Welcome to the CN Second Quarter 2019 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Well, thank you Eric. Good afternoon, everyone and thank you for joining us for CN’s second quarter 2019 earnings call. I would like to remind you about the comments already made regarding forward-looking statements.With me today is JJ Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Keith Reardon, our Senior Vice President, Consumer Products, Supply Chain; and James Cairns, our Senior Vice President, Rail Centric Supply Chain and our recently appointed Executive Vice President and Chief Operating Officer, Rob Reilly.Once again, I do want to remind you to please limit yourself to one question so that everyone has the opportunity to participate in the Q&A session. The IR team will be available after the call for any follow-up questions.It is now my pleasure to turn the call over to CN’s President and Chief Executive Officer, JJ Ruest.

Thank you, Paul and good afternoon everyone and welcome to our second quarter earnings call. We had a very positive result from top line revenue growth of 9%, which is actually our best ever quarter in the company history and from adjusting our cost to the slower pace of growth we experienced in selective markets during the quarter. We produced adjusted EPS growth of 15%, revenue growth of over $200 million and the operating ratio was a solid 57.5.I am going to do a quick review of the last quarter operation. Our GPM production, our production rate was up 3% over last year, but more important, it was up 5% in our key Western region, a record production for the West. Our operating metrics also continued to improve on a year-over-year basis. For example, car velocity was up a strong 9% and railcar dwell time was down a solid 11%. During the quarter, we reduced active rolling stock in part or return lease or scrap, the least productive of our rolling stock for a total of roughly 8,700 railcars and 60 locomotives. We currently have about 200 qualified train crews on temporary layoff in our Western region waiting for the crude-by-rail volume opportunities to pickup higher and we continue to progressively tighten down our overall management headcount. As a result of these actions, our operating ratio sequentially improved every month during the quarter and has stood at a solid 57.5 for Q2 which is 70 basis points better than last year.Now, a quick review of the second quarter top line, which as I said earlier was our best ever quarter in the company history, with nearly $4 million of revenue. Carload and RTM were both up 2% and the price continued to be solid and above rail inflation. Intermodal revenue…

Thank you, J.J. Thank you. And I’m very excited to join the CN team under J.J.’s leadership, and his vision of one team after 30 years of railroading with the Santa Fe and BNSF Railway companies. In the short-time that I’ve been here, I’ve had the opportunity to spend the majority of my time out in the field, seeing the operation, meeting the key players, and I’ve been very impressed with the leaders I’ve met. Nearly, there is no better example the CN team working together as one than what I personally witnessed at the Sarnia Tunnel derailment a couple of weeks ago with the team working tirelessly around the clock to restore service to our tracks, not only restoring service to our track, but most importantly completing that complex undertaking injury free, it was very impressive to see the CN professionals and action out there.It’s clear to me that this is a well-run organization and it’s a privilege to be part of it. However, our work is not done here. So I believe we have opportunities to improve in safety, become more efficient, leveraging the technology as you’re able to see at our Investor Day in June, and still continue to grow with our customers, and not only grow, but grow profitably for our shareholders. That is where my focus will be as in running a safe efficient railroad for our customers and shareholders. And again, very glad to be part of this team.With that, I’ll pass it over to James for the marketing outlook. James?

Thanks, Rob. So looking at the second half of the year, we still see volatility in a few markets including grain, lumber, U.S. coal and crude. Fundamentals for crude remained strong for the second half of 2019. August spreads are challenging for rail, but we have a few new contracts starting in August that will ramp up through the balance of 2019. A change in government curtailment policy could impact demand moving forward.U.S. coal could recover in Q3 as water levels on the Mississippi River subside. The API2 U.S. coal benchmark pricing has shown some improvement recently and we are watching this closely. Canadian coal will continue to ramp up through H2 as Coalspur’s new mine increases production. We were very happy to see the announced sale of RTI to AMCI at Riverstone. With the right level of investment, Ridley can double its coal handling capacity and this bodes well for CN bulk export opportunities via Prince Rupert.Propane volume will continue to be strong with sequential growth from Q2 to Q3, driven by full ramp up of the AltaGas facility in Prince Rupert. Next up for propane will be the Pembina project at Watson Island in the Prince Rupert area, which is scheduled to start up in the second half of 2020. We have the capacity to move more grain products than there is current demand. Uncertainty around the ban of canola exports in China will push a larger-than-expected grain carryover into the new crop year. New export facilities on the West Coast combined with newbuild, new track elevators in the country will help us continue to move record volumes into new crop year.Refined products revenue was up 20% in Q2, and we expect to see continued growth in this segment through the balance of 2019. We handle a significant majority of refined products originate in Alberta and over 90% of Greater Toronto Area Destin-refined petroleum products carloads. Full impact of BC mill closures and production curtailments will be a headwind for the forest products volume for the balance of 2019. We are rightsizing our fleet and resources accordingly.Thank you. And I’ll now pass it over to Keith Reardon, who will provide a brief overview of the consumer products and market outlook. Keith?

Thanks, James, and good afternoon, everybody. While the consumer products market is more tied to consumer spending in North America, we have also been faced with some small softness in the segment. On the international intermodal front, trade tensions between the U.S. and China created a pull-forward of traffic late last year and early this year, which eventually led to a slowdown in volumes in Q2. As we start heading into the traditional peak season, we do expect volumes to recover. It is currently difficult to assess the size of this year’s peak; however, we are seeing volumes improving over Q2.We are seeing this at the Port of Prince Rupert, for example, where in June, the volumes were up 3% and up more than 24% so far in July. Rupert is running at an annualized run rate of 1.25 million TEUs. I’m also very pleased to announce that we have renewed several of our longstanding customer contracts in this segment including Hapag-Lloyd and Evergreen. When appropriate, we will also announce the other overseas customers that we have successfully concluded negotiations with. This once again highlights the strong relationships with and commitments from our partner’s steamship lines, the benefit from our strong service offering, our unique market reach and our key competitive advantages.We are also very excited to have teamed up with Hutchison Port, a world-class port operator from Hong Kong and a JV to build a container terminal in Quebec City, which is connected to CN and many destinations across our respective networks. While this is still a few years out, we are committed to continue to grow in the international intermodal segment. We are also looking forward to working with PSA, the new owner of Halterm terminal in Halifax, and developing that long-term relationship to attract more business to…

Thanks, Keith. Starting on Page 9 of the presentation, I will summarize the key financial highlights of our record second quarter performance. Let me start by highlighting that this is the first quarter of fully integrating TransX into our financials impacting intermodal revenues and on the expense side mostly labor and purchased services.As JJ previously pointed out, revenues for the quarter were up 9% versus last year just shy of $4 billion. Fuel lag on a year-over-year basis represented a tailwind of $17 million or $0.02 of EPS driven by an unfavorable lag this quarter of $11 million versus an unfavorable lag of $28 million for the same period last year. Operating income came in at $1.682 billion, up $163 million or 11% versus last year. Our Q2 operating ratio is 57.5% or 70 basis points lower than last year. On a comparable basis with every railroad that have reported, excluding the benefit of any land sales, this represents the lowest OR in the industry for the quarter. Also the inclusion of TransX increased our Q2 operating ratio by 110 basis points. Net income is $1.362 billion or $52 million higher than last year with reported diluted earnings per share of $1.88 versus $1.77 in 2018, up 6%. Excluding the impact of a deferred income tax recovery from the enactment of a lower provincial income tax rate this quarter and gains on surplus asset sales in 2018we achieved record adjusted diluted EPS of $1.73, up 15% versus last year. The impact of foreign currency was favorable by $28 million on net income in the quarter or $0.04 of EPS.Turning to expenses on Page 10, our operating expenses were up 8% versus last year at $2.277 billion. Expressed on a constant currency basis, this represented a 6% increase. At this point,…

Well, thank you, guys. To wrap this up, where we stand right now on operating matrix are at PSR railroading level and we are in good position to have good results going forward. For example, in the last four weeks, the last 28 days, our RTM are running at 6% growth so far. In the next 3 years, as you know, as pretty what we’ve mentioned at the Investor Day, we are aiming for low-double digit diluted EPS growth, normalizing our capital intensity, producing high-50s operating ratio with ROIC in the range of 15% to 17%, free cash flow that is growing faster than earnings and dividend per share the growth in line with earnings.So, operator, Eric, we will now turn it back to you for question from the people on the call.

[Operator Instructions] The first question is from Ravi Shanker with Morgan Stanley. Please go ahead. Your line is open.

Thanks. Good evening, everyone. So I have one, Rob, if I can ask you, now that you’ve been in the seat for a while unlike the Analyst Day where you were new, CN obviously has a long and proud history of schedule railroading in its blood, maybe your former employer didn’t have that, but can you just talk about some of the outside of scheduled operations, maybe some of the best practices or what your former employer did really well that maybe you can bring to CN?

Yes, thanks, Ravi and look forward to seeing you again. Certainly not here to compare and contrast rank and look at the BNSF, great run company and have great experiences there. What I’ve seen at CN, I’ve been very impressed with in terms of how they make their decisions, the speed in which they make their decisions. Great example was in the second quarter before I got here, some of the decisions were made in terms of reacting to the volumes out there, how quickly they laid up locomotives, how quickly they react in terms of assets, very impressive that their fingers on the pulse. It’s very obvious that this is a season group of schedule railroaders, and they do a lot of things, really, really well and I’ve been very impressed in my few weeks here.

Thank you.

Thank you. The next question is from Cherilyn Radbourne with TD Securities. Please go ahead. Your line is open.

Thanks very much and good afternoon. So, you knew you were going to get a question on crude by rail, so I’ll go ahead and ask it. Can you just give us your thinking as to when the Alberta crude contract could transition to the private sector and how quickly thereafter you would expect to see a ramp up in volumes?

So I think, James has been our expert will take that up. Yes, thank you, Cherilyn. So tough to say with governments involved, but I think they have stated publicly that they fully intend to have the contracts transferred to the private sector by the fall. We are ready to go since those contracts get transferred over. I think the real determining factor Cheryl is going to be this pace of scale or wrap up that is going to depend on whether the transfer of contracts is time with the reduction in curtailment or exclusion of curtailment for crude by rail barrels. We are very hopeful that’s going to happen and could see some very positive news here this summer.

Hopeful and ready.

Yes.

To get the reserves.

Thank you. The next question is from Benoit Poirier with Desjardins Capital. Please go ahead. Your line is open.

Yes. Thank you very much. Keith, could you provide maybe more color on the Yang Ming contract loss and also how that will impact your service at Deltaport given that your competitors’ market share is expected to go from 20% to 70%? Thank you.

Sure. So it’s got two questions. Well, I will take them, Benoit, thank you. So the first about the Yang Ming contract, we were sitting at the negotiation table and got to the point where we said no and that’s pretty much the end of that story. With regard to the transfer of the contract over at Vancouver to Deltaport, it’s a very complicated thing because you have multiple alliances, multiple carriers, slot charter agreements and that type of thing. I can tell you within the last 4 years, there has been anywhere between 12 and 13, I look at my notes, but 12 and 13 times that the market share of who is handling the business there has gone up and down for us and back and forth. It’s been a long time though since we have had a significant share in 2015. I think the share right now is right around 50/50. So, we know that there will be a lot of changes. I think there is 4 or 5 different scenarios about what could play out over the next 6 months with different alliances talking to us and talking to the terminal operator about moving some vessels around, strings that type of thing. So I don’t think we can call who is going to have what type of market share and what that’s going to do with regard to how much footage gets dropped on a weekly basis. So we are going to wait and see how it all plays out there.

Okay, that’s great color. Thank you very much for the time.

Thank you.

Thank you. The next question is from Chris Wetherbee with Citi. Please go ahead. Your line is open.

Hey, thanks. Good afternoon.

Good afternoon.

James and Keith maybe you could give us a little bit of a rundown of the specific drivers that you sort of have the most confidence in, in terms of building the RTM growth as we move into the second half of the year. It sounds like crude by rail is likely to be one and I think coal and maybe a couple of others are sort of the key drivers there, but can you sort of break them out a little bit and go into a bit of detail there?

Well, I think Chris you hit on the first two, it’s going to be crude, it’s going to be coal, it’s going to be grain and it’s going to be propane and intermodal, key drivers of our RTM growth going into second half of the year.

Thank you.

Thank you. The next question is from Allison Landry with Credit Suisse. Please go ahead. Your line is open.

Thanks. Good afternoon. Just wanted to follow-up on the international intermodal, it sounds like you have got some good success there. And I think you said that you had won some new contracts. So just wondering if you could give us a sense of the potential magnitude and timing of these new contracts and if we should expect any of that volume to flow through in the second half of the year? Thank you.

So, most of those contracts or renewals, Allison, we are working on some of the other, I’ll call them open contracts or renewals for our competitors. Well, we are always looking at that. They are looking at ours. But the renewals that we had, Evergreen and Hapag, I can announce we have renewed some other contracts. It’s just not at the appropriate time to do that to give that announcing per our customers, but we have renewed some, yes.

Okay. Thank you guys.

Thank you.

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

Thank you operator. Hey, J.J. Hey, team. Wanted to touch on pricing a bit, your outlook is to continue to have pricing above rail inflation, but how would you categorize sort of the pricing environment now and into the back half of the year compared to how it came into the year?

Yes. Thank you, Jason. I would characterize it as stable. We continue to have success pricing ahead of railway cost inflation. That’s been our model for many years now and we see no reason to deviate from that and we are having success in the marketplace.

And if I could follow-up in the back half of next year obviously the truckers are going to get some curtailments by the governments with the devices being put in their cars. Do you see that as an opportunity to maybe push up pricing on the domestic intermodal a little bit more?

So, maybe you want to pick that up, Keith?

Sure. So we saw that happened in the states. The ELDs come in line June of 2021 right. So, we have already seen a significant amount of large trucking firms and large intermodal firms in Canada have already begun using those devices, because a lot of them do some trans-border work as well. So, I don’t think you are going to see the big bang that you saw in the states, but there will be some of the smaller firms and some of the – maybe some of the midsized firms that they will be impacted a little bit more. So we see good pricing power now. I don’t know that that’s going to increase at the ELDs.

Some more of a muted response we saw in the states.

It’s not going to be the big bang, I don’t think so.

Just because it as cross-border, a lot of companies are already equipped.

Yes, yes.

Makes a lot of sense. Appreciate the time as always, gentlemen.

Thank you.

Thank you. The next question is from Steve Hansen with Raymond James. Please go ahead. Your line is open.

Yes. Good afternoon, guys. Just a quick one here on the coal side, the Coalspur facility ramp up is encouraging, but I think it has been a little bit slower than expected. Can you maybe just give us a sense for the cadence through the back half of this year and into next year? Any specific issues that you see is accelerating or slowing that down? Thanks.

Yes, I won’t speak to any kind of the specific challenges that Coalspur has had. Anytime you startup a new facility or a mine like that you are going to have a bumps and starts kind of we have seen that. Talking with our good customer, Coalspur, we see a continued ramp up going through the balance of this year, Q3 and then into Q4. All signs are very positive for continuing growth in the carload volume that we see out of that facility.

And we also see the fact that the RTI coal terminal in Rupert is now finally been sold. It’s in ahead of the good private investors who have intent to invest and that’s what creates fortunately the mid-term to see some growth in Rupert because of the new ownership.

That’s great. Thanks, guys.

Thank you.

Thank you. The next question is from David Vernon with Bernstein. Please go ahead. Your line is open.

Hey, guys. Just a quick question on the intermodal RPU, is there a way you can separate out kind of what the growth was from TransX versus what the core growth was in the business?

Specific to you want me to break just TransX and then our intermodal business and what the growth was?

In terms of the RPU growth of 14% or whatever it is year-over-year, I am just trying to get a sense for what it was for rail versus TransX?

I believe the – I am going to give you a roundabout number, how about this – the numbers for TransX are about $100 million.

In total revenue.

In total revenue, should be able to back into the rest of it from there.

Okay?

Okay.

Okay, thank you. The next question is from Walter Spracklin with RBC Capital Markets.

Thanks so much. Good afternoon, everyone. So when I look at your operating performance on a sequential quarterly basis barring last year, it’s very typical you are getting summer railroading in Canada tends to be a lot easier. So, your operating ratio historically has been a lot better in the third quarter versus Q2. Just wondering if there is anything as you say if you are flagging anything in the operating side that might pop up or anything that would indicate that historical trend albeit barring last year that historical trend wouldn’t continue into the summer period here for CN this year?

Yes. Walter. Thanks for the question. Listen, I think it’s steady as she goes. Obviously, we are not going to give any guidance on the OR on a quarterly basis, but as you can see, we are continuously improving our OR in a year-over-year basis as the capacity is there and as we have the right infrastructure. So that’s exactly our game plan. And I think over the next couple of years as we have provided guidance at our Analyst Day that you have attended, I think that we are comfortable that will get into the high-50 OR which is what we have said to the market. And on a quarterly basis, you can make your own assumptions. We are not going to go there on a quarterly basis, just be careful when you look at it on a quarterly basis, there is sometimes timing. So, OR, you need to look at it and we look at it over the next few years and we are right on our game plan and we are very pleased this quarter, because we actually delivered what we said we were going to deliver. So we are very pleased about this. And when you adjust for asset sales as I said in my remarks, then we have the lowest OR in the industry. So we are pretty pleased about that.

Okay. Thank you very much.

Thank you.

Thank you. The next question is from Brandon Oglenski with Barclays. Please go ahead. Your line is open.

This is David [indiscernible] on for Brandon. Just had a quick question, what we saw at the Investor Day was the infusion of some outside talent that you have brought in. We had heard from Rob already. We noted you had hired a new Chief Digital Officer and I was wondering if you could talk about some of the experiences and things you will bring to the table as they apply to the digital initiatives and technology initiatives you had highlighted at the Investor Day? Thanks.

Yes, yes. So, it’s J.J., maybe I can pick this one up. So, David comes from a big Canadian industrial company, which is also has a lot of remote location, been in business with companies and been in business for a long time, heavily unionized. So, he comes from a background that’s similar to what we experienced here in the rail industry at CN. And also his role is to help us out apply technology, advanced technology to our operation, but also to help us automate regular administration process. We have still have it in the rail industry at CN, a lot of jobs, which are repetitive combining data, going to a spreadsheet and we can automate those through RPA. But also we are looking as we saw in the Investor Day to automate track inspection, train inspection and him and Michael Foster and the [indiscernible] basically are mandated to bring in new level of scale and efficiencies to schedule railroading that takes into account what’s now readily available to any large industrial company like CN. So, it’s time for us to really – as an industry, CN to really put forward on that and David was the last piece of the talent that where we are looking to add to our team. In fact, he already bought his house, but he is going to be with CN sometime in mid-August. So, it’s all coming up together nicely. The rail industry can automate just like any other industry. I think that helps.

Thanks for that.

Thank you.

Thank you. The next question is from Seldon Clarke with Deutsche Bank. Please go ahead. Your line is open.

Hey, thanks. Can you just talk about some of the maintenance projects that you are undertaking in the third quarter and whether we should expect the same type of network disruption that we saw in 2018?

Jamie, you are on that?

The combination maintenance and also capital program, yes, so we are in the middle of work block season right now obviously put in rail and tie-in during the summer months. We do have our expansion plan well underway. We have got a couple of those projects completed in the first half of this year and the rest that are planned to be completed in the third and fourth quarter are all on track and should be completed as well.

And just to add on, I mean we did learn from our deployment of our basic CapEx maintenance and also our capacity from last year. Obviously, this is a big program this year similar to last year. So, the team did a good postmortem starting to season. So, the way that we’re deploying our capital is actually better so that you should not expect to have some of the impact that you had last year in the third quarter; we did learn. So stay tuned. But as Rob said, we’re on track and this capacity will help us when we get to the busy fall season which is coming up.

Thank you.

Thanks.

Thank you. The next question is from Konark Gupta with Scotiabank. Please go ahead, your line is open.

Thanks, and good afternoon. Just wanted to follow-up on the volume outlook for the second half, so like you pointed out a few commodities and segments, which are obviously clearly ramping up and then you also have easier comps and frac sand and autos, I guess, in the second half. So I just wanted to understand the 6%, 6.5% RTM growth we have seen so far in July and with the contracts that you have mentioned that you’ve just won or renewed. What do you think the second half volume outlook should be in that upper sort of mid-single digit range is that sustainable or you think there is this further acceleration you are going to expect?

Well, I think we – just to make a point before I pass it onto Keith and James is all we’re talking about is 2019; we’re not to 2020 at this point. But – and the contract win we’re talking about in case of General Motors is starting in October. James or Keith, you want to add to what you said earlier?

So as J.J. just pointed out, the contract win that we have with General Motors in Vancouver is in October, and we feel confident with the numbers that all line up to the mid-single-digits.

Yes, I could talk a little bit more about kind of what we see that sequential ramp up in H2 compared to H1. So if you think about what we did with – on the coal side of things, we got the full ramp-up of Coalspur that we talked about. Then, we have the full ramp up of our propane export facility with our good friends at AltaGas. On the grain side, we’re looking very positive on grain, could be a crop in the range of the average for the last three years. But they carryover from this crop season to new crop season and potential to have a 10 or maybe two-week earlier start up compared to last year’s late start for the crop. I mean, these are easy times to execute when you can got to get the grain crops started a couple of weeks early there. And I think the last one I talked about was coal, propane intermodal you did?

Yes, maybe we should talk a little bit about the follow-up on the press release on the new stuffing facility in Prince Rupert, where we will be moving some resins that way. And it will be about 400 containers the month that will be stuffing there with our Charlie Reymann and his team that not only add to the revenues for James, but it’s very helpful to our steamship line folks that are looking for a write-back – revenue write-back to Asia. So it’s a really, really great thing that the team has been working on, it will come to fruition here very shortly.

And there is some further market shift or contract shift, if you wish, we will only talk about those things when our customers are comfortable that we can talk about them. Thank you

Thanks.

The next question is from Jordan Alliger from Goldman Sachs. Please go ahead.

Yes, hi. Afternoon everyone. Just a quick follow-up, I just want to make sure I heard right, you talked, I think about the frac sand markets, and I think you said that perhaps customers were suggesting something and then maybe it wasn’t coming in quite as expected. I know that was an opportunity set for you guys, you talked about, and I just wanted to get a little color around that to make sure I heard that correct.

Yes, so it’s J.J. talking. So these were my comments. It is basically, we were geared up in the second quarter to much more frac sand and what we did. What’s more than – we basically to be in line with our customers on prediction, and the combination of, I guess, they were too optimistic, but also that marketplace is maybe little tough or tougher than what they thought plus they are also competing with local sand in different areas. So we have the resources ready and you may remember that winter of 2018, there was a lot of public comment made that CN wasn’t ready for frac sand, while we’ve got geared up with people, track, locomotive and whatnot. But then in second quarter here is – was the reverse. What the industry was talking that would happened, did not quite happen. So that’s what it was.

When you say, I mean is – do you anticipate sort of shorter-term or just not clear yet?

This is all related to how much drilling activities that there is right now and related to, I think, the frac sand industry in North America is maybe not quite getting the volume across the board that we’re hoping for and CN is experiencing the same thing.

Thank you.

So in term of how much sand will be required in future, again, it will be back to the basic that James kind of was talking about, what’s the price of natural gas, what’s the price of crude, and how much drilling activities will there be.

Thank you.

Thank you.

The next question is from Ken Hoexter with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Good afternoon, J.J. and team. J.J., maybe you could just revisit some of your opening comments. You talked about balanced growth and parked capacity and it sounds like you’re bringing some employees back from furlough. It looks like employees were up 5% normalized for the TransX. Maybe you could just talk about the kind of what’s going on the employee side and how you balance out with the, I guess, mid-single-digit growth here you’re looking for in the second half? Thanks.

Yes. So maybe I’ll start and then maybe just Ghislain can add some, but on the headcount side, on the people side, we are doing three things. One is, we’ve had in last year, quite a few – remember, we used to talk paycheck and employee, and really paycheck is really to what knows the most, and we are trying to reduce the number of contractors, consultants we have at CN, because those paychecks are more inspected than the people work full time. So on one end we are in sourcing work because that work is done more cost effectively with full-time employee, and also where we retain the skill, that’s mostly in the world of IT, in the world a PTC for example. And on the other end, on the operating side, we want to size up the size of our labor sort of workload and we were prepared for more workload this summer than what we had, crude by rail, for example, is even – it’s a growth story. We’ve been quite what it was, we had some layoff in the second quarter, 500, and the 500 is now down to 200 because of attrition, and we are at – and the third leg is on the management side. When I say management, I mean, the headquarter, but all non-unionized job at CN. And to give you a reference point, on October 15, 2018, we had 6,900 management job at CN, and now in July, we’re roughly at 6,030 to be precise and we want to finish to end the year at 5,700. So we are streamlining our management structure, we are sizing our crews based on volume and attrition. And then also by the same time, we are insourcing some work on the consultant, mostly in IT, because these consultants they are too expensive and also we end up training people for their next consulting job as opposed to in the next project at CN. And I’ll let Ghislain, you want to have?

You covered it very well. I think what, Ken, you need to be mindful of again is attrition is a good lever for us because there’s quite a few people that go, that retire and therefore, when we are a little bit up on the headcount side, it only takes a couple of months and the attrition eats into it. So that’s really a good lever that we have and that we use. So, but otherwise JJ, you covered it very well.

So, Ken Hoexter we are focused on head count, but remember the discussion that we learned back and it is with Hunter. It’s more about the paycheck and the head count. So some time, you have to increase your headcount to reduce the cost of these outsource services that we buy from outside.

Helpful. I’ll wrap up. Thanks, JJ and Ghislain. I appreciate it.

Thank you.

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

Hi, thanks. Afternoon guys.

Good afternoon.

So the 10,000 carloads accrued in June, what’s the run rate you’re assuming for third quarter? And then separately, Ghislain, if I look comp per employees down 2% year-over-year in the quarter, how much of that’s the incentive comp, how much is just the mix of TransX. I’m just trying to understand is that – if we should think that that continues to fall year-over-year in the back half of the year?

James, you want to add some more colors on the crude by rail?

Yes, specifically on crude, we’re going to see a slight ramp up from our June volumes as we go into the third quarter and then into the fourth quarter.

And this is all based on our own gut feel of the spread and what the government of Alberta may or may not do and how early they will do it.

Yes, I’m not sure. I got your question, Scott, on the second piece, I know there is one on incentive comp. So, yes, incentive comp helped us absolutely on the labor side this quarter and this just demonstrates that some of our incentive model is working. And I mean, on the people side, I think we’ve answered it and we’re going to try to right-size our resources. What we’re proud about this quarter is, we obviously, our volumes are lower or softer than what we expected, but we were very quick to react and this is partly why we have the quarter we have. So again, we’ve talked about in our opening remarks that the markets are changing very quickly, very volatile. So, our policy is very close to the demand and we can react very quickly to what’s happening out there in terms of the cost side. So, we’re very pleased about that and I think, stay tuned, our business plan is working and we’re delivering what we said we’re going to deliver.

Maybe I maybe I didn’t ask right, if I can just ask it more directly. The comp per employees for the TransX people, is that lower than the overall average, meaning as we add that into the model, does that bring does that bring comp per employee lower?

TransX is part of CN, I wouldn’t start commenting on their comp model versus our comp model. I think comp is comp and the numbers are there and I’m going to let you make an assumption.

So maybe, they may not have as many senior Position and they are all basic [indiscernible] all the salaries on Canadian funds, maybe that could help because on the rail operation, we have quite a few people who are based in the United States.

Alright. Thank you guys.

Thank you.

Thank you. The next question is from Brian Ossenbeck with JP Morgan. Please go ahead.

Alright, thank you for taking the question.

Thank you.

Just wanted to go back to the resource allocation, it sounds like you’ve obviously made some adjustments to where it seems a little softer. If you could just give us a sense which areas are you watching closely that could be a little bit weaker into the back half of the year? And also give us a little bit of context as to how the Digital Twin that you’re rolling out, I believe, at year-end imagine you have a decent working model for that. Is that starting to show some benefits in terms of adjusting more in real time or is that something you don’t expect to get a lot of mileage out this year versus next when it’s fully ramped out?

Yes. So, if I may start on the digital twin, the tool that we want to have in term refers to models our capital, then the resource plan. We’re not using it yet. And today, I would in term of a day-to-day tool, that’s not where we’re at. We’re still building that tool and we want to use that tool at this point for the first use to be modeling the network and making the capacity decision, more kind of a month-by-month, it’s kind of a mid-term tool, and ultimately, eventually will go for mid-term to more short-term to more and more short term. So that’s work in progress, but huge payback in what we might be able to extract as incremental capacity by using the network much smarter. I think I forgot what was your first question within the two questions?

Yes. I’m just asking, if you could give us a sense of where you’re looking at in the second half that it might be a little softer, you kind of hit the highlights in terms of whole crude [indiscernible]?

We keep an eye on all of our markets. We try and keep take control over that, make sure that we are rightsizing our resources continually. Some of the markets that we’re watching very closely forest products, for example, U.S. coal and of course, crude, need to make sure that we’re able to react either way. Crude, could have to react up, could have to react down, it’s going to be very interesting to see what happens in the fourth quarter here.

Forrest products are so, and the Mississippi River is still high and the [indiscernible] in Europe is always, we need to stay very close to that.

Okay, great, thanks very much.

Thank you.

The next question is from Justin Long with Stephens. Please go ahead.

Thanks and good afternoon. So, I was wondering if you could help us understand the quarterly cadence of RTM growth. It’s baked into the guidance for the third quarter and fourth quarter, just given some of the moving pieces with new contracts, the comps, etc? And then just lying on the tax rate, even after the adjustment, it was lower than the 26% you guided to last quarter, so curious if that assumption in the guidance has changed as well?

Yes, I can start with the tax, Justin, so I did last quarter, as you know, we discussed and I did provide some visibility that our effective tax rate for the full year would be 26%. I’ve just said in my remarks prepared remarks that now, we see 25% of effective tax rate for the full year, and that’s mainly due to tax strategies that we are employing to reduce some of the unfavorable impact that the U.S. tax reform has on CN. So, this is good news. And on the I can comment and then if my colleagues in the marketing wants to jump in on the RTM, I mean, if you look, we’re still guiding for and it’s not a guidance, it’s an assumptions so our assumption is still mid-single-digit volume growth in terms of RTM. So I mean, that is mid, so you can decide what you decide what mid is, but and freight in the first half of the year, we delivered 3%, so you can but just do the math and you can see that and that’s what I said in my remarks as well that we need an uptick in RTM growth in the second half, but at the end of the day, volumes are volumes. What we are focused on is to protect earnings. That’s what we’re focused on. At the end of the day, if volumes come at 4% instead of 5% or 6% or whatever it is and whatever your midpoint is, we want to protect earnings and what’s important for us is to deliver our guidance on earnings, which is low double-digit EPS growth. I think that’s what our investors wants to see and that’s what this team is committed to deliver.

That’s right. It’s about modulating the resource to the volume slower growth means slower increase in resource. And as the network is also becoming more efficient, we need to bring that to the bottom line. So rolling stock, headcount either permanent head count like management, as I said earlier that we are aggressively bringing down and it gives the operation side is to go from week-to-week, month-to-month to see this how many people we need to have and make sure we have enough people, but at the same time not more than what we need. So, it’s almost basically now a weekly exercise in terms of how much rolling stock we have out there and how many people we have on the furlough board on lay off. It’s very dynamic, we keep it tight.

Thank you.

Okay, great, thanks for the time.

Thank you.

The next question is from Tom Wadewitz with UBS. Please go ahead. Your line is open.

Yes, thank you for the time. There were some comments I think about peak season that some optimism and I think your comments on intermodal in general in second half showing some expecting some growth. How much visibility do you have at this point? What kind of underpins the view you have at this point on peak season?

Keith?

Yes. So, a couple of different things. We have the ability to talk to our domestic customers who have the inventories in the warehouses and what they see is going to be their needs, but we also have our discussions with the Allianz and what they’re doing with their vessel calls and the size of their ships, and where they’re calling if they’re moving some stuff around. And we can see out I mean, we know what’s on the vessel, three, four, weeks out, anyway. So that’s the guidance or that’s the visibility that we have and we make the best decisions we can with it.

Yes, we have more and more a better system and also cooperation with some of the terminal operator, who have the visibility of what’s coming for CN, right, for CN Rail to and fill in as the vessel are loaded. So, we kind of see three weeks out. I mean, what’s loaded today, we’ll get two or three weeks from now, so we have at least that better visibility on what’s loaded in the ship, which are a distant to CN, CN port and CN cities. So that’s helpful.

And what about...

Yes, go ahead.

Yeah, you commented a bit on the inventories, is that something that’s is there much visibility in terms of, you think inventories have actually come down or coming down or is that kind of a broader macro data that you’re looking at?

Well, that’s also what I said earlier is that we can’t say how big the peak is going to be, but we do feel that there will be volume growth over Q2. There will be a peak season, we just don’t know how big of a peak it will be, right? So can’t regulate what the answer is, but we do make a lot of, a lot of phone calls and a lot of visits to our domestic side to triangulate the information to see if we can figure that out, and it’s probably not an exact science, but we do our part and we do a lot of work to try and figure that out.

Okay. Thank you.

Thank you, Tom.

Thank you. There are no further questions registered at this time. So, I would like to turn the meeting over to Mr. Ruest.

Okay.

I am sorry, I am sorry, we have one that just had, Mr. Scott Group pop up from Wolfe Research. Please go ahead.

Hey, guys. Thanks for the follow-up. Just big picture, the guidance you have got, you are assuming accelerating volume growth, but decelerating earnings growth to get to low double-digit earnings growth. Maybe help walk us through that and do you think that there is potentially upside on the low double-digit for earnings growth based on the first half?

Yes, listen the guidance is there. I mean, there is a lot of – Scott, as you know, there is a lot of different moving parts to the equation and I mean there is freight thing, there is volume, there is various commodities, etcetera, etcetera. And then there is comparables as well what we did versus last year, in Q3, Q4. So, all-in-all our best foot forward right now and what I can tell you is we are maintaining our mid single digit volume growth in terms of RTM, but we need an uptick to get there as an assumption, because we did 3% in the first half and with our math and you can do your math obviously, but with our math then we are confident at this point that this will result in low double-digit EPS growth for the year and we are proud of that and we are confident that we will deliver on that.

Okay. Okay, thank you.

Thank you. Thank you, operator.

Thank you. There are no more questions registered at this time. So, I would like to turn the meeting over to Mr. Ruest.

Okay, thank you everyone for joining us today. We are very proud of our results, but the race goes on and we have already working in the third quarter. So, thank you for all joining us today and this is the end of our call. Thank you.