CN's Second Quarter 2015 Financial Results Conference Call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN's second quarter 2015 financial results, press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please stand by. Your call will begin shortly. Welcome to CN's Second Quarter 2015 Financial Results Conference Call. I would now like to turn the meeting over to Janet Drysdale, Vice President-Investor Relations. Ladies and gentlemen, Ms. Drysdale.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us. I would like to remind you of the comments that have already been made regarding forward-looking statements. With me today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, our Executive Vice President and Chief Financial Officer; Jim Vena, our Executive Vice President and Chief Operating Officer; and JJ Ruest, our Executive Vice President and Chief Marketing Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question. And with that, it's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Thank you, Janet, and thanks to all of you for joining us. It's a beautiful day in Montreal, and I'm here with the CN leadership team to discuss our very solid second quarter results. It was a bit of a tougher environment from a growth standpoint, but I'm pleased to - and I'm really pleased overall still with our top-line performance. As JJ will discuss, we had good growth in our service-sensitive segments, intermodal, automotive. It was much tougher in the bulk sector, particularly coal on an export basis and grain, which is returning to a normal trend. But overall, we did follow the environment and held our own in what's a bit of a challenging environment. Most importantly, we had a very swift response to that slower growth environment. We're recalibrating our resources to drive efficiency. As Jim will describe to you, all of our core metrics are in line or better than last year, and that's very important because that's all we can do when the environment is a little tougher from a volume standpoint. It's how fast and how efficient you are at reacting that makes the difference. How we react though is about maintaining balance between operational and service excellence. It's really a combination of both, and I'm pleased to say that we delivered superior service in all of our market segments during the quarter and also delivered a record operating ratio of 56.4%. Overall, that drove the data in terms of financial results. Luc will give you more of the details, but our diluted EPS at CAD 1.15 is up 12% on a year-over-year basis as adjusted, and we have very strong free cash flow in excess of a CAD 1 billion of free cash flow after only six months during the year. So very good results overall, good balance, good focus, and we're pleased with the momentum that gives us entering the back end of the year. With that, I'll turn it over to Jim to cover the operational highlights.

Claude, as you said, it's all about balance. Operating the railroad is all about reacting quickly to changes in workload in an efficient way. We responded quickly to the change, keeping cost in line with the business level. Key drivers for us are train starts, yard expenses and rolling stock inventory management. In the charts, you will see a small drop in train productivity as measured in trainload. However, this drop was driven by a change in product mix, not by us not responding to the change in business level. If you look at train productivity in terms of train length, we were up 1.3% year-over-year. With our continued focus on train productivity, we will be able to continue this improvement. In June, train length was up almost 3%, and trainload had improved by 1%, both on a year-to-year basis, and we continue to see that as we go through the month of July. With train miles being reduced, we immediately cut back on the active locomotive fleet, less productive and less reliable units out of active service, the ones with the little gray hair on them. Currently, we have about 200 locomotives stored and locomotives we have stored across the whole network to respond to any changes in the market and the business that's there. Locomotive productivity at 223 trailing GTMs per horsepower-hour was the new quarterly record, beating the previous record we set in Q2 of 2014, so a good result. Yard productivity also improved year-over-year, up 4%. This was challenging to do with workload dropping. You do not want to cut back and hurt throughput. We reacted quickly, undertaking a terminal-by-terminal review, cutting assignments and yard expenses ahead of the curve. As I've often said, there is no better measure of overall railway performance than car velocity.…

Well. Thank you, Jim, and thank you to the team - for your team for the fluid service we've enjoyed in the second quarter. Its JJ now speaking and I will walk you through the second quarter revenue and then provide you with a commercial outlook. The revenue was flat to last year at CAD 3.125 billion. The breakdown is as follow, the weaker volume accounted for roughly 3.5% to 4% drop in revenue. The carloads were down 49,000 units. Coal alone went down 36,000 carload. Grain was down 20,000 carload, and crude was down a disappointing 8,500 carload. Solid same-store pricing came in at 3.9%. And as you remember, same-store price is net of exchange. It is also net of fuel surcharge fluctuation. The weaker CAD 81.03 gave us 6.5% of incremental revenue, and a lower applicable fuel surcharge took away 6% of revenue. In short, the deceleration in carload and fuel surcharge revenue was wholly offset by solid pricing and by gain in foreign exchange. Now, we'll go through the highlights of the revenue on a as reported basis to the major business units, starting with forest product. U.S. housing starts drove lumber and panel revenue, and the offshore export of lumber was also constructive. Wood pulp export was strong, increasing 18%. We have good car supply, and we continue to upscale the quality of our business mix using our high-velocity pool, low-velocity pool destination program, which result in solid yield improvement across our merchandise railcar fleet. Automotive, revenue grew. Growth was fueled by strong industry sales, a favorable long-haul mix of business for CN and the year-over-year effect of market share gain from last year. Petroleum and chemical, the CN crude shipment were 23,000 carloads in the quarter, a 27% drop in volume from last year. Industry-wide,…

Thank you, JJ. Starting on page 12 of the presentation, let me walk you through the key financial highlights of our solid second quarter performance for 2015. As JJ pointed out, revenues were in line with last year at just over CAD 3.1 billion. Fuel lag represented a revenue headwind of about CAD 8 million or CAD 0.01 of EPS in the quarter. Operating income was CAD 1.362 billion, up over CAD 100 million or 8% versus last year. Our operating ratio was 56.4%, a record level for a second quarter. This represents a 320 basis points improvement over last year. Other income in the quarter was CAD 16 million, up CAD 14 million versus last year. Now, this is always a bit of a difficult category to forecast for timing, but for the first half of the year on an adjusted basis, we are at about CAD 20 million, just over CAD 4 million above last year. Net income stood at CAD 886 million, up 5% and the reported diluted EPS reached to CAD 1.10, up 7% versus last year. When excluding the deferred income tax impact of CAD 42 million or CAD 0.05 per share, resulting from the enactment of a higher provincial corporate income tax rate in the quarter, the adjusted diluted EPS stands at a CAD 1.15, and that's up 12% versus last year. The impact of foreign currency in the quarter was CAD 64 million favorable on net income or CAD 0.08 per share. Turning to page 13, as Jim indicated, we made significant progress in terms of efficiency, productivity and cost management in the quarter. Operating expenses were lower than last year by about CAD 100 million or 5% at a CAD 1.763 billion. Expressed on a constant currency basis, this is an improvement…

Okay. Well, thank you, Luc, and thank you to the rest of the team. Just to summarize, we reacted quickly to realign our resources during the quarter and delivered a very solid Q2 performance. We clearly see some global economic uncertainty in the current environment, but we're leveraging a great franchise in a very well-diversified portfolio. As Luc just said, we're reaffirming our EPS guidance for the full year and we continue to keep our eye on building for the future. We have a solid pipeline of growth and efficiency initiatives, and we are staying squarely focused on our strategic agenda. With that, Patrick, we'll turn to the Q&A.

Thank you. We'll now take questions from the telephone lines. [Operator Instructions] The first question is from Chris Wetherbee from Citi. Please go ahead.

Hey, great thanks and good afternoon, guys.

Good afternoon, Chris.

Obviously, a very, very strong performance on the operating ratio. I wanted to sort of get a sense as you think about the rest of the year and typically from a seasonal perspective, 3Q is a little bit better than 2Q on the OR. When you think about the puts and takes and sort of flattish-type volumes going forward or potentially even down, how should we think about that typical seasonality playing out into 3Q and 4Q? I just want to get a rough sense of maybe what might be changing particularly around some of the expense items that would be helpful?

Well, as Luc said, Chris, our Q2 operating ratio was a record all-time, not just for CN, but for the industry. We also had a lot - I mean a very good start in terms of our capital program which brought forward capital credit that normally peak in Q3. So, I think we should be delivering a very, very strong Q3. I'm not sure the sequential or the relation between Q2 and Q3 will hold to history, but we're in the current environment. And I would like to add, obviously, the low fuel price is helping just the math here in terms of the OR. But we feel the operating ratio should continue its very, very strong performance between now and the back end of the year, and it's testament to our efficiency focus and the fact that we're reacting swiftly to realign resources.

So, it feels that you should have appropriately resourced for the volume environment as you're heading into the third quarter here.

We think we are staying in balance and we'll adjust as we go, but we are caught up right now and should continue to drive very, very strong efficiency as we have in Q2.

Right. Thank you very much for the time.

Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Thanks very much and good afternoon. The window - the rate on regulated Canadian grain is going to start impacting same-store pricing as you reported next quarter. I was just wondering excluding that impact, do you think the capacity across the transportation space remains strong enough to stay towards the top end of your 3% to 4% pricing objective?

Yeah, you're right. Regarding the Canadian grain cap, it's effective August 1, but we don't set up right in August 1 but something that's digested over a period of 12 months from August 1 to July 31. So, we know that and we know that when we say that our pricing will be in the range of 3% to 4%, including what the Canadian government is doing on the grain cap.

Thank you. That's my one.

Thank you, Cherilyn.

Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead.

Yeah, great. Thank you. Good afternoon. Wanted to see if you could give us a sense of how you think volumes may play out. I guess you - yeah, I know that's pretty tough question. I suppose it's a bit of a guess in certain markets, but you said full-year volume is kind of flat, but you were up a lot in first quarter and kind of down 3% in second. Do you think that you'd see kind of less worse third quarter and then maybe flat year-over-year in fourth quarter, or do you have any sense of how we might think about that and even into 2016, whether you'd have conviction that you'd return to growth or just kind of how we might look at the contour of volumes over a couple of quarters? Thank you.

Yeah. JJ may answer this, but I think we should see a gradual improvement in Q3 going to the Q4 peak season, and we're - to finish generally comparable on a year-over-year basis, you have to have flattish growth overall for the next six months. This conceivable, we would be a little down again in Q3 and then start to turn the corner in Q4. JJ, do you have a little more color on that?

Yeah, that's right, so flattish to potentially slightly down in the third quarter. And when you look at the evolution of the carloads and the revenue ton mile, the RTM, eventually the RTM will start to come back up a little faster than the carload because of the bulk business. We're not moving all of our bulk right now. And eventually, we'd be moving grain and eventually a little more potash during the fall peak. So fourth quarter volume-wise, whether you call it RTM or carload, it should be slightly better than the third quarter. But all of that together is we have some bulk segment where, still, we're limping along, as I said iron ore, coal, grain, field of next crop, and the crude by rail is sort of we're not too sure exactly where that goes from quarter-to-quarter.

And on that energy side, Tom, I mean it's margin. If the spreads were to widen significantly, maybe we'll be surprised on the upside, but we're taking the view that right now, it takes kind of - it takes a while to adjust to the current circumstances and we're just not sure we're going to have growth in this energy complex that we can count on for the full year.

Any early thought on 2016?

No. I think we'll cover that when we have a better visibility, Tom. Thank you.

Yeah. It's early.

It makes sense. I appreciate it. Thanks for the time.

Thank you.

Thank you. The next question is from Walter Spracklin from RBC. Please go ahead.

Yeah. Thanks very much. Good afternoon, everyone. Just looking back at your guidance and how it's evolved over the last couple of quarters, you were starting the year expecting 3% to 4% carload growth with a little bit more optimism, obviously, on the energy markets and pointing to an EPS growth that would approach or target a double-digit. You then went down to 3% but went to a solid double-digit or squarely in double-digit. Now, you're down to flat but reaffirming. With incremental margins being fairly strong in your business and with volumes coming down, you're obviously generating a better margin and still keeping your EPS growth. Is this really just a foreign exchange type of offset or is there - and some good cost controls that Jim mentioned or is there something else at play here that's allowing you to kind of maintain your EPS guidance while seeing some volume degradation through the year?

All right. That was a comprehensive question, Walter, and thanks for the summary on our guidance. I think you did it well. I would just say that, of course, exchange is helping, but exchange has not changed much really over that period. And so, we're adjusting to the lower volume environment by reacting swiftly and making up on the cost side would be the bulk of the situation. But, Luc, you may have a slightly different color.

Well, I think I would just add, I mean, again, the volume may not be everything that we had expected, but it's still very solid. And the pricing that JJ was alluding to 3.9% same store, very solid pricing. So, we've been able to make the most out of, arguably, a difficult environment.

Okay. Thank you very much. Thank you, Walter.

Thank you. The next question is from Ken Hoexter from Merrill Lynch. Please go ahead.

Great. Good afternoon and congrats on a great OR; tremendous performance. Just - it seems like you're bouncing off the bottom on a lot of the energy and other commodities, I think, JJ was throwing out there. So I guess, the question will be for Jim on that. How do you think about the cost returning in this environment just if we do bounce? Claude, you kept talking about parking and adjusting quickly. How about going in the other direction, do you think you get that snapback here on some of these volumes or is it more measured?

Let me just say, bring it on. Jim, over to you.

I was going to say, let him bring it on because we'll use it and we'll see what we can do with it. I think we've shown that we can handle an upside. Bottom line is, Ken, we're always adjusting. It's a continuous - every day, you adjust to see where the business is going to be. That'd be a real good problem to have if it returns and returns quick.

Appreciate the insight. Thank you.

Thank you, Ken.

Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.

Good afternoon. I guess, my question is also on the pricing side. JJ, with softer volumes, obviously some of the capacity snugness is probably a little bit less than we had last year. I'm just wondering, how comfortable are you with that 4% price increase number, and kind of what gets you there, on the same store?

Thank you, Turan. It was 3% to 4% and we're sticking to the 3% to 4%, where we did 3.9% in the second quarter. Most of our market, I would say, they're in balance. We have enough equipment and service and crews and capacity and locomotive to do a great job. In some segments, it's fairly recent that we'd be able to caught up. Namely in automotive, it's only in June that we were able to get caught up. Now, we are caught up. And we never really tried to do the heavy price increase on one hand and then a couple of quarters later to cut the price to get some extra carloads. So, we're into a long term and we like compounding effect of inflation plus pricing. And you look at our chart for the last 10 years that Janet has, it shows the effort and the mindset of compounding effect. And so, we try to stay away from the commodity type approach of commoditizing rail freight as you would tend sometime to do in export coal or crude by rail because of the downside of that midterm, right? So what we have, 3% to 4% above inflation, steady Eddie. That's the game plan for 2015 and 2016.

Great. Thank you. Sorry, go ahead.

Steady Eddie, JJ. Next question. Thank you, Turan.

Thank you. The next question is from Bill Greene from Morgan Stanley. Please go ahead.

Hi. Good afternoon. Claude, I wanted to get your take on the OR again, but what I want to focus on is you mentioned, of course, how you are setting sort of the records here, I think, both for you and for the industry. If the business came back, holding things like pension or fuel constant, is this sort of the new bogey? Is this sort of a new normal, or do a lot of these costs come back such that we see with growth comes higher OR, which in a total dollar sense could be fine, but we need to keep that in mind as we think about longer-term projections?

I would say first and foremost, you've got to calibrate your model to the fuel surcharge. I mean, the reality...

Right. Holding that constant, obviously that will have a big impact.

So, we're not taking credits for fuel surcharge coming down or fuel price coming down in terms of our OR, but we delivered exceptionally strong because of all of the initiatives that help us drive value, the quality top line with pricing, the focus on the mix that we are able to hold on to and the reacting swiftly with resourcing. All of that is how you stay in the lead in terms of efficiency, and we're determined to stay in the lead in terms of efficiency going forward. As to predict where it's going to go and the bogey, there's so many moving parts, Bill that I hesitate to even venture a guess. We'll be delivering as good an OR as the environment allows us to, and we intend to stay a leader.

All right. I appreciate your time. Thank you.

Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Yes. Hi. I just want to say also congratulations on this performance in the context of this sort of backdrop on the volume side.

Thank you, Fadi.

But a question for JJ, if you look at your sort of crude business, can you sort of identify what's economical to keep getting pushed at these low oil prices and what's not? I mean I'm sort of trying to figure out if you want to put a number in 2016, and being sort of a worst case scenario for crude, what would that number be in your mind?

You mean in term of the carload or the...

Yes.

Carloads. I would not do this at this point because we've - this year was supposed to be a year where energy were supposed to grow in carload. And in fact, we actually have negative growth on those commodities. So, the world has changed on us. And at this point, it's hard to really get into the next six months. I won't go in 2016. But crude production in the back end that moves by rail seems to be down. Crude production from Western Canada is going up in total, about 200,000 barrel a day for 2016 and 2017. The question is how much of that is going to be available to rail versus crude, crude versus pipeline. So, the spread right now are - they're going all over the map. For example, right now, consumption of crude in Alberta is down because you have refineries and turnaround, so this is not something secular. This refinery will come back, right? Husky will come back in line. Eventually, Shell will do its turnaround and come back. And when they're down, the crude that's locally normally consumed, it needs to go in the pipeline, so that creates temporary widening of the spread and eventually refinery come back in and the crude is consumed locally and that impacts the supply/demand of those pipeline. So, many aspects. And during the forest fire in May was a reversal. We had CNR Rail, Cenovus and MEG, who are producer of crude, who went down for a period of time till the forest fire were close to the refinery, and the spread was ready to collapse, right, because there was excess amount of capacity at that time. So it's hard to read, so it is what it is.

Okay.

We only have locomotive and crude. The customers have all the equipment. So when there is opportunity, we are willing to chase it, as long as the price makes sense and the price may or may not make sense. And then after that, we want to focus on sort of the more fundamental stuff. In the case of frac sand, we seem to have hit the lows in the month of May and now which seems to be running at kind of a running rate, and most of the frac sand is related to natural gas or natural gas liquids.

And maybe LNG is up in Western Canada and that gives us continuing boost in terms of moving sands long-haul towards Western Canada.

Many moving piece - parts around the supply/demand and balance for the pipeline network.

Okay. Thank you.

Thank you.

Thank you, Fadi.

Thank you. The next question is from Jason Seidl from Cowen & Company. Please go ahead.

Thank you very much, gentlemen. Thank you for the time and good afternoon. Wanted to focus a little bit on the intermodal growth that you had. Obviously, silicon, pretty strong in the quarter. I'm just trying to get a sense going forward on that growth rate. I mean are we going to start to see it slow a little bit? Did you guys feel that you had any residual impact from sort of the issues that some of the West Coast ports have had? I'm wondering if you could elaborate on that for me.

The second quarter international growth was as strong as the first quarter, meaning that the business that came to us from so-called - that came to us on the U.S. West Coast port stuck in the first quarter. It also stuck in the second quarter. We actually had bigger volume out of Vancouver, slightly bigger volume in second quarter than first quarter in Vancouver. So, that tells me that our U.S. business is intact. In fact, it was the biggest reason for our growth on the international side, the import to the U.S. Midwest. So what we had is we're getting into a time where the comparable start to change. We haven't added up any new customer. So we're living off the U.S. economy and the demand for that on the import side. And on the Canadian side, the Canadian GDP is a little weak right now, and that's pretty showing up on the import of the Canadian side. So, we're not going to be more following, for the next little while, what's happening in the U.S., GDP, stronger; Canadian GDP, a little weaker and then our own self-help of initiative that has to do with Mobile and New Orleans and expansion in Rupert and Vancouver and Montreal over time.

Longer term, Jason, I mean, Rupert announced an expansion of their terminal. During the second quarter, we were at 775,000 TEUs as a run rate.

Yeah.

And so, this is remarkable. This terminal, not so long ago, was built for 500,000 TEUs. We're running 275,000 TEUs more than that, and the capacity is being built as we speak. I mean Vancouver, for us, was slightly above 1 million TEU run rate. And there again, we're expecting our partners to be looking at their capacity and most likely make investments to grow the capacity. We're having good growth with the slightly lower Canadian dollar in Halifax. There's new service coming there. We're opening new opportunities in Mobile and in New Orleans. This is not a one-trick pony. It's following the opportunities in the market as we go and trying to outpace the economy year-after-year.

That's right. There's still room in Rupert to fit another call as we speak today. And in case of Halifax, we will have some new call coming in late this fall on the export, which will be a welcome news for our eastern network. Thank you.

Thank you, guys.

Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yes. Thank you very much and congratulations for the good quarter. Just looking at your safety matrix in Q2, it's pretty much unchanged versus last year. But just for 2015, I'm just wondering how should we be thinking related to the impact on annual incentive bonus plan and any color on the impact of the recent derailment?

Let me - we're having a strong focus on safety. It's essential in the current environment, and that's - a lot of our capital expenditure is focused on upgrading and strengthening our infrastructure. We're pleased with the fact that we are turning the corner and are getting better safety statistic. When you look at all of the accidents, all of the incidents that we saved that includes smaller incidents that are leading indicators, we are actually down on a year-over-year basis, Jim, year-to-date 17% or so?

Correct.

Our FRA accident, that's all the accidents that are more than CAD 10,000 are flat essentially on a year-over-year basis, year-to-date, and we're focused on making sure that we run the safest possible railroad. It's all about keeping our social license, making sure we can move the commodities that we handle without impacting the communities that we go through. It's a big focus for us.

Okay. Thank you very much, Claude.

Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.

Well. Good afternoon, everyone, and congrats again on the OR. I think you might have even stole some thunder from your former colleagues here. Luc, I wanted to talk to you about the labor compensation benefits like because, obviously, it came down a lot sequentially. And you did have, I think, a lot of stock comp this quarter which in my understanding, that won't repeat because that's an accrual adjustment one-time in the quarter. But you also mentioned pension, and can we go over the effects too in the back half of the year just how do we look at the labor line? Maybe even further for Jim, is there further efficiencies we can get out of the current volume environment where head count could even sequentially come lower in the back half of the year?

Yeah. And Jim can comment a little bit more on that. But essentially, what's going to be happening is we should be looking at flat to negative or to a lower head count during the balance of the year, and we could even end up closing the year probably a couple of percentage points lower than last year. So, we'll continue to see some definite progress on that line and that's part and parcel of driving the lower labor cost. At the same time, we have enjoyed the benefit of lower stock-based compensation, so I think that's an issue which we'll have to see how the stock is going to perform in the back half for the year. Certainly last year, we gained a lot of - stock price went up significantly in the second half. So we may still have a little bit of a benefit there. We'll have to see. On pension, we started out the year and without the benefit of the actual valuation, we thought that our total pension expense would go up by about CAD 100 million. So this is very good news. We'll be in the CAD 70 million range and that gives us, if you look at the back half of this year, CAD 30 million reprieved in terms of the cost increase that we have foreseen. So, I think those are the key elements to the variance. So again, I think lower hiring implies lower training cost. I mean we're looking at everything. We're looking and it's not just on the T&E and the engineering and mechanical, but it's through the entire company that we're focusing on all of the labor cost and all components of it.

So if I could real quick, Brandon, good question. Bottom line is this, my boss is sitting right next to me, there's no way I'm going to give you how much more I think. Is there more left in velocity that are utilization of cars? Absolutely, but I'm not giving you a number moving forward. But same as we're doing up to now, we want to optimize and I think there's something left. So no way I have to say it.

Yeah. He's not saying it, but we both know there's a lot of potential. And I would say tongue-in-cheek, we will gladly take an increased stock price and deal with it between now and year-end.

Smart man, Jim. Thanks, guys.

Thanks.

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead.

Oh, yes. Good afternoon, guys. Just a question related to the cadence of the expense reduction through the quarter, I'm presuming that April was a little more difficult and you probably got some catch-up in May and June as the expense management really started to flow through. I guess I'm just trying to understand how much of that was completely executed by the end of the quarter and/or how much is in the quarter versus how much rolls as well through or carries through into Q3 as well. I think you touched on the labor count issue a little bit already, but just around some of the other categories that might also have some expense reductions sort of built into Q3 that you've already executed on?

It's Luc. I can certainly say that we'll continue to look for opportunities to reduce the purchased services and materials. So again, we're looking at, in some cases, redeploying our own personnel in replacement of outside contractors. The equipment rents, we're continuing to look at what we need to get out there and what can be effectively reduced; same thing on the C&O. So I mean we're really going through systematically every category. Is there the same quantum that we've seen in Q2? Perhaps not, but I mean again we'll have to see where and how the business settles down. So, we're continuing to push the envelope and we'll have to see how it unfolds. But I think there's still some to be had in the second half.

Thank you.

Thank you. We'll go to the next question.

Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.

Hey. Thanks. Good afternoon, guys.

Hi.

So, just wanted to follow up on pricing. JJ, you mentioned a couple of times on the call so far that you're not cutting freight rates to try and get more volume. Is this something that other rails are doing that you're seeing out there, or are you getting pressure from the customers to start doing because I haven't heard you make that kind of comment in the past? And maybe just more broadly on pricing, I think you were the first one on second quarter calls last year to talk about how rail pricing should really get better in 2014. So do you have - sorry, should really get better in 2015. Do you feel comfortable kind of giving us an early view on pricing in 2016?

Well, actually my comment at the time were before when energy [ph] wasn't around CAD 100 for crude, the whole network was still snug North America and the effect of all the capital investment on all the rail was still not fully felt. Now, we got more capital that's been deployed and there's been some cutback especially on heavy RTM commodities like coal, [indiscernible] grain and energy commodities. But the market is still balanced. But my might view is the pricing environment, as it reflect in the second quarter result, I mean we do have to produce these dollars, they're at 3.9%. The way we calculate things and the way we want to do main things on the steady Eddies is very solid in our view and we have sent our salespeople to do that. By the way, our salespeople, one-third of their sales bonus is related to pricing, so it's not just about top-line revenue. It's one-third top-line revenue, one-third pricing and one-third other initiative and that's the balance that we like to have going forward. Regarding crude by rail pricing, there's always some pressure on pricing from customers. And the crude by rail is an example where the spread is all over the map. The crude producers are under financial distress. Of course, they want something better. And these are big volume that sometime they're more like the mirage because they're big, but you never quite get there. As you get closer to them, you find that there was really no lake, it's just another pile of sand. So in that context, I would suggest that what pricing, for us, is important is the mid-term impact. Chasing something for three months or one month for 20 train is taking the context that we want pricing that we would be happy with in 2016 and 2017. So from that point of view, very disciplined, number one.

You have to be - I mean in crude, it only takes one accident and it costs a lot of money. I remind everybody our two incidents during the first half cost us CAD 65 million in terms of accident cost. That's a lot of money. It takes a long time to cover for that. So we think that the market has to settle. If the price is not right, we're not going to move the business. If the price is right, given it's a dangerous commodity, we're going to do it and we're going to do it well and add value to our customers. That's our philosophy and we're sticking to it.

Yeah. Crude by rail carload will be driven by the spread, not by the railway.

Thank you, Scott.

Okay. Thank you.

Thank you.

Thank you. The next question is from Brian Ossenbeck from JPMorgan. Please go ahead.

Hi. Good afternoon. Thanks for taking my call. So, obviously, you're involved in a tremendous amount of activity in the Canadian economy. Is there any concern you have with the pace of economic growth? Last week, the central bank cut rates, basically acknowledging that the economy was technically in recession in the first half of the year; a large part of that obviously from oil prices. So, I just want to get your high-level thoughts on the economy as you enter the back half of the year. It seems like you're seeing some stress on domestic intermodal customers a bit. But also, what is the sense you get from the shippers and the customers that you speak to on a regular basis? Thanks.

We're a bellwether of the heavy side of the economy, and we have very good visibility on that part. And I would echo what you said, the general economy in Canada has been more sluggish than what we've seen in the U.S. The U.S. economy, I mean I think consumers' balance sheet have been repaired. There's a propensity to focus on discretionary impact with lower fuel prices, and we've seen better growth in what is driven by consumer demand in the U.S. than we have in Canada. I think what Canada is facing, is people probably understated the impact of the energy complex cutback on capital expenditure. You add it all up, it's not just what happens in Western Canada. It's the components that have to feed those big investments. It's the labor that's flying from one part of the country to get to Western Canada. It's discretionary dollars. So, Canada has seen a bit more of an impact, but I'm of the view that we should - we may see a slight betterment in the second half because everything could turn and get a little bit better. So, we think Canada will do better in the back end of the year and we finish the year a little bit lower growth than people were expecting. But we don't see Canada in a recession. We see Canada in a technical slowdown that happened to take place for the first six months of the year.

Okay. Thank you.

Thank you, Brian.

Thank you.

Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.

Thanks. Good afternoon. Following up on the earlier question on the labor line, I know that you mentioned that wage inflation was sort of in the 1% range. So, is that something that we should be thinking about in terms of modeling purposes for the third and fourth quarter? And then could you clarify if there was a separate tailwind on this line item for other incentive comp accruals related to achieving 2015 targets?

Yeah. It's Luc. The wage inflation actually is running around 3%. So what effectively we've done is through a combination of head count reduction, lowering of training expenditures, lowering of compensation overall, including some portion of incentive compensation, we've been able to offset part of that wage inflation and effectively come out with a 1% wage cost increase. So, that is what I've said.

And over time, as a big part of that, we've been really, really focused on making sure we reduce overtime and also get more of the work done by our inside forces as opposed to using contractors to do the work. It really is a long list of execution items that allow you to deliver efficiency gains as volume declines. Okay. Thank you, Allison.

Thank you.

Janet, I think there's one more question and then we'll close this call.

Thank you. The last question is from David Vernon from Bernstein. Please go ahead.

Thanks for taking the question, guys. Just with respect to the lower oil price environment, are you guys seeing any negative headwind created on the domestic highway conversions that you guys had been experiencing the last couple of years? And could you give us an update on what's happening with the J.B. Hunt contract that was announced, or discussed anyway, at the intermodal site tour a few months ago? Thanks.

So, the cheaper energy makes the trucking a little more competitive versus rail. The spread - the cost between the two is obviously narrowing. Then you get back down to the basic of how many drivers there is being the number one bottleneck of our growth for the trucking side. And on the Canadian side, the reason why our domestic intermodal is down like 2.5% or 3% volume-wise is more about the economy itself than it is about conversion back and forth with truck. But long term, when you have a steady economy or a little more growing economy on the Canadian side anyway, I think the future of intermodal long haul is extremely viable. Regarding J.B. Hunt, they are an example of somebody who does extremely well in good times and bad times, using intermodal as a way to compete in the marketplace against the long-haul truckers. And this was something missing in our stable of product, to have a good strong partner, a couple of partners who are able to get product from Canada to U.S. just about from anywhere to anywhere, anywhere in Canada to anywhere in the U.S. And we're happy that they're going to be partnered with us for the long term and I think over time, steady Eddie that will produce some benefit to both of us, us and J.B. Hunt.

Thank you, David, and thank you for all those good questions and thank you for being disciplined. Let me put it to you this way. We delivered very, very solid second quarter results. We're pleased. It's the team of railroaders, 24,000 strong, that delivers this kind of performance, driving on all factors, and we feel we have good momentum. We feel that we're seeing some green shoots. We're seeing some opportunities to focus on growth. It's sluggish, but it's out there. And a little [indiscernible] a little expense management, a lot of execution, and a focus on long term, sticking with our game plan is what we need to do to continue to drive value for our shareholders, and that's what we intend to do and we'll report to you next week in October. Have a safe day. Thank you very much.

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