Core Natural Resources, Inc. (CNR) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon. My name is Julianne, and I will be your operator today. Welcome to CN's Second Quarter 2022 Financial and Operating Results Conference Call. [Operator Instructions] I'd now like to turn the call over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

[Foreign Language] Good afternoon, everyone, and thank you for joining us for CN's Second Quarter 2022 Financial and Operating Results Conference Call. Before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian securities laws. These statements are subject to risks and uncertainties and that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statements regarding forward-looking statements in our presentation. After the prepared remarks, we will conduct a Q&A session. I do want to remind you to please limit yourself to 1 question. The IR team will be available after the call for any follow-up questions. Joining us on the call today are Tracy Robinson, our President and CEO; Rob Reilly, our Chief Operating Officer; Doug MacDonald, our Chief Marketing Officer; and Ghislain Houle, our Chief Financial Officer. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Tracy Robinson.

[Foreign Language] Good afternoon, everybody. Very pleased to be here with you all today. Whether you're joining by phone or the webcast, welcome. And I'm very proud of the quarter that this team has delivered in Q2. Now last quarter, we laid out a number of principles that would guide the way that we run our business and the way that we grow. And I'm happy to say that we've advanced on all of these principles. And while we continue to have work ahead of us, as I said last quarter, this is going to take some time. I'm very pleased with the way the team is coming together and the results that they're producing. Now we've leaned into our scheduled operations, improving train performance and service to our customers, and we're seeing the beginnings of improvement in velocity. We've begun the work on our book of business to ensure that we're selling into our operating model in a manner that we can deliver to our customers, and we continue to improve our yield performance. We're growing our bottom line. We're growing our top line. More work to do, but we've got a great start. Now let me highlight a few key points of our Q2 financial performance. We achieved record revenues of $4.3 billion, up 21%. Now that's on 2% volume growth, higher fuel surcharge revenues and a strong yield management. The operating ratio for the quarter was 59%, a 260 basis point improvement over Q2 last year. The network is fluid, and the operating team has done a great job of improving performance across the network. The commercial teams had a strong quarter on yield, and bringing these together with the work of the rest of the team has enabled us to deliver a record EPS. We achieved $1.93 in the quarter, up 30% over last year. Solid performance by the team. Now as I reflect on my first few months as CEO of this great organization, and I got to say that every day, I feel more excited about the future of CN. I spent a lot of time during these last few months meeting with our employees across the system, with our customers, conversations with government and with our investors, including many of you. And since our Q1 call in April, I've spoken about some of my key priorities, and these remain the same. I am really encouraged with the start that we have, and we're far from done, as I said, but I'm seeing a team that is leaning in, doing it together, focused on bringing CN back to being a leader in the industry. And I'm going to let my colleagues today highlight some of the progress we're making. But before I turn it over to them, I'll provide a few high-level thoughts. Now firstly, we spoke about leaning into a scheduled operation. This has launched very well and it's leading to improved performance for our customers and across the network. We continue to build momentum here. Rob is going to provide you with some more details on this, and also in our preparedness to accommodate what we believe will be a very strong volume growth expected in the second half of this year. Secondly, it's about being thoughtful and intentional about our book of business. Our customer service levels are better, and we're going to stay focused on this. We know that we earn our way to grow by running a tight efficient operation and freeing up capacity for growth. This is important as we ready ourselves for the volume coming, particularly in the Western network over the remainder of this year. We've seen over the years, a lot of growth in the Western corridor. This is an important region for us. And as we move forward, we're going to keep focusing on it. But we're also going to lean into more fully utilizing the other parts of the network, densify in the Eastern region, the southern region. This will strengthen our business, our resilience. It's going to drive stronger returns. Now Doug is going to provide you with an update on the business environment and double-click a little bit on Halifax, which we believe is a gateway that will provide significant opportunities for CN in the future. Third, I talked about working in a much more integrated basis. We need to sell into the schedule and the operating model that we have in a way that leverages our strength. Our efforts to do this in a coordinated way are generating results. Ghislain, Rob, Doug and I meet on a regular basis, and we look at pretty much every contract, every pricing decision. We work the resource levels, whether it's crews, equipment, and we work our capital spend, where we're investing. We know that success is about having all these levers set in the right places. Now our decision is not always easy, but we do it as a team, and I think it's driving the right outcomes. And finally, it's about ensuring that we grow the top line at the same time that we're growing the bottom line. Our results this quarter reflect this effort, and I'm pleased with our progress and our momentum here. Ghislain will provide more details of our financial performance in the quarter. So our plan is working. And this team, our full team, is focused on delivering solid results as we move into the second half of this year. Now let me pass it over to you, Rob.

All right. Thank you, Tracy. The team delivered a very solid quarter of operational results, and I want to thank the employees in the field for their continued dedication and focus as we continue to progress on our plan. I also want to thank the employees that were on duty during the recent Signal and Communications Employee 16-day Strike who worked hard to keep the railroad running safely and uninterrupted. Operating performance improved in the second quarter when compared to last year as we emphasize running the railroad to plan. The initial focus was on train departures, and we started at our 4 hump yards in April. And then we turned our attention to our key flat switching yards in May. Since then, we've seen solid improvement in our origin on-time train departures, which reached over 90% in June, up 14% from June of 2021. It's also helped our connection performance, which was up 30% to nearly 80% in June. Clearly, the team has made solid progress on executing to the plan. While the second quarter is when the railroad typically gets its footing after coming out of winter, this year's performance is more than your typical improvement and highlights the dedication of the operating team to execute to the plan. The team achieved performance on a number of operating metrics that we haven't seen since prior to the pandemic, particularly in Western Canada, where car velocity is the fastest since Q2 of 2017, network train speed is the best since Q3 of '17 and through dwell is the lowest since Q3 of '16. Team is also delivering for our customers and working closely with the marketing team as we look to densify part of the network where we do have capacity. While volumes were down in the West due to lower grain volumes, GTMs in our Southern region delivered all-time daily records for the quarter. In addition, this quarter, team -- this quarter, the team once again set an all-time record for fuel efficiency for CN and for the industry, which drove the avoidance of approximately 43,000 tons of carbon emissions. We are confident that these operational changes are sustainable and will drive further efficiencies as we get ready for a very busy fall with continued broad demand and a more normalized Canadian grain crop. We continue to prepare our resources to handle these expected volumes. Our headcount is up 850 from the end of last year, with a large part of that increase being conductors as we prepare for a strong Q4. We purchased 47 locomotives that will all be in service by the end of September. We have 500 more additional high-capacity hoppers to the grain fleet and continue to add capacity to our Western Corridor with 4 additional siding projects. Finally, a word about safety. Our safety performance aspirations are anchored on the fundamental belief that all injuries and accidents are preventable. Our objectives are simple: eliminate on-the-job fatalities and reduce serious injuries to become the safest railroad in North America. We're proud it's been over a year since we've experienced a serious injury, and over 18 months since our last strategic fatality, both of which are the longest streaks in our company's history. With that, I'll ask Doug to provide some color on the marketing side.

Thanks, Rob, and kudos to you and the operating team for delivering a solid performance in Q2. We are working hand-in-hand with the operating team to deliver for our customers. Let me take a few minutes to highlight our solid top line performance in Q2 and expectations for the balance of the year. We delivered positive volume growth in Q2, with RTMs up 2% and revenues up 21% despite a 40% decline in Canadian grain shipments. This is a new Q2 revenue record. We focused our sales to the eastern and southern parts of our network where we have more capacity to grow. We saw solid growth in P&C from refined petroleum products and also crude oil, which is filling available capacity due to lower Canadian grain volumes. Automotive volumes came back strong with us from a 6- to 12-month backlog on orders. U.S. grain and coal continues to remain strong due to the unfortunate war in Ukraine and the sanctions on Russia. Forest Products and metals orders remain strong and well above empty car supply. Elongated car cycles on interline shipments are reducing overall car supply for our customers. Domestic intermodal remained strong with no slowdown in demand. International intermodal volumes were down in June as we are metering flows of Western imports destined to Montreal and Toronto to ensure fluidity of terminals as the industry faces driver shortages and full warehouses. We remain focused on yield management with inflation plus pricing on renewals and as well as other surcharges on older contracts for additional storage and services. As we think about the second half of the year, we continue to assume low single-digit RTM growth for the year. The current demand remains strong, and we continue to dialogue with customers to monitor any signs of weakness. On grain, we are still expecting a Canadian grain crop over 70 million metric tons versus less than 50 million last year. We are working with our supply chain partners and customers on solutions to alleviate the challenges with import containers destined to Montreal and Toronto. We have recently opened up additional storage capacity in each area to add some flexibility to the supply chain. We will continue to benefit from strong coal prices, higher production from Conuma, restarts of CST and Coal Valley mines as well as continued strength in U.S. coal shipments, both domestic and export. We remain focused on driving strong yields with contract renewals coming in above rail inflation. Before I pass it on to Ghislain, let me take the opportunity to highlight an example on how we plan to densify the eastern part of our network. The Port of Halifax, which is solely served by CN, has significant opportunities to attract additional container business in the future. We are working very closely with our partners, PSA Halifax, to leverage this unique gateway. PSA now owns both terminals in Halifax and have made considerable investments over the years. The port's capacity is about 1.15 million TEUs and is currently operating at about 50% of the capacity. We see significant opportunities to add incremental business over the next few years on a part of CN's network that has capacity to grow. With more production coming to Southeast Asia, we view Halifax as well positioned to accommodate this shift of production that wants to make its way to North America. Our service out of Halifax has the fastest transit times from the East Coast to Montreal, Toronto, Detroit and Chicago. Last month, we started a second daily service out of Halifax. And after 4 weeks, we have moved 24% more containers and reduced PSA's ground count by 27%. I'm very excited about the prospects of Halifax and our partnership with PSA. So in closing, my team's focus is on providing the level of service our customers have come to expect from us and driving top line growth to the bottom line. With that, I will pass it on to Ghislain.

[Foreign Language] I will talk to Page 15 of the presentation, which will provide more visibility on our second quarter performance. These results highlight the strength of our franchise as we delivered volume growth of 2% in terms of RTMs and 21% growth in revenues despite a significant headwind from Canadian grain. The top line performance, combined with a solid operating performance, drove record earnings in the quarter. Let me provide you with more details on the quarter. My comments will reflect adjusted results, which exclude advisory costs related to shareholder matters. We delivered adjusted operating income of nearly $1.8 billion in Q2, up 29%. Our Q2 adjusted operating ratio came in at 59%, which was 260 basis points lower than the same period last year. Our fuel expense was up over 70% as we saw fuel prices continue to rise in the quarter. We have an effective fuel surcharge program that deals with pure price fluctuations like this, but it does create some noise in the short term. In the quarter, we were impacted with the unfavorable fuel surcharge lag versus last year. Adjusted diluted EPS reached a quarter record of $1.93, up 30% versus last year. We generated free cash flow of almost $1 billion in Q2, up over $250 million from last year, mainly due to higher earnings. Under our current share repurchase program, which runs from February 1, 2022, through January 31 of next year, we have repurchased just over 15 million shares for $2.3 billion as at the end of June. Moving on to Page 16. We remain confident on our outlook for the balance of the year and are reaffirming our 2022 financial outlook, including adjusted EPS growth in the range of 15% to 20% with an operating ratio that starts with a 5. We expect volumes in RTMs to be up in the low single-digit range for the year, with strong growth expected in the second half of the year, including a normalized Canadian grain crop starting in the fall. We continue to assume that in 2022, the average price of WTI will be in the range of USD 90 to USD 100 per barrel, and the value of the Canadian dollar in U.S. currency will average approximately $0.80 for the year. We are not modeling any major service disruptions in the second half of the year, and our outlook does not assume an economic recession. That being said, we have a strong bulk franchise, including grain, potash and coal that is less impacted by economic fluctuations and a current backlog of lumber traffic. In conclusion, let me reiterate a few points. The current demand environment remains strong. The network is fluid and running well as we continue to run a scheduled railroad with a focus on car velocity. While we are seeing some inflationary pressures starting to impact our costs, we are closely monitoring the situation and making sure that we control our expenses and continue to price above rail inflation on contract renewals. We have an advantaged network and know what this network can produce. We have a strong balance sheet that provides us financial flexibility, and we will allocate our capital in a manner that drives long-term value for our shareholders. Let me pass it back to Tracy for some closing comments.

Thanks, Ghislain. Now let me just close our prepared remarks by reiterating a few key points. We have an advantaged 3-coast network with a balanced book of business. We have a solid pipeline of growth opportunities across many segments. Doug provided you with 1 example, Halifax, with a significant opportunity to densify the eastern part of our network. And as highlighted by Rob, we're making some good progress on the operating side. And the railways fluid, and we're running faster and more efficiently. We will invest not only in our capacity to accommodate those growth opportunities, but also in our talent to develop the next generation of railroaders. And we're looking forward to discussing more of our growth strategy when we get together at an Investor Day in the spring. This is a great company with a significant potential, and I'm very excited about our future. Now we're happy to pause and take your questions.

[Operator Instructions] The first question comes from Chris Wetherbee from Citi.

I guess maybe I wanted to kind of focus on the operations in the back half of the year. So you've given us the RTM guidance for positive inflection and moving forward from the second quarter. I'm curious, as you think about sort of the cost opportunity or the efficiency opportunity, how much do you think you'll have or will be able to be realized in the back half of the year? I want to get a sense of what's included in the 15% to 20% EPS growth year-over-year? And maybe where you may see opportunity to either exceed or maybe be pressured a little bit by the macro?

Thanks, Chris. The operations team has done a tremendous job of kind of putting their foot to the gas on this network and this operation. Certainly, it's going to be a different environment in the second half. And I'm going to ask Rob to comment on some of where the opportunities are and where the pressures will be.

Yes, Chris, when you look at 2022, it's really a tale of 2 halves. Really, the first half of this year has been driven by the southern portion of our network in GTMs and volume. We've experienced some crew delays down there just because of the volumes that we've handled. So we look to see that actually improve in the second half of this year as well as Eastern Canada. The big volume that we're going to see in Q4 is really Western Canada and with the normalized grain crop. So some of the some of the velocity that we're seeing right now may come down a little bit as that volume really starts to pick up. But our focus in terms of running a scheduled railroad, as we've continued to emphasize here, will continue to pay dividends, and we'll continue to press that even in the high-volume times of the year, and we expect to see some benefits from that.

Our next question comes from Brian Ossenbeck from JPMorgan.

Maybe 1 for Doug. Can you talk about yields? And can you break down in the quarter, perhaps maybe your core price, mix, fuel, FX, a lot of moving parts, maybe even some storage fees you mentioned, certainly would be helpful for some context around that. And then just the sustainability of that into the back half of the year, your visibility there and expectations for next year as well.

Okay. Thanks, Brian. It's Doug. So listen, we don't really -- we don't guide on what our price is, but we continue to do it well above inflation. So we've had great success on our contract renewals as we go through that. And really where the rest of it is coming from is with the supply chain disruptions that are out there, we're providing a lot of additional services to customers for storage and for other things that they need done. And that's where the rest of it is coming from. So we're actually able when you combine it all together, we've been able to keep well above rail inflation for our pricing. And we continue to see that, it will happen really for the rest of this year, and we even see it into next year right now.

Our next question comes from Ken Hoexter from Bank of America.

Congratulations, Tracy and team, on a great quarter. Maybe, Doug, talk a little bit about the ramp of volumes. You noted the opportunity in the East Coast, but you need a sizable ramp to get to that low double -- low single-digit RTM target. Maybe talk about the rolling of grain, maybe the downside of economic pressure that you've built into targets in terms of getting to that target. And maybe also the kind of labor thoughts there, what you need to get there.

Well, I'll talk about the markets, and then I'll turn it over to Rob to talk a little bit about the labor. But Ken, so I'll say, listen, a lot of this is going to come out of the Canadian grain crop. Like that's really where we're going to see as a big increase this year. We're seeing well above 70 million metric tons right now is what the forecast is. But so we're looking -- we're guiding towards that. And that's what we're set for. Now everything else is remaining strong at the same time. I'll say the only little hiccup we've seen recently is the international intermodal, and we've put place -- well, we've put solutions in place for that, that are taking in effect right away actually. So we should see that improve for August. With that, I'll turn it over to Rob for any thoughts on labor.

Yes. And from a labor standpoint, Ken, we have been preparing for this more normalized grain crop in Q4. And certainly, that's what it appears as we sit here today that we're going to be back to those levels. So we've been hiring in Western Canada. Other than some of the hard-to-hire locations that we typically see, we're in pretty good shape as we go into Q4. Some of the crew issues we experienced in the South where some of the geopolitical issues with Ukraine that really allowed us to move more freight in the South, so we've been hiring for that. We get much better here as the quarter comes to a close. So we'll continue to stay after it. As we look into next year, we'll continue to plan for attrition as well.

Our next question comes from Konark Gupta from Scotiabank.

Congrats on a great quarter. I just wanted to ask the labor question a little bit differently here. In terms of resource level where you are relative to where the economy is, how soon can you adjust the network and resources if demand starts to slow down versus your expectations?

Yes. So we're certainly playing different scenarios as we go forward. We've shown the ability to adjust. When it comes down to labor, we'll certainly take a look at that. And we'll do things like repositioning people into other training or other departments to make sure we hold on to that labor versus furloughing and dealing with some of the issues, I think, some of the U.S. railroads are doing right now. But we walked through a number of scenarios out there, growth scenario and also something less than that and we'll be nimble. Obviously, with cars, locomotives, we can do things very quickly in terms of laying those up, and we'll do that as we start to see if we see any of those signs.

Our next question comes from David Vernon from Bernstein.

So sticking on the intermodal theme, Rob, I've heard from some former colleagues in the shipping industry that you guys did metering service off of cost. Truck availability was challenged in Montreal. Are those challenges kind of lifting right now? Could you talk a little bit to where the level of congestion is and what the risk is to the volume growth on some of those sort of inter linkages, if you will? And then, Doug, do you have any sort of commitment from the sea ship lines on Halifax longer term? I'm just wondering if this shift in volume up to the Eastern Canada, Northern ports could be tied to some of the backlogs we're seeing in some of the U.S. East Coast ports.

Thanks for that question, David. And we're going to turn that one over to Doug. He's been leaning into some of the trucking issues as well. So Doug, why don't you take both of those?

Yes. So David, so really the issues are, I'm going to say, more in line. So it's the Montreal, Toronto areas for us, and we've also seen it a little bit in Chicago. So with the warehouses being full, there's no place for the containers to go once they get in land. That's been backing up the terminals, which then backs up at the ports, which backs up ships at the harbor. So what we've been doing is we've been focusing on how do we move that and create extra space. At the same time, there's also been a shortage of drayage that we found out. So it's been down roughly 18% from what it was year-over-year in June. So we've been working with the freight forwarders and the different drayage companies to be able to increase that, and we have seen it really improve in the month of July. So that's all good news, and we've seen dramatic improvement. Now what we're also doing is we're working on new storage locations in Toronto, which is up and running already and a new facility here just outside Montreal, which will be up and running next week. Now on Halifax, we don't have any customer commitments to give us specific volumes through there. We have to build up our service, which we already know is there, and that will attract the new business. So we did have already great success over the last 4 weeks, and we expect to see more of that with the customer base because of the service that's there.

Anything from vessel schedules or [indiscernible] services, something that would give you confidence in sort of 2023 volume? Or...

Sorry, David, you're breaking up.

Sorry. I was just wondering if there were any commitments from the sea ship lines on 2023 in terms of vessel calls.

No, we don't have any commitments as of yet for solid numbers yet.

Our next question comes from Benoit Porier from Desjardins Capital Markets.

[Foreign Language] My question now, just wondering with respect to Trudeau government climate plan, which has focused on reducing nitrous oxide emission for fertilizers, any potential adverse impact in the long term on the grain and fert? Tracy, any comments on that?

[Foreign Language] I'm going to turn that one to Doug. But first, let me say that we've got some pretty strong forecasts for fertilizers and grain. As we look forward, it's one of the unique benefits of our Canadian economy. But Doug, do you want to comment on the specifics?

Sure, Benoit. So specifically, just around the fertilizer market. Listen, we had actually a fairly wet spring, so we actually saw some lower volumes there in the first half. We're expecting a normal shipment pattern actually all throughout the fall and into next year. If you want to talk specifically about potash, we're seeing obviously a very strong market for offshore, and the domestic market suffered the same as the fertilizers, so we see that pick up in the second half as well. But it continues to be a very strong market right across the board.

Okay. And what about the potential desire to reduce the fert by 30% by 2030? I'm just wondering about the reduction target, whether you see any impact here, Doug, longer term?

I'll take that one, Benoit. So this is something that this organization has done a great job on. We have right now the -- we're starting on those targets in the right place, which is the fuel efficiency. Most of our emissions, of course, come from our locomotives. So we have seen -- I think, Rob laid out a 4% improvement in fuel efficiency year-over-year, which is a tremendous improvement. And we continue to be, I think, the best in the railroad sector from the fuel efficiency perspective. So that's Phase 1. Beyond that, we have a plan that will take us towards what is a scientific-based target that the team has developed. And we're going to lay out a little bit more of our investments to do that as we go forward. But I'm pretty pleased with the plan that's in place and with the progress that the team has made on that Stage 1 piece.

Congratulations again.

[Foreign Language]

Next question comes from Amit Mehrotra from Deutsche Bank.

Congrats on the results. Just laying -- I just wanted to understand the guidance, the EPS guidance for this year. If I look at the first half, adjusted EPS is up 20% year-over-year. So I guess to get to your full year guidance, it implies a step down in earnings power in the second half relative to what you did in the second quarter. If you can just address that? And then, Tracy, I think -- I believe the company brought in Ed Harris as an operational consultant. I just wonder if you could talk about that, why did you and the team decide to bring him in with the scope of his work is at CN and maybe share some of the results that has occurred since bringing him in as well.

Yes. So thanks, Amit. Maybe I can start and then pass it on to you, Tracy back. So listen, yes, I mean, you heard a little bit of what Rob talked about in the second half of the year from an operating standpoint, and then Doug talked about what we can do from a revenue and volume standpoint. So when you do all of that math, we come in with, again, reaffirming our guidance of 15% to 20%. Now what -- like we said in here, and we purposely intentionally laid out our assumptions to help you guys understand how we get to those numbers. The big number right now is what's going to happen on fuel. Fuel is up and down quite significantly. And as you can see as well, we are assuming a foreign exchange of $0.80. And if you look at it today, the current spot foreign exchange, I think, is $0.76 or $0.77. So there's lots of moving parts. I think that last year, we did have a couple of service interruptions as well. And then when you get to the back end of the year, remember, we're the railroad of the north. So we get hit on winter sometimes quite early. So when you put all of these in, again, we feel comfortable with reaffirming our guidance of 15% to 20% and with an OR that starts with a 5. So if you remember, in Q1, we started a little bit from the back tees on 66. We did much better this quarter on 59. We expected that because from a seasonality standpoint, Q2 is always better than Q1. And we're going to continue to push on our expenses and our operations. and on the top line. And on this, maybe I'll turn it over to you, Tracy.

Thanks, Ghis. And let me make a quick comment on that. When I came in and we were looking at what to do with our guidance on the year, we considered a whole range of scenarios and building kind of the expectations that we put in front of you last quarter. And I think Ghis today laid out a number of the assumptions that we've made as we look to the remainder of the year, particularly on those things that we don't control, and he just spoke about them now. There's a lot of year left, and we're positive, we're optimistic. We're working hard to get ready for what's coming. But there's a lot that's not yet certain. So we're comfortable with how we're doing. We're comfortable with confirming our guidance and based on where we sit now and what we see coming. As to your second question, we have a few people on the properties that are giving us advice, we're pretty intense on where we're going and getting there as quickly as we can. And so one of those focus is, as you say, Ed Harris in on the consulting arrangement, largely for Rob's purposes. And maybe Rob is best if you speak to what you've asked Ed to do.

Yes, Amit. Very fortunate to have Ed as a sounding board for the team. He obviously brings great experience and great knowledge. Our goal is really about improving every facet of our business, whether it's operations, marketing, finance, et cetera. So when we have opportunities to bring people in that can help with that and continues -- help us continually improve, we do it. Our operations is about running a safe, efficient operation that continually meets the service our customers expect and need. And that's really what it's about. In the end, the team in the field is what will and is driving the results, and that's really where the credit goes. I appreciate the question.

Our next question comes from Fadi Chamoun from BMO.

Maybe I'll do 2 in 1 as well. So on the pricing side, Tracy, you talked about the opportunity to revisit pricing on some of the business. In what inning would you say you are in terms of kind of revisiting the pricing on that business? And my main question really on the ROIC as well. You talk about kind of bringing CN back to kind of top-tier performance in the industry. The dialogue in the past have been at around mid-teens ROIC, and we've seen a few of your peers kind of move up into the high teens. Do you see the scope of that happening kind of in the next couple of years to kind of bring that ROIC back to top tier in the industry?

Thanks for the question, Fadi. And listen, let me start with the first one. So as we think about what we call curating the book of business or being intentional about the book of business, it's not just pricing, it's about understanding our network and our operating plan and where we have capacity. So you heard Doug talk about this. Where we have available capacity, whether it's short term or it's long-term, Doug's team sells into that. We want to drive earnings and drive more operating efficiency through that. Where we have more demand than capacity and we can't operate effectively or deliver for our customers, and we make adjustments there as well. And in all cases, we ensure that we've got a book that pays at the appropriate price. So they sit as well being intentional, but what we're putting on our network, drive the right service, the right velocity and the right bottom line growth. And this isn't something that is -- I mean, I think this team has put a really hard shoulder into that this quarter. We're going to continue to do that. And -- but we'll get some of what we need to clean up cleaned up. So you'll see us continue to do this. There will always be opportunities, and I expect it's something that we'll be talking about as we go forward as well. When it comes to our ROIC, I'll just say generally that what we're really focused on, and then I'll turn it over to Ghis. But what we're really focused on right now is delivering to the goals that we laid out for you for this year. And we look forward when we get together next spring at an Investor Day to kind of lay out what you think the longer term holds for us. But Ghis, do you want to add anything to that?

I think you covered it well. I think that we've guided that we would hit an ROIC of 15% this year. I think we're very confident that we will hit that. And I think that we'll provide more visibility from a longer-term standpoint on the -- on some of these measures when we have our Analyst Day that we've always already said that we were shooting for some time in May. So we'll provide more visibility on some of these metrics at that time.

Our next question comes from John Chappell from Evercore.

Tracy, I wanted to dig a little deeper on the freight operational alignment. And in the last 90 days, you've definitely taken a focus to the operations of the network, and it shows in a lot of the service metrics, even your outlook for the back half of the year, the double green arrows that Doug has all over his Slide 12. When you think about positioning then from focusing on the network and the service and then really leaning into that and really pushing for top line growth, what are some of the metrics that you're looking at that gives you the comfort that you can lean in a little bit more to solve the network?

Thanks for that question. You're kind of getting into where the shorter term meets the longer term. So we have a pretty clear view of what our book of business looks like for this fall. And so most of our focus is making sure that we manage that well, and well means that we're doing it in a way that delivers to our customers, whatever part of the network that we're on. Where we have opportunities -- like the West is going to be full. Where we have other opportunities, different parts of the network, if we've got more capacity, we'll do more of what Doug and team have done with Rob in the last quarter, which is identify the capacity to look for the opportunities whether they be short, medium or long term to fill that, that drives growth to the top line. But as importantly, we do it when we can drive growth to the bottom line. So you're going to see us working those 2 at the same time in a way that's connected to each other. So right now, what we're focused on is making sure that the way that we move this big volume that's coming to us in the second half of the year.

Our next question comes from Scott Group from Wolfe Research.

So Ghislain, I just want to come back to the guidance. I understand there's some moving parts here. But if we're looking at this right, it implies second half operating ratio and volumes are better than second quarter, but the earnings may be potentially a little worse. Is that right? Or is there any more -- it's maybe a little confusing. Is there any more color to share? Is there a piece of the guidance, the earnings or the OR guidance that you feel better about? And any help there would be great.

Listen, Scott, we do provide annual guidance. We don't -- we typically run away from providing either quarterly guidance or half of the year guidance. I think that we ran a lot of different scenarios under -- with Tracy and Doug and the team, and I think I'll leave it at that. We are comfortable to reaffirm our guidance. We've, as I said, intentionally put out our assumptions out there to help you guys. And I'll leave it at that.

Our next question comes from Walter Spracklin from RBC Capital Markets.

I just wanted -- just one clarification on the Halifax. I know, Doug, you mentioned 600,000 TEUs and now added a second train that's led to a 24% increase. Does that mean you're running at 750,000, if you could just clarify that? But my main question is on the West Coast, and with the labor disruption or potential labor disruption in LA Long Beach, historically, that's led to volume increases. I know Eric Waltz at Deltaport has indicated that's been as much as 13% above the norm. Are you seeing that go up there? Are you worried about that further clogging your capacity? How comfortable are you at handling any increase or the increase you might be seeing in Long from LA Long Beach potential labor disruption? Any visibility as to whether that's happening now as it has in the past when that type of layer disruption reared its head.

Okay. So Walter, thanks for the questions. So for Halifax, listen, it's -- yes, we're starting to train out. It's a little bit shorter than running a full train today as a lease, but we're also picking up a lot of freight in Moncton as well. And by the time that train is running through the rest of our Eastern operation, it's running at full size. So it's a combined train in the end, but which starts out as a full intermodal train, and it's -- so -- and we've been very successful with it. And we're going to try and grow that out to a full train. We can't do it day 1, but we got to start somewhere, and it's been working really well. On the West Coast, you're absolutely right. There's been a lot of talk about potentials for a West Coast port strike in the U.S. Listen, we haven't seen anything come up north yet. We haven't had anyone talk to us about it. And right now, we are -- the terminals are kind of full in Canada already. So we're working on bringing those numbers down for them, so they're fluid. Could we take some extra volume? There is some potential, but it depends on the supply chain. And we would really need to do it before the end of September when grain kicks in because then we won't really have any available capacity to do it.

Congrats on the great results.

Our next question comes from Brandon Oglenski from Barclays.

Doug, I guess in response to that question, you talked about your -- I think, still metering into Toronto and Montreal, if that's correct. Is this a physical limitation on your terminals? And are these storage positions more a temporary solution or a permanent solution? And I guess more broadly, if I can sneak in a similar follow-up. Like is there any signs of weakness in the portfolio today that would point to a softening economic environment, if you don't mind?

Okay. So the metering, it has really went on in June more than anything else and for the first half of July. So last week, we put in a new solution in Toronto and what that's allowing us to do is to vacate the terminals. So the issue was that we would -- the boxes would arrive in Montreal and Toronto, and no one would pick them up because there wasn't any place to take them. The warehouses were all full plus we did have some -- there wasn't enough drayage capacity. So now we've created a partnership in Toronto that has its own drayage service and the ability to store boxes. So that's really helped us out in Toronto. So we're back running Toronto at full speed and actually running some extra freight through there to help out the West Coast ports. With respect to Montreal, our solution really starts up next week, and we'll be in the same position there. But Montreal has already started to improve already. So that's how that's working, and we expect to see all of August running at full speed, if not higher. Now with respect to the -- we have seen no weakness at all in any of our markets, and we'll keep giving that guidance until some of our customers tell us differently.

Our next question comes from Steven Hansen from Raymond James.

You referenced some opportunistic crude by-rail movements in your commentary for the period. Just curious as to what kind of longevity you see of that business through the back half of the year and how it might interplay with the arrival of the Canadian grain crop?

So Steve, we actually really plan around it. So me and Rob talk about it every month, we go through it with the customers as well. And really, it's 1 larger customer who has the opportunity to do it. It's moving from the Alberta market down into the Gulf Coast, and we've been taking it month by month. So we actually -- we've agreed to take it, I'll say, through the rest of -- partially through the rest of Q3, and probably we'll finish -- and it will finish in Q3. So when grain starts at the end of September, we expect that to be using the capacity and we are fully planning for it, and we will take the crude off the table at that point.

Our next question comes from Ravi Shanker from Morgan Stanley.

A quick question on Halifax. Again, based on how excited you guys sound about it, and it sounds like your port partners and customers as well, it doesn't sound like you guys expect a meaningful shift in near-shoring over time impacting volumes coming in to North America from Asia. So if you can just unpack what do you think happens with that over time, that would be great. And as a quick follow-up, Ghislain, I'm sorry, did you quantify what the strike impact was in the quarter?

Okay. So I'll start off. So with Halifax, no, we're seeing lots of volume shift over to Southeast Asia for production and for sourcing. And that's coming in -- coming to the East Coast, just as easily as go to the West Coast. So we're seeing that diversion into the East Coast. And I think all the East Coast ports are seeing that. Halifax is greatly positioned to take on more of it, and we're working with the customers to do that. But we had to put the service in place to attract the business. And really, that's what the focus has been. We haven't seen a lot of near shoring come into North America yet. There's a lot of talk, and we've seen a little bit of it, but nowhere near that, anything that will impact the volumes for this year or next. Ghislain?

Yes. Maybe on the -- thanks, Ravi. On the strike impact, I would say, these were 750 unionized folks that were on strike for 16 days. I would say the impact was 0 -- minimal to 0. And again, I want to thank our management team under Rob's leadership and Tom Hilliard's leadership that kept the railroad running without any blip in the quarter. So I really want to thank all that team that did a wonderful job keeping, as I said, the railroad running flawlessly and safely in the second quarter.

Our next question comes from Tom Wadewitz from UBS.

Yes. So some -- I guess, a question on the intermodal side. Revenue per piece was up, I think, 33%, so a pretty big increase in revenue per piece in intermodal. And I'm guessing maybe a piece of that might be storage fees. Can you give a sense on kind of is that a meaningful component? And how might we look at the intermodal revenue per piece in 3Q? And then just another on the intermodal side. Obviously, some Walmart news recently that points to softness in the consumer, and I guess that's been kind of a concern for a while. Do you see any risk to kind of slowness in international intermodal when you look to 4Q or even potentially into 2023?

Okay. So Tom, so on the revenue per unit, so those numbers, we don't really give guidance on that. There's a lot of mix in there. So really, what we've done is we've seen continued progression with taking pricing action also on our contract renewals. So we've seen that, and we'll continue to see that. We continue to see like we're seeing in the terminals and one of the things are the storage charges. So that's a big part of it. Those will start to go away as the supply chain regulates. Now when that happens, we don't know. We still see lots of the bullwhip effect of volumes coming in, trying to go as in a lockdown, volumes drop off. But we're expecting not to see a normalized supply chain to see those storage charges continue for the rest of this year at least. Now on the consumer softness on the international, we're seeing some small dips here and there, but that's more of -- it's just the supply chain. We're not seeing anything around the demand side right now, and the customers say, we may be soft because of some demand issues this month, but next month, they're telling us, please expect a full boat load to come in. So we're planning based on what the customers are telling us. And right now, it's to keep running what we're doing.

Our next question comes from Ari Rosa from Credit Suisse.

So I wanted to ask about kind of as we think about risks heading into 2023, obviously, there's this big merger kind of pending. You mentioned the uniqueness of CN's network, obviously, being as tri-coastal network. That kind of uniqueness perhaps erodes a little bit if the CP-KCS deal goes through. I wanted to think about -- or I wanted to hear about kind of how you guys are thinking about that potential shift in the competitive landscape. Any conversations you're having with customers around that? And if you think there's any volume that perhaps is exposed as that deal goes through?

Thanks, Ariel, for that question. I would say that we're playing our own game, and we're pretty focused on it. You've heard us say before that when this railroad is operating at its best that it's pretty tough to compete with. And we like the opportunities that we see. We think we're showing you some of what can we can make this place do. And there's more of this to come. We're pretty keen about getting in front of you guys early next year and talk about some of the growth that we see coming in the future and some of the choices that we have there. So we're pretty excited about playing our own game. As far as the customer front, I mean, I think we're always working with our customers to try and ensure that we are positioned properly for the way they see their business going and growing in the future, and that continues to be the case. And Doug, do you want to add anything to that?

Yes. Like we constantly evaluate risk with our customers and where they want to go, what markets and where we can go. So listen, we work with all of them. I'll say the KCS is not a big interline partner of CN's. So the risk is very low for us to begin with, but we'll work with our customers whatever risk there is there and make sure that they can get their products to market. That's the key thing.

Our next question comes from Justin Long from Stephens.

I was wondering if you could provide any color on the contribution you're expecting from the nonrail businesses in the back half of the year? And any update on the potential strategic alternatives for these businesses?

Yes. Justin, listen now, just for a matter of modeling, we have all of those businesses in the model, and they are part of the guidance that we've offered. As I'm watching some of those businesses, actually, it's kind of cool they're becoming -- TransX in particular, becoming increasingly efficient and competitive. I would put them at or nearer at kind of the top in their segment as we look at their competitiveness and what they bring to us. So that's in our model as we go into the remainder of the year and where we go with that longer term is something that we'll be contemplating as we look to 2023 and beyond.

Our next question comes from Jason Seidl from Cowen.

Tracy and team, congrats on the quarter. I just wanted to try to dive into how Halifax a little bit more in the growth that you think that could come there. Where do you think some of this growth is going to come from? In other words, what other ports of call might be at risk for other people?

Well, good question, right? So there's -- ideally, it's fully aimed, Jason, at West Coast volumes first, right? We believe with the shift to Southeast Asia that from a cost and, I'll say, timing perspective, it's just as easy to come through the canal system, Suez Canal over to the East Coast, and we think we can get there. So we think we provide a great service that services those key markets in Montreal, Toronto as well as Detroit and Chicago. There's also other markets we can reach too, but those are the key ones. So now will it come from other terminals? There is the potential for it to come from New York, New Jersey, Baltimore, even Savannah, if it's not moving in an optimal pattern. So -- but our key focus is going after that surplus or stock West Coast business that can't move today.

Our next question comes from Bascome Majors from Susquehanna.

So your U.S. subsidiary is bargain with the U.S. rail carriers, and there's some uncertainty as to what that actual union wage increase is going to be from 2020 forward. Can you talk a little bit about how CN has managed that uncertainty with your accruals? And if actual wages were to come in different than your expectation, when do you true that up retroactively and communicate it to us, respectively?

So I can start and then Rob can jump in, if you want to. So yes, so we have accrued for potential back-end wages in the U.S., and we believe at this point that these accruals are appropriate. And if there's a change from what -- from when the negotiation is completed or the mediation completed, then we will make that change when that happens. But I would tell you that we have accrued it, and we believe that it's appropriate. Rob, anything you want to add on?

No, I think you answered it. Just from an understanding standpoint, we certainly understand the inflationary pressures are real on all of our workers and all the rail workers in the U.S. And we look forward as much as they do in getting this thing settled and done and moving forward. So nothing further.

Is there any way to help us size up how much of your labor expense is related to U.S. Union agreement?

Well, we're not going to go into that detail, obviously. And as I said, the -- all the railroads in the U.S. are in mediation as we speak. So we're not going to give that detail and we're going to let it play out. We're part of the -- we're sitting at the table. And to Rob's point, I think we're looking forward to get this done and move forward.

Our last question will come from Jeff Kauffman from Vertical Research Partners.

Just a question more on top-down strategic here. I think Rob did a great job talking about how you paid attention to the yards and you improved fluidity. I was looking more at the head count. And in your presentation, you mentioned you brought on about 800 employees, I think, since the end of last year. It looks like headcount could be approaching kind of flattish year-on-year toward year-end. As we look at the organization, and there was a big cut of about 2,000 people and then we're adding back. How is the distribution of labor different? Did we cull older employees and bring in younger employees? Have we strategically beefed up employee count in some areas versus others? I understand how the operations have changed. I'm trying to understand how the workforce has changed.

Jeff, thanks for the question. I'm going to start on that and then I'm going to give it over to Rob to give you a little more detail. So when we made the cuts last year, that was not focused on our running trades or anyone who operates the trains. It was a great effort made to make sure that we protected that capability. The reductions in workforce that were made were focused largely on the center on head office and on management employees. And so that's important to note. And as far as how it's changing in the field, Rob, I'm going to hand that one over to you.

Yes. Really, you've seen the surge really in conductor hiring. And that's really for 2 things: one, for volume; and secondly, for attrition. That's what we hire for. And we've been preparing for this normalized grain crop here in Q4, and that's really where you've seen it. The rest of the departments have stayed pretty flat in terms of where they ended the year.

Okay. Thank you all for your interest and for your questions. We're pretty happy with this quarter. We've been off to a great start and are deep into doing the same for the second quarter. Paul's team will be hanging around for a little bit this afternoon. If you have some additional questions, I know you know all of you how to reach out to him. Thank you, and have a great day.

The conference call has now ended. Thank you for your participation. You may now disconnect your lines at this time.