Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Canadian Pacific's second quarter 2019 conference call. All slides accompanying today's call are available at www.cpr.ca. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you'd like to ask a question, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I'd now like to introduce Maeghan Albiston, AVP, Investor Relations and Pensions to begin the conference. Please go ahead.
Thank you, Adam. Good morning, everyone, and thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and actual results may differ materially. The risks, uncertainties, and other factors that could influence actual results are described on slide 2 in the press release and in the MD&A that's filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures, which are outlined on slide three. With me here today is Keith Creel, our President and Chief Executive Officer, Nadeem Velani, Executive Vice President and Chief Financial Officer, and John Brooks, Executive Vice President and Chief Marketing Officer. The formal remarks today will be followed by Q&A. In the interest of time, we'd appreciate if you could limit your questions to two. It's now my pleasure to introduce Mr. Keith Creel.
Thanks, Maeghan. Good morning. Listen, the team and I are extremely proud to sit here this morning and represent our 13,000-strong CP family. We get to share and discuss a record-setting quarter for this company. When I say record-setting, it's a mix of records. Second quarter records are all-time records in OR revenue, EPS, all-time record for workload on GTMs on the network, train length records, train late records, locomotive productivity records, fuel efficiency records, and most importantly, quarterly safety record. We had a very challenging first quarter. To bounce back the way this company's bounced back, to regain the momentum that sets us apart from the industry, most specifically in our train accident ratio, the way we run the railway safely every day speaks to the commitment and to the potential that this company represents.
An all-time record as well on personal injuries for the company. Certainly, the culture when it comes to safety is strong and getting stronger. It's something we're extremely focused on and proud of. This kind of performance demonstrates what a mature precision scheduled railroading company ran by the best team of railroaders in the industry can produce. That said, we talk about the records, something even more encouraging. This pursuit of operational excellence is something that I call it a journey. It's not a destination. Maintaining a constant pursuit, a constant constructive tension in the organization, even in the face of record volumes, when we're focused on making sure that we keep our assets right-sized at the peak to accommodate and to allow for any kind of softening or metered demand that we might face, as well as our normal seasonal demands that come down in July.
This team is doing that. Within that quarter, taking out locomotives and taking out headcount that's associated with those locomotives, reducing us down almost 10% in our locomotive fleet alone. With that being said, the quarter was not without its challenges. We talk about the things that went well. I can tell you this quarter, we faced unprecedented pressures from the Mississippi River, much like our Class I partners. When I say pressures, the pressures did not let up. The duration of the floods that we experienced this year, 40, 50 years, if you go back through history, you're going to be hard-pressed to find anything that was that prolonged in the impact to this railway. Our team, I tell you, the men and women that run this railroad day in and day out are inspiring. They battled the floodwaters.
They kept the railroad open as long as they possibly could. Yes, we had to reroute some trains. Yes, we had some additional operating expense tied to it, a bit of capital expense tied to it, and some foregone revenue. For us to be able to sustain that kind of pressure and bounce back the way we did, again, speaks to the test of the strength of this team. Switching over to the commercial side, I tell you, we continue to make progress that's encouraging as well. We laid out a plan at our Investor Day in October. We told the market, we told our shareholders, we told our investors that we had a unique set of opportunities that we worked hard to set up.
We had created the capacity and developed a strategic plan to convert it in the marketplace, that is what's fueling this pace of growth that's unprecedented in the industry in a time of metered demand across the macro economy. We call it self-help. We call it unique opportunities that allow us to be counter to what the balance of the industry is experiencing, that's what you're seeing in these results. You read about our press release during the quarter of Yang Ming. That's one commercial success that John will talk about the specifics of. Yes, we're super excited about the partnership and absolutely excited about the revenue and what it's going to do driving earnings and growth in 2020 and beyond.
From an operational perspective, I'm equally as excited because what it allows this company to continue to do, setting itself apart from our competition, setting a new standard for service in our partnership. That specific, what I call the third leg of the alliance, which is Hapag-Lloyd, Ocean Network Express, and now will be in 2020, Yang Ming, allows us to continue to fine-tune and create an industry-best service that will get you from Shanghai to Chicago with the lowest on-dock dwell time that can't be matched by our competition, whether it's U.S. West Coast or other Canadian alternatives, into the Midwest markets with our fastest transit time and our shortest routes and our reliable capacity. It's something that's compelling in the marketplace, it's something that will continue to make a strong difference in our operational ability to continue to drive margins and operational exits within the organization.
To add benefit to that as well, you probably read HMM Hyundai, which is a customer that CP currently enjoys a partnership with. They made a strategic decision as well, effective spring of 2020. They are joining the alliance. That volume now currently calls on Centerm on the South Shore, which CP serves. That volume will shift to Deltaport, will be handled by our partners at GCT, and will be moving on the ships with the alliance, which again, gives us another step to incremental improvement, takes out complexity in the terminal, takes out additional cost, and improves efficiency and velocity. As a proof point, if you think about this, if I go back a year and a half ago, the share at GCT Deltaport had gone down to about 20% for CP and the balance for our competitor.
With this new contract that comes online in January, we're going to be about 65%-70% of the product that's being discharged on the dock at GCT, again, enabling that reliable service, industry-best service into the Midwest. When you think about all these things, you put them together, what does it mean? What does it mean for our customers? What does it mean for our shareholders and our investors? It's a solid proof point that when we say we're going to do something, we do it. It says that sustainable profitable growth is not just a catchphrase. It's woven into the DNA of how we run this business. When you do it, and you do it well, and you live and die and breathe by that principle, you do what you say you're going to do.
You don't try to be everything to everyone, but those that you serve, you serve the best, and you do it with this kind of culture and this kind of discipline, these results are possible. It allows you to grow this company now and into the future. As excited as we are about 2019, the opportunities that John and the team put together for 2020 and 2021 from an investor standpoint, we certainly expect not only in 2019 to meet our guidance, but to carry strength and momentum into 2020 and 2021 as well. It's going to bode well for anybody that's invested in this company, as well as our employees, as well as our customers. The perfect trifecta. With that, I'm going to turn it over to John to provide some more color on the commercial side.
After Nadeem covers the financial performance, we'll open it up for questions.
All right. Thank you, Keith, and good morning, everyone. Total revenues were up 13% this quarter to CAD 2 billion, with six out of our nine lines of business being up double digits in revenue. RTMs were up 6%, FX with a tailwind of 2%, and fuel was flat. On the pricing side, as expected, we continued to land in that 3%-4% range. Taking a closer look at our second quarter revenue performance on the next slide, I will speak to the results on a currency-adjusted basis. As Keith spoke to, it was an extremely strong quarter for the bulk portfolio. Grain was up 11%. Canadian grain and grain products delivered a record second quarter, up double digits. Both April and May were record months for volume, and from a tonnage perspective, this was the third biggest quarter of all time for CP in grain.
Seeding in Canada is now complete, and as of right now, we expect new crop to be in line with the past couple of years. Additionally, we project carry-out stocks to be normal, but certainly more heavily weighted on the canola side. All this to say, we expect there to be good volumes of grain to move this fall. As a reminder, the new regulated grain pricing for CP taking effect on August 1st will be 3.7%. In contrast, U.S. grain volumes were down double digits as the PNW export market continues to be challenged due to the lingering trade dispute with China.
We are watching the U.S. grain markets closely, though, because with the flooding and tough growing conditions that have emerged across the central and eastern U.S.. Actually, this might present a pretty good opportunity for CP grains into these areas that are expected to be short production. Moving on to the coal business. As a result of maintenance outages at both port and mine, Canadian coal volumes decreased this quarter. In spite of these supply chain challenges in Canada, we actually saw fairly strong movements of thermal coal in the U.S., and our revenues were up 5%. The demand environment for met coal remains strong, and we continue to expect a strong back half of the year. On the potash front, Q2 was an all-time record quarter for volume and revenue, as strength in our export potash outweighed weakness on the domestic side.
That weakness being the result of flooding, and again, poor weather conditions in the upper Midwest of the United States. In spite of the weakness on the domestic side and certainly some tough comps we have coming into the second half of the year on potash, with strong global demand and still a very healthy pricing environment, we expect the opportunity for upside as we move into the second half of the year. On the merchandise front, the energy, chemical, and plastic portfolio had another strong quarter with revenue growth of 22%. The growth included another strong quarter of LPGs, plastics, refined products, all moving on our energy train into Vancouver. Excluding crude, ECP volumes were up 9% and revenues grew 13%.
On the crude by rail, as expected, we came in at around 25,000 carloads or approximately 160,000 barrels per day, as production curtailments began to ease and the fundamentals begin to improve. Crude by rail remains variable, we expect volumes will continue to increase as production and curtailment balance stabilizes, and our new contracts and existing customers continue to ramp up the second half of the year. In MMC, volumes declined 9%, largely driven by our frac sand. Revenues are only down 2%. Consistent with what I've spoken about a number of times in the past, we are executing a surgical strategy to rehome our frac sand from the Permian Basin to the Bakken. This market diversity yields higher revenue per carload, single line haul efficiencies, and improved margins.
We currently have two unit train facilities in service, and we're adding a third unit train facility in this region by the end of the year. In automotive, certainly despite a weak North American demand environment, CP revenues were up 12% on the quarter. We continue to see success driven by GLOVIS and the opening and ramp-up of our Vancouver auto compound that we've spoken about. As a reminder, this is only a portion of the GLOVIS business, with the full contract coming online to us in 2020. This, combined with continual growth at Vancouver, give us confidence in this sector well into next year. Finally, on the intermodal side of the business, overall revenues were up 11%. Both domestic and international volumes were up low double digits. Despite some softening in the retail sector, domestic revenues were a record in Q2.
On the international side of the business, we continue to excel in the market and execute our playbook. Most recently, I'm very pleased that CP was named Best Logistics Provider in Rail at the Asian Freight Logistics and Supply Chain Awards in Hong Kong. Further, as Keith mentioned, preparations are well underway with Yang Ming for our 2020 onboarding of their volumes, which will move through GCT Deltaport, leveraging our capacity, not only at the Port of Vancouver, but also at our capacity and our inland terminals across our network. We are also excited, as is Yang Ming, around taking full advantage of our fastest routes into Chicago, Toronto, and Minneapolis. Look, I am extremely pleased with the efforts of the team, the sales and marketing team, in collaboration with the operating team to deliver this quarter.
While there's no doubt there's uncertainty in the macro environment and some softness in some of our lines of business. Between the combination of our strong bulk franchise coupled with new business that is moving now and new business that will be starting up in 2020, I have a high degree of confidence that we will continue to deliver the growth and outpace the industry. The CP team is focused, and we are collaborating with our customers to create efficiencies and convert opportunities in the marketplace. With that, I'll pass it over to Nadeem.
Thanks, John, and good morning. As Keith noted, this was a strong quarter by virtually any measure. When we reported in April, I was encouraged by how the volume and operating trends were recovering from a challenging winter. Those trends continued throughout the quarter and led to strong revenue growth, as John detailed, as well as very strong cost control. The end result was a Q2 operating ratio decrease of 580 basis points to a second quarter OR of 58.4%. Ignoring the impact that last year's labor disruptions had on the OR in Q2, we still saw an improvement of 440 basis points year-over-year. Adjusting for land sales, depreciation, and stock-based comp, we saw incremental margins of about 90%. Taking a closer look at a few items on the expense side, as usual, I'll be speaking to the results on an exchange-adjusted basis.
Comp and benefits was up 8% or CAD 28 million versus last year. The primary drivers of the increase were increased stock-based compensation of CAD 20 million, resulting from the higher share price as well as higher headcount. Fuel expense was flat year-over-year as increased volumes were offset by decreased price and record Q2 fuel efficiency of 0.93 gallons per 1,000 GTMs. Materials and equipment rent expense were both flat year-over-year. As expected, depreciation was CAD 183 million, an increase of 5%. Purchased services was CAD 265 million, a decrease of CAD 23 million or 8%. The primary driver behind the decrease was a land sale of CAD 17 million, which we guided to on our Q1 call. Decreased rolling stock costs and other operating efficiencies was a further tailwind.
Additionally, the casualty line under purchased services reverted back to historical levels. Rounding out the income statement, adjusted income increased by 33% and adjusted EPS grew 36%. Below the line, you'll note that there was a CAD 88 million income tax recovery related to changes in the Alberta corporate tax rate. This benefit was excluded from normalized earnings and will have a negligible impact to our 2019 effective tax rate. As the benefits are phased in over the four years, we will start seeing more meaningful benefits to our effective tax rate. Turning to the next slide, our leverage in the quarter came in at 2.4 times adjusted net debt to adjusted EBITDA, within our target range of two to 2.5 times. In May, we repaid our debt maturity, which we refinanced early in March.
With the strong operating performance and growth the last two years, we've worked our way back into our target leverage range. While CapEx increased sequentially given winter flooding and network investments, we will keep our capital spending within our guidance of CAD 1.6 billion. We continue to take a balanced approach to shareholder returns. In May, we meaningfully increased our dividend by 27.5%. This marked the fourth straight year we have raised our dividend as we gradually move towards our targeted payout ratio of 25%-30%. On the share buyback front, as of the end of Q2, we have completed nearly 70% of our current share repurchase program at average cost of roughly CAD 272 per share. We will remain opportunistic and disciplined in our deployment of capital. Combining this discipline with our strong operating performance, we delivered an ROIC of 16.8% the last 12 months.
This will undoubtedly be the strongest ROIC in the entire industry, which is a tremendous achievement by the CP team. The railroad is operating as well as I've ever seen it, and our team of railroaders is getting stronger and deeper each day. We continue to watch the demand environment closely, and should the macro environment change, we'll continue to adapt our cost base quickly. As Keith mentioned, we are confident in our full-year guidance and expect to deliver another set of strong results when we speak again in October. With that, I'll turn it back to Keith to wrap things up.
Thanks, Nadeem, John. Just to wrap up, looking forward, a lot's been made about our tough comps the back half of the year. Tough comps are what happen when a company performs. We're realists. We're going to stay humble. We're going to stay focused. We understand the demand environment is not without its challenges. You can be rest assured this team's going to be focused, disciplined, and committed, and competent to delivering our guidance for the year. These results are a testament to the power of our operating model and CP's ability to execute operationally, financially, and commercially, all at the same time. With that being said, let's open it up for questions.
Certainly. If you would like to ask a question, just press star one on your telephone keypad, and if you would like to withdraw your question, press the pound key. As previously highlighted, please limit your questions to two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Chris Wetherbee of Citi. Chris, your line's open.
Hey, thanks. Good morning, guys.
Good morning.
Maybe wanted just to pick up on that comment about the second half and the comps that you guys face. If you could talk a little bit about some of the key commodity groups that you feel most confident about in terms of maintaining the mid-single digit RTM growth as you face some of those tougher comps. If there is some sort of demand sluggishness, maybe what are the areas where potentially you could see that kind of flow through? Just kind of curious about what your outlook is there on the volume side.
Chris, I can start off. This is John. Look, we turned in a really strong Q2 in the bulk side of the business, and I see that tailwind continuing. As I mentioned, we're kind of in the grain trough a little bit right now in July, but I expect upside as we move through the quarter in the grain. The potash demand environment continues to be strong. Certainly some weakness in the domestic side, but we think that picks up through the quarter, and the export side continues to be very strong. Teck is, for the most part, sold out through Q3, so we'll continue to see some tailwind there. Our year-over-year comps as it results to international intermodal, we still have I think some upside as I look through Q3 in that space, sort of despite some of the challenge that others are facing.
We haven't seen the blank sailings with our customers in that area. I'm positive on all that space. I think we've outmatched the industry on the auto sector here now for the second straight quarter, and frankly, I think that trend continues as we move into Q3 also. Then the crude side. Yes, it's variable, and there's certainly some moving parts that need to be worked out here. The contracts are in place, and we're actually, I think, more optimistic today than we have been that these issues are going to get resolved, and there could be significant upside in crude by rail.
Okay. That's very helpful. I'm down. Last quarter, Nadeem, I think you were pretty constructive about the potential for the OR in the second half of the year, even facing the more challenging comps than you had here in 2Q. Could you speak a little bit to sort of how you're feeling after getting the second quarter done? Obviously, really strong performance. You mentioned very high incremental margins. It doesn't appear that there's anything sort of blocking that as we move into the back half of the year, but if you could put some color around that'd be great.
Let me set this up for Nadeem. We're still convicted, Chris, over to you, Nadeem.
Yes, I think, Chris, we're doing what we say we're going to do in terms of, as Keith noted, that our conviction comes from that, comes from a network that's running, as we mentioned, as good as we've ever seen it. It comes from that what's in our DNA of strong cost control and not getting lulled in a false sense of confidence. In times like this where you see a bit of softness, you can start putting assets aside proactively and only adding resources where necessary. Same level of conviction in the back half. Yes, we have some tough comps, but we feel very good about what we can do from a cost control point of view, and those incremental margins will add to the bottom line.
Yeah. The fundamental demands, Chris, that drove the performance of second half of last year exist the second half of this year with even more pent-up demand, so to speak, and an ability for us to execute given our investments. Think about the grain fleet alone. We talk about investing in our hopper fleet, the efficiencies we get from that. We'll just start to begin to realize some of those operational efficiencies, meaning fewer bad orders, meaning more velocity with the fleet, meaning I don't need as many cars. I'm moving the same or more grain with fewer cars. We're looking at doing things with our potash fleet to respond to surging demand or record demand with our customer and partner in Canpotex. Running 200 car potash trains to Vancouver, and even to a point we're testing with UP over Portland, we ran 188 car train just recently.
We're going to continue to push the envelope, squeezing what we can of our assets to do more with less, all within the mantra of precision scheduled railroading as we continue to deliver service. As we do that, costs come down, capacity increases, velocity improves. It's just a different space to operate in with the same or better demand. In the second half, you should expect better performance, which is exactly what this team is focused on producing.
Helpful call. Thanks for the time. Appreciate it.
Thanks, Chris.
Your next question comes from Walter Spracklen of RBC Capital Markets. Please go ahead.
Yeah, thanks so much. Good morning, everyone. Coming back to Keith, your comments about how much more improved the handling is, the complexity is improved. I look back at your, just eyeballing the last few years, going from second quarter to third quarter, you've done anywhere from, obviously summer railroading in Canada is a lot easier, and you've done anything from 200 to 600 basis points quarter sequential. Nadeem, you talked about 100 basis points on the year as something that you generally target, gosh, everything looking at it here, given the items, Keith, that you mentioned, it suggests that you could be well above the 100 to 200 improvement year-over-year on the OR. When we go into the next year, with Yang Ming coming in and the lower complexity of everything consolidating in Deltaport.
My question is, are we beyond the 100 to 200 that we've typically come to expect in operating ratio improvement on an annual basis?
Walter, I love your optimism and your belief in the model. Part of this, the art of the possible, we exceed our expectations that have in the past, but you're talking about quantum leaps in areas that we've made quantum leaps, and it's just hard to keep setting a world record mile redoing it every year. We're going to continue to improve. We're going to sweat our assets, their puts and their takes, and we're going to drive in spite of the headwinds that we face in these areas. We're going to get incremental margin improvement for the next several years given the business that I see laying on the railroad. You could say there's some conservatism in our guidance. We feel we need to be responsible and guide to what we feel confident that we'll be able to deliver.
At the same time, I don't want to be overexuberant and mislead and create a bar so high that we disappoint. I don't want to demotivate my team either. Rest assured you got a team here and you got a leader and a leadership team that will push this envelope in a responsible, constructive way. We expect and we hope to exceed your expectations, but I can't tell you that I see 200 basis points of opportunity given all the moving parts that we see out there and all the things that may or may not happen with winter. Could I make a case where everything goes our way? A euphoric case? I'd love to be able to control that. I can't. I've got to be reasonable, and I've got to be responsible in what my guidance is.
I see confidently ability to get that 100 basis points, but I'm not willing to extend this to the two. Not yet. I want to wait and make it happen instead of assume it's going to happen. I just don't think that's a responsible way to handle it.
Yeah. I'd add, Walter, that the stock-based comps is probably the biggest headwind in terms of, it's a first-class problem and certainly something that our shareholders won't complain about in terms of that headwind, but that adds a bit of a challenge when looking at year-over-year.
Fair enough. I appreciate that. Going now down to the EPS level, I know you're double digit for this year, long term double digit. Double digit, obviously a very unspecific wide range. Consensus is moving up now into that mid-teen. Might after this go into the mid-to-high teen. Are you comfortable with that kind of progression? You did 36% in the second quarter. Are you comfortable with that trend as you demonstrated very strong second quarter results that expectations go up into that mid-to-high teen range?
I'd echo what Keith has conveyed on the OR side. We want to be able to deliver on what we're committed to. We've kind of talked about the low double digit type of range. Call it conservative or what have you. Just mindful of the things we can't control, which is these curtailments and if stock continues to run, that can be a headwind and if you have some sort of weather disruption in December or what have you. We're mindful that there's still a long way to go. We're confident in our ability to grow double digits. I don't want to get into the weeds of what level of double digits, so I'll just leave it at that.
Sure. Okay. Appreciate it. Great quarter, guys.
Thank you.
Your next question comes from Fadi Chamoun of BMO. Please go ahead.
Good morning. Thank you. John, you mentioned pricing in the 3%-4% range. Is this pricing kind of broad-based? Are you seeing the strength across all the segments? I'm particularly curious about the intermodal market, the domestic intermodal market. We are seeing some easing in the freight demand environment, I guess. So if you can speak to that, please.
Yeah. Fadi, we were talking earlier this morning, I'm quite pleased with the discipline the team has been able to show and the results we're producing on the pricing front really now going over the last year, quarter by quarter. We landed in that upper end of that range again, and as I look at the renewals pushing into Q3, I think I feel pretty confident that we're going to be able to sustain that. Certainly, as you called out, there's some areas where there's some weakness or a little more challenge than others. We have seen, as you said, some weakness in the domestic sector, particular retail type business. That being said, the pricing is held in there also pretty decent, maybe towards the lower end of that range specific for that area.
I would also just call out, particularly for Q2, we did see some pretty positive mix, a point and a half in that space. It had to do with less of our longer haul crudes. We have some shorter haul crude that took place that impacted that. Frankly, just some of our new business pricing has been quite strong that we've brought on this year.
Okay, great color. Thanks. The second question I had is, you feel very positive, obviously, about the opportunities to grow well into 2020, and you have few new business awards that you have already communicated. Is the CapEx outlook kind of continuing to be in that CAD 1.6 billion range into 2020? Do you see that creeping up? As related to that, maybe to Nadeem, the free cash flow conversion, like net income to free cash flow conversion has been just about 55%, I think, on average for the last few years. Can you talk about kind of the levers that you have to kind of improve that as we move into the next two to three years?
I understand there's some improvement in the margin, obviously, but is there anything else maybe on the CapEx side that is unique that you can highlight that could help improve cash flow performance? Thanks.
Okay, Fadi, if I can, I'll take the capital question. I'll let Nadeem expand on the free cash flow. When it comes to our capital envelope, the answer is no creeping. The same discipline in running the railway, it's the same discipline approach on managing capital. As we talk about the formula, what's the art of the possible? How do you get sustainable low-cost growth? You create capacity, you sell to the strength of your network, you sell and you birth the capacity you have. When you sign up new customers to grow the book of revenue, you're in lockstep with the capacity or the capital that's required to create that capacity to be able to deliver the business. If you don't, you jeopardize the entire operating model and success across every line of business.
The business that we signed up for 2020 and 2021, the assets we need, be it a locomotive being remodeled, remanufactured, the surgical siding here, siding there, CTC here, there, CTC there, inspection truck here, inspection truck there, all that's in the plan. It's all baked into the plan. You will not see a big swing in our capital envelope as we bring on this additional business in 2020 and 2021. In fact, after 2021, you'll start to see our need for capital based on what we see today, taking into account the growth, actually to diminish and come down, not go up.
Perfect segue to your second question there, Fadi, about what we did, where we invested, where we continue to invest the opportunities right now on the covered hoppers, on locomotive modernization, what we did with Alyth Yard and will do in Minneapolis as well to support our service, to support our growth agenda. Those things start tailing off, I think the next leg of the story is going to be a very positive one from a free cash conversion point of view. If you look in the once we get past the investment in covered hoppers in that 2022 timeframe, you'll start seeing free cash conversion more in the 75%-80% kind of levels. I think that is something that's somewhat overlooked. I think that's going to be a very impactful story to CP and what we can deliver.
I think you're right on in terms of what we can achieve and where there's next opportunity.
Thank you. Appreciate the color and the great quarter. Thanks.
Thank you.
Your next question comes from Allison Landry of Credit Suisse. Please go ahead.
Good morning. Thanks. I just want to go back to the question on the RTM guide and ask it in a little bit of a different way. If I'm just doing the math to get to, call it, 4% or 5% for the full year, basically on a sequential basis, second half RTMs need to increase somewhere in the low double-digit range versus the first half. That's a much bigger sequential increase than we've really seen historically. Maybe putting the tough year-over-year comps aside, how can we think about the sequential ramp in RTMs in Q3 and Q4? Maybe based on the commodities that you talked about earlier in your response to, I think Chris asked the question, potash, grain, crude, et cetera.
Allison, if we're up 2.7% year-to-date already, I don't think we need double-digits to get to mid-single-digit. I'm not sure.
Sequentially, I meant, not year-over-year.
Sequentially, right. These are the tough comps in the back half. I'd point out to John's comments on the strength in bulk areas like potash. You're going to see a ramp-up in crude, which is going to support a strong sequential RTM growth.
You're going to see a pickup in Teck coal. The coal itself month-to-date, we're talking about some of the softest we see. The growth that we experienced in the second quarter, Allison, was in spite of actually shipping less coal due to some supply chain challenges. It's not a demand issue. It's just working out some noise that's in the supply chain, which is working itself out. We're realizing in the third quarter, we've shipped month-to-date more than we did last year. All those things, with a 3.5% year-to-date number, the second half sequentially, you can be at it a little bit north of the mid-single-digit and you're going to come to the math that we're coming to. It's not hard to get there.
Okay. All right. Sounds like you guys are pretty confident there. Keith, I think in your prepared remarks, you talked about basically hitting a record for workload in terms of GTMs on the network. Where do you think you are from a capacity or resource standpoint? Obviously, the really strong incrementals in Q2, it seems like the network's in great shape. If volumes and workload growth persists, at what point might you need to layer back in some resources, specifically on the headcount side? Thank you.
The only place that we're not capacity constrained, we're capacity contained. We're trying to be in lockstep is locomotives. We said that all along. We've got more than adequate track capacity, terminal capacity. We made some strategic investments in Calgary that we'll realize this year and through the fourth quarter. We just converted what was an old hump yard into a very productive switching yard, and we didn't finish that until first week of January, so we haven't even realized the benefit of that in the fourth quarter. Again, locomotives, that's it. We're training, we're hiring in lockstep with our demand to make sure we've got the running trades employees ready to pull and operate the locomotives, and we're bringing the locomotives online as we remanufacture them in lockstep with the demand as well. The game is not to be long on assets.
We've got the right things, the right parts moving in the pipeline to be just on spot with assets. When it comes to track and terminals, we're not there at all. In fact, our capacity, our flexibility, our ability to handle surges is drastically improved. We've got more capacity than we've ever had in partnership with GCT at Deltaport. Our South Shore is working extremely well. We're hitting records with our grain partners there, creating capacity. It demonstrates the fluidity of the network. We're talking about record volumes. We put more stress on this network than has ever been put on this network in its history, in its 138-year history. Year-over-year, we increased train speed by 5%.
That just tells you there's resiliency in this network, if you're an investor, you don't need to get worried about this company getting into a trap or playing a catch-up capital game, or we're over-committing. It's a surgical execution of a strategic plan we developed two years ago in lockstep in partnership with our customers, protecting our customer service, protecting our investors' trust and our employees' trust. That's what we're doing day in and day out, that's why we have so much conviction and confidence in our guidance.
Great. Thank you, guys.
Thank you.
Your next question comes from Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.
Hey, great. Good morning, and congrats on a solid quarter, Keith and team. Just the employees, how do you think about the trends as you grow in re-add costs? Should it stay low mid-single digits with volumes, and your thought on the impact to the OR with the employee base?
Yeah, on the employee base, this year, mid-single digit RTM is 1%-2% headcount. We're up a little bit right now with capital work at its peak. That'll come down sequentially, and we'll be that 1%-2% on a mid-single-digit RTM. That's the best way to gauge it.
We were kind of pre-hiring and getting our people up in anticipation of the crude contract with the Alberta government that started here in July. We've kind of pre-hired for that. That was already in the cost base as we speak.
You're ahead on employees then because of it?
Yes.
Okay. My second one is on the crude-by-rail, just given what you were just highlighting, Nadeem, on Alberta's commitment and the shift of that potential. I know that wasn't in your commitment for volumes, but maybe talk about what you expect to be the outcome or what you're seeing so far with negotiations and where do you see crude-by-rail volumes trending going forward?
Yeah. You know what? I'm pleased with the progression of those discussions with the Alberta government, Ken. We're seeing a good expression of interest from a number of shippers in terms of commercializing, if that's the right term, that capacity. There's efforts underway with the major producers in the government to try to find a workable solution, you've probably read about it, I'm sure, around the production levels matching curtailment, and if they can prove that that's going into a rail car, they would get that sort of equal relief. Those discussions are ongoing. My guess, it's probably at least another couple of months, maybe more of a Q4 story in terms of resolution and getting ramped up. All that being said, we did about 25,000 car loads in Q2.
I can see that jumping up to 30,000 car loads with the potential for upside as we look at Q3. We've got a fairly steady ramp-up of sets coming online as we move forward here.
Yeah, I think the only thing I'd add, Ken Hoexter, is, listen, this is a space, we're realists. It's been volatile. It's been unpredictable. I would agree with John. I'm cautiously optimistic, and I see the parts moving in a favorable direction for a favorable resolution. The fundamentals are we've got a lot more oil being produced and pipeline capacity to take it away, and there's a demand for it in the market. We just got to work through this, and we'll continue to work in lockstep with the government to get this issue resolved. I think you'll see fourth quarter, some robust demand that's just going to be in the marketplace, which will represent some upside. If all other things work for us and all the things line up right and mother nature's good to us, there's a bit of optimism in the fourth quarter.
All those things have to happen, but again, there's more fors lining up than against as far as trying to get this resolved in the crude space.
Great. Thanks for the time, guys.
Yeah.
Thanks.
Your next question comes from Tom Wadewitz of UBS. Tom, please go ahead.
Good morning, congratulations on the strong execution in the quarter. Wanted to ask you if you could give me kind of a high-level frame, perhaps, John or Keith, on share gain this year and how you might, I don't know if share gain is the right term, but new business, let's say, and what the revenue contribution is if you kind of put it together for this year. Maybe at a high level on how we think about that in 2020, whether that revenue contribution from new business would be larger or similar or just some high-level frame on the new business impact.
I think it's a good indication of, Tom, why you see what we've been able to do in Q2 and our confidence as we look into Q3 and Q4. We've added Dollarama. We've built an auto compound. We've seen significant upside with K+S as they continue to ramp up. Potash, the bulk remains strong. That albeit not new, but I think we're performing well in terms of our share in those spaces also. We've talked, I've talked quite a bit about wanting to further develop and grow our transload business. I can tell you we've had quite a bit of success. As you look at in the Eastern market with refined fuels business growing strong through transload. Our Hamilton steel facility has grown double digits in terms of that throughput. You start adding all those things up.
I just looked the other day, we've added about CAD 35 million of annualized new business with our short line partners so far this year. That's sort of low-hanging fruit that's been out there for quite some time, and you put a little focus to it, and that sort of singles and doubles start adding up. I think those are some of the things that are helping propel us today. As I look into next year, in 2020, of course, you got the Yang Ming and the further auto opportunities that we've spoken about, as GLOVIS hasn't even fully ramped up yet. You got the G3 terminal opening up next year. We've got a project for refined fuels with Suncor that we've spoken about publicly that'll start up next year.
Again, we forget about this business, K+S has really ramped up well and they expect another big step function of growth as we look into 2020. You start putting all that into a blender and it becomes a pretty compelling story.
Let me ask it a little bit differently. Just, do you think it's a bigger impact this year in terms of the revenue contribution from new business, or a bigger impact this year than next year? Is it kind of similar next year, or how would you describe the magnitude?
I think it frames the magnitude in mid-single digit RTM growth and double-digit earnings confidence, Tom. That's probably the best way to summarize it.
Okay, fair enough.
Okay. Thanks, Tom.
I guess the second one, just on-- Keith, can you add a little more to your comment on Hyundai in terms of what that means that they're changing, is there kind of new business for you on the volume side with Hyundai, or that's primarily efficiency? Or just maybe build a little bit more on your comment that you started at the beginning of the call.
Yeah, I think it's both. I think it's growth and volume for Hyundai. I think that it's also efficiencies, and I'll say this and explain it. They're served at Deltaport. Through all the consolidation of the shipping industry over the last several years, where they landed with their partners they weren't benefitting. They haven't realized the same cost synergies that some of their competitors have. Although we follow their business out of Vancouver, the size of the pie has been reduced because they've been at a cost disadvantage. Move forward to 2020, they sign up with the alliance. They're enjoying industry-best service. They're going to enjoy industry-best cost. They won't be at a disadvantage anymore, and we firmly believe that as a result of the cost advantage and the service improvements, they're going to grow in the marketplace.
When their ships get fuller, our trains get fuller. It's a quality revenue problem or opportunity for us, at the same time, any time we can take complexity out of precision scheduled railroading, you minimize the moving parts. The remaining parts move faster. The dwell on the dock is going to be lower. The trains are going to discharge larger and on time more frequently. It allows me to move my assets faster. My crew costs are going to be optimized. My equipment costs could be optimized. My velocity is going to be optimized. It creates capacity, it just hits you across every business unit incrementally because it's moving in some of our highest density corridors.
It's a positive, positive, positive that I get just as excited operationally, because not only does it allow us to enjoy the benefit now, it allows us to sustain constant improvement as we go forward as we become better railroaders as we get better through our investments and through our execution, executing our operating model day in and day out. It's a win-win not just for intermodal, but for CP and for all of our business lines that go through Vancouver, given it's such a key corridor for this railway.
Okay, great. Thank you.
Thank you, Tom.
Your next question comes from Scott Group of Wolfe Research. Please go ahead.
Hey, thanks. Good morning, guys.
Good morning.
Good morning.
Nadeem, wanted to ask a follow-up on the guidance. Do you think that we maintain double-digit earnings growth in third and fourth quarter?
Yeah, I didn't hear the last part. In what?
Do you think we maintain double-digit earnings growth in third and fourth quarter? I understand full year. We don't want to get into the double digit versus strong double digits. I'm just trying to isolate second half of the year.
I certainly expect that's fair representation in Q3. Q4, it may be a little bit difficult. I'm not going to give you a quarterly guidance on EPS. Looking at what Q4 was, that was an all time record EPS number for the company.
Okay. That makes sense. Keith, I don't know if I'm a little early to ask this, but I think that the 10-year Teck contract comes up next year, and it's the first time sort of this management team has an opportunity to take a look at that contract. Do you think there's big opportunities either from an operating or pricing or just philosophically opportunities with that contract since it's been 10 years?
It comes up in 2021. You are a little bit early, Scott, rest assured, it's not something that we're not thinking about. Listen, here's the strategy at this company. It's our objective to become integral into the companies that we partner with their success, because when they do well, we do well. We want to be part of their supply chains. We're part of the reason that Teck is able to enjoy
Reliability in the supply chain and low cost producer and win market share in world markets. We're part of the formula. As long as we continue to play that role, we continue to be good supply chain partners. We originate the coal, we have access to Neptune, access to Westshore . We're going to continue to be a key player, strategic player, and create compelling value that's going to be hard to walk away. When you talk about huge opportunities, to me, the opportunity is to strengthen the partnership and help them grow in the market space.
Quantum leaps in productivity, listen, we're always going to push to move things better. If we can knock out some of that noise, making the supply chain more reliability in partnership with the terminals at the coast as well as in partnership with the terminals that load the coal, we do our part in the middle, yes, there's opportunities. As far as quantum leaps, no. As far as improving and protecting that revenue stream and helping them succeed in the world marketplace, I think we're very confident in our ability to be able to do that. That's what gives us confidence at the negotiating table. We just got to make sense. When you make sense, you're part of what helps the company succeed in the marketplace, it's hard to walk away from that.
Okay, great. Thanks for the time, guys.
Thank you.
Thanks.
Your next question comes from Brian Ossenbeck of JP Morgan. Please go ahead.
Hey, good morning. Thanks for taking my question. John, I just wanted to come back to your comment on the mix. Clearly, it's been strong this quarter, a couple of points as you mentioned. Can you just elaborate a little bit on what was driving that? It sounded like crude was a significant source, but also maybe a mix of new business. If you could elaborate on what you expect. Do you think you can maintain that sort of clip in the back half of the year? How much of that is reliant on continued ramp-up in crude?
Yeah. We definitely saw less long-haul crude Kansas City, more shorter haul over some of our Western gateways and that had a material impact. Some of the new business in the crude by rail space that we've brought on has also come on, as I mentioned, at very strong pricing levels. I look at it like this, Brian, as I look at Q3 and Q4, I think that moderates. I'm not sure we see that mix tailwind like we had in Q2 as some of this other longer haul crude ramps back up.
Okay. Crude is the biggest mover.
It is
in there? Okay.
It is. Yep.
Just another question for you, John, on the Canadian ELD mandates now in effective June 2021, a little bit later than expected. I think you've typically referred to that as sort of upside outside of the guidance, but now it's been delayed a bit, even past the 2020 outlook. Do you think actually having that in place will create any sort of shift as people start to get ready for that, maybe assess what that actually means for the business now that we had something approved and solidified? Or is it still too early to think about any impact from that? Thank you.
No, I think having that certainty in the marketplace now is good. We expect it to be somewhat of a capacity crunch driver when it is applied, and now that we know a locked-in date, we can have those frank discussions on when we get into the renewals and what our pricing looks like between now and then. With the expectation that when ELDs do come about, how that's going to change and impact the marketplace. All in all, I think putting a line in the sand now and having clarity, actually that's sort of helping us out.
Okay. Thank you very much.
All right.
Your next question comes from Seldon Clarke of Deutsche Bank. Please go ahead.
Hey, guys. Thanks for the question. Just getting back to the outlook for margins in the back half of this year. You called out incremental margins of 90% in the quarter which is well above your longer term. Huh?
That wasn't us.
Oh, I'm sorry.
Hey, restate that if you can. It got walked on a little bit somehow.
I apologize. Just wanted to ask about the outlook for margins in the back half of the year in a little bit of a different way. You called out incrementals of 90% in the quarter, which is obviously well above your kind of longer-term range of 65%. You talked about pre-hiring employees, and you had some tailwinds from mix in the quarter. Just kind of given all those moving pieces, how should we think about your core incremental margins in the back half of the year?
Yeah. When we guide the incremental margins, we've talked about that 70%-75% level. We're comfortable with that. Quarter-to-quarter could it change? Could it be a little bit lower and a little bit higher? Yes. Somewhat dependent on the mix of business as well and just how things are operating. I think on the whole, we're still confident with that 70%-75% level.
Okay. Even with some of the headwinds from the pre-hiring in the second quarter, you still expect that to kind of step down? There were enough positives to get that up to 90%?
I mean, yeah, if you take out the pre-hiring, it would be closer to 100%. That pre-hiring was done in Q2. That was in the numbers we just reported, right?
Right. Yeah, that's kind of what I was asking, why it would step back down again.
Well, again, it depends on the quarter to quarter. There's other costs and other things that vary between quarter to quarter, right? If you hit 100% one quarter, it doesn't mean it's going to be sustainable forever. That's why we guide on a full-year basis, not quarterly.
Got it. Okay. Just kind of a longer-term question on OR. Given everything that's going on in the industry as it relates to PSR, it feels like the theoretical floor that management teams are willing to put out there is kind of a high 50s for OR. Just given what you guys have done in the last several quarters, incremental margins at that 90% range, and your core incremental margin at that 70%-75%, what do you think the ultimate floor is for rail ORs over the next several years?
Well, I'd say this. I'm going to speak to what I've got good line of sight to and what I know, and obviously, I can't control it all, and some things could be a little short or actually overachieve. I see an ability annually to improve with our business mix and the growth that we're going to bring online with chair and with partnerships, organic and inorganic growth, a point a year for the next two to three years. I see this going annually from sub 60 out of the possible mid-50s.
Okay, that's really helpful. I appreciate the time.
Thank you.
Your next question comes from Benoit Poirier from Desjardins Capital. Please go ahead.
Yes, thank you very much, and congratulations for the good quarter. John, just in terms of forest product, obviously a very good performance when we look at the revenues up 8%. It seemed a big discrepancy versus the industry. Could you maybe talk about what are the key drivers here in terms of forest product and what you see kind of for the second half?
You know what? We've actually seen quite a bit of success in two areas. One is our pulp business has been quite strong. That's sort of a derivative of our growth in our international business that has allowed us to grow the pulp business for export back out of Canada. We've seen good success in that space. Our team has been focused really on asset utilization of our centerbeam fleet. The lumber market has no doubt been challenged, but I think we've targeted into the marketplaces that we do see sustainable business and then really focused on asset utilization with our partners into those marketplaces. There's no doubt, as I look into Q3 and Q4, there's going to be some headwinds in that space. Certainly, we got the sawmill curtailments that are somewhat ongoing in BC.
The good thing is that has less impact on us, and frankly, because a big part of our network in the West is transload, origin transloads, we've actually got a little bit of insulation from some of that impact. I do expect that Q3 and Q4 in the forest product space will certainly be more challenged in the lumber space. We're certainly going to try to sustain it as we look into our pulp business.
Okay, that's great color. Maybe a high-level question for Keith. When we look at the strength of the Canadian dollar, obviously right now at 130, still in line with your assumption for the year, no material impact on the bottom line. Does it influence the way some of your customers think about their business strategy? Is there a certain level where the Canadian companies could become, let's say, having more difficulty or more competitive issues, Keith?
Well, it's the same fundamental that exists. A lower Canadian dollar generally is going to favor the Canadian producer because it gives them a little bit of advantage reaching the marketplace on exports. As long as that is there, I don't see a whole lot of change. If the Canadian dollar were to get remarkably stronger, could you see an impact? Maybe. I just don't see that as a possibility or probability in the immediate future.
Okay, perfect. That's great color. Thanks for the time.
Thank you, Benoit. Take care.
Your next question comes from Ravi Shanker of Morgan Stanley. Please go ahead.
Thanks. Morning, everyone. I know there's a lot of focus on crude by rail in the near term, but if I were to ask you a longer-term question in terms of the conversations you're having with your customers and the constant delays you're seeing in new pipeline projects, is this still viewed as a three-year opportunity, or are you having constructive conversations for longer-term contracts and seeing those volumes extend beyond that initial window?
Well, I'll let John add color if he'd like to, Ravi, but discussions when this all started, it would have been two to three years is based on pipelines. Those expectations have been far missed. There's so much uncertainty with the pipelines, a three- to four- to five-year discussion is possible. I think it extends the tail a bit. I still believe the pipelines will be built. There's too much of a critical need. There's just a lot of noise and a lot of hoops and obstacles to get through, but they will come. There's a bit of a tail to our two to three when we started this thing, but it's not going to be a forever tail, which I continue to remind John and the commercial team, we're making 30, 40-year asset decisions at this company.
It's certainly not that kind of tail, and we're not going to overextend our capital, overextend our company based on a four- or five-year opportunity on a 30- or 40-year decision.
Yeah. Ravi, Keith's bang on. Our discussions, just frankly with the producers, these contract lengths are lining up in a three- to five-year range.
Got it. When you mentioned that long-term outlook, I think your peer is maybe looking at some growth opportunities beyond just the core railroad business, port acquisitions and such. Can you just give us an update on what your M&A pipeline or non-railroad growth pipeline looks like, and if there's any potential activity there?
I guess the shortest update is, given our opportunities, our own unique storage CP, we're not interested in pursuing a strategy to buy trucking companies. We're railroaders. We're going to continue to play to our core strengths. Does that mean that we won't look at partnerships? Does that mean that we won't take strategic steps to make sure that our customers have a level playing field and continue to win market share based on the strength of our service? We'll do that. As far as buying trucking companies, we're not in the market.
Understood. Thank you.
Thank you, Ravi.
We have no further questions at this time, so I will turn the call back over to Mr. Keith Creel for closing remarks.
Okay. Well, to wrap this up, I want to thank everyone for their time this morning, for your interest. For our shareholders, thank you for your trust and your vote of confidence. We've had a phenomenal quarter. It's behind us now. It's in the past. We're looking forward. We're focused on our convictions to make sure that we continue to meet or exceed our customers' expectations the second half of this year, as well as our shareholders. With that being said, we look forward to sharing our third quarter results later in the year. Thank you.
This does conclude today's conference call. You may now disconnect.