Canadian National Railway Co (CNI) Q1 2021 Earnings Call Transcript

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Canadian National Railway Co (CNI 0.39%)
Q1 2021 Earnings Call
Apr 26, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the CN First Quarter 2021 Financial and Operating Results Conference Call.

I would now like to turn the meeting over to Paul Butcher, the Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

Paul Butcher -- Vice-President, Investor Relations

Well. Thank you, Christina. Good afternoon, everyone and thank you for joining us for CN's first quarter 2021 financial results conference call. I would like to remind you about the comments already made regarding forward-looking statements.

With me today is JJ Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; and Sean Finn, our Executive Vice President, Corporate Services and Chief Legal Officer.

I do want to remind you to please limit yourselves to one question so that everyone has the opportunity to participate in the Q&A. The IR team will be available after the call for any follow-up questions.

It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. JJ Ruest.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, thank you, Paul, and good afternoon to everyone. I hope you all had a safe, healthy and constructive start to 2021. Here at CN, we're off to a good strong running start. The underlying performance of CN has been strong and this is thanks to our dedicated colleague.

Our railroaders delivered despite severe winter operating conditions, unprecedented demand and number of markets like fert and grain and ongoing challenge during the pandemic.

As you can see from slide five, CN is on track to become the premier railway of the 21st century. We are focused on our role as an engine of the North American economic growth and prosperity, as well as a supply chain and environmental leader. We pioneer and we're the first to implement Precision Scheduled Railroading across our network and we are a clear industry leader in ESG. Our strong balance sheet is a testament to operational excellence and we continue to prudently invest in the business and our strategy as we grow and expand our reach. CN has a long standing successful track record of strategic and acquisitive acquisition throughout North America, which has resulted in successful integration of our current rail network. In line with our existing strategy, CN made a superior proposal to acquire to KCS. This is the right next step for both CN and KCS toward becoming the premier railway of the 21st century.

Turning to slide six. We are confident that together with KCS' experienced and very talented team, we will be able to continue that success in a combination of CN and KCS to the benefit of both companies. Specifically, this offer will deliver a superior value to KCS shareholders. CN's proposal represent a 21% premium to the CP proposal, and more than double the amount of cash per share, resulting in not just greater value, but also greater certainty of the value for KCS shareholders. The combination will also significantly enhance customers' choice and competition. In particular, it would create a new express route that connect the US, Mexico and Canada with end to end seamless single owner single operator service. It would connect vibrant port from all three coasts to more inter-land market and cities. It would connect CN and KCS buyers and sellers to more destinations. It will also preserve access to all existing interchange option to enhance route choice and ensure a robust competition.

We are also firmly committed to maintaining open gateway to competitors' network. We believe this combination will enable better solution to our customers, speed of movement of goods from country to country, coast to coast, enhance competition, create jobs up and down the railroad, and prevent millions of tons of greenhouse gas from entering the atmosphere by converting truck traffic to rail supply chain.

As an update on where our proposal currently stands, on April 21, we submitted a pre-filing notification to the STB, of our intent to file an application seeking authority to combine with KCS, should the KCS Board of Director accept our superior proposal. We are proposing to use an identical voting trust structure that CP has proposed, and we are confident that the STB will not subject our proposal to any different standard in approving the voting trust than those that would be applicable to CP. We believe that both voting trusts are equally likely to be approved. If our voting trust is approved and the combination with KCS is consummated, KCS shareholders will receive the value of their consideration being offered when the transaction close in trust, which we anticipate could be as soon as the second half of 2021. We are fully committed to this transaction and confident in our ability to achieve all necessary regulatory approval for closing to our voting trust, and then ultimately receive approval to combine with KCS.

On page seven, I would like to provide a brief update on our strong progress as we have made an only one week since announcing our proposed combination. We were very pleased to learn on Saturday that the Board of KCS determined that CN's offer is reasonably expected to lead with company superior proposal, and we were granted permission to conduct our confirmatory due diligence. We look forward to working toward finalizing a definitive agreement merger to combine our two great railroads. I connected with Pat, the CEO of KCS over the weekend and reiterated CN's strong enthusiasm, readiness, and most importantly, our deep commitment to begin collaboration with the KCS team toward a successful combination.

Secondly, we filed earlier today an application with the STB for the approval of our voting trust and named Dave Starling as a trustee. Finally, a great importance of note, in less than a week of making a proposal to combine with KCS, we have received an overwhelming amount of support from more than 500 freight customers, port ecosystem partners, suppliers, government officials, and other stakeholders. They have voiced their support for a combined CN-KCS which will help them compete in their market and better serve their needs by offering greater choice and greater efficiencies.

We have also spoken to our shareholders and many of you as well and I appreciate your strong support in this combination. I might tell on behalf of the entire CN team, we are fully committed to this transaction and we're very confident in our ability to achieve all the necessary regulatory approval to close into a voting trust and then ultimately receive approval to combine with KCS. Together, we will create the premium North American Railway for the 21st century.

Moving on page eight. I'm very proud of the CN underlying performance in Q1. This quarter, we realized solid results and we continue to work on our yield of our new business mix. During the quarter, we continued to deliver industry-leading volume growth with RTM up 5%, while revenue were flat versus last year, mainly due to adverse fuel lag and exchange rate. Our yield strategy is working. Our same-store pricing was 4.2% in Q1. Our network is fluid and we have recovered very well from the polar vortex of February. Our efforts are reflected in our ability to capitalize on consumer-driven trends and growth of our Intermodal business, which was up 19% for the quarter with CN significantly outpacing the rest of the industry, as well as our strong financial performance and gain in safety, train length, car velocity, labor productivities, fuel efficiencies and other key measure of operational performance. We are confident in our business and committed to our long-term strategy.

With that, I will turn to Rob. Rob?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Right. Thank you, JJ, and thank you to the talented employees of CN who helped deliver a very solid quarter.

As you'll see on slide 10, our team moved an all-time Q1 record for volume with GTMs up 6% year-over-year despite the impact of the polar vortex that JJ just spoke about in February. While volume was up, crew starts were up only 1%, our active online inventory of railcars was down 3% and train length improved 5%. The railroad continues to run very well in its fluid with car velocity also improved 5%. In addition, our labor productivity improved 9%. All-in-all, just a solid quarter of winter operation.

As detailed on slide 11, we are the North American rail leader in fuel efficiency. We improved our fuel efficiency 4% versus the same time last year to an all time Q1 record. These efforts allowed us to save CAD12 million from our initiatives alone and save the planet over 60,000 tons of co2 emissions during the quarter. From a safety perspective, our personnel injury rate and accident rate were improved an impressive 27% and 36% respectively, living up to our core values. From a technology standpoint, our FRA approved autonomous track inspection cars provide safety and cost improvements to our railroad. As we prepare to enter into Phase 3 of our program, we will be able to enhance overall safety while reducing manual inspections by 75%. In Q1 alone, our accident costs decreased over CAD30 million versus Q1 last year due to this technology and the dense ecosystem of Portal and wayside detectors on our network. These cars are now covering 100% of our core main line and 95% of our gross ton-miles move.

As I previously mentioned, we experienced a couple of weeks of February, extreme cold temperatures with temperatures dipping below minus 40 degrees on large parts of our network. During this time, we were able to deploy our air car fleet, which allowed us to use multiple air sources during this challenging time. With this technology, we moved an additional 232,000 feet of traffic in February that would have otherwise been delayed or lost due to the cold. This helped us move 5% more volume during the quarter while holding crew starts flat. Along with that we're able to continue to deliver for our customers. CN has now set 13 consecutive all time monthly records for Canadian grain, keeping the streak intact throughout the winter months. We continued deploying technology to make our railroad safer, more efficient and more reliable and we're starting to see additional benefits from key projects including track and train inspections.

Moving to slide 12. We are optimistic on the volumes as we look out over the remainder of the year. To that end, our board approved an additional 75 locomotives over the next 12 to 24 months to support the projected growth and economic improvement. Our business is doing very well as evidenced by our strong performance this quarter. Our capital investments over the last three years continue to provide safe and sustainable transportation options for our customers as the global and North American economies remain on a steady path to recovery.

As you can see on slide 13, our strong operational performance coupled with strong demand led to record Q1 Canadian grain shipments. We beat last year's revenue record by over 20%, setting a new all time high watermark for sustainable grain supply chain volume. In total, as I said, but I'll say it again. We have now set records for grain tonnage now for 13 consecutive months, delivering for the Canadian farmers. And as JJ highlighted a moment ago, our intermodal performance has also been very strong, increasing by 19%, which far outpaced industry growth.

Turning to page 14. We are confident in our ability to continue delivering strong results as the economy rebounds. Our network is fluid and we've recovered well from the extreme temps in February. We look forward to realizing the pipeline of growth opportunities in front of us. This includes continuing to grow our position as a clear industry leader in intermodal. We continue to maintain a very disciplined approach to yield management and the strategy is working, including same store pricing of 4.2% in Q1. We're also focused on diligently managing our capex to drive productivity in best-in-class capacity and resiliency.

As we look toward the future, we expect to maintain our leadership and digital scheduled railroading, building on our history as a PSR pioneer. This will continue to be a competitive advantage as we execute on our strategy. And as JJ already mentioned, ESG will continue to be a priority. We've recently undertaken major new ESG initiatives focused on environmental protection, active social responsibility, stakeholder engagement, and best-in-class governance. On that point, CN's Board of Directors announced in Q1 that at least 50% of independent directors come from diverse groups, including gender parity, the establishment of the Indigenous Advisory Council, and an Annual Advisory Vote on CN's climate change action plan. We expect to continue to grow our ESG leadership and serve as an example in the industry.

As I mentioned earlier, our best-in-class employees have done an exceptional job in helping to carry-out our strategy and we know that we have the right talent in place to continue to drive sustainable long-term growth.

With that, I will turn the call over to Ghislain to go over our financial results in detail.

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Yeah. Thank you, Rob. My comments will start on Page 16 of the presentation which will give a bit more color on some of the highlights of our first quarter performance that JJ discussed earlier.

During the quarter, we booked a non-cash benefit of CAD137 million to recover part of the charge we recognized on the non-core branch lines we put up for sale in Q2 last year. Recall that in Q1 of 2020, earnings also included an income tax recovery of CAD141 million resulting from the CARES Act. Excluding these non-recurring items, adjusted net income was around CAD870 million essentially flat with adjusted diluted EPS of CAD1.23, up 1% versus last year. If we adjust for the impact of fuel lag and stronger Canadian dollar, our adjusted EPS would have been up 11%, so quite a solid underlying performance.

Now moving on to slide 17, we generated a strong free cash flow of nearly CAD540 million in Q1, down about CAD35 million from last year, mainly from lower net cash from operating activities, partly offset by lower capex. We have paused buying back shares in light of our proposal to combine with the KCS.

Moving on to page 18. We are encouraged about the economic recovery and the vaccine rollout, which is giving us strong confidence for the balance of the year. The underlying performance in Q1 is a testament to the dedication of the CN railroaders who perform day-in and day-out. We are building off a strong volume performance in Q1 and looking to see the rail-centric part of our business recover. The increase in industrial production will drive growth in our carload segment, moving forward, such as chemicals, forest products, metals, fuels, and plastic. With that said, we are pleased to update our financial outlook, and are now targeting double-digit adjusted diluted EPS growth for 2021 versus high single-digit EPS growth previously. This is backed by the assumptions of high single-digit volume growth in terms of revenue ton-miles. We still expect to deliver free cash flow in the range of CAD3 billion to CAD3.3 billion, which will drive further improvement in free cash flow conversion.

I will now turn the call back to JJ to give some closing remarks ahead of the Q&A.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Rob. And thank you, Ghislain. So -- and thank you for all of you to joining us today. It's a proactive approach [Indecipherable] pro-economic growth -- merger that we're proposing connecting more sellers and buyers. And I would like to take a moment to reiterate some of the highly compelling aspects of our proposal. By combining with KCS, we would compete head to head on all three coasts at lower cost, safer service, better fuel efficiencies for Mexico through the heartland of America. This will result in a safer, faster, cleaner, stronger railway. In addition, we will bring our leading ESG and operating expertise to KCS business to the benefit of both company's stakeholders.

As mentioned during our April 20th announcement, based on our conservative and preliminary analysis of publicly available information, the combined company is expected to achieve EBITDA synergies approaching CAD1 billion with the vast majority coming from additional revenue opportunity. The strong cash flow generation of the combined company will allow the company to rapidly delever following the close of this transaction. We anticipate the transaction will be acquisitive to see an adjusted diluted earnings per share in the first full year following the termination of the voting trust and CN assuming control at KCS, and double-digit accretion often full realization thereafter.

We are confident in the strength of our business and strategies and we progress toward becoming the premier railway of the 21st century. We look forward to engaging constructively with the KCS Board, and all relevant stakeholders to deliver the superior transaction with KCS, to deliver a greater choice of efficiencies for customers, and deliver enhanced opportunities for employee and local communities. Overall, we have a better bid, we are a better partner, a better railway, and the best solution for KCS and the North American economy.

On that note, we will start to take some questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of David Vernon with Bernstein.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, David.

David Vernon -- Sanford C. Bernstein & Company LLC -- Analyst

Good afternoon, guys. So JJ, I want to kind of ask this question again a little bit. I know we talked about this when you made the bid. But looking at this transaction, why is now the right time to come in with a competing offer here, like where -- like what's changed in the market that makes this such a better deal than it may have been two or three or five years ago, at a lower price point?

Jean-Jacques Ruest -- President and Chief Executive Officer

So there is many reasons why now. And I covered them -- those earlier late last week. But the main reason why now is that the Board of KCS, obviously after very thorough thinking have decided that it is time for them to crystallize the value for their shareholders. Therefore, they're willing at this point to entertain doing a merger and -- with a strategic partner -- a merger with basically another railroad, that's -- so the timing of that is also very much dependent whether or not you have a partner with who you could dance.

And then from an economic point of view, with the beginning of a post-economic recovery, the GDP forecast for North America looks as good as it can be. We had the USMCA which was renewed which is also something that has a specific value to [Indecipherable] top combination. And then depending on who you believe, the time of Mexico, this might be the decade of Mexico in term of near-shoring now that there is some challenge between the relationship of North America and China, but also the fact that the cost of labor in China has been rising to the point where Mexico might have a better decade. And all that, you put that together, the fact that long-term money is acquirable. When you put all that together, it says to CN, yeah, it's time for you to make a good offer to the KCS board and for them to consider it very seriously.

David Vernon -- Sanford C. Bernstein & Company LLC -- Analyst

That's very clear. Maybe if I could just kind of squeeze one little follow-up here. As you think about the unique drivers of value, is it more about getting CN's rail connections further west or further south?

Jean-Jacques Ruest -- President and Chief Executive Officer

So the driver of value here really definitely for us to be successful, we need to create a superior product, a product that can really compete with the long-haul truck. And on that point, I could ask Rob to comment on that. But right now, the rail network in North America is not really designed to really be as successful as it can be for long-haul distance from say Mexico City, all the way to Detroit and Toronto on the East or Mexico City to Wisconsin and Calgary on the West. And in order to do that, you know, putting two railroads together really makes it appealing.

You want to make some comment Rob about the product that we have in line?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Yeah. Sure, JJ. You know, David, when you look at it and as JJ just talked about with the USMCA contract just finalized here last year, it really needs a strong transportation option. We don't get to Mexico and certainly the KCS does and it allows us to really become the true North American railroad, really connecting the continent, but we bring a lot of things to the table when we look at it. You know, when we look at the different industries, the auto industry would get a second line of service between Detroit and Kansas City that would help increase and enhance options. You know intermodal service from Mexico to the upper Midwest and Southern Ontario, that's actually being truck today is on I-35. It's really about taking it of off the highway, saving the fuel and emissions, really increasing choices for shippers.

You know, for farmers in the Midwest, Iowa, Illinois, Wisconsin, Indiana, and others see opportunities to better access the Mexican market. You know, our reach and port access would open the Midwest and KCS shippers to the world quite frankly from the Atlantic to the Pacific and the Gulf. For Canadian aluminum producers, the ability to directly reach markets in the Southern US and Mexico. For lumber and panel buyers in Texas, CN's Forest Products franchise gets fully unlocked and allows for further optimization and utilization of our fleet of over 10,000 center beams and boxcars. I can keep going on, but there is a lot of things this combination would bring, enhancing choices for shippers and customers and really being the backbone of USMCA.

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. Pro-choice, pro-competition, and very much focused on growth. Thank you, David.

Operator

And as a reminder, please limit yourselves to one question. And your next question comes from the line of Scott Group with Wolfe Research.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, Scott.

Scott Group -- Wolfe Research, LLC -- Analyst

Hey. Thanks. Afternoon, guys. So I'm going to -- I want to ask about the operating ratio, just because it does -- it look like this -- it will be worst among the rails this quarter. And I know you talked about maybe a sub 60% OR earlier in the quarter, is that now in this higher guidance?

And then longer-term, CP talked about maybe a low 50s OR pro forma with KCS. How do you think about your OR longer-term on a pro forma basis? And maybe do you see opportunities to leverage some of the success that KCS has had with PSR to get your margins back on track?

Jean-Jacques Ruest -- President and Chief Executive Officer

So maybe I can start that and then Ghislain can add. But when we look long term, we look at our North American network focusing on the economic trial I was talking about earlier and significant growth coming from intermodal. So in a world of growth -- growth from intermodal, the focus at CN will be very much more EPS than try to get the lowest OR. That's one good example if you move a lot of crude, a lot of coal.

Ghislain?

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Yeah. And on that front, JJ, thanks on EPS. We're quite proud of our results for this quarter. I mean, when you look, our earnings are up 1%. All the other rails are down, including our Canadian competitor. They stated that their earning was up, but if you take out the CAD50 million of one-time land sales, they are actually down 5%. So we're up 1% and when you look at the underlying fundamentals of the business, as we mentioned, we would be up to 11% when we consider the fuel lag and we consider FX. So quite proud of EPS, and this is what we're focused on.

Scott Group -- Wolfe Research, LLC -- Analyst

Can you just --

Jean-Jacques Ruest -- President and Chief Executive Officer

Go ahead.

Scott Group -- Wolfe Research, LLC -- Analyst

No, sorry to interrupt. Go ahead, JJ.

Jean-Jacques Ruest -- President and Chief Executive Officer

As I said, we were focused on EPS, and the focus is on EPS. That's what we want to optimize.

Scott Group -- Wolfe Research, LLC -- Analyst

Okay. And do you -- I mean can you clarify where the guidance is on OR though?

Jean-Jacques Ruest -- President and Chief Executive Officer

No. I mean our guidance, as we -- and we're quite proud. I mean we upped our guidance. I think that we're quite bullish on the economy coming forward, on the markets, and we've upped our guidance to targeting double-digit EPS growth. And that's what our guidance is, with backed up by a mid -- high single-digit RTM growth, that's our guidance.

Scott Group -- Wolfe Research, LLC -- Analyst

Okay.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thanks, Scott. Thanks for the question.

Scott Group -- Wolfe Research, LLC -- Analyst

Thank you.

Operator

Your next question comes from the line of Cherilyn Radbourne with TD Securities.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, Cherilyn.

Cherilyn Radbourne -- TD Securities -- Analyst

Thanks very much. Good afternoon. I wanted to ask, in relation to the increasing guidance for the year, and particularly the increase in your volume outlook. Obviously, intermodal has been very strong. So maybe that's the upside, but would love to know if you're starting to see some signs of life in the carload side of the business, which I think would be helpful from a mix standpoint. Thanks.

Jean-Jacques Ruest -- President and Chief Executive Officer

So Rob, you want to talk about, what we expect to move between now and at the end of the year?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Yeah. So Cherilyn, we actually see some positive movement here, particularly in the second half of the year is really where we see the upside as the economy really starts to kick in. You know, we are moving quite a bit of gas, moving out to export through the Port of Prince Rupert, actually, the second gas terminal just opened up, the forest products group has continued to stay strong here. We talked about grain. I think the single -- the carload franchise really starts to move in the second half of the year quite frankly is what we see the big side -- in terms of the upside, Cherilyn.

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. It's pretty broad-based. Very broad-based.

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Thank you.

Cherilyn Radbourne -- TD Securities -- Analyst

Thank you.

Operator

Your next question comes from the line of Tom Wadewitz with UBS.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, Tom.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Yeah. JJ, thank you for the question here. I wanted to try to get your sense of the kind of negotiation with KSU, and how you address maybe some of the concerns that they potentially would have regarding the regulatory process? So I guess in particular, CP now has visibility with the waiver that they would be able to go to a voting trust. You know, you don't yet have that visibility. And so is that a significant barrier to an agreement with KSU? Are there things that you can do in terms of the negotiation that would address concerns that they might have that they reached an agreement with you, but then STB comes back and says, no we're not going to allow you to do a voting trust?

Jean-Jacques Ruest -- President and Chief Executive Officer

Thanks for the question, Tom. So we've only put our offer to KCS Tuesday of last week. And only this morning that we filed for the voting trust. So -- and we fully intend to address every regulatory issue concern that KCS has. So maybe, Sean, maybe you could give a brief and an update kind of where we're at in the process of doing these different things?

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Sure. Thanks, JJ. Sure, Tom. Happy to do so. So obviously, we now filed a non-disclosure agreement with KCS and we have access to the data room. But we're going to start a dialog in the coming days with them. I think you saw today, we filed at the STB a letter setting out our views on the process by which the STB will rule on the voting trust, first of all. Secondly, we also filed a petition with our voting trust which is identical to that we will entrust before the STB those put forward by CP. And our application is very simple. We're just asking the STB, has they annunciate their process to approve the voting trust that they do both at the same time. So the same track, the same standards and ultimately come to a decision at the same time with respect to both CP's voting trust and our voting trust. And we are very confident even working with KCS who will obviously be ensuring both parties seeing their voting trust getting approved that -- we adopted a process that is fair, transparent and even-handed, and we're confident that the STB will do that.

We've asked them to rule by May 31, which puts us in line to be in a position where both voting trusts have been approved by STB prior to the vote by the KCS shareholders sometime in June. So obviously that dialog is ongoing. We will be able to show no doubt with the KCS that when it comes to the voting trust, our position is identical to CP's. And hopefully, we're very confident that the STB will rule on both at the same time. We think that's the best approach to have an even level-playing field for everybody. Ultimately, at this stage, as you know, the standards for the voting trust is public interest. It does not go to the competitive issues. But again our transaction is pro-competitive, where we have new choices, additional choices for customers in the US and across the network and we're very confident that we'll get the voting trust to be approved by STB in early June, late May.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Do you need an agreement first for them to review it or not -- an agreement with KSU or not necessarily?

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

No. Not. We filed -- we opened our proceeding last week when we filed the voting trust, it's not required that you'd have the final agreements signed before they approve the voting trust.

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Great. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Tom.

Operator

Your next question comes from the line of Allison Landry with Credit Suisse.

Jean-Jacques Ruest -- President and Chief Executive Officer

Good afternoon, Allison.

Allison Landry -- Credit Suisse -- Analyst

Thank you. Good afternoon. Maybe just following up on Tom's question. I mean, there seems to be some disparity between CN's view about what the public interest standard actually means, specifically from the voting trust compared with how -- excuse me, CP is outlining their view of the public interest and/or, so maybe if you could just sort of walk us through how you understand the STB language? What do you think it means -- you know, I mean basically CP is trying to you or is arguing that competition is something that that will be considered. I think what CN is saying, it's more about financial fitness and the divestiture of the asset. So hoping that you could provide some clarity on your view on what the public interest standard means specifically for the voting trust? Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Sean, you want to talk to these technical points?

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Sure. Allison, very happy to. Well, first of all again, Allison, our position is that, our bid is pro-competitive, will create choices for customers, and therefore it doesn't have competition. I also want to make a comment. Our view is there are no insolvable regulatory problems. I mean there is a history of these issues that are raised in the context of an STB application is being mitigated and worked out with obviously the customers through the STB process. The standard with respect to the voting trust is very clear and our trust is exactly the same as CP, as a public interest standard, but it focuses on the risk of financial harm of the applicant carriers and that goes to if that for some reason transaction were not to be approved by both carriers, in our case KCS and CN will remain financially viable at the -- post the transaction is yet to unwind the voting trust and we're very confident both companies are extremely viable, would not have an issue post of voting trust if -- were not to be approved, ensuring that there is no proper control of KCS, and it is clear both in our voting trust that there is no control by CN, the trustee being Dave Starling is an independent trustee, with great experience when it comes to both the railway industry, but also KCS specifically. And we were happy to welcome his independence as trustee.

And therefore, we are very confident that the public standard test that must be met at this stage will be analyzed by the STB. And again, the issue will be and what we're asking STB to do is apply the same standards and the same criteria in the same timeframe to both voting trust. So we're confident that when the STB receives both applicants detailed submission on the public interest that they will come to the view that. In our case, we made the public interest trust and our voting trust will be approved by the STB.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Allison.

Allison Landry -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Your next question comes the line of Ken Hoexter with Bank of America.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Hey, great. Good afternoon JJ, Rob and Ghislain and team. Looking at the cost side of the [Indecipherable] thoughts on near term on employees relatively to your -- the flat performance in the quarter. How do you think you ramp as volumes ramp through the year and your thoughts on costs. And I guess maybe long-term, your thoughts on synergies, you mentioned kind of top line versus the cost side as well. Thanks.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you, Ken. So maybe I can start and then Rob can add in. So the month of February was bit of an expensive money for all the railroad some of the polar road tax, we talked about yield, same-store price at 4.2%. So that's a good trend. We like that numbers and the volume ahead of us is obviously positive and constructive just like the economy. And when you look at all the series of KPI that Rob is going to -- during the presentation on the operation side, we've made progress, just about on all fronts, if not all front. So I mean we are with that in light things looks -- it looks positive for the rest of the year.

Rob if you want to add?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Yeah, Ken. If you just look at our operations team, so what it takes to move the freight out there in the first quarter, our operations headcount, even though I said volume was up 6%, our head count was down 6% in operations roughly about 800 people less to move that freight. As I mentioned, our labor productivity was up 9%. You know when we look at it as we came out of the COVID depths of second quarter last year into the third quarter, we didn't bring all of our resources back on a one-to-one basis. And we've been able to maintain that here through the second half of last year and then certainly in the first quarter of this year. You know as you look at the second quarter this year versus last year of course, we're going in a different direction.

We're seeing growth versus the big downturn we saw really at the end of April and May as work started to trough on us. So we weren't doing any hiring last year in the second quarter at all, that all stopped since COVID set in and we made as you'll recall, we had a lot of people furloughed to the contrary, we're actually hiring. We're actually hiring conductors right now, getting ready for the second half of this year. So we're prepared, we're optimistic about the second half of this year in terms of the volume and that's really where our focus is preparing to move that.

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

And maybe JJ I can add. If you're looking Ken at the labor costs of Q1 being higher, that's all major variances, incentive compensation because to Rob's point, our average number of employees in the quarter were down 3%.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, guys.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you. Thank you, Ken.

Operator

Your next question comes from the line of Brian Ossenbeck with JPMorgan.

Brian Ossenbeck -- JPMorgan -- Analyst

Hey, good afternoon. Thanks for taking the question. Just a quick one on the end markets. Can you just remind us what impact do you think you will see from the yield, the mandate when it becomes effective in Canada mid this year? We've heard some concerns about the availability of devices being certified, is that really something that you're focused on, have any impact on some of your end markets that overlap with trucking?

Jean-Jacques Ruest -- President and Chief Executive Officer

So maybe I can pick this one up. Most trucking firm in Canada with cross borders have to have the equipment already because that's what is legal requirement in United States. So then you're left with only the fleet that's only running in Canada that has to meet that mandate by mid-year. So the impact is, I would say -- I would qualify this slightly positive. Because already a good portion of the fleet had to be converted because a number of equipment have moved cross border. So the impact is a slight positive. But I think it's coming up at a time when the economy is going to be strong. So really the economy is going to be a bigger factor than the ELD implementation. Thank you.

Brian Ossenbeck -- JPMorgan -- Analyst

All right. Got it. Thanks, JJ.

Operator

And your next question comes from the line of Jason Seidl with Cowen.

Jean-Jacques Ruest -- President and Chief Executive Officer

Hi, Jason.

Jason Seidl -- Cowen and Company -- Analyst

Thank you very much, Hey, JJ and team. Thanks for taking my question. Want to talk on any of the customer overlap that may exist and maybe you could walk us through some of your options on how to sort of placate the STB and the customers going forward in the deal?

Jean-Jacques Ruest -- President and Chief Executive Officer

So the overlap that is well known is between Baton Rouge and New Orleans where both CN and KCS have a parallel line and we know the detail of that and we think we can definitely solve that as Sean said earlier due to one problem -- none of them are insolvable and we solve them. I don't know, Rob, if you want to add to other [Speech Overlap] overlap?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Yeah, I think you hit it. You know the overlap, just like we said on Tuesday is really between Baton Rouge and New Orleans where we do have a few customers that -- their options will go from two to one. We knew that going in and we said that in -- again, that represents less than 1% of the combined railroads network. So we will remedy it. There is a number of things you can do with that, including the divestiture of the line, but we'll cross that bridge when the time comes, but we will handle it.

Other places that are out there have been mentioned, I'll just go through them real quick. Jackson Mississippi, there is no two to one. East St. Louis, no two to one. Springfield, Illinois, no two to one. Council Bluffs, no two to one. Mobile, Alabama, no two to one. In fact, the Port of Mobile, Alabama has sent in their support for our proposed merger. So they get it. If for some reason there is another issue out there we will work with our customers to remedy that as we always have. And as JJ said. It's important to note that in a little over three business days, over 500 letters of support, that is significant in terms of what we're seeing out there. Thanks for the question.

Jason Seidl -- Cowen and Company -- Analyst

Appreciate for obligation.

Jean-Jacques Ruest -- President and Chief Executive Officer

Hopefully this help clarify everything has been said on this in the last week. So thank you for the question, Jason. Next question.

Operator

Your next question comes from line of Justin Long with Stephens.

Justin Long -- Stephens Inc. -- Analyst

Thanks and good afternoon, I wanted to ask about the 75 locomotive orders that you mentioned. I think you got approval for that from the Board. Any color you can give on the expected timing of those units and when they should be delivered and is this an order that's contingent on the merger being approved or is this predicated on just a stand-alone business in the growth you're expecting?

Jean-Jacques Ruest -- President and Chief Executive Officer

So maybe I'll pass it on to Rob. But just to clarify the approval of the Board for the grain fleet expansion and the locomotive fleet expansion took place before we made the offer to KCS.

Rob?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

That's exactly right. Had nothing to do with the merger and does not have anything to do with the merger. It's really based on growth and growth prospects we see over the next 12 to 24 months. In terms of timing, we expect to get roughly 25 of those here in the second half of this year. The other 50 first half of next year. There could be some variability if volumes bigger than that we could pull some of those forward but that's about what we look like in terms of the timing.

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. So we're not losing our focus at all on Canadian grain and Canadian farmers. We are making a major capital investment over three years, adding -- renewing 3,500 new lower cube, high capacity hopper cars and the 75 locomotive, we got some flexibility over when we take them. And it's basically our commitment that as we see growth coming. We want to be prepared for it. We want to be able to move the economy and do our part for to enable the recovery post COVID. Thank you, Justin.

Justin Long -- Stephens Inc. -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Chris Wetherbee with Citi.

Jean-Jacques Ruest -- President and Chief Executive Officer

Hi, Chris.

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Yeah. Hey guys, thanks for taking the question. I guess maybe a couple of things here. First, just on the voting trust, when you think about sort of the similar approaches that you'd like the STB to take review both of them. I guess I'm trying to make sure I understand that relative to the desire to have your deal reviewed by the new merger rules as opposed to you are are sort of seeking the waiver, is there a reason why maybe the same rules makes sense for the trust as opposed potentially the deal. And then in terms of what ultimately kind of becomes, how the industry ultimately shapes up, how would you expect something to -- the downstream effects to look, if you were to be able to acquire in case, do you think this trigger something else in the future or do you think this is sort of won and done and then this is it?

Jean-Jacques Ruest -- President and Chief Executive Officer

So thank you, Chris. It's a question often asked. So we will revert to our expert, you Sean to cover that.

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Thanks, Chris. On the question of the waiver may be which you were asking about. But to be specific, we believe we can close the transaction on new rules or old rules. So for some reason, the STB were to rule, but we've taken the position from the outset that we think that this transaction should be reviewed under new rules, first of all. Secondly, it does provide, and obviously, our 500 or more support letters are recognized the fact that CN has taken the position that we are confident that under the new rules we can get this transaction approved and closed.

And when it comes to evaluating the voting trust, again, we're of the view that clearing our submission what we said is that, we want the same standards applied under the same timeline and the public interest test for the approval of the voting trust, our submission is that, it is the same for both voting trust leading that to ask the STB to rule both at the same time and hopefully, adopting a process which will allow us to even -- even the -- level playing field -- excuse me, which is fair, transparent, and even-handed. So obviously, our position is that, when it comes to the voting trust, our regulatory assessment is identical to CP's when it comes to getting it approved as a vehicle to use to move on to the next level of this transaction.

Paul Butcher -- Vice-President, Investor Relations

So I hope this helped [Speech Overlap]. Go ahead.

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Isn't that downstream effects? What do you think about that?

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Well, I think that's something that will be obviously assessed by the Board based on the new rules on the overall transaction and we'll address those as they come through. But again our capability of demonstrating it is pro-competitive that as Rob has clearly explained that there is no -- there is -- has competition and there is not -- there are areas where we've to address with mitigation, but we remain confident that under new rules we can get this transaction approved and closed.

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Okay. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you. Next question. Operator?

Operator

And your next question comes from the line of Jon Chappell with Evercore ISI.

Jean-Jacques Ruest -- President and Chief Executive Officer

Hi, Jon.

Jonathan Chappell -- Evercore ISI -- Analyst

Good afternoon. Hi, JJ. I wanted to ask about the impact of what's going on in the Port of Montreal right now? Obviously, this one is a little bit more expected and sounded like there was business already shifting to Halifax. How is your network position for the proactive shift in freight. And if you can just remind us what was the impact both from a volume and a cost perspective on the prior strike and how do you expect it to be similar or different this time around?

Jean-Jacques Ruest -- President and Chief Executive Officer

So this is the second time in about six months that we have a labor disruption. And the last time, it was maybe you cut shippers or importers by surprise, this time because it was seven, it was the second time and it was also they had a specific deadline, so customers side coming diversion of freights had to take place many weeks ago, that's another important aspect. When the disruption took place last year, it was disruptive to our own operations. So I would say, there was a new business, but it was also unplanned costs as a result of. So this time, you know we organized differently. I'm sure the importer is also organized differently. There has been diversion of freight already to St. John and Halifax, both. And currently the federal government is actually looking at the potentially having some some regulation that may bring either work stoppage to a close or maybe bring the two party closer together. So but all-in, it's not a big to do in term of our second quarter results.

Jonathan Chappell -- Evercore ISI -- Analyst

Great. Thank you, JJ.

Jean-Jacques Ruest -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Brandon Oglenski with Barclays.

Jean-Jacques Ruest -- President and Chief Executive Officer

Hello, Brandon.

Brandon Oglenski -- Barclays Capital -- Analyst

Hey, good afternoon and thanks for taking my questions. I guess JJ or Rob, there was a lot of public discussion last week about how your potential combination would be somewhat anti-competitive from a rail perspective. And I think it went beyond, just the shared line in Louisiana. So can you give us maybe some more extensive response to those comments, especially in relation to underlying agreements which supposedly could be more challenge going forward.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, maybe I'll start. I mean frankly our focus from the beginning has been on KCS and creating value for their shareholders and their customers as well as CN shareholders. The combination that we're proposing is really, really pro-competitive. It's really about creating new products, new services to compete harder. There's nothing wrong with competition, competition is good, it brings innovation, it raise new services. It helps connect more buyers with more sellers, seeing as a bigger network. We can actually connect more destination. All these gateway will remain open. CN is -- there is no railroad including CN and we make good money chasing traffic with other railroad. So there is definitely no incentive financially otherwise not to continue to grow the interchange business with other railroads including the CP at Kansas City.

So a merger that's based on growth is a merger that really is looking for a bigger pie of the overall freight in North America. We're not looking for a bigger pie -- bigger size of a small pie, we're looking for a bigger pie and therefore, interchanging with other railroads as well as competing much harder with truck with obviously what we created now as a premier railroad for the 21st century, focused on the economy ahead -- the economy ahead of us is going to be much more related to consumers and to intermodal, whole lot less reliant on thermal coal and crude has been good and bad at time, but crude is too volatile to actually do a merger of this size. And so I mean there is -- our view is always from the beginning, this is pro-competition to create a new product, it's about growth, and it's about creating a reason for freight shippers to use a rail network.

An Rob, you want to add?

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Yeah. You nailed it. I think you hit on all the key points. I'd just reemphasize. You know as JJ said, we plan on keeping the gateway is open. There is no plans to shut those. So as far as your question on the interline that's our plan.

Jean-Jacques Ruest -- President and Chief Executive Officer

Yeah. And just to add, when you look at the ports, Mobile, New Orleans, Montreal, Quebec City, Halifax, Vancouver, Rupert, Lazaro Cardenas, Veracruz, all these ports with this combination can really connect to even more interland market. You could connect St. Louis, Memphis, Kansas City to all three coasts, TransAtlantic trade to Kansas City, Gulf, South American control to Kansas City coming from the West as well, you could potentially give an opportunity again for the Lazaro Cardenas to potentially be an option for those to import product in Houston and/or export product from Houston back to Asia.

When you look at the map, you got to look at what it could do to actually enhance the economy and enable something that was put together with a lot of effort USMCA, enable the content also to do more trade within itself. You have now the content of a finished vehicle, North America requires a higher content made from North America. So that means more product, more parts moving within the continent, very long haul, and that's what this combination is all about, is to support and enable the economy ahead with no intention of reducing competition or closing gateway.

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Thank you.

Brandon Oglenski -- Barclays Capital -- Analyst

Thank you.

Operator

And your next question comes the line of Amit Mehrotra with the Deutsche Bank.

Amit Mehrotra -- Deutsche Bank -- Analyst

So let me ask a question. JJ, you know, I want to ask a previous question slightly in a different way If I could. So bear with me for a second. I mean you and the team have obviously done a lot of work, offered a compelling proposal. I think that's undeniable. But at the end of the day, the outcome is quite binary. And what I was hoping you could help us with is, how CNI is impacted by a potential CP-KCS merger, both I guess with respect to the competitive implications for CNI. And then also does an outcome like that necessitate the need for your company and the CNI Board to pursue other acquisition opportunities to counterbalance that competitive implication?

Jean-Jacques Ruest -- President and Chief Executive Officer

So thanks for the question, Amit. So that's really a question for later. It's something we've been talking about obviously for the last many, many years as to the so-called end game. Our focus really is the opportunity at hand. The Board of KCS have decided that they are willing to partner with another railroad, a strategic partner, and CN from the very beginning of when we got privatized, the first thing that we did was made an acquisition early on of the Elanor Central. We had a marketing alliance with KCS. And early days, we've been focused on what was at that time known as Naphtha. Naphtha has now been renewed with somewhat different lable, a lot of the -- quite the Naphtha attraction was -- is still there today. So that's really the focus that we have.

I think, if this doesn't happen, then we'll see how that plays at that time. But there is a lot of value and we believe as Sean was saying earlier, that we can resolve these different issues as they come and that's what we are focused on right now. But just look at the CN network the way it is today, with three coasts, a huge amount of potential just stand-alone. Just remember, when we started 25 years ago, the company was nowhere what it was today. We build it up over 17, 18 different acquisitions, big and small. We build it up for organic growth, and that is always be the case. We are very nimble and we're going to keep doing that. Right now, we're focusing on one specific, the KCS, and being the naphtha railroad, the USMCA railroad. It doesn't mean that we -- our future is any different long term. We have a bright future no matter what, but we think that this is the time to do this one transaction. First time since I joined CN that actually KCS is actually willing to merge with some -- another railroad. So we'll jump on that.

Amit Mehrotra -- Deutsche Bank -- Analyst

Okay. Very good. Thank you. Best of luck.

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Thank you. JJ, if I may, just wanted to be clear that. I talked about the voting trust before, clearly our application, there is no date yet for the KCS shareholder vote. But our application today, we're looking to have the -- our voting trust approved on the same timeline as CP's voting trust, the same standards and the same criteria and that'd be done prior to the voting trust of KCS -- might set a voting trust by the end of May or June. I know I'm presumptuous, I'm assuming that's when it could take place, but clearly I wanted to be clear that we want to ensure that the STB rules on both voting trust prior to the KCS shareholder vote later this year.

Jean-Jacques Ruest -- President and Chief Executive Officer

Very important point. Thank you, Sean.

Operator

Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets.

Benoit Poirier -- Desjardins Securities -- Analyst

Yeah. Good afternoon, everyone. Obviously very good color about the voting trust, but now when we look at the data room, could you provide may be more color about the timing to perform data room analysis. I know it's not your first time and I would assume it's more virtual these days. And if you could also provide some color about the timing to make a binding proposal and finalize the definitive merger agreement. Thank you.

Jean-Jacques Ruest -- President and Chief Executive Officer

Sean, you want to cover that?

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

Yeah. Benoit, thank you. Yes. As I said, we've started -- we'll be starting tomorrow hopefully, getting access to the data room, looking at the material, it is a virtual data room to your question, Benoit, that could take us two weeks, 2.5 weeks to get our confirmatory due diligence completed and therefore allow us to then move to finalizing. We've already tabled a draft merger agreement. We have one ready to go, so we'll just update it in line with the due diligence. And hopefully, we'll be engaging very proactively and very respectively in the days to come with the KCS team and we're looking forward to be in a position to have hopefully a merger agreement in the next 30 to 40 days.

Benoit Poirier -- Desjardins Securities -- Analyst

Perfect. That's a great color. Best of luck.

Jean-Jacques Ruest -- President and Chief Executive Officer

Okay. Thank you.

Operator

Thank you. I would like to turn the meeting back over to Mr. JJ Ruest.

Jean-Jacques Ruest -- President and Chief Executive Officer

Well, thank you. Thank you for joining us today. Obviously, it's an important time in the CN history. As we mentioned earlier, you know we're proud of our first quarter result, economy ahead of us looks good. The operating metrics are solid. The fuel efficiency is good. Very important to us also is our safety performance, much improvement in personnel injuries and train accidents. So a lot of good things that look good for the quarters to come. On the long-term view, obviously, the desire of CN to give reasons to the Board of KCS to consider a combination with us is very much top of mind and we're going to be putting a lot of focus and effort on to that in the coming weeks.

So thank you for joining us today and more to come in the weeks and months to come. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Paul Butcher -- Vice-President, Investor Relations

Jean-Jacques Ruest -- President and Chief Executive Officer

Robert Reilly -- Executive Vice-President and Chief Operating Officer

Ghislain Houle -- Executive Vice-President and Chief Financial Officer

Sean Finn -- Executive Vice-President, Corporate Services and Chief Legal Officer

David Vernon -- Sanford C. Bernstein & Company LLC -- Analyst

Scott Group -- Wolfe Research, LLC -- Analyst

Cherilyn Radbourne -- TD Securities -- Analyst

Thomas Wadewitz -- UBS Securities LLC -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Justin Long -- Stephens Inc. -- Analyst

Christian Wetherbee -- Citigroup Global Markets -- Analyst

Jonathan Chappell -- Evercore ISI -- Analyst

Brandon Oglenski -- Barclays Capital -- Analyst

Amit Mehrotra -- Deutsche Bank -- Analyst

Benoit Poirier -- Desjardins Securities -- Analyst

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