. And as far as our locomotives, we did that with the purpose. As we laid up locomotives, we laid up the least reliable, and we laid them up in places where we could get to them quickly. So yes, we stick, we remain very tactical throughout this, Cherilyn, and we're ready for whichever way it may go here.

[Jean-Jacques Ruest]

If I may add to what Rob said. In June, we pulled car out of storage for the automotive sector, when we recalled some crews in Michigan. And as we speak in July, the lumber business has picked up, and we're calling back crews for -- in the lumber geographic market and putting cars in service. And the business out of Rupert right now is very strong. That's another area where we are -- we have been recalling some crew selectively. Be very mindful of the cost. But at the same time, we are an enabler of the economy. We're an enabler of the recovery. And when some of these segments start to come back, we need to be there for them, and we are.

[Operator]

The next question is from Ken Hoexter from Bank of America.

[Kenneth Scott Hoexter, Managing Director and Co]

JJ, maybe digging into that, your thoughts on employees. You're down 5,100 year-over-year. Maybe just talk about your -- or Rob, your thoughts on increasing that sequentially. And then cost per employee was flat year-over-year, your thoughts on where there lots of onetime costs that you held back on in the quarter that we should see going forward. Maybe just talk about the pace of return of costs?

[Jean-Jacques Ruest]

Rob?

[Robert E. Reilly]

Yes. So we have -- since our low, we saw the trough in terms of volumes in late May. And that's really where we spiked or saw our most employees on furlough. As we got into the summer season with vacations and also an increase in volume, we selectively called back employees, but it's not on a one-to-one basis as volumes come back, Ken. And we're very methodical about bringing them back, especially as we go into the third quarter. And just as Ghislain talked about, we're still trying to figure out what the future volume is going to be. So we're very, very careful with all of our assets, not just employee resources, but also our locomotives and cars as well.

[Jean-Jacques Ruest]

Yes. And some of these differentials are -- some of them are furloughed. That is that we hope that we will have enough business at some point to call them back. And some are not furloughed, meaning they're permanent. So we don't have over 5,000 people in furlough. It's more like 3,000. 3,000...

[Kenneth Scott Hoexter, Managing Director and Co]

And your thoughts on the cost per?

[Jean-Jacques Ruest]

Can you say that again?

[Kenneth Scott Hoexter, Managing Director and Co]

The cost per -- also the back half, what's just your thoughts on the cost per employee, which was flat. I just want to know if there were one-timers that you pulled out during the quarter that are going to come back as we move through the rest of the year.

[Jean-Jacques Ruest]

Ghislain, do you have any color on that?

[Ghislain Houle, Executive VP & CFO]

Well, the -- there's a bit of incentive compensation that created a benefit in the quarter, Ken. And maybe that's because when you look at employee and when you look at inflation, it's still running around 2% wage inflation. So -- but there is some benefit related to incentive compensation that has provided some benefits in the quarter.

[Operator]

The next question is from Chris Wetherbee from Citi.

[Christian F. Wetherbee, MD & Lead Analyst]

Just kind of curious if you could give a little bit more color on the line sales that you announced. And then maybe as you think forward, if they're noncore, maybe what that might mean from a cost savings perspective. Would this be accretive from an OR standpoint as we go into the back half of the year?

[Jean-Jacques Ruest]

So they are noncore. Ghislain, you want to pick that up? You work on that project pretty much.

[Ghislain Houle, Executive VP & CFO]

Yes. So yes, they are noncore. As you remember, many years ago, we did rationalize our network in Canada, and we've never really done it in the U.S. And these noncore lines came with -- when we bought the WC. They're really noncore lines in Wisconsin. There were noncore lines in Michigan and noncore lines in Ontario. Again, with the cost structure of a smaller operator, not a Class 1 railroad like us, and the ability that sometimes they have to get some funding from the government, I think they will be better suited to run these lines than we are. And as you know, these lines will continue to feed in into our main line and continue to -- and will continue to benefit from the long haul. So in terms of OR benefits and so on and so forth, I would say, Chris, stay tuned. I think that this is a good step. And as you know, this is part of PSR. Part of PSR is you rationalize some of your network, and you have better operators in terms of their cost structure, operate some of the noncore lines than we are, but then still keeping the line haul and business coming to your main line. So we're quite excited about this, and it just shows you and the market that we're pushing on PSR in every front that we can.

[Jean-Jacques Ruest]

Yes. It's on the fundamental of making sure we have a network that has a capital call where it's needed. And in some cases, a short line operator could actually get capital from a state province or government, which we don't have access to. So it's a better model for those noncore line that we're selling.

[Operator]

The next question is from Benoit Poirier from Desjardins Capital.

[Benoit Poirier]

Could you maybe provide some color on the latest question with respect to the potential proceeds for the assets and whether you would use the amount to buy back some shares? Or any thoughts about the proceeds you might use?

[Jean-Jacques Ruest]

Ghislain?

[Ghislain Houle, Executive VP & CFO]

Yes. I mean listen, we're going to try to get as much as we can for these lines. Obviously, we -- we're hiring bankers to help us market them and so on. And so I'm not going to lay out what we expect, because again, we're going to shoot ourselves in the foot when we auction these lines out and what we get for it. But hopefully, we get a good amount. We get what they're worth. And then we'll see what we do with the cash. Again, our use of cash policy doesn't change at CN, Benoit, as you know. First use of cash is towards the business. And then we look at shareholder distribution, first and foremost, dividend. And I'm quite proud of our 7% dividend growth this year. I'm quite proud of the consistency of our dividend, which is 16% CAGR since we privatized. And as you know, we've used share buyback to get to a targeted leverage level because this is the flexible tool. So the cash will come. And when it does, then we'll figure out what we do, but our use of cash strategy remains the same.

[Jean-Jacques Ruest]

That's right. It's investing in the business, dividend and share buyback. Thanks for the question, Benoit.

[Operator]

The next question is from Scott Group from Wolfe Research.

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

So you had a slide with some structural cost changes. Any way to quantify how much that is? And then on the yield side, yields overall were down. Any way to think about some of the moving pieces for the third quarter on either rev per car or rev per RTM?

[Jean-Jacques Ruest]

So maybe Rob can talk -- give some color into where we think with a permanent takedown in our costs. And regarding the RTM question, I think cent per RTM. Maybe Ghislain can add to that. Well, let's start with Rob.

[Robert E. Reilly]

Yes. Thanks. Thanks for the question, Scott. So I mentioned some of that in my opening comments in terms of some of the shops and some of the yards that will remain closed. We don't anticipate those being opened back up. In terms of locomotive fuel efficiency, of course, I quantified that in there in terms of what we -- what we got on the quarter, and we'll continue to see record fuel efficiency here with some of the measures we have in place. So we'll continue to see that going forward. The train design in terms of what we're doing with train length and train weight, that'll continue. We'll continue to see those improvements year-over-year into the quarter. So those are some of the structural changes we're looking at, and we see that continuing here for the near future.

[Jean-Jacques Ruest]

And Ghislain?

[Ghislain Houle, Executive VP & CFO]

Yes. Yes. I think, Scott, in terms of cent per RTM, I think we're not going to provide guidance on cent per RTM on a quarterly basis. But all I can tell you, we don't necessarily manage the business on cent per RTM. The mix that we have is the mix that we deal with. I think what we manage is price, and we're quite good. And Keith and James and their teams have done quite a good job actually to manage price. I mean the price that we're getting is still above rail inflation. It's solid pricing. We continue that way. And that's -- so you can expect that to continue in the third quarter and the fourth quarter and going forward.

[Jean-Jacques Ruest]

That's right. So some of the takeout will be permanent. And definitely, especially in the month of June, our mix change because the automotive business, as you know, Scott, which is very lightweight and high revenue, that business was, almost disappeared. So they have big impact in the second quarter in our mix, what's happening in the automotive business, namely, as an example.

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

JJ, is your point that -- okay...

[Jean-Jacques Ruest]

Go ahead.

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

Is your point on the auto piece that the yield should start to get better as auto's coming back?

[Jean-Jacques Ruest]

No. The point is more is that, I mean, I think in May, we were down 90% in automotive. So if you look at the impact on the CN total book of business, we had an impact on the distortion, for example, between gross ton mile and revenue ton mile and what it does to our so-called mix of business. But what's important for us is for each carload to make money. And we measure that through revenue to cost ratio, the RCR, which is the reverse of an operating ratio. And when it comes to pricing, we don't look, as you know, on cent per RTM because when you look at cent per RTM, you're looking at noise, what is exchange, mix, length of haul, you name it. I provide the car -- the customer provides the car. What's really important when it comes to price is same-store price, which is the same thing as a retailer does. The sales this year compared to the same sales last year, what's my spread? And anything that doesn't -- is not a same-store sales doesn't go in the calculation of same-store price, because now it's a different sales. You don't have a comparable. And a lot of these different sales have a huge impact on the -- on what you call the cent per RTM. So that's why we're not focused on cent per RTM. We're focused on same-store sales. And we're focused on the revenue to cost ratio, which is a reverse of operating ratio, but per unit -- per customer.

[Operator]

The next question is from Konark Gupta from Scotiabank.

[Konark Gupta, Analyst]

My question is just going back to your previous target for operating ratio that you discussed at the Investor Day before. How do you think about the operating leverage and capital intensity heading into 2021 as volumes recover further and you bring back more employees and pull out some fleet from the storage?

[Jean-Jacques Ruest]

Well, right now -- maybe I can start, and Rob can add in. Right now, we do have capacity on our network, capacity that we built the last 2 years, capacity that we could have used this year, if the economy -- the pandemic did not hit us. So obviously, we have capacity to grow. We also have qualified people, whether to maintain equipment, fix locomotive or run train, and these people are in furlough. And I feel for them, and we hope the business come back to a point where we can recall many of them, eventually, hopefully, most of them by 2021. As we get much more efficient, and Rob talked about train length and train weight, the number of people per ton mile, if you wish, goes down, that's a significant savings. The overall philosophy and operating ratio is not to be the lowest, not to be the worse. We want to have an operating ratio, which is very competitive, but at the same time allows us to be able to grow organically with our customers as customers have business to offer to us. I know Rob, you want to maybe share your philosophy in operating ratio?

[Robert E. Reilly]

Yes. So in terms of operating leverage going forward here into the third quarter, I mentioned some of the things we're doing, and we'll continue to do. We are not bringing back resources on a one-to-one basis, and that will continue to provide benefits for us. When you go through a quarter like we did, we're able to test and really press the edges in terms of what we're capable of, and we found some of these opportunities through that process. Again, I talked about fuel efficiency, train length. These are things that -- when you talk about setting records at CN, that's saying something, right? This is a storied -- long storied history of operational excellence. And when you start to set records, and we set a number of them here in the second quarter, that really speaks to the team. That speaks to the operating model. And we've really done a nice job, and we continue to leverage that here going into the third quarter.

[Jean-Jacques Ruest]

Yes. So competitive operating ratio but also focused on business growth and focused also on inorganic growth, things beyond just rail, things that would be accretive to rail. That's why we have made some acquisition and joint venture. Thank you.

[Operator]

The next question is from Brian Ossenbeck from JPMorgan.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

A question for Rob on the technology on the operating side. Can you give us an update on the inspection cars? It looks like you're moving to phase 2 under the FRA next month with some reductions on visual inspections. You got Transport Canada on board. It looks like growing up through some subdivisions. So maybe you can just give us an update on how this is progressing relative to expectations? And at what point do you think you'll be able to quantify some of the benefits, either from an accident reduction perspective, workforce perspective or even capacity additions in the future?

[Jean-Jacques Ruest]

Very timely question. Rob, do you want to...

[Robert E. Reilly]

Yes, I'd love to take that one. Thank you for the question. So we continue to make progress, just as you talked about. In the U.S., of course, we have a pilot program going on with the FRA. We are transitioning to phase, 2 as you speak -- as we speak here, as we go into August. What that will mean is 50% less manual inspections. And what that means for us is that all around our autonomous track inspection program, it's really about having a safer, more reliable network. It does reduce costs, and it unlocks capacity on our network by embedding these in revenue service trains versus a human being on the track. So in terms of quantifying it, we've seen our train accident ratio down 22% year-over-year. And certainly, some of that can be traced back to that. We've tested the line in the U.S. 17x more than traditional testing right now. So in terms of strengthening the line, in terms of turning our employees into fixers versus finders, all of that is coming through. And then in Canada, we're starting to see the results of our work with Transport Canada. So we do have an exemption there to begin testing that, and we'll continue to follow the same pattern that we had in the U.S. Again, ultimately, this makes us safer, more reliable network. We do see costs fall out just from the safety aspects of it, and it does unlock capacity as we go on.

[Jean-Jacques Ruest]

Huge potential and you're going to hear from us in the months to come that we're adding resource. We want to help out Rob with top-tier talent as to how we implement and roll out technology for the rail operations. So more to come on that. Thank you, Brian.

[Operator]

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

[Walter Noel Spracklin, MD & Analyst]

So just on incremental costs here, you guys did a pretty good job of keeping costs contained in the quarter. So the OR degradation was less than 300 basis points. Just curious, obviously, your cost efforts didn't -- it obviously probably improved through the course of the quarter. And so as you exited the quarter, would it be safe to say that your ability to limit OR impact from continued volume declines here in the third quarter, potentially the fourth, will be moderated such that we don't see a degradation in the operating ratio? Are we -- or are they coming out in a way that it's still likely to see some degree of OR degradation as we go through the quarter here, excluding fourth quarter with the strike last year, just focusing here on the third?

[Jean-Jacques Ruest]

So Ghislain, you want to look in your crystal ball and answer that one?

[Ghislain Houle, Executive VP & CFO]

Yes, I can look at my crystal ball, Walter. First of all, the -- I mean at the end of the day, what we do on cost and what the team did, to your point on the second quarter, is quite remarkable. And we've got to remember that we have some headwinds that are quite fixed that we have to deal with, and I've mentioned that at the beginning of the year. We have about $130 million of depreciation that we have to deal with. And we have another -- used to be $70 million on pension. Now with betterment in pensionable payroll, it's down to $50 million. But it's still $50 million. So we have $180 million of headwind. And if you slide that every quarter, this is cost that we have to deal with. So I think that you -- the proof will be in the pudding in Q3. I mean as you know, and JJ made the point, we've never been enamored with the OR at CN. I think that we'd rather be a $20 billion at 60% OR than $15 billion at 59%. Just do the math. So I think that at the end of the day, we will continue to manage costs, and we manage both the short term and the long term. So we do make decisions on the -- to make sure that we know that our report card's coming out every 3 months. And the report card will come out in October, and you guys will look at the OR and all of the metrics. But we're making decisions as well to make sure that we're well prepared for the winter coming at us. And whether we like it or not, we have a winter in Canada and for 2021. So yes, we -- so stay tuned. I didn't really answer your question on how the OR will look like because I'm not. But at the end of the day, we are very pleased with our OR in Q2, and I'm telling you to stay tuned for Q3.

[Jean-Jacques Ruest]

Yes, and just on the headwind from depreciation. It's a headwind short term because of the capital program we did the last 2 years. But at the same time, it says that we're ready to handle much more business. So that headwind eventually become how we're going to be able to grow with the economy as when the economy grows or as we create product, it can gain market share. So that's a whole card for 2021. And James has this program that we announced today on the grain. So these railcars would be built between now -- most of them between now and Christmas and delivered to CN the first 15 days of January. So they'll be very helpful to contribute to the revenue of the next winter. Thank you, Walter.

[Operator]

The next question is from Brandon Oglenski from Barclays.

[Brandon Robert Oglenski, VP & Senior Equity Analyst]

Keith, you sounded -- I should phrase it, relatively bullish about intermodal prospects looking into, I guess, "peak season." Can you talk about some of those opportunities you mentioned in your prepared remarks, I think about carriers adding back rotations and that you're winning some of that incremental business?

[Keith Donald Reardon, Senior Vice]

Sure.

[Jean-Jacques Ruest]

Keith? And as I said earlier, we believe in the strength of the consumer in North America. And the market where that shows the most, #1, is intermodal. You see that a bit in lumber and automotive, but where there is something to really exploit, whether the product is really tailor-made to drive the economy, consumer economy, that's intermodal. Keith?

[Keith Donald Reardon, Senior Vice]

Sure. It wasn't fun going through the beginning of the second quarter and hearing about blank sailings and also the challenges that our customers were having and the fact that they thought that was going to be going into the third quarter as well. So it's great that we've seen a lot of the blanks that they had for Q3. They've reinstituted those calls. And right now, on the West Coast, we have much less noise around the blank sailings than we did during Q2. In fact, they're adding 11 extra loaders in Q3 on the West Coast, 9 on the West Coast and 2 on the East Coast. That's -- those types of things and the discussions that we have with our customers and the fact that our boots-on-the-ground folks in Asia are telling us the strength of what's going on with orders from North America, those give us the confidence that I can sit and talk to Rob and ask him -- have that discussion about being prepared. As I said, Rupert's probably going to have a record in July, and we see the same thing for August as far as the volume's solid on the West Coast.

[Jean-Jacques Ruest]

Ghislain, maybe you want to add something, something about TransX and a year after the acquisition, you've been able to accomplish with TransX.

[Ghislain Houle, Executive VP & CFO]

Yes. Sure. That's another -- sure, JJ. That's another piece of business that we're quite bullish. And I'm happy to report that after a year -- and I think Keith and the team is doing and did an outstanding job integrating TransX with our overall CN family. As you know, Brandon, big projects or investments, we typically have internal auditor going in and auditing the business case and auditing the return and reporting directly to the Board. So they're not all done yet, but close. And I'm happy to report that the return of the investments, both in TransX and H&R, will deliver higher than our typical ROI threshold that we use at CN of 12%. So this is a good accretive acquisition, and we're quite pleased. And as I said before, Keith and the team is doing a hell of a job managing this. And frankly, their OR, as we speak, is now the best-in-class for these types of companies. Like if you look at J.B. Hunt or some of the others that are best-in-class, TransX is right there with them.

[Jean-Jacques Ruest]

The mandate for TransX is to compete with the best of the best, like J.B. Hunt in the OR. They're not a trucking firm, they're an intermodal firm. And they're increasing the amount of rail they do since last year. Thank you, Brandon.

[Operator]

The next question is from David Vernon from Bernstein.

[David Scott Vernon, Senior Analyst]

Rob, I wanted to focus in on the train length and train weight gains that you had in the second quarter. Could you talk to whether some changes in mix or maybe just lower volume on the network allows you to kind of extend that? And then what the outlook should be kind of from here? Should we be expecting in this 9,000, 9,500 feet length range for the rest of the year, even through the winter months? Or should we be expecting this to kind of come off as volume comes back?

[Jean-Jacques Ruest]

Rob?

[Robert E. Reilly]

Yes. Winter, all bets are off. We'll see what winter brings, and then we can have that discussion at that point. As far as the changes we've made, we do view those as structural, and mix or no mix, what we've done is really take what has been delivered to us and make the best out of it. So we're looking at a significant volume drop that we saw this quarter, and we took action. Part of that was increasing train size and reducing crew starts. And a lot of things come with that. When you do that, bigger trains lead to greater train fuel efficiency, leads to better utilization of your locomotives. We saw train velocity improve all during this period as well, 5% year-over-year. So we plan on keeping trains big and looking for more opportunities that are out there.

[David Scott Vernon, Senior Analyst]

The inclusion of -- no physical constraints that may come back into the network as volume kind of recovers?

[Robert E. Reilly]

We continue to invest in capacity investments, particularly in Western Canada. I think you'll see us continue to do that. That will allow us to continue to maximize our train size. So right now, our plans are to continue to keep trains big.

[Jean-Jacques Ruest]

That's right. We have construction activities, right, as we speak here around the Port of Vancouver, Port of Rupert as well as the north line Québec to Rupert where we're adding siding during the summer. Thank you for your question.

[Operator]

The next question is from Seldon Clarke from Deutsche Bank.

[Seldon T. Clarke, Associate Analyst]

As it relates to the 1,500-grain hoppers that you plan on purchasing in 2021, is there any way to put some numbers around that opportunity next year as that relates to either volumes or productivity? And how that differs from some of the previous long-term guidance you've given around grain? And does this maintain CapEx in your more normalized range for 2021? Or how should we think about it from that perspective?

[Jean-Jacques Ruest]

So maybe I'll take the first part, and Ghislain can talk about the CapEx of 2021 without getting too deep in the detail. So definitely, these railcars are more productive. Therefore, you can move -- as you know, the Canadian grain cap, you get paid by the ton mile. So the more you can put in a car, you get more revenue per car. So obviously, the yield of a car, which has a higher payload, or the profit yield of a train that has a higher payload because each car is heavier and each car's a little shorter, you make the business more profitable. That's why the business case is compelling, to really invest long term in the grain business. So it is profitable. It is -- it has a good return. And the new formula of the grain cap says there is a compelling case to renew your fleet. But as long as that fleet has a higher payload, higher payload per train, higher payload per car. CN is a little more north than my competitor in terms of where we are in the Canadian prairies, and a little more north in these little more canola. Canola is a lighter crop. And the impact on the revenue per car of a lighter crop of this different car is actually beneficial to us. We have a -- we even have a better return than if we were moving a lot of wheat, for example. In terms of revenue impact, without getting too deep in the detail, you look at our book of business on Canadian grain, how we do usually. And obviously, we'd like to do more of that. And I think, James, there was a decision issued by the Canadian government on the grain cap, and it's sort of favorable to the CN as it -- this year, in term of the MRE.

[James Cairns, Senior Vice]

Yes. I think we had an outweighted benefit on the MRE compared to the other railway in Canada by about 5%. So we're very happy with the outcome of the MRE for next crop.

[Jean-Jacques Ruest]

Yes. As of August 1, the MRE is revised, and it turned out that CN had a 5% favorable spread on that. Ghislain, regarding the CapEx for next year?

[Ghislain Houle, Executive VP & CFO]

Yes. Maybe -- yes, CapEx for next year, listen, I think, Seldon, we're -- as I said in my opening remarks, I mean, we're not providing guidance, still. I think we're going to see -- we're going to look to see how the recovery and how the recovery sticks. It still -- I think we see signs of it. And -- but at this point, it's a little bit choppy. So I would say, stay tuned on that one. I mean we'll see in Q3 and then early Q4. We'll go through all of our bottom-up, top-down exercise. And obviously, we need to go to our Board and make sure that they approve our capital envelope. But what I'm going to say to you is the big 2 years of our CapEx investments of 25% of revenue is behind us. And I think that going forward, it'll be lower than that. And as you know, our historical rate has always been in the 20% range, but we'll see. I mean if we don't need to invest, we won't. And to JJ's point, right now, with volumes that we have and the 2 years of significant investments we've made, we've got plenty of capacity, and we're still now putting some this year on very targeted areas in Rupert and very targeted areas in Vancouver. And we have -- we're very pleased to have the help in -- of the government or the Port of Vancouver, same thing in Rupert with the government. So -- and those are dealing with specific pinch points that we have. And again, we think of the long term. And those pinch points has been with us for a long time. We're happy that now we got the attention of people to help us fund for some of these things. And that will create value to us for the next 5, 10, 15 years.

[Jean-Jacques Ruest]

Yes. We love to find projects like this project at a pretty good return. And we love to find projects where the capital -- this capital for 2021, that slides on $150 million is already approved by the Board, so we can place the order here in the coming weeks. And what's important is the asset will come to us at the time we need it, first week of January. So it will be accretive to the next winter movement of grain, which is typically peak time and would also be accretive to the fall of 2021, which is also a peak time. So it's capital that will go to work right in the first 2 weeks of the year.

[Robert E. Reilly]

JJ, I might just add there. From an operational efficiency standpoint, we'll be able to move 8% more cars on the same length train that we do now with these new cars and move an additional 20% to 30% more grain, depending on the commodity per train. So we get immediate benefits from it.

[Jean-Jacques Ruest]

It creates corridor capacity right away. Thank you for your questions, Seldon.

[Operator]

The next question is from Jon Chappell from Evercore ISI.

[Jonathan B. Chappell, Senior Managing Director]

JJ, you faced 3 pretty unique challenges in the last 3 quarters with the strike, the blockades and the really steep recession, and you've managed it incredibly well. As you look through the headwinds, maybe finally becoming tailwinds for the first time in the year, how do you feel about the capacity service, customer positioning and wins to return to growth and really to grow the bottom line at a greater pace than even the top line when the carloads inflect?

[Jean-Jacques Ruest]

Yes. Well, definitely, it has been special time between our labor disruption in November, the rail blockade where we felt we weren't getting a whole lot of support, even though we had injunction everywhere and then right away, having the pandemic. I think what it shows is CN resiliency is very strong. I mean the management team that we have, down to people who run train, people who run trains during the pandemic, people who are -- a lot of people have the opportunity to stay home because of a -- we're safer at home. We have to work very hard to make the working conditions such that everybody would keep coming to work. And by the way, even though our headquarter is somewhat empty, a lot of us kept coming in. On average, I think we had 200 people reporting to this building here every day from day 1, and they still report to work every day since the beginning of this pandemic. So what it does, it creates confidence. I think it creates confidence that we can do with whatever comes at us, whether we have a second wave of pandemic, which is possible, and we're ready and prepared for that, or we have a strong recovery, which we're already and prepared for and hoping for. That would be a good thing. But we don't plan for the best. We plan for the worst, but then are ready to be exploiting whatever might come at us. CN is focused on growth. So we are always thinking in that line. So as much as we work on our costs, because being a cost leader is quite important. We're also working on our pipeline of inorganic growth. And you heard that we have a new Chief Strategy Officer at CN. And Maureen, one of our Board members, is heading a new Board committee on long-term strategy. And these 2 things are really to address some of the fundamental challenge there is in the railroad is, yes, from time to time, we'll have disruption, pandemic, rail strike or blockade. But the real fundamental issue is how do we grow long term as an industry beyond coal, beyond the cyclicality of crude. And some of that has to come from inorganic growth, has to come from initiatives that we need to initiate as opposed to wait from customers to bring business to us. So I think putting all that in is kind of where we're at right now is we have our eyes on the short term, but we also have a lot of specific cap rate on long term. And I did mention earlier that Rob should get help over the next few months here in terms of other talent joining CN that will help us really beef up the technology side. Thank you.

[Operator]

The next question is from Jason Seidl from Cowen.

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

I think you guys before talked about some of the shops and locations that you've idled due to the slowdown from COVID. Can you talk about the outlook on when you think you're going to be reopening them as business comes back and how we should think about those costs as they layer through the quarters?

[Jean-Jacques Ruest]

So Rob has had merchandise yard shops. Rob, do you want to take that?

[Robert E. Reilly]

Yes, sure will. I think I mentioned it there in the beginning. That's part of our structural changes. So we don't anticipate opening those up again. If -- and certainly won't be anytime soon. It will take something more than what going on right now. What we...

[Jean-Jacques Ruest]

There was some yards, right?

[Robert E. Reilly]

Absolutely. Yes. We shut 4 yards and 4 or 5 shops down. So what we've seen with the rationalization of our locomotive footprint, it actually gets locomotives in the right place to begin with, gets it to where our materials and online inventory is, actually reduces materials in the long run by having it there. And we're seeing it in terms of reliability and availability, in terms of getting the locomotives in the right shop with the right people to work on them and get them back in service. So we see it as structural. I appreciate the question, Jason.

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

Yes. So these were -- so okay. So those were closed because I think you used the words closed and idled, and I didn't know if they were -- some could be reopened. So these are closed permanently, then.

[Robert E. Reilly]

Yes. That's permanent.

[Jean-Jacques Ruest]

And along those lines, you could see the same logic as to why we are doing -- putting for sale some short line. Is -- That's also a structural change along the line of idling or closing some merchandise yard and/or shop, is that when we look at a U.S. network, we decided that some part of the network is better in the hand of others. And that's also part of looking out the long term for PSR, that's part of the decision why we did that at this time back in the -- this quarter. Thank you, Jason.

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

Do you think those sales will close this year?

[Jean-Jacques Ruest]

Well, I think, we -- Ghislain, you want to...

[Ghislain Houle, Executive VP & CFO]

Well, I mean, we'll do our best. We're hoping, obviously. But as I said, we've hired bankers to help us package this thing. And we will be very disciplined and auction, go out and auction out and so on. And we'll see how it's going to go. So if we can close this year, trust me, we will. But we want to be disciplined, and we want to be -- we want to have the best value for them because, again, remember that this business will continue to be fed on our main line. So we need to have the best operator to come in, because they will continue to manage these noncore lines, and that business will come to us on our main line. So I think we're quite pleased about this, and we'll see.

[Jean-Jacques Ruest]

Yes. I think realistically, 6 months might be a little short time. 6 to 12 months, these things should come together.

[Ghislain Houle, Executive VP & CFO]

But the key is to be disciplined, and the key is to have a good auction process. And the key is to maximize the value and get the right operator. That's the key.

[Operator]

The next question is from Allison Landry from Crédit Suisse.

[Allison M. Landry, Director]

So the dwell numbers have deteriorated pretty meaningfully year-over-year and also versus 2018 in the last several weeks and velocity and cars align on the wrong direction. Presumably, this is at least partly driven by the uptick in volumes. But is there something from a mix standpoint or you're focused on train length and weight or the selective yard closures that are -- that are driving this deterioration? And how do we reconcile these weekly public metrics with the structural improvement that you made in the quarter? And if you could just sort of speak to where you are from a network fluidity standpoint?

[Jean-Jacques Ruest]

Yes. So Rob will pick it up. What we did on dwell was a conscious decision as it relates to how we optimize costs. Rob?

[Robert E. Reilly]

Yes. Thanks for the question, Allison. I'd love to answer that one. And really, from my perspective, it's not a concern. In fact, it was part of our planned response to the significant volume drops we saw here in the quarter. When you look at the increase in dwell, we have on a very low base to begin with. So you got to take that into consideration. We're talking about adding an hour or so to the car cycle that's measured in days, and sometimes weeks, when it goes off-line to other railroads. And then you look at what we were able to do with train length and train weight, all-time records. Bigger trains drive greater fuel efficiency and utilization of our locomotives. And as a result, we were able to reduce crew starts 21% greater than volume reduction. Our active online inventory was reduced as much as 20% in the quarter. So increased dwell did not drive additional cars online. Train velocity improved 5%. It's a big part of a car's cycle, so we made up time there. And then you look at our employee productivity, it eclipsed all-time highs from a service standpoint, 3 straight months of delivering all-time grain to the ports. And then our domestic intermodal service really has never run better. So we made the right calls in the quarter, and we'll continue to focus in on what's important. Thanks for the question.

[Operator]

The next question is from Tom Wadewitz from UBS.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

I wanted -- you mean you talked about, I think, some optimism on intermodal improving the international intermodal and some constructive commentary on the sailings that you see happening in third quarter. Obviously, you have quite a few longer-term drivers of growth. I was just wondering if you could give some broad comments on how you would think about volumes in third quarter or fourth quarter. Can you -- should we think about volumes down mid-single in third? And is there any chance you could -- a path that you could get to volume growth in fourth quarter? Obviously, I recognize there's not a lot of visibility, but just want to see if you could offer some broader thoughts on how volumes might play out in the second half.

[Jean-Jacques Ruest]

Yes. Maybe I can start, and Keith can chime in. So import is strong. Export is not as strong. Comment made earlier by Keith that we have more loaders. Loader is just basically the reverse of a blank. When shipping line add loaders, I mean, they're actually adding vessels in their schedule because of the strong import. But the export is not as strong right now from North America. Do you want to look out in time, see the next few months, what things look like, Keith?

[Keith Donald Reardon, Senior Vice]

Yes. As JJ said, the addition of these extra loaders is kind of the reverse of the blanks. And that's a positive thing for us. And then talking to several of our customers, whether they're North American-based or overseas, they've done a really good job managing their capacity, and they've done a really good job of creating a market where they've been able to keep the rates in good stead. So there is pent-up demand right now. There -- we are kind of in a peak season, I would say, right now. And if the discretionary income of the people that are doing all this buying, whether it's at the home -- the DIY folks that are putting in the decks or painting, if that keeps up and if the strong business that we've been handling like the refrigerated goods that are happening now, whether we're in a pandemic or not, that -- I think that's going to continue to grow with what we brought on with TransX and H&R and our other wholesale partners that have -- keeping that business strong. I don't think that we're going to see -- unless there's another wave of the pandemic, I think that our -- the contacts that I talked to, they're seeing it stay strong into at least in the beginning of the fourth quarter. We'll see how it goes, but that's kind of what we're planning for right now with them as they give us a heads up over the next 2 to 3 months.

[Jean-Jacques Ruest]

There is a surge from the retailer, which is reflecting back in the shipping line and back into the port activities into a different consumption, which is I would call it the stay-at-home consumption. People are building a deck. They're renovating their house. They're painting. They're spending money in their backyard. They're putting in a pool. Where -- I mean these are the things that there's a high amount of disposable income that goes into it. So some supply chain are out of whack. Some supply chain and warehouse is full, because people don't want to buy those stuff. And some other warehouse that relate to what I just said, sort of the stay-at-home expense around the house and on the backyard, I mean, these supply chain are empty and you try to get a barbecue, you may not quite get the kind that you're looking for. You're just going to have to buy whatever is left at Home Depot. So we see some of that, too, where some container needs to move fast because of consumers spending his money differently this summer. Thanks for the question.

[Operator]

I would like to turn the meeting back over to Mr. Ruest.

[Jean-Jacques Ruest]

Well, thank you, operator. Thank you for joining us today. Maybe I can just use some closing comments. We are very proud of our end-of-quarter results here. The team has been able to do the best of what came at us very quickly. We kept everybody safe. We unfortunately had to do quite a few layoffs. Good news is, we started to recall some people back to work. We also start to get some asset back in the business. You see from our cars at RTM every week that there is some sequential growth. We would love to see more of it, but we'll track the economy. And in the meantime, Rob is working very hard on this cost, and we're very lucky, staying focused on the long-term business. I mentioned the work that we do on strategy and the work that we're doing with things related to inorganic growth, which have nothing to do with most of what we talked about here today. So stay tuned. CN is ready for anything, whether we have a slow recovery or second wave of pandemic or a better business outlook sometime in October, November. So we'll see. Thank you for joining us today. This is the end of the call. Thank you, Patrick.

[Operator]

You're welcome. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.