Welcome to the CN First Quarter 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, Christina. 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 JJ Ruest, Our President and Chief Executive Officer Ghislain Hul, our Executive Vice President and Chief Financial Officer Rob Riley, our Executive Vice President and Chief Operating Officer and Sean Finn, our Executive Vice President, Corporate so that everyone has the opportunity to participate in the Q and 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. JJ Ruest.
Well, thank you, Paul, and good afternoon to everyone. I hope you all had a safe, healthy and constructive start to 2021. Our railroaders delivered despite severe winter operating condition, unprecedented demand in a number of markets like port and grain and ongoing challenge in the pandemic. As you can see from Slide 5, 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 the supply chain and environmental leader.
We pioneer and were the first to implement precision schedule railroading across our network and we are a clear Our strong balance sheet is a testament to our operational excellence and 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 the KCS. This is the right next step for both CN and KCS toward becoming the premier railway of the 21st Century. Turning to Slide 6.
We are confident that together with KCS experience 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 doubled 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 would create a new express route that connect the U.
S, Mexico and Canada with end to end single owners, single officers. It would connect vibrant ports from all three coasts to more interland market in 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 Gateway to competitors' network.
We believe this combination will enable better solution to our customers, Speed of movement of goods from country to country, coast to coast, enhanced 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 stands, On April 21, we submitted a pre filing notification to this TB of our intent to file an application seeking authority To combine with KCS, should the KCS Board of Directors accept our superior proposal, we are proposing to use an identical voting trust Structure that CP has proposed and we are confident that the STB will not subject our proposal to any different standard in approving the voting trust Then those that would be applicable to CP. We believe that both voting trusts are equally likely to be approved. If our Board in Trust is approved and a combination with KCS is consummated, KCS shareholders will receive the value of their consideration being offered When the transaction closed in Truss, which we anticipate could be as soon as the second half of twenty twenty one. 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 7, I would like to provide a brief update on our strong progress as we have made in only 1 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's 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 2 great railroad. I connected with Pat, the CEO of KCS, over the weekend And we created CN's strong enthusiasm, readiness and most importantly, our deep commitment to begin collaboration with the Kia CS team toward a successful combination. Secondly, we filed earlier today an application with the STB for the approval of our voting trust and named Dave Finally, 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 officials and other stakeholders.
They have voiced their support for a combined C and KCS, which will help them compete in their market and better serve their needs by offering greater choice and greater We have also spoken to our shareholders and many of you as well and appreciate your Trunk's support in this combination. I myself, on behalf of the entire CN team, we are fully committed to this transaction and we are very confident in our ability To achieve all the necessary regulatory approval, to close the Tour of Voting Trust and then ultimately receive approval to combine with KCS. Together, we will create the premium North American railway for the 21st centuries. Moving on Page 8. 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 forward vortex of Our efforts are reflected in our ability to capitalize on consumer driven trend and growth of our automotive business, which was up 19% for the quarter with significant 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 measure 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, JJ, and thank you to With GTMs up 6% year over year despite the impact of the polar vortex that JJ just spoke about in February. While volume was up, Cruise starts were up only 1%. Our active online inventory of railcars 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 operations. 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 $12,000,000 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% 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 3 of our program, we will be able to enhance overall safety while reducing manual inspections by 75%. In Q1 alone, our accident costs decreased over $30,000,000 versus Q1 last year. Due to this technology and the dense ecosystem of portal and wayside detectors on our network, these cars are now covering 100% of our core mainline And 95 percent of where gross ton miles move.
As I previously mentioned, we experienced a couple of week of February Extreme cold temperatures with temperatures dipping below minus 40 degrees on large parts of our network. During this time, we were able to deploy our aircar 132,000 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're 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 railroads safer, more efficient and more reliable, and we're starting to see additional benefits from 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 to 24 months to support the projected growth Our business is doing very well as evidenced by our strong performance this quarter. Our capital investments over the last 3 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 watermark 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. And as JJ 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 strategies working, including same store pricing of 4.2% in Q1. We are also focused on diligently managing our CapEx to drive productivity and 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. And as J. J. 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.
Yes.
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 JJ discussed earlier. During the quarter, we booked a non cash benefit of $137,000,000 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 an income tax recovery of $141,000,000 resulting from the CARES Act. Excluding these non recurring items, adjusted net income was around $870,000,000 essentially flat, With adjusted diluted EPS of $1.23 up 1% versus last year.
If we adjust for the impact of fuel lag and stronger Canadian dollar, Our adjusted EPS would have been up 11%, so quite a solid underlying performance. Now moving on to Slide 17, we generated strong free cash flow of nearly $540,000,000 in Q1, down about $35,000,000 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 the 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
Thank you, Rob, and thank you, Ghislain. So thank you for all of you to joining us today. It's a proactive approach to a pro economic growth merger that we're performing, connecting more sellers and buyers. And I would like to take a moment to reiterate some of the highly compelling aspects of our proposal. By combining with TCS, we would compete head to head On all three coasts, at lower costs, 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 As mentioned during our April 20th announcement, based on our conservative and preliminary analysis of publicly available The combined company is expected to achieve EBITDA synergies approaching $1,000,000,000 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 the transaction. We anticipate the transaction will be accretive to Cien adjusted diluted earnings per share in the 1st full year following termination of the voting trust And CN assuming control of KCS and double digit accretion of in 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.
And your first question comes from the line of David Vernon with Bernstein.
Good afternoon, David.
Good afternoon, guys. So, J. J, I want to kind of ask this question again a little bit. I know we talked about this when you made the bid. But Looking at this transaction, why is now the right time to come in with a competing offer here?
Like where Like what's changed in the market that makes this such a better deal than it had been 2 or 3 or 5 years ago at a lower price point?
So there's many reasons why now, and I covered them those earlier last week. But the main reason why now is that the Board of KCS, Obviously, after Ruitoro 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 And we're a strategic partner, a merger with basically another railroad. That's so the timing of that is also very much dependent on whether or not You have a partner with who you could dance. And then from an economic point of view, where 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 North South Top Combination.
And then depending who you believe, the time of Mexico, this might be the decade of Mexico in terms of new shoring Now that there is some challenge between relationship North America and China, but also the fact that the cost of labor in China has been rising And all that, you put that together, the fact that long term money is affordable. When you put all that together, It says to CN, yes, it's time for you to make a good offer to the KCS Board and for them to consider it very seriously.
That's very clear. Maybe if I can just kind of 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?
So there's a driver of value here already. Definitely for us To be successful, we need to create a superior product, a product that can really compete with long haul truck. And on that point, I could Rob to comment on that. But right now, the rail network in North America is not really designed to really be as successful as it 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 2 railroads together really makes it appealing.
You want to make some comment, Rob, about the product that we have in mind? Yes, sure, JJ. David, when you
look at it and as JJ just talked about with the UMCA 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-thirty five. 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 see 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 Force Products franchise gets fully unlocked and allows for further optimization and utilization of our fleet 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. Yes,
And as a reminder, please limit yourself to one question. And your next question comes from the line of Scott Group with Wolfe Research.
Good afternoon, Scott.
Hey, thanks. Afternoon, guys. So I'm going to I want to ask about the operating ratio, Just because it does look like this it will be worst among the rails this quarter. And I know you talked about maybe a sub-six DOR earlier in the quarter. Is that now in this higher guidance?
And then longer term, CP talked about maybe a low-50s OR Pro form a with KCS, how do you think about EUROAR longer term on a pro form a basis? And maybe do you see
So So maybe I can start and then Ghislain can add. But when we look long term, we look at North American network focusing on the economic trend I was talking about earlier And significant growth coming from, you know, intermodal. So in a world of growth, growth from intermodal, The focus at CN will be very much more EPS than try to get the lowest OR that one could get, for example, if you move a lot of crude with a lot of coal. Ghislain?
Yes. And on that front, JJ, thanks. On EPS, we're quite proud of our results for this quarter. I mean, 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 $50,000,000 one time land sales, They're actually down 5%. So we're up 1%. And when you look at the underlying fundamentals of the business, as we mentioned, we would be up 11% When we consider the flag and we consider FX, so what about EPS and this is what we're focused on.
Can you just Can you just
Go ahead.
No, no. Sorry to interrupt you, John.
As I said, we're focused on EPS. The focus is on EPS. That's what we want to optimize.
Okay. And you I mean, can you clarify where the guidance is on OR though?
No, I mean, our guidance as we and we're quite proud. I mean, we upped our guidance. I think that we're quite bullish on the economy coming forward On the markets and we popped our guidance as you know to targeting double digit EPS growth And that's what our guidance is with backed up by a mid high single digit RTM growth. That's our guidance.
Okay. Thanks, Scott. Thanks for the question. Thank you.
Your next question comes from the line of Cherilyn Radbourne with TD Securities.
Good afternoon, Cherilyn.
Thanks very much. Good afternoon. I wanted to ask in relation to the increase in guidance for the year and particularly the increase in your Obviously, intermodal has been very strong, so maybe that's the upside. But we'd love to know if you're starting to see signs of life in the carload side
So Rob, you want to talk about what we expect to move between now and the end of the
Yes. So, Cherilyn, we actually see some positive movement here, particularly in the second half of the year is really where we see the 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 Sherman just opened up. The Forest Products Group has continued to stay strong here. We talked about grain.
I think the single The carload franchise really starts to move in the second half of the year, quite frankly, is what we see the big side in terms of the upside, Cherilyn. Yes, it's
pretty broad based, pretty broad based. Thank you. Your
next question comes from the line of Tom Wadewitz with UBS.
Good afternoon, Tom. Yes.
JJ, Thank you for the question here.
I wanted to try to
get your sense of the kind of negotiation with KSU and how you address Maybe some of the concerns that they potentially would have regarding the regulatory process. So 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. And so Is that a significant barrier to an agreement with KSU? Are there things that you can do in terms of the negotiation that would address concern that they might have that they reached 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. So we've only put our offer to KCS Tuesday of last week. And this morning, this morning, did we file for the Board in Trust. So and we fully intend to address every regulatory issue concern that KCS has. So maybe Sean, maybe 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. So obviously, now we signed a disclosure agreement KCS and we have access to the data room, but 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 sending 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 debt of voting trust before the STB 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. So 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. And we're very confident even working with KCS.
We'll obviously be interested in both parties seeing their voting trust getting approved That we adopted a process that is fair, transparent and even handed. And we're confident that the STB will do that. We've asked to rule by May 31, which puts us in line to be in a position where both voting trusts have been approved by STB prior to The vote by the KCS holders sometime in June. So obviously, that dialogue is ongoing. We will be able to show no doubt with the KCS That when it comes to the voting trust, our position is identical to CEP's.
And hopefully, we're very confident that the STB will rule on both at the same 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 willing trust is public interest. It does not go to the competitive issues. But again, our transaction is pro competitive. We have New choices, additional choices for customers in the U.
S. And across the network. And we're very confident that we'll get to a voting trust to be approved at SDB in Early June, late May.
Do you need an agreement first for them to review it or not an agreement with KSU or not necessarily?
No, not. We filed we opened our proceeding last week and we filed the willing trust and it's not required that you have the final agreements signed before they approve the willing trust. Great. Thank you.
Thank you, Tom.
Your next question comes from the line of Allison Laundry with Credit Suisse.
Good afternoon, Allison.
Good afternoon. Maybe just following up on Tom's question. I mean, there seems to be some Disparity between CN's view about what the public interest standard actually means, Specifically for the voting cost, compared with how CP is outlining their view Maybe if you could just sort of walk us through how you understand the SCB language, What you think it means, I mean, 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. So 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'm very happy to. Well, first of all, again, Allison, our position is that our bid is pro competitive, We'll create choices for customers and therefore it doesn't have competition. I also want to make a comment, our view is there are no insolvable regulatory I mean, there's a history of these issues that are raised in the context of an SDB application is being mitigated And worked out with obviously the customers through the SDP process.
The standard with respect to the voting trust is very clear. And our trust is exactly the same as CP's. And 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 a transaction would have to be approved that both carriers in our case KCS and CN will remain financially viable At the post of the transaction, if you had unwind the voting trust and we're very confident both companies are extremely viable, will not have an issue post the voting trust We're out 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 The trustee being Dave Starling is an independent trustee with a great experience when it comes to both the rail industry, but also KCS specifically. And we were able to welcome his Independence as trustee. And therefore, we are very confident that the public standard test that must be met at this stage It will be analyzed by the STB.
And again, the issue will be and we're asking the STB to do is supply the same standards and the same criteria In the same timeframe, the both voting trusts. So 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 made the public interest trust and our voting trust will be approved by the STB. Thank you, Allison.
Just if I can
Okay. Thank you.
Your next question comes from the line of Ken Hoexter with Bank of America.
Hey, great. Good afternoon, JJ, Robin, Ghislain and team. Looking at the cost side of the 60% to 4% of our guidance, thoughts on near term on employees relatively 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 Maybe long term, your thoughts on synergies. You mentioned kind of top line versus the cost side as well.
Thanks.
Thank you, Ken. So maybe I can start and then Rob can add in. So The month of February was a bit of an expensive month for all the railroad, some of the Polar Vortex. We talked about yields same store price at 4.2%. So that's a good trend.
We like that numbers. And the volume ahead of us is obviously positive and constructive, just like the economy. And when you look at all the series of KPI that Rob was going to during Presentation on the operations side, we've made progress just about on all fronts, if not all fronts. So I mean, we are With that in light, things looks positive for the rest of the year. Rob, if you want to add to Yes.
Ken, if you just look at our operations team, so 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%. And 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, and we've been able to maintain that here through the second half of last year and then Certainly in the Q1 of 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.
In May is where it So we weren't doing any hiring last year in the second quarter at all. That all stopped as soon as COVID set in And we made 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 the So we're preparing, we're optimistic about the second half of this year in terms of the volume and that's really where our focus is, is preparing to move that. And maybe JJ I
can add. If you're looking Ken at the labor costs of Q1 being higher, that's all major variance 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 JPMorgan.
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?
So 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 our legal So then you're like with only the fleet that's only running in Canada that has to meet that mandate by mid year. So the impact is, I would say I would qualify as just slightly positive, because already a good portion of the fleet had to be converted because a number of equipment moved So 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 The implementation. Thank you.
All right. Got
it. Thanks, JJ.
And your next question comes from the line of Jason Seidl with Cowen.
Thank you very much. Hey, JJ and team, thanks I wanted 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 sort of You know, placate the STB and the customers going forward in the deal?
So the overlap that is well known is between Baton Rouge and New We're at both CN and KCS have parallel line. And we know the detail of that and we think we can definitely solve that. As Sean said earlier, 2 to 1 problem, none of them are unsolvable and we'll resolve them. I don't know if, Robbie, you want to add to the other shortfall overlap?
Yes. I The overlap just like we said on Tuesday is really between Baton Rouge and New Orleans
where we do A
few customers that their options will go from 2 to 1. We knew that going in and we said that. And again, that represents less than 1% of the buying railroads network. So 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, but we will handle it.
Out places that are out there that have been mentioned, I'll just go through them real quick. Jackson, Mississippi, there's no 2:one East St. Louis, No 2:one Springfield, Illinois, no 2:one Council Bluffs, no 2:one Mobile, Alabama, no 2:one In fact, the Port of Mobile, Alabama has sent in their support for our proposed merger, so 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. And as JJ said, it's important to note that In a little over 3 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 has been said on this in the last week. So 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. And 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.
Sameet, 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?
Yes, 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 to 24 months. In terms of timing, We expect to get roughly 25 of those here in the second half of this year, get a 50 first half of next year. There could be some variability of volumes bigger than that.
We could pull some of those forward, but that's about what we look like in terms of the timing.
Yes. So We're not losing our focus at all on Canadian grain and Canadian farmers. We're making a major capital investment over 3 years, adding renewing 3,500 new low cube, high capacity hopper cars. And the 75 locomotive, we got some flexibility about 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 Chris Wetherbee with Citi.
Hi, Chris. Hey, guys. Thanks for taking
the question. I guess maybe a couple of things here. First, just on the voting trust, when you think about sort of the similar approaches that you'd like the I guess I'm trying to make sure I understand that relative to the desire to have your Reviewed by the new merger rules as opposed to sort of seeking the waiver. Is there a reason why maybe the same rules make sense for The trust as opposed to potentially the deal. And then in terms of what ultimately kind of becomes how the industry ultimately shapes How would you expect something to the downstream effects to look if you were to be able to acquire in case you do you think this triggers something else in the future?
Or do you think this
So thank you, Chris. It's a question often asked. So we'll revert to our expert here, Sean, to cover that.
Thanks, Chris. On the question of the waiver maybe, what you're asking about, but to be specific, we believe we can close the transaction on new rules or old rules. So 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 new rules, 1st of all. Secondly, It does provide and obviously our 500 or more support letters are recognized 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. And 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 standards applied and the same time line and the public interest test for the approval of the voting trust, Our submission is that it is the same for both holding trusts and leading that to asking the SGB to rule both at the same time And hopefully adopting a process which will allow us to even a level playing field, excuse me, which is fair, transparent and even handed.
So 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.
So I
hope this helps. And then downstream effects. Go ahead.
Just to add 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. But again, our capability of demonstrating is Pro competitive that has Rob clearly explained that there is half competition and there's not there are areas where we We'll have to address with mitigation, but we remain confident that on the new rules we can get this transaction approved and closed.
Okay. Thank you.
Thank you. Next question. Operator?
And your next question comes from the line of Jon 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 was your network positioned for the Proactive shift in freight.
And if you can just remind us what was the impact both from a volume and a cost perspective on the prior And how do you expect it to be similar or different this time around?
So this is the second time in About 6 months that they have a labor disruption. And the last time it was Maybe you caught shippers or importers by surprise this time because it was the 2nd time. And this was also they had a specific deadline. So customers saw it coming. Diversion of rates 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. So I would say, there was a new business, but it was also on So this time, we're organized differently. I'm sure the importers also organized differently. There's been that version of freight already to St.
John and Halifax both. And Thanks both. And currently, the federal government is actually looking at potentially having some regulation that may bring either the worst stoppage to a Those are maybe bring the 2 party closer together. So all in, it's not a big to do in terms of our second quarter results. Great.
Thank you, JJ. Thank you.
Your next question comes from the line of Brandon Oglenski with Barclays.
Hello, Brandon. Yes, good afternoon and thanks
for taking my questions.
So 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. And I think it went beyond just the shared line in Louisiana. So Can you give us maybe some more extensive response to those comments, especially in relation to airline agreements, which supposedly could be more challenged going forward?
Well, maybe I'll start. I mean, frankly, our focus from the beginning has been on KCS and creating value For the shareholders and their customers as well as the CN shareholders, the combination that we're proposing is really pro 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 destination. All these gateway will remain open. CN is There's no railroad including CN.
We make good money at the changing traffic without the railroads. So there's definitely no incentive financially otherwise Not to continue to grow the interchange business with all the railroads, including the CP at Kansas City. So A merger that's based on growth is a merger that's really is looking for a bigger pie of the overall freight in North America. We're not looking for a bigger pie bigger side of a small pie. We're looking for a bigger pie and therefore, interchanging one of the railroads as well As they're competing much harder with truck, which obviously what we created now as a premier railroad for the 21st century focus on The economy ahead of us is going to be much more related to consumers and to Intermodal, a whole lot less reliant on terminal coal And crude has been good and bad at times.
Crude is too volatile to actually do a merger of this size. And so I mean this 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 know Rob, you want to add? Yes. 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. So as far as your question on the interline, that's our plan.
Yes. And just to add, when you look at the ports, Mobile, New Orleans, Montreal, Quebec City, Halifax, Vancouver, Rupert, Nazzero's, Cadena, Veracruz, all these ports with this combination can really connect to even more interland market. You could connect St. Louis, Memphis, Kansas City to all three coasts, transatlantic trade to Kansas City, Gulf, South American, close to Kansas City, coming from the West as well, you could potentially give an opportunity again for the Lazaro Cardenas to potentially be an option for those to 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 And enable the continent also to do more to aid within itself.
You have now the content of a finished vehicle North America requires a higher made from North America. So that means more product, more parts moving within continents, very long haul. And 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.
And your next question comes from the line of Amit Rokhara with Deutsche Bank.
Let me ask a question. J. J, I want to ask a previous question Slightly a different way if I could. So, bear with me for a second. I mean, you and the team have obviously done a lot of work, offered a compelling proposal.
I think It's undeniable, but at the end of the day, the outcome is quite binary. And what I was hoping you could help us with is How C and I is impacted by a potential CP KCS merger, both I guess with respect to the competitive implications For C and I and then also does an outcome like that necessitate the need for your company and the C and I Board to to other acquisition opportunities to counterbalance that competitive implication.
So thanks for the question, Amy. So that's really a question for later. It's something we've been talking about Obviously, for the last many, many years as to the so called endgame, our focus really is the opportunity at hand. The Board of KCS have decided that they're willing to partner with another railroad, a strategic partner, NCN. From the very beginning of when we got privatized, The first thing that we did was made an acquisition early on of the Lindner Central.
We had a marketing alliance with KCS. In 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 the But the NAFTA traction was still there today. So that's really the focus that we have. If this doesn't happen, then we'll see at that time.
But There's a lot of value. And we believe, as Sean was saying earlier, that we can resolve these different issues as they And that's what we are focused on right now. But just look at the CN network the way it is today with TreeCo's huge amount of potential just standalone. Just remember, when we started 25 years ago, the company was nowhere what it was today. We build it up over 17, 18 different acquisitions, Big and small, we build it up with organic growth.
And that has always been the case. We are very innovative, very nimble, and we're going to keep doing that. Right now, we're focusing on one specific, the KCS and being the NAFTA railroad, the USCMC railroad. It doesn't mean that we 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, the KCS is actually willing to merge with some 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 wanted to be clear that I talked about the Bowdoin Trust before. Clearly, Our application, there's no date yet for the KCS shareholder vote. But our application today, we're looking to have the our voting trust approved On the same timeline, AACP's voting trust, the same standards and the same criteria and that'd be done prior to the voting trust I set up voting trust by the end of May or June.
I'm quite presumptuous. I'm assuming that's what it could take place. But clearly, I want to be clear that we want to ensure that the STB rules on both
Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets.
Yes. Good afternoon. Good afternoon, everyone. Obviously, very good color about the voting trust. But now when we look at the data room, could you provide maybe more color about the I mean to perform a data room analysis.
I know it's not your first time and I would assume it's more virtual these days. And if you could also So provide some color about the timing to make a binding proposal and finalize definitive merger agreement. Thank you.
Sean, you want to cover that? Yes. Merci beaucoup Benoit. Thank you. Yes, as I said, we've started 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. That could take us 2 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 Due diligence and hopefully we'll be engaging very proactively and very respectively in the days to come with the KCS team.
And we're looking forward to be in a position to have hopefully a merger agreement in the next 30 to 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. JJ Roue.
Well, thank you for joining us today. Obviously, 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 first two injuries and train accidents. So a lot of good things It look good for the quarters to come. On the long term view, obviously, the desire of CN to give reason to the Board of ECS to consider a Combination with us is very much top of mind. And we're going to be putting a lot of focus and effort onto that in the coming weeks.
So Thank you for joining us today and more to come in the weeks and months to come. Thank you.
You're welcome. The