Welcome to the CN Q1 2021 Financial and Operating Results Conference Call. I would now like to turn the meeting over to Paul Butcher, the Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.
Well, thank you, Cristina. Good afternoon, everyone, and thank you for joining us for CN's Q1 2021 financial results conference 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, Rob Reilly, our Executive Vice President and Chief Operating Officer, and Sean Finn, our Executive Vice President, Corporate Services and Chief Legal Officer. I do want to remind you to please limit yourselves to one question so that everyone has the opportunity to participate in the Q&A. 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. J.J. Ruest.
Thank you, Paul, and good afternoon to everyone. I hope you all had a safe, healthy, and constructive start to 2021. Here at CN, we're off to a good, strong running start. The underlying performance of CN has been strong, and this is thanks to our dedicated colleagues. Our railroaders delivered despite severe winter operating conditions, unprecedented demand in a number of markets like potash and grain, and ongoing challenges in the pandemic. As you can see from slide five, CN is on track to become the premier railway of the 21st century. We are focused on our role as an engine of the North American economic growth and prosperity, as well as a supply chain and environmental leader. We pioneer and we're the first to implement Precision Scheduled Railroading across our network, and we are a clear industry leader in ESG.
Our strong balance sheet is a testament to our traditional excellence. We continue to prudently invest in the business and our strategy as we grow and expand our reach. CN has a long-standing successful track record of strategic and accretive acquisition throughout North America, which has resulted in successful integration of our current rail network. In line with our existing strategy, CN made a superior proposal to acquire KCS. This is the right next step for both CN and KCS toward becoming the premier railway of the 21st century. Turning to slide six, we are confident that together with KCS experienced and very talented team, we will be able to continue that success in a combination of CN and KCS to the benefit of both companies. Specifically, this offer will deliver superior value to KCS shareholders.
CN's proposal represents a 21% premium to the CP proposal and more than double the amount of cash per share, resulting in not just greater value, but also greater certainty of the value for KCS shareholders. The combination will also significantly enhance customers' choice and competition. In particular, it will create a new express route that connects the U.S., Mexico, and Canada with end-to-end seamless, single-owner, single-operator service. It would connect vibrant ports from all three coasts to more inland markets and cities. It would connect CN and KCS buyers and sellers to more destinations. It will also preserve access to all existing interchange options to enhance route choice and ensure robust competition. We are also firmly committed to maintaining open gateways to competitors' networks.
We believe this combination will enable better solution to our customers, speed of movement of goods from country to country, coast to coast, enhance competition, create jobs up and down the railroad, and prevent millions of tons of greenhouse gas from entering the atmosphere by converting truck traffic to rail supply chain. As an update on where our proposal currently stand, on April 21st, we submitted a pre-filing notification to the STB of our intent to file an application seeking authority to combine with KCS should the KCS Board of Director accept our superior proposal. We are proposing to use an identical voting trust structure that CP has proposed. We are confident that the STB will not subject our proposal to any different standard in approving the voting trust than those that would be applicable to CP. We believe that both voting trusts are equally likely to be approved.
If our voting trust is approved and a combination with KCS is consummated, KCS shareholders will receive the value of their consideration being offered when the transaction close in trust, which we anticipate could be as soon as the H2 of 2021. We are fully committed to this transaction and confident in our ability to achieve all necessary regulatory approval to close into a voting trust and then ultimately receive approval to combine with KCS. On page seven, I would like to provide a brief update on our strong progress as we have made in only one week since announcing our proposed combination. We were very pleased to learn on Saturday that the board of KCS determined that CN's offer is reasonably expected to lead to a company superior proposal, and we were granted permission to conduct our confirmatory due diligence.
We look forward to working towards finalizing a definitive agreement merger to combine our two great railroads. I connected with Pat, the CEO of KCS, over the weekend and reiterated CN's strong enthusiasm, readiness, and most importantly, our deep commitment to begin collaboration with the KCS team toward a successful combination. We filed earlier today an application with the STB for the approval of our voting trust and named David Starling as the trustee. A great importance of note, in less than a week of making a proposal to combine with KCS, we have received an overwhelming amount of support from more than 500 freight customers, port ecosystem partners, supplier, government official, and other stakeholders. They have voiced their support for a combined CN KCS, which will help them compete in their market and better serve their needs by offering greater choice and greater efficiencies.
We have also spoken to our shareholders, and many of you as well, and appreciate your strong support in this combination. I, myself, on behalf of the entire CN team, we are fully committed to this transaction and we're very confident in our ability to achieve all the necessary regulatory approval to close into a voting trust and then ultimately receive approval to combine with KCS. Together, we will create the premier North American railway for the 21st centuries. Moving on page eight. I am very proud of the CN underlying performance in Q1. This quarter, we realized solid results and we continue to work on our yield of our new business mix. During the quarter, we continued to deliver industry-leading volume growth, where RTM up 5%, while revenue were flat versus last year, mainly due to adverse fuel lag and exchange rate. Our yield strategy is working.
Our same-store pricing was 4.2% in Q1. Our network is fluid and we recovered very well from the polar vortex of February. Our efforts are reflected in our ability to capitalize on consumer-driven trends and growth of our intermodal business, which was up 19% for the quarter, with CN significantly outpacing the rest of the industry, as well as our strong financial performance and gain in safety, train length, car velocity, labor productivities, fuel efficiencies, and other key measures of operational performance. We are confident in our business and committed to our long-term strategy. With that, I will turn it to Rob. Rob?
All right. Thank you, J.J., and thank you to the talented employees of CN who helped deliver a very solid quarter. As you'll see on slide 10, our team moved an all-time Q1 record for volume, with GTMs up 6% year-over-year, despite the impact of the polar vortex that J.J. just spoke about in February. While volume was up, crew starts were up only 1%, our active online inventory of rail cars was down 3%, and train length improved 5%. The railroad continues to run very well and is fluid, with car velocity also improved 5%. In addition, our labor productivity improved 9%. All in all, just a solid quarter of winter operation. As detailed on slide 11, we are the North American rail leader in fuel efficiency. We improved our fuel efficiency 4% versus the same time last year to an all-time Q1 record.
These efforts allowed us to save CAD 12 million from our initiatives alone and save the planet over 60,000 tons of CO2 emissions during the quarter. From a safety perspective, our personal injury rate and accident rate were improved an impressive 27% and 36% respectively, living up to our core values. From a technology standpoint, our FRA-approved autonomous track inspection cars provide safety and cost improvements to our railroad. As we prepare to enter into phase III of our program, we will be able to enhance overall safety while reducing manual inspections by 75%. In Q1 alone, our accident cost decreased over CAD 30 million versus Q1 last year due to this technology and a dense ecosystem of portal and wayside detectors on our network. These cars are now covering 100% of our core mainline and 95% of where gross ton miles move.
As I previously mentioned, we experienced a couple week of February extreme cold temperatures, with temperatures dipping below -40 degrees on large parts of our network. During this time, we were able to deploy our air car fleet, which allowed us to use multiple air sources during this challenging time. With this technology, we moved an additional 232,000 feet of traffic in February that would have otherwise been delayed or lost due to the cold. This helped us move 5% more volume during the quarter while holding crew starts flat. Along with that, we were able to continue to deliver for our customers. CN has now set 13 consecutive all-time monthly records for Canadian grain, keeping the streak intact throughout the winter months.
We continue deploying technology to make our railroad safer, more efficient, and more reliable. We're starting to see additional benefits from key projects, including track and train inspections. Moving to slide 12. We are optimistic on the volumes as we look out over the remainder of the year. To that end, our board approved an additional 75 locomotives over the next 12- 24 months to support the projected growth and economic improvement. Our business is doing very well, as evidenced by our strong performance this quarter. Our capital investments over the last three years continue to provide safe and sustainable transportation options for our customers as the global and North American economies remain on a steady path to recovery. As you can see on slide 13, our strong operational performance, coupled with strong demand, led to record Q1 Canadian grain shipments.
We beat last year's revenue record by over 20%, setting a new all-time high water mark for sustainable grain supply chain volume. In total, as I said, but I'll say it again, we have now set records for grain tonnage now for 13 consecutive months, delivering for the Canadian farmers. As J.J. highlighted a moment ago, our intermodal performance has also been very strong, increasing by 19%, which far outpaced industry growth. Turning to page 14. We are confident in our ability to continue delivering strong results as the economy rebounds. Our network is fluid and we've recovered well from the extreme temps in February. We look forward to realizing the pipeline of growth opportunities in front of us. This includes continuing to grow our position as a clear industry leader in intermodal.
We continue to maintain a very disciplined approach to yield management, and the strategy's working, including same-store pricing of 4.2% in Q1. We are also focused on diligently managing our CapEx to drive productivity, best-in-class capacity, and resiliency. As we look towards the future, we expect to maintain our leadership in digital scheduled railroading, building on our history as a PSR pioneer. This will continue to be a competitive advantage as we execute on our strategy. As JJ already mentioned, ESG will continue to be a priority. We've recently undertaken major new ESG initiatives focused on environmental protection, active social responsibility, stakeholder engagement, and best-in-class governance. On that point, CN's board of directors announced in Q1 that at least 50% of independent directors come from diverse groups, including gender parity, the establishment of an indigenous advisory council, and an annual advisory vote on CN's Climate Change Action Plan.
We expect to continue to grow our ESG leadership and serve as an example in the industry. As I mentioned earlier, our best-in-class employees have done an exceptional job in helping to carry out our strategy, and we know that we have the right talent in place to continue to drive sustainable long-term growth. With that, I will turn the call over to Ghislain to go over our financial results in detail.
Thank you, Rob. My comments will start on page 16 of the presentation, which will give a bit more color on some of the highlights of our Q1 performance that J.J. discussed earlier. During the quarter, we booked a non-cash benefit of CAD 137 million to recover part of the charge we recognized on the non-core branch lines we put up for sale in Q2 last year. Recall that in Q1 of 2020, earnings also include income tax recovery of CAD 141 million resulting from the CARES Act. Excluding these non-recurring items, adjusted net income was around CAD 870 million, essentially flat, with adjusted diluted EPS of CAD 1.23, up 1% versus last year. If we adjust for the impact of fuel lag and stronger Canadian dollar, our adjusted EPS would've been up 11%, quite a solid underlying performance.
Now, moving on to slide 17, we generated strong free cash flow of nearly CAD 540 million in Q1, down about CAD 35 million from last year, mainly from lower net cash from operating activities, partly offset by lower CapEx. We have paused buying back shares in light of our proposal to combine with KCS. Moving on to page 18, we are encouraged about the economic recovery and the vaccine rollout, which is giving us strong confidence for the balance of the year. The underlying performance in Q1 is a testament to the dedication of the CN railroaders who perform day in, day out. We are building off a strong volume performance in Q1 and looking to see the rail-centric part of our business recover. The increase in industrial production will drive growth in our carload segment moving forward, such as chemicals, forest products, metals, fuels, and plastic.
With that said, we are pleased to update our financial outlook and are now targeting double-digit adjusted diluted EPS growth for 2021 versus high single-digit EPS growth previously. This is backed by the assumptions of high single-digit volume growth in terms of revenue ton miles. We still expect to deliver free cash flow in the range of CAD 3 billion-CAD 3.3 billion, which will drive further improvement in free cash flow conversion. I will now turn the call back to JJ to give some closing remarks ahead of the Q&A.
Thank you, Rob, thank you, Ghislain. Thank you for all of you to joining us today. It's a proactive, approach way pro-economic growth merger that we're proposing, connecting more sellers than buyers. I would like to take a moment to reiterate some of the highly compelling aspect of our proposal. By combining with KCS, we would compete head-to-head on all three coasts at lower cost, safer service, better fuel efficiencies from Mexico to the heartland of America. This will result in a safer, faster, cleaner, stronger railway. In addition, we will bring our leading ESG and operating expertise to KCS business for the benefit of both company stakeholders.
As mentioned during our April 20th announcement, based on our conservative and preliminary analysis of publicly available information, the combined company is expected to achieve EBITDA synergies approaching CAD 1 billion, with the vast majority coming from additional revenue opportunity. The strong cash flow generation of the combined company would allow the company to rapidly deliver following the close of this transaction. We anticipate the transaction will be accretive to CN adjusted diluted earnings per share in the first full year following termination of the voting trust and CN assuming control of KCS and double-digit accretion upon full realization thereafter. We are confident in the strength of our business and strategies. We progress toward becoming the premier railway of the 21st century.
We look forward to engaging constructively with the KCS board and all relevant stakeholders to deliver the superior transaction with KCS, to deliver greater choice and efficiencies for customers, and deliver enhanced opportunities for employee and local communities. Overall, we have a better bid, we are a better partner, better railway, and the best solution for KCS and the North American economy. On that note, we will start to take some questions. Operator?
At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Your first question comes from the line of David Vernon with Bernstein.
Good afternoon, David.
Good afternoon, guys. J.J., I want to ask this question again a little bit. I know we talked about this when you made the bid. Looking at this transaction, why is now the right time to come in with a competing offer here? What's changed in the market that makes this such a better deal than it been two or three or five years ago at a lower price point?
There's many reasons why now, and I covered those earlier last week. The main reason why now is that the board of KCS, obviously, after very thorough thinking, have decided it's time for them to crystallize the value for their shareholders. Therefore, they're willing, at this point, to entertain doing a merger with a strategic partner, a merger with basically another railroad. The timing of that is also very much dependent on whether or not you have a partner with who you could dance. From an economic point of view, we're at the beginning of a post-economic recovery. The GDP forecast for North America looks as good as can be. We have the USMCA, which was renewed, which is also something that has specific value to a North-South combination.
Depending who you believe, the time of Mexico, this might be the decade of Mexico in terms of nearshoring. That there is some challenge between relationship North America and China, also the fact that the cost of labor in China has been rising to the point where Mexico might have a better decade. All that, you put that together, the fact that long-term money is affordable. When you put all that together, it says to CN, "Yeah, it's time for you to make a good offer to the KCS board, and for them to consider it very seriously.
All right. That's very clear. Maybe if I can just squeeze one little follow-up in here. As you think about the unique drivers of value, is it more about getting CN's rail connections further west or further south?
The driver value here really definitely for us to be successful, we need to create a superior product, a product that can really compete with long-haul truck. On that point, I could ask Rob to comment on that. Right now, the rail network in North America is not really designed to really be as successful as can be for long-haul distance from, say, Mexico City all the way to Detroit and Toronto on the east, or Mexico City to Wisconsin and Calgary on the west. In order to do that, putting two railroad together really makes it appealing. You want to make some comment, Rob, about the product that we have in mind?
Sure, JJ. David, when you look at it, and as JJ just talked about with the USMCA contract just finalized here last year, it really needs a strong transportation option. We don't get to Mexico, and certainly the KCS does, and it allows us to really become the true North American railroad, really connecting the continent. We bring a lot of things to the table when we look at it. When we look at the different industries, the auto industry would get a second line of service between Detroit and Kansas City that would help increase and enhance options. Intermodal service from Mexico to the upper Midwest and Southern Ontario, that's actually being trucked today. It's on I-35. It's really about taking it off the highway, saving the fuel and emissions, really increasing choices for shippers.
For farmers in the Midwest, Iowa, Illinois, Wisconsin, Indiana, and others, it's the opportunities to better access the Mexican market. Our reach and port access would open the Midwest and KCS shippers to the world, quite frankly, from the Atlantic to the Pacific and the Gulf. For Canadian aluminum producers, the ability to directly reach markets in Southern U.S. and Mexico. For lumber and panel buyers in Texas, CN's forest products franchise gets fully unlocked and allows for further optimization and utilization of our fleet of over 10,000 center beams and boxcars. I could keep going on, but there's a lot of things this combination would bring, enhancing choices for shippers and customers, and really being the backbone of USMCA.
Yeah. Pro-choice, pro-competition, and very much focused on growth. Thank you, David.
As a reminder, please limit yourself to one question. Your next question comes from the line of Scott Group with Wolfe Research.
Good afternoon, Scott.
Hey, thanks. Afternoon, guys. I want to ask about the Operating Ratio, just because it does look like it'll be worst among the rails this quarter. I know you talked about maybe a sub-60 OR earlier in the quarter. Is that now in this higher guidance? Longer term, CP talked about maybe a low 50s OR pro forma with KCS. How do you think about your OR longer term on a pro forma basis? Maybe do you see opportunities to leverage some of the success that KCS has had with PSR to get your margins back on track?
Maybe I can start and then Ghislain can add. When we look long term, we look at North American network focusing on the economy triad I was talking about earlier and significant growth coming from intermodal. In a world of growth from intermodal, the focus at CN will be very much more EPS than to try to get the lower OR that one could get, for example, if you move a lot of crude or a lot of coal. Ghislain?
Yeah. On that front, JJ, thanks. On EPS, we're quite proud of our results for this quarter. When you look, our earnings are up 1%. All the other rails are down, including our Canadian competitor. They stated that their earnings was up, but if you take out the CAD 50 million one-time land sales, they're actually down 5%. We're up 1%, and when you look at the underlying fundamentals of the business, as mentioned, we would be up 11% when we consider the fuel lag and we consider FX. We're proud of EPS, and this is what we're focused on.
Can you just?
No, we're focused on. Go ahead.
No, sorry to interrupt. Go ahead, JJ.
As I said, we're focused on EPS. The focus is on EPS. That's what we want to optimize.
Okay. Can you clarify where the guidance is on OR though?
No, our guidance, and we're quite proud, we upped our guidance. I think that we're quite bullish on the economy coming forward, on the markets, and we bumped our guidance as you know, to targeting double-digit EPS growth. That's what our guidance is, backed up by a high single-digit RTM growth. That's our guidance.
Okay.
Thanks, Scott. Thanks for the question.
Thank you.
Thank you.
Your next question comes from the line of Cherilyn Radbourne with TD Securities.
Good afternoon, Cherilyn.
Thank you. Thanks very much. Good afternoon. I wanted to ask, in relation to the increase in guidance for the year, particularly the increase in your volume outlook. Obviously, intermodal's been very strong, maybe that's the upside. Would love to know if you're starting to see any signs of life in the carload side of the business, which I think would be helpful from a mix standpoint. Thanks.
Rob, you want to talk about what we expect to move between now and the end of the year?
Cherilyn, we actually see some positive movement here, particularly in the H2 of the year is really where we see the upside as the economy really starts to kick in. We are moving quite a bit of gas, moving out to export through the Port of Prince Rupert. Actually, the second gas terminal just opened up. The forest products group has continued to stay strong here. We talked about grain. I think the carload franchise really starts to move in the H2 of the year, quite frankly, is what we see the big side in terms of the upside, Cherilyn.
Yeah. It's pretty broad base. Thank you.
Thank you.
Your next question comes the line of Tom Wadewitz with UBS.
Good afternoon, Tom.
Yeah. J.J. Ruest, thank you for the question here. I wanted to try to get your sense of the kind of negotiation with KCS and how you address maybe some of the concerns that they potentially would have regarding the regulatory process. I guess in particular, CP now has visibility with the waiver that they would be able to go to a voting trust. You don't yet have that visibility, is that a significant barrier to an agreement with KCS? Are there things that you can do in terms of the negotiation that would address concern that they might have that they reach an agreement with you, but then STB comes back and says, "No, we're not going to allow you to do a voting trust."
Thank you for the question, Tom. We've only put our offer to KCS Tuesday of last week, and only this morning did we file for the voting trust. We fully intend to address every regulatory issue concern that KCS has. Maybe, Sean, you could give a brief and an update, kind of where we're at in the process of doing these different things.
Sure. Thanks, JJ. Sure, Tom. Happy to do so. Obviously now signing a non-disclosure agreement with KCS, and we have access to the data room. We're going to start a dialogue in the coming days with them. I think you saw today we filed at the STB a letter setting out our views on the process by which the STB will rule on the voting trust, first of all. Secondly, we also filed a petition with our voting trust, which is identical to the other voting trust before the STB that was put forward by CP. Our application is very simple. We're just asking the STB as they enunciate their process to approve the voting trust that they do both at the same time.
The same track, the same standards, and ultimately come to the decision at the same time with respect to both CP's voting trust and our voting trust. We're very confident even working with KCS who will obviously be interested in both parties seeing their voting trust getting approved, that we adopted a process that is fair, transparent, and even-handed. We're confident that the STB will do that. We've asked them to rule by May 31st, which puts us in line to be in a position where both voting trusts have been approved by the STB prior to the vote by the KCS shareholders sometime in June. Obviously, that dialogue is ongoing.
We will be able to show no doubt with the KCS that when it comes to the voting trusts our position is identical to CP's. Hopefully, we're very confident that the STB will rule on both at the same time. We think that's the best approach to have an even level playing field for everybody. Ultimately, at this stage, as you know, the standards for the voting trust is public interest. It does not go to the competitive issues. Again, our transaction is pro-competitive, where we have new choices, additional choices for customers in the U.S. and across the network. We're very confident that we'll get to a voting trust to be approved at STB in early June, late May.
Do you need an agreement first for them to review it or not? An agreement with KCS or not necessarily?
No. We opened our proceeding last week, and we filed the voting trust, and it's not required that you have final agreements signed before they approve the voting trust.
Great. Thank you.
Thank you.
Thank you, Tom.
Your next question comes the line of Allison Landry with Credit Suisse.
Good afternoon, Allison.
Thanks. Good afternoon. Maybe just following up on Tom's question. There seems to be some disparity between CN's view about what the public interest standard actually means specifically for the voting trust compared with how CP is outlining their view of the public interest standard. Maybe if you could just sort of walk us through h ow you understand the STB language, what you think it means. Basically, CP is trying to or is arguing that competition is something that will be considered. I think what CN is saying is more about financial fitness and the divestiture of the asset. Hoping that you could provide some clarity on your view on what the public interest standard means specifically for the voting trust. Thank you.
Sean, you want to talk to these technical points?
Sure, I'll be very happy to. First of all, again, Allison, our position is that our bid is pro-competitive, will create choices for customers, and therefore it doesn't have competition. I also want to make a comment. Our view is there are no insoluble regulatory problems. There's a history of these issues that are raised in the context of an STB application as being mitigated and worked out with, obviously, the customers through the STB process. The standard with respect to the voting trust is very clear, and our trust is exactly the same as CP's.
It's a public interest standard, but it focuses on the risk of financial harm of the applicant carriers, and that goes to if, for some reason, the transaction were not to be approved, that both carriers, in our case, KCS and CN, would remain financially viable at the post of the transaction if you had to unwind the voting trust. We're very confident both companies are extremely viable, would not have an issue post the voting trust if it were not to be approved. Ensuring that there's no improper control of KCS, and it is clear both in our voting trust that there is no control by CN. The trustee being David Starling is an independent trustee with great experience when it comes to both the rail industry, but also KCS specifically, we were happy to welcome his independence as trustee.
Therefore, we are very confident that the public standards test that must be met at this stage will be analyzed by the STB. Again, the issue will be, and what we're asking the STB to do is apply the same standards and the same criteria and the same timeframe for both voting trusts. We're confident that when the STB receives both applicants' detailed submission on the public interest, that they will come to the view that, in our case, we meet the public interest test and our voting trust will be approved by the STB.
Thank you, Allison.
Okay, thank you.
Your next question comes line of Ken Hoexter with Bank of America.
Great. Good afternoon, J.J., Rob, Ghislain and team. Looking at the cost side of the 66 OR again, thoughts on near term on employees relatively to the flat performance in the quarter, how do you think you ramp as volumes ramp through the year and your thoughts on costs and I guess, maybe long term, your thoughts on synergies you mentioned kind of top line versus the cost side as well. Thanks.
Thank you, Ken. Maybe I can start and then Rob can add in. The month of February was a bit of an expensive month for all the railroads in with the polar vortex. We talked about yields, same store price at 4.2%, that's a good trend. We like that numbers the volume ahead of us is obviously positive and constructive, just like the economy. When you look at all the series of KPI that Rob was going through during the presentation on the operations side, we've made progress just about on all front, if not all front. I mean, with that in light, things looks positive for the rest of the year. Rob, if you want to add.
Yeah. Ken, if you just look at our operations team, what it takes to move the freight out there in the Q1 , our operations headcount, even though I said volume was up 6%, our headcount was down 6% in operations, roughly about 800 people less to move that freight. As I mentioned, our labor productivity was up 9%. When we look at it as we came out of the COVID depth of Q2 last year into the Q3 , we didn't bring all of our resources back on a one-to-one basis. We've been able to maintain that here through the H2 of last year and certainly in the Q1 this year. As you look at the Q2 this year versus last year, of course, we're going in a different direction.
We're seeing growth versus the big downturn we saw really at the end of April and May is where it started to trough on us. We weren't doing any hiring last year in the Q2 at all. That all stopped as soon as COVID set in, and as you'll recall, we had a lot of people furloughed. To the contrary, we're actually hiring. We're actually hiring conductors right now, getting ready for H2 of this year. We're preparing, we're optimistic about the H2 of this year in terms of the volume, and that's really where our focus is preparing to move that.
Maybe J.J., I can add. If you're looking, Ken, at the labor costs of Q1 being higher, that's all major variance to incentive compensation because to Rob's point, our average number of employees in the quarter were down 3%.
Great. Thanks, guys.
Thank you. Thank you, Ken.
Your next question comes from the line of Brian Ossenbeck with JP Morgan.
Hey, good afternoon. Thanks for taking the question. Just a quick one on the end markets. Can you just remind us what impact you think you'll see from the ELD mandate when it becomes effective in Canada mid this year? We've heard some concerns about availability of devices being certified. Is that really something that you're focused on having an impact on some of your end markets that overlap with trucking?
Maybe I can pick this one up. Most trucking firm in Canada who do cross borders have to have the equipment already because that's what is a legal requirement in United States. You're left with only the fleet that's only running in Canada that has to meet that mandate by mid-year. The impact is, I would say, I would qualify as slightly positive because already a good portion of the fleet had to be converted because of a number of equipment move cross border. The impact is a slight positive, but I think it's coming up at a time when the economy is going to be strong, so really the economy is going to be a bigger factor than the ELD implementation. Thank you.
All right. Got it. Thanks, JJ.
Your next question comes from the line of Jason Seidl with Cowen.
Thank you very much Trevor, JJ Ruest, and team. Thanks for taking my question. I want to talk on any of the customer overlap that may exist, and maybe you could walk us through some of your options on how to placate the STB and the customers going forward with the deal.
The overlap that is well-known is between Baton Rouge and New Orleans, where both CN and KCS have a parallel line. We know the detail of that, and we think we can definitely solve that. As Sean said earlier, two to one problem, none of them are unsolvable, and we will solve them. I don't know if, Rob, you want to add other snowfall overlap?
Yeah, I think you hit it. The overlap, just like we said on Tuesday, is really between Baton Rouge and New Orleans, where we do have a few customers that their options will go from two to one. We knew that going in, and we said that, and again, that represents less than 1% of the combined railroads network. We will remedy it. There's a number of things you can do with that, including divestiture of the line, but we'll cross that bridge when the time comes. We will handle it. Other places that are out there that have been mentioned, I'll just go through them real quick. Jackson, Mississippi, there's no two to one. East St. Louis, no two to one. Springfield, Illinois, no two to one. Council Bluffs, no two to one. Mobile, Alabama, no two to one.
In fact, the Port of Mobile, Alabama, has sent in their support for our proposed merger. They get it. If for some reason there is another issue out there, we'll work with our customers to remedy that, as we always have. As JJ said, it's important to note that in a little over three business days, over 500 letters of support. That's significant in terms of what we're seeing out there. Thanks for the question.
Appreciate the clarification.
Hopefully this helped clarify everything that's been said on this in the last week. Thank you for the question, Jason. Next question.
Your next question comes from the line of Justin Long with Stephens.
Thanks, and good afternoon. I wanted to ask about the 75 locomotive orders that you mentioned. I think you got approval for that from the board. Any color you can give on the expected timing of those units and when they should be delivered? Is this an order that's contingent on the merger being approved, or is this predicated on just the standalone business and the growth you're expecting?
Maybe I'll pass it on to Rob, but just to clarify, the approval of the board for their grain fleet expansion and the locomotive fleet expansion took place before we made the offer to KCS. Rob?
Yep, that's exactly right. It had nothing to do with the merger and does not have anything to do with the merger. It's really based on growth and growth prospects we see over the next 12 months-24 months. In terms of timing, we expect to get roughly 25 of those here in the H2 of this year, the other 50 H1 of next year. There could be some variability. If volume's bigger than that, we could pull some of those forward, but that's about what we look like in terms of the timing.
Yeah. We're not losing our focus at all on Canadian grain and Canadian farmers. We're making a major capital investment over two years, adding, renewing 3,500 new low cube, high capacity hopper cars and the 75 locomotive. We got some flexibility on when we take them, and it's basically our commitment that as we see growth coming, we want to be prepared for it. We want to be able to move the economy and do our part to enable the recovery post-COVID. Thank you, Justin.
Great. Thank you.
Your next question comes from the line of Christian F. Wetherbee with Citi.
Hi, Chris.
Hey, guys. Thanks for taking the question. I guess maybe a couple things here. First, just on the voting trust. When you think about the similar approaches that you'd like the STB to take, because reviewed both of them, I guess I'm trying to make sure I understand that relative to the desire to have your deal reviewed by the new merger rules as opposed to seeking the waiver. Is there a reason why maybe the same rules make sense for the trust as opposed to potentially the deal? In terms of how the industry ultimately shapes up, how would you expect the downstream effects to look if you were to be able to acquire KCS? Do you think this triggers something else in the future, or do you think this is sort of one and done and then this is it?
Thank you, Chris. It's a question often asked, we'll revert to our expert here, Sean, to cover that.
Thanks, Christian F. Wetherbee. On the question of the waiver maybe, which you're asking about, but to be specific, we believe we can close the transaction on new rules or old rules. If for some reason the STB were to rule, but we've taken the position from the outset that we think that this transaction should be reviewed under the new rules, first of all. Secondly, obviously our 500 or more support letters recognize the fact that CN has taken the position that we are confident that under the new rules, we can get this transaction approved and closed. When it comes to evaluating the voting trust, again, we're of the view that clearly in our submission, what we said is that we want the same standard applied and the same timeline and the public interest test for the approval of the voting trust.
Our submission is that it is the same for both voting trusts and leading that to ask the STB to rule both at the same time. Hopefully adopting a process which will allow us to even a level playing field, excuse me, which is fair, transparent, and even-handed. Obviously, our position is that when it comes to the voting trust, our regulatory assessment is identical to CP's when it comes to getting it approved as a vehicle to use to move on to the next level of this transaction.
I hope this helped.
Then the downstream effects?
Yeah. Go ahead.
Just the downstream effects. What would you think about that?
Well, I think that's something that will be obviously assessed by the board based on the new rules on the overall transaction, and we'll address those as they come through. Again, our capability of demonstrating it is pro-competitive. As Rob clearly explained, that there is half competition and there are areas where we'll have to address with mitigation, but we remain confident that under new rules, we can get this transaction approved and closed.
Okay. Thank you.
Thank you. Next question. Operator?
Your next question comes from the line of Jonathan Chappell with Evercore ISI.
Hi, John. Good afternoon.
Hi, JJ. I wanted to ask about the impact of what's going on in the Port of Montreal right now. Obviously, this one was a little bit more expected, and it sounded like there was business already shifting to Halifax. How is your network positioned for the proactive shift in freight? If you can just remind us, what was the impact both from a volume and a cost perspective on the prior strike, and how do you expect it to be similar or different this time around?
This is the second time in about six months that they have a labor disruption. The last time it maybe caught shippers or importers by surprise. This time because it was the second time, they had a specific deadline, so customers saw it coming. Diversion of freight started to take place many weeks ago. That's another important aspect. When the disruption took place last year, it was disruptive to our own operations. I would say there was some new business, but it was also unplanned cost. This time, we're organized differently. I'm sure the importer is also organized differently. There's been diversion of freight already to Saint John and Halifax both.
Currently, the federal government is actually looking at potentially having some regulation that may bring either the work stoppage to a close or maybe bring the two parties closer together. All in, it's not a big to-do in terms of our Q2 result.
Great. Thank you, JJ.
Thank you.
Your next question comes from the line of Brandon Oglenski with Barclays.
Hello, Brandon.
Hey. Yeah, good afternoon, and thanks for taking my question. I guess, JJ or Rob, there was a lot of public discussion last week about how your potential combination would be somewhat anti-competitive from a rail perspective. I think it went beyond just the shared line in Louisiana. Can you give us maybe some more extensive response to those comments, especially in relation to interline agreements, which supposedly could be more challenged going forward?
Maybe I'll start. Frankly, our focus from the beginning has been on KCS and creating value for their shareholders and their customers, as well as the CN shareholders. The combination that we're proposing is really pro-competitive. It's really about creating new products, new services to compete harder. There's nothing wrong with competition. Competition is good. It brings innovation and it brings new services. It helps connect more buyers with more sellers. CN has a bigger network. We can actually connect more destinations. All these gateways will remain open. CN is a railroad, including CN, we make good money interchanging traffic with other railroads. There's definitely no incentive financially otherwise, not to continue to grow the interchange business with other railroads, including the CP at Kansas City.
A merger that's based on growth is a merger that's really looking for a bigger pie of the overall freight in North America. We're not looking for a bigger slice of a small pie. We're looking for a bigger pie, therefore, interchanging with other railroad as well as competing much harder with truck, with obviously what we created now as a premier railroad for the 21st century, focused on the economy ahead. The economy ahead of us is going to be much more related to consumers and to intermodal, a whole lot less reliant on thermal coal and crude. That's been good and bad at time, crude is too volatile to actually do a merger of this size.
Our view is always from the beginning, this is pro-competition, it's to create new product, it's about growth, and it's about creating reason for freight shipper to use a rail network. I don't know, Rob, you want to add?
Yeah. You nailed it. I think you hit on all the key points. I'd just reemphasize, as JJ said, we plan on keeping the gateways open. There's no plans to shut those. As far as your question on the interline, that's our plan.
Yeah. Just to add, when you look at the ports, Mobile, New Orleans, Montreal, Quebec City, Halifax, Vancouver, Rupert, Lázaro Cárdenas, Veracruz, all these ports with this combination can really connect to even more inland market. You could connect St. Louis, Memphis, Kansas City to all three coasts. Transatlantic trade to Kansas City, South American trade to Kansas City, coming from the west as well. You could potentially give an opportunity again for Lázaro Cárdenas to potentially be an option for those who import product in Houston and/or export product from Houston back to Asia. When you look at the map, you got to look at what it could do to actually enhance the economy and enable something that was put together with a lot of effort, USMCA, and enable the continent also to do more trade within itself.
You have now the content of a finished vehicle North America require the higher content made from North America. That means more product, more parts moving within continent, very long haul. That's what this combination is all about, is to support and enable the economy ahead, no intention of reducing competition or closing gateway.
Thank you, Jennifer.
Thank you.
Your next question comes to the line of Amit Mehrotra with Deutsche Bank.
Thanks for letting me ask a question. JJ, I want to ask a previous question slightly a different way if I could, bear with me for a second. You and the team have obviously done a lot of work, offered a compelling proposal. I think that's undeniable. At the end of the day, the outcome is quite binary. What I was hoping you could help us with is how CNI is impacted by a potential CP-KCS merger, both I guess with respect to the competitive implications for CNI, and then also does an outcome like that necessitate the need for your company and the CNI board to pursue other acquisition opportunities to counterbalance that competitive implication?
Thank you for the question, Amit Mehrotra. That's really a question for later. It's something we've been talking about, obviously, for the last many years as to the so-called endgame. Our focus really is the opportunity at hand. The board of KCS has decided that they're willing to partner with another railroad, a strategic partner. CN, from the very beginning of when we got privatized, the first thing that we did was made an acquisition early on of the Illinois Central. We had a marketing alliance with KCS. In the early days, we've been focused on what was at the time known as NAFTA. NAFTA has now been renewed with somewhat different label. A lot of what the NAFTA attraction was is still there today. That's really the focus that we have. If this doesn't happen, then we'll see at that time.
There's a lot of value, and we believe, as Sean was saying earlier, that we can resolve these different issues as they come, and that's what we are focused on right now. Just look at the CN network the way it is today with three coasts. Huge amount of potential just standalone. Just remember, when we started 25 years ago, the company was nowhere what it was today. We built it up over 17, 18 different acquisitions, big and small. We built it up with organic growth, and that will always be the case. We are very innovative, very nimble, and we're going to keep doing that. Right now, we're focusing on the one specific, the KCS and being the NAFTA railroad, the USMCA railroad. It doesn't mean that our future is any different long-term.
We have a bright future no matter what, but we think that this is the time to do this one transaction. First time since I joined CN, actually KCS is actually wanting to merge with another railroad, so we'll jump on that.
Okay, very good. Thank you. Best of luck.
Thank you.
J.J., if I may, just I want to be clear that when I talked about the voting trust before, clearly our application, there's no date yet for the KCS shareholder vote. Our application is today we're looking to have our voting trust approved on the same timeline as CP's voting trust, the same standards, and the same criteria. That'd be done prior to the voting trust with KCS. When I said a voting trust by the end of May or June, I'm probably presumptuous, I'm assuming that's when it could take place. Clearly, I want to be clear that we want to ensure that the STB rules on both voting trusts prior to the KCS shareholder vote later this year.
Very important point. Thank you, Sean.
Your next question comes the line of Benoit Poirier with Desjardins Capital Markets.
Yeah.
Good afternoon, Benoit.
Good afternoon, everyone. Obviously, very good color about the voting trust. Now when we look at the data room, could you provide maybe more color about the timing to perform a data room analysis? I know it's not your first time, and I would assume it's more virtual these days. If you could also provide some color about the timing to make a binding proposal and finalize a definitive merger agreement. Thank you.
Sean, you want to cover that?
Yeah. Merci beaucoup, Benoit Poirier. Thank you. Yes, as I said, we'll be starting tomorrow, hopefully, getting access to the data room, looking at the material that's in there. It is a virtual data room to your question, Benoit Poirier. That could take us two weeks, 2.5 weeks to get our confirmatory due diligence completed, and therefore allow us to then move to finalizing. We've already tabled a draft merger agreement. We have one ready to go, so we'll just update it in line with the due diligence, and hopefully we'll be engaging very proactively and very respectfully in the days to come with the KCS team. We're looking forward to be in a position to have hopefully a merger agreement in the next 30- 40 days.
Perfect. That's great color. Best of luck.
Okay. Thank you.
Thank you. I would like to turn the meeting back over to Mr. Jean-Jacques Ruest.
Well, thank you for joining us today. It's an important time in the CN history. As we mentioned earlier we're proud of our Q1 result. The economy ahead of us looks good. The operating metrics are solid. Fuel efficiency is good. Very important to us also is our safety performance, much improved on the personal injuries and train accidents. A lot of good things that look good for the quarters to come. On the long-term view, the desire of CN to give reason to the board of KCS to consider a combination with us is very much top of mind. We're going to be putting a lot of focus and effort onto that in the coming weeks. Thank you for joining us today, and more to come in the weeks and months to come. Thank you.
You're welcome. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.