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Canadian Pacific Railway Limited (NYSE:CP)
Q2 2021 Earnings Call
Jul 28, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific's Second Quarter 2021 Conference Call. The slides accompanying today's call are available at www.cpr.ca. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

And I would like to introduce Chris De Bruyn, Managing Director, Investor Relations and Treasury to begin the conference.

Chris De Bruyn -- Managing Director, Investor Relations and Treasury

Thank you, Sylvie. Good afternoon, everyone and thank you for joining us today. Before we begin, I want to remind you, this presentation contains forward-looking information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures as outlined on Slide 3.

With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; and John Brooks, our Executive Vice President and Chief Marketing Officer. The formal remarks will be followed by Q&A. In the interest of time, we would appreciate if you limit your questions to one.

It is now my pleasure to introduce our President and CEO, Mr. Keith Creel.

Keith Creel -- President and Chief Executive Officer

All right, good afternoon. Thanks, Chris. I want to begin my comments by saying that my thoughts and my prayers remain with those affected by the wildfires in British Columbia and specifically those in Lytton. Our hearts at CP go out to everyone that's been impacted, the Village of Lytton and Lytton First Nations and several members of the CP family who actually lost their homes in the Lytton fire.

Next, I want to continue to thank the more than 12,000 strong CP railroaders that are truly the drivers behind the unique story of sustainable profitable growth at CP. Baron [Phonetic], it's the best team of railroad, it's the industry we continue to prove it. It's a team that I'm extremely proud to be railroading with. So let's spend the time and focus on the results. Needless to say extremely proud of what the team has delivered this quarter. Through the collective efforts of our railroaders in the quarter, we delivered record second quarter revenues and nearly CAD2.1 billion, record second quarter operating ratio of 55.3%, and earnings growth of an impressive 27% to a record CAD1.03.

Behind those numbers obviously is a very impressive operating performance, special thanks to Mark Redd, and the industry best team of talented railroaders that he leads and serves with daily able to produce train weights, train lengths continue to improve, built to last year's records up, 1% [Phonetic] and 3% [Phonetic] respectively. Record second quarter car miles per day up 4% on the quarter. Trip plan compliance, better than 90% [Phonetic] continues to improve. And most importantly, take the results for the quarter both all-time lows for this Company, records on both reportable injuries, as well as reportable derailments, personal injuries were down 34%, and train accident frequency decreased 70%. This is only attainable with the right safety culture.

It's one of focusing on getting stronger, something we're continuously focused on. It's a pursuit of excellence, you never really are right. You pursue perfection again through an ongoing continuous improvement process focusing with a commitment to investment in technology, people in process continues to show our efforts through the results of constant improvement. The financial and the operating results this quarter undeniably a continuation of our unique precision scheduled railroading story at Canadian Pacific, truly shows what a proven season PSR model can accomplish.

Sustainable profitable top-line growth, margin improvement, earnings growth, running the network efficiently and safely and creating significant value for our customers and for our shareholders. It's truly a balanced approach and a balanced outcome. This is a team that has a track record of producing results, creating value, no excuses to make, the results here in these areas be it managing on the downside or being it the rebound and post the pandemic prove that in states.

So with that said, let me say the balance of my comments for our Q&A. And I'll turn it over to John to provide some color on the markets.

John Brooks -- Executive Vice President and Chief Marketing Officer

All right, thank you, Keith, and good afternoon, everyone. So as Keith said, I'm extremely pleased with the record results this team delivered this quarter. We achieved the all-time record second quarter revenue at CAD2.1 billion, up 15% year-over-year. And I can tell you despite a choppy supply chain environment, we grew our top-line by 4% versus 2019.

Now looking specifically at the Q2, RTMs were up 9% in the quarter. Fuel and FX combined to be a 2% headwind. Price and mix combined to be positive 8%. The pricing environment as many have talked about remains very strong, and our mix was driven positively by moving more autos and carload merchandise volumes. Now taking a closer look at the second quarter revenue performance, I'll speak to the results on a currency-adjusted basis. Grain volumes were down 1% on the quarter, while revenues were up 4%. Our U.S. grain volume was up close to 40% on the quarter, as our PNW export demand continued to be strong.

In Canada, I'm pleased to report that CP has moved over 30 million metric tons of grain and grain products this crop year setting an all-time company record. I want to thank all the members of the CP family and our customers that relentlessly drive every day to make records like this happen. In Q2, we did have lower volumes in Canadian grain driven by a combination of factors, including high grain prices and record movements resulting in lower grain supply and carry-out.

Now looking ahead, we're monitoring the dry conditions across the prairies. We see a high likelihood for an early harvest and are forecasting normal peak demand levels. As we close out the crop year, our grain franchise development has been impressive. We have added 13 more elevators upgraded to our unique 8,500 foot model. We have eight more upgrades coming online by the end of the year and we'll add three more 8,500 greenfield elevators to our network in the next six months. Additionally, we have at this point now over 4,300 of our new high-capacity covered hoppers in service.

Moving on to the potash front, volumes were down 9% in the quarter. The decrease in volume reflects the impact to export volumes as a result of infrastructure upgrades going on at our ports. We are pleased with Canpotex investment at the Portland Terminal that enables greater supply chain resiliency and increased throughput. The Portland facility would now be able to land 388 car trains at their terminal. We continue to see strong demand fundamentals for potash use. We expect upside to our potash franchise in the back half of the year and into 2022. And to close out the bulk business, coal revenues were up 32%, while volumes were up 12%, as the supply chain executed well and we lapped COVID-related challenges. We expect small -- strong demand from tech into the second half of the year as we look to recover volumes impacted from the recent fires.

Moving on to merchandise, the energy, chemicals and plastics portfolio saw revenues increase 16%. Now excluding crude, ECP volumes exceeded expectations to be up 18%, as demand for products such as gasoline, asphalt, LPG all rebounded from 2020 lows. I expect strength in ECP to continue as recovery does into the second half of the year. I'd also note that we're very excited about the forthcoming launch of our first DRU train from the USD Terminal at Hardisty, Alberta for ConocoPhillips. This train is destined for USD's facility in Port Arthur, Texas, and we expect this business to ramp up to 15 to 20 trains per month in Q3. This marks the beginning of a long-term shift from traditional crude by rail to DRUbit, a more sustainable environmentally friendly and pipeline competitive product. It is CP's honor to be partners with Gibson Energy, USD and ConocoPhillips as we're delivering this innovative safer rail solution.

Moving on from ECP, our forest products revenues were up 22%, as lumber prices hit record highs pushing our volume and revenue to an all-time best in the quarter. We expect to continue to see solid demand as inventories remain relatively low and housing and home improvement start continued to be strong. In MMC, revenues were up 49% and volumes increased 51%, largely driven by higher volumes of frac sand as drilling rebounded with the oil markets. Further, we are seeing a good recovery in steel and metals-related markets. I would note that we are adding 150 mill gons to our fleet to support strong customer demand for finished steel and scrap.

On the automotive front, revenues were up 216%, while volumes were up 259% on the quarter. So while we lapped easy comps, our business wins with the OEMs like Glovis, FCA, Honda drove our outperformance in this space relative to the industry. Now looking again, we do expect to see ongoing chip challenges during Q3, but with dealer inventories remaining low and demand continuing to be strong, we expect increasing production levels as the auto industry tries to catch up.

And moving on finally to the intermodal side of the business. Quarterly volumes were up 9%, while revenue was up 27%. We have now had three consecutive record quarters in domestic intermodal. With our reliable service product and capacity for growth, we continue to perform well in this space anchored by our strong retail franchise. I'm extremely pleased with our intermodal growth into Atlantic Canada through our acquisition of the CMQ. Since the start-up of this service, we have moved over 10,000 containers in this market, and we're on a current run rate that exceeds 20,000.

Our service from Saint John is the most direct fastest rail option for customers to Montreal, Toronto, Chicago and beyond. On the international front, we had record revenue, while managing through significant supply chain challenges with well-documented port congestion, vessel delays and container imbalances across the industry. I'm pleased to announce that we've expanded a new strategic partnership with COSCO and OOCL. This multi-year contract will deliver new growth on our core intermodal lanes originating from both Vancouver and Montreal utilizing existing train capacity.

We expect this contract will generate over CAD100 million annually in incremental revenue. The partnership is grounded in and reflects the value that CP can uniquely offer in terms of capacity and service for COSCO, OOCL and our mutual customers. And finally, Maersk International volume continues to onboard successfully. And we look forward to the opening of our domestic transload facility in Vancouver in September. The transload facility as a reminder uses CP's land capacity to offer a unique service solution and stickiness for our intermodal customers. Additionally, this service product alleviates congestion in Vancouver by taking thousands of roads off the truck, thousands of trucks off the road by using direct rail service from the port to the customer.

So let me close by saying no different than how this team outpaced the industry on revenue and volume through the pandemic. Now halfway through 2021, we are leading the industry again compared to 2019. And we expect to continue to execute our playbooks and deliver on our self-help initiatives. Looking forward to the balance of the year and into 2022, we have a strong pipeline of initiatives, and we expect robust demand environment to continue as economies around the world continue to recover. You can count on the CP team to continue deliver sustainable profitable growth.

With that, I'll pass it over to Nadeem.

Nadeem Velani -- Executive Vice President and Chief Financial Officer

Great. Thanks, John, and congrats on yet another contract win. I'm proud of the exceptional results this team has produced in the quarter. As John mentioned, we achieved a Q2 record in revenue and we did that while effectively managing resources and controlling costs. The outcome of the solid execution by our 12,000 plus team of railroaders was a Q2 record adjusted operating ratio of 55.3%. The team executed on all fronts with 15% revenue growth, 19% operating income improvement, a 170 basis point decrease in the OR, and grew adjusted diluted EPS, 27%.

Looking at the results, you'll note that we have adjusted a total of CAD308 million in costs related to the KCS transaction, CAD99 million from PS&O and CAD209 million below the line in other expense. I'll speak to the adjusted results today. Taking a closer look at a few items on the expense side, I'll speak to the results on a currency-adjusted basis. Comp and benefits expense was up 13% or CAD44 million versus last year. The primary driver of the increase was higher volumes and increased training costs in support of the improved demand environment.

Recall in Q2 last year, we were furloughing employees, so most training expenses were on hold. Headcount was up 6% in the quarter as we successfully bring on resources to accommodate the improved demand environment. Fuel expense increased CAD98 million or 82% primarily as a result of higher fuel prices and increased volume. The lag and timing of recoveries in our fuel surcharge program was an CAD18 million headwind in the quarter. Equipment rents was down CAD2 million or 7%, as efficiency improvements more than offset increases in rent expense from automotive contract wins.

Depreciation expense was CAD200 million, an increase of 6% as a result of a higher asset base. Purchased services was CAD256 million adjusted for the acquisition costs, an increase of CAD3 million or 1%. The main driver of the increase was the increase in volume. Moving below the line, as expected, other components of net periodic benefit recovery was up CAD10 million, reflecting lower interest costs related to a decrease in the discount rates. Income tax expense increased CAD68 million or 36% primarily as a result of higher taxable income, partially offset by a lower effective tax rate. Rounding out the income statement, adjusted diluted EPS grew 27% to CAD1.03 in the quarter. A reminder, we executed a five-to-one share split in the quarter.

Moving on to free cash to wrap things up. We generated very strong cash flow in the first half of '21 with cash from ops excluding the termination fee increasing by 28%. Our balance sheet and liquidity remains very well positioned with leverage of just 2.0 times adjusted net debt to adjusted EBITDA at the bottom of our targeted range. We have repaid all of our commercial paper and our credit facilities remain undrawn, while our share buyback program remains paused.

We currently have approximately CAD900 million in cash which is available to return to shareholders through buybacks, dividends or strategic options. We continue to reinvest in the railroad and are on track to meet our CAD1.55 billion guided capex spend for 2021. We remain disciplined stewards of capital with our industry-leading adjusted ROIC of 16.7%. I spoke last year about the improvements in our capital efficiency and how we proactively increased our capital spend to take advantage of the softer volume environment during the height of the pandemic, which in hindsight has laid the foundation to support our safety and growth agenda.

I'm proud to say, we've continued to build on the efficiency gains we established last year. Our year-to-date per unit cost of rail ties is down 7% versus last year and down 10% versus our three-year average. I'm proud of the team and culture we have at CP, where the team will meet challenges like the pandemic head on and look for ways to turn them into opportunities and then we build on those gains. It's a relentless drive to find efficiencies to do better to generate value. So while the start of Q3 has had some challenges, the network has recovered well and we see a clear path forward. We have a strong demand environment and the team in place to manage resources, control costs and ultimately deliver for all stakeholders, the communities we operate in, customers and our shareholders.

With that, I'll turn it back over to Keith to wrap things up.

Keith Creel -- President and Chief Executive Officer

Okay, thanks, Nadeem and John for that color. To sum it up, volumes came in strong against 2020, but also very importantly, John made this point uniquely exceeded our 2019 volumes, and the team brought it to [Phonetic] bottom line, driving operating income growth, earnings growth and margin improvement, safer than ever before, that -- that has set us up well to close out a very strong 2021 enjoying a very strong demand environment, which we see continuing well into 2022. And partnership with our self-help initiatives, you can continue to expect to see our performance by this team at Canadian Pacific.

So with that, let me open it up to the operator for questions and commentary.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Thank you for your patience. And your first question will be from Jon Chappell at Evercore ISI. Please go ahead, Jon.

Jonathan Chappell -- Evercore ISI -- Analyst

Thank you. Good afternoon, everybody.

Keith Creel -- President and Chief Executive Officer

Hi, good afternoon.

Jonathan Chappell -- Evercore ISI -- Analyst

Keith, you've been pretty passionate about the merger activity thus far this year, and maybe you've said everything you want to say and it's in the STB's hands at this point, but I would have thought maybe with the executive order earlier this month and the House Transportation Letter that you guys published earlier this week, you might have been even more emboldened with some updates there. So maybe you can just kind of catch us up to speed on what you're thinking post some of those important letters have been posted and how you things -- how you think things proceed from here?

Keith Creel -- President and Chief Executive Officer

Well, thanks. I can tell you my conviction about the beliefs of and the strengths of the proposal that we successfully negotiated with KCS initially has not changed, has not wavered at all, in fact it's grown stronger. The facts are very compelling. It's the only Class 1 combination that presents pro-service, pro-competition, pro-growth, new lanes, essentially, it's all winners. There's zero overlap. There's no losers, no debits and credits. It's not about trying to suggest that you enhance, it's about preserving and enhancing. So it's very unique and the facts, and with that said, we think that obviously, those facts are being weighed on, obviously it's in the STB's hands. We expect a decision in the coming weeks and we stand ready to reengage with the KCS.

We're gratified by the outpouring support that our deal even not signed up still continues to garner. We've got over 1,050 support letters, and yes, CN has support letters too. I think their number is over 1,750 which they've proudly communicated, however they forgotten that there is also over 340 opposition letters to their combination. Customers Amtrak, Mitali [Phonetic], TFI, ECC, Labor Unions, certainly not just what has been discussed this week.

But with all that being said, you think about the executive order, how does that affect our beliefs and in the way we look at this, I can say this overall, we're not fans of more regulation, I'm not going to suggest that. We think competition is the best way to assure good outcomes for our customers and for the North American economy. But with regard to the specific executive order, we think that in fact it emphasizes the importance of competition, it emphasizes the importance of Amtrak access, both of which are unique facts speak well too without the need for the STB to enforce through any new promises. So we think that proves and sits well for our proposed combination.

And I think in reading and listening to the statement that Chairman, Oberman spoke to, and I believe even CN perhaps spoke to it last week, consolidation can be beneficial under certain circumstances. We firmly believe that our facts satisfies and complements to certain circumstances where consolidation can be beneficial. So, again we feel very strongly about this, ultimately it's up to the STB, it's in their capable hands and and I'll finish where I started. We stand ready to engage, reengage with the KCS, should the STB rule in opposition to Canadian National's trust. So we'll see where it goes. We're in a wait and see just like everyone else. Hopefully, that addresses...

Jonathan Chappell -- Evercore ISI -- Analyst

Got it. Thank you, Keith.

Keith Creel -- President and Chief Executive Officer

Hopefully, that addresses the question.

Jonathan Chappell -- Evercore ISI -- Analyst

It does. Thank you.

Operator

Thank you. Next question will be from Fadi Chamoun at BMO Capital Markets. Please go ahead.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Good evening. Thank you. Keith, I mean you've laid out quarter after quarter here very compelling kind of organic growth story for CP and you continue to execute on that front. But just wanted to get your thoughts, as the M&A path becomes harder for whatever reason and thinking kind of three years, five years, 10 years out, what are the levers, what are the things that CP can do to kind of stimulate the growth story for CP on a long-term basis, are there things that the -- that you can do as peers in the industry as far as commercial agreements go or marketing strategy that could kind of enhance your access to markets and enable you to kind of produce that kind of growth outcome longer-term that would have come in an M&A transaction?

Keith Creel -- President and Chief Executive Officer

Yeah, let me, Fadi, you're right in target with a lot of thinking. Let me start though at our own backyard, we still have over 1,000 acres of develop -- development land currency, so to speak across our network, which is very unique in our competitive space. It has been table stakes for our success. It's been part of our strategy. If I take you back to our Investor Day, three years ago, four years ago, the time is flying by. So there's still several opportunities for self-help initiatives, be it CMQ property build that out, be it build out capacity in the Chicago Gateway be it build out additional land assets in Vancouver. So there is still many chapters left of that growth store that in and of itself is going to drive organic growth that's unique we believe to the industry or Canadian Pacific.

When you think about replicate -- replicating M&A obviously, I don't need to speak to the attributes of the unique opportunity that a combination would create for us with KCS. We've spoken enough about that, but in the absence of that fairly, I think with our unique origin strengths, our unique access to some of those markets, shortest length of haul and partnership perhaps with marketing alliances, with the Western rails, you can make a case to different markets for both and even some of the markets east of the Mississippi as well. So we'll continue to look at those opportunities.

We've never been bashful about doing what's best for the customer and to try to create new supply chain solutions. Obviously, if we can get in the origin and then given the destination, we can do it, controlling our own destiny and controlling the product, the best outcome, but in the absence of that opportunity, we're certainly going to leverage the way we run the railway, the origins of strengths, the shortest length of haul to the markets to get into some of these additional growth markets that M&A would allow, and again, leverage it with our unique capacity at our terminals, be it in Chicago, be it in Toronto, be it in Montreal, be it in Calgary, be it in Winnipeg, be it in Vancouver. We have a very unique opportunity unlike anybody else in this industry to enable that. So, again priority one, we think the best outcome comes through M&A, but in the absence of M&A, we're going to make the best. And I think you better then the balance of the industry with a very unique outcome.

Fadi Chamoun -- BMO Capital Markets -- Analyst

Okay, great. Thank you.

Keith Creel -- President and Chief Executive Officer

Thank you, Fadi.

Operator

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

Allison Landry -- Credit Suisse -- Analyst

Thanks, good afternoon, and I appreciate you taking my question. So, Keith, I mean, obviously, CP has set what's arguably a new bar for what the industry can achieve from an OR perspective, especially seeing that the 55% in Q2. Great, that's just one quarter, could you address how much further to improve, you have in terms of the productivity metrics, train lengths, weight, fuel efficiency, and what that may tell us about the trajectory of the long-term OR. And maybe just if I can ask that in a different way, if this is a better way, since you do have a demonstrated track record for growth, is there a point where you think the OR bottoms out and the focus and shift to growing EBIT dollars and improving ROIC?

Keith Creel -- President and Chief Executive Officer

Well, let me -- let me start with the ROIC, we've got the best in the industry. So I'm pretty proud of where it's at. I think it's in a healthy place. Again, I think if you get fixated too strongly on any one particular number, you don't optimize all numbers. And then I'll go back to the operating ratio.

We don't have a focus on the operating ratio. It's a natural outcome of running the business the proper way. When you bring on sustainable profitable growth, that's key, you have the assets and the resources property in place to create a fluid network, you're going to be controlling your cost, that's going to drive your operating income, that's going to drive your earnings growth and the output of that has a very impressive operating margin. So we're at industry best, how much further do we have to go, I can tell you now that until we have every train linked to optimize, we haven't converted all the 8,500 foot facilities. We don't have a perfectly organic fleet of high capacity grain cars. We don't have wireless equipment. We don't have, part of our network, if I go to, I'll give you, for instance, it's much better than it was and it's been a journey of constant improvement, but even for Canpotex.

If I go back a year and a half ago, we were running 130 car train sets to Portland with partnership to the UP, that was pre-PSR and UP, and that was part of our evolution. We're now running 188 car trains to Portland, but that's still is not the same as Vancouver, where we enjoy the efficiency of running a 200 car train. So there are gaps all the way across the network as we continue to strategically invest, you should expect us to continue to make incremental improvements in train lengths, in train weights and locomotive productivity and terminal dwell, that's truly what PSR is.

It's a continual pursuit of excellence. Yesterday's records become your floor, your benchmarks, and you pursue improvement, you don't accept excuses, you create constructive tension, you have a list of opportunity areas, you have, in simple terms, the top 10 list, and once you accomplish those top 10 and guess what, you've got another list of 10. So it's an imperfect science, it's an outdoor sport, you're never going to fully get perfection. It's just the constant pursuit of that and an ability to understand how to manage the business flows, how to manage it when the business goes down.

When you go into a pandemic, how to adjust resources, and how do you adjust those resources, so that you're positioned well when the rebound comes. So that you can avoid some of the lumpiness and some of the challenges that quite frankly until you have gone through those cycles and truly understand how to manage it as well coming up as you down and vice versa, you can't have the kind of results that CP is producing. So again it's work in progress. We're going to remain humble. We're going to continue to work hard. We're going to identify opportunities.

We're going to invest in our people to develop the culture. We're going to invest in our process, in our technology, and at the end of the day, you'll see continued improvement. I believe on margins, I believe bringing it to the bottom line and to your point driving pretty impressive earnings growth as a result, I just think it's a recipe for success. It's a gift that keeps on giving. If you truly know how to run a PSR railroad you can satisfy the shareholder in a very unique way, you can satisfy the customer and you can do it in a safe and efficient manner day in and day out. It's just the recipe for how to run a railway successfully.

Allison Landry -- Credit Suisse -- Analyst

Thank you.

Keith Creel -- President and Chief Executive Officer

Thank you, Al.

Operator

And your next question will be from Chris Wetherbee at Citi. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Hey, thanks, good afternoon. Maybe if I could ask you to sort of take that answer and then pull it down into maybe the second half of the year and maybe give us a little bit of sense of how you think the potential on OR maybe looks in the back half? Obviously, you've made some great strides in the first half, the comps are a little uneven for you, 3Q versus 4Q, one being a little bit easier than the other. Just want to get a sense maybe what the full-year operating ratio looks like and sort of how that plays in with obviously a pretty robust top-line opportunity seems like a better pricing environment, but there are some inflationary costs out there. So maybe if you could just kind of put that into -- put that all together and give us a sense of how the margin opportunity looks in the back half, that'd be great? Thank you.

Nadeem Velani -- Executive Vice President and Chief Financial Officer

So, Chris, let me take that. So obviously this -- we're half of the year in, we had a bit of a challenging winter. I think we got some fuel prices which can impact the OR a bit negatively. We've been able to overcome that. We've got the wildfires that we're dealing with, and some of the impact that, that has in July, but these aren't excuses. I think to us, you pointed out some of the upside, some of the opportunities, the railroad has never been run. So effectively from a casualty and safety point of view to Keith's remarks and my remarks earlier, continue to find ways to do things more efficiently. Mark Redd and the operating team are standing group of railroaders and the continuous improvement culture is driving opportunities to offset some of those challenges that present themselves. So to me our ability -- we'd said at the beginning of the year that at least 700 basis point improvement off of 57.1% [Phonetic], not backing off of that, there's probably upside on that. Could we do 150 basis point type of improvement, absolutely. So we're pretty bullish on what we can do from a efficiency point of view in the back half of the year.

Chris Wetherbee -- Citi -- Analyst

That's helpful. Thanks very much. Appreciate it.

Nadeem Velani -- Executive Vice President and Chief Financial Officer

Thanks, Chris.

Keith Creel -- President and Chief Executive Officer

Thanks, Chris.

Operator

Next question will be from Tom Wadewitz at UBS. Please go ahead.

Tom Wadewitz -- UBS -- Analyst

Yeah, good afternoon. I wanted to -- I hope you don't mind, but I wanted to ask you one additional question on the M&A stuff. If the STB, I'll just give you a scenario, see how you respond to it, but obviously there is a scenario where STB could reject the voting trust and CN deal with KSU doesn't expire to February, so there could be just kind of period of time where there is uncertainty about whether what would CN would try to do, but it also might be an obvious period for you to get engaged with KSU again.

I'm just wondering if you could talk about your thoughts on the approvals that you achieved, the waiver in the voting trust, is there an expiration date on those? Is time of consideration relative to the sizable break fees or just how do you think about how quickly you might want to reengage if the scenario is that there is a rejection of the voting trust from STB?

Keith Creel -- President and Chief Executive Officer

Tom, it's all -- it would be pure speculation on our part. We've been clear on the strength of the facts. Obviously it depends on what the STB says and it depends on how they say it and what they're focused on. And at the end of the day, I guess the best question is to the KCS shareholders, how much risk are they willing to take. So I think the best way to answer your question is we stand ready to engage. We've got a very compelling value proposition. We've got a path to approval to deal certainty. We've got unique facts that are pro-competitive. There's so much uniqueness and strength and value creation in our story, again, we think it's compelling, but at the end of the day, KCS made a decision to partner with Canadian National. We think Canadian National's facts were not supportive.

We think they're bad. We think they're anti-competitive. We've not been bashful about saying it, but at the end of the day, what we think is just our view and our opinion, ultimately, the STB is the regulator and the STB certainly both the authority and has the experience, and I feel we'll make a decision and when they do, we'll assess it. And again, it's going to be up to the KCS shareholders. Should they not allow it, it's going to be the question to be answered is how much risk is the KCS shareholder willing to take.

Tom Wadewitz -- UBS -- Analyst

Maybe if I can just...

Keith Creel -- President and Chief Executive Officer

Maybe we're not able to win that port [Phonetic], we'll see.

Tom Wadewitz -- UBS -- Analyst

Maybe if I can just narrow it a little bit to give you a better chance to respond. Do you think there is any kind of risk to further time goes out that STB would come back and say your waiver and your voting trust approval have expired or is your understanding that there is good in the year as they were when they were originally granted?

Keith Creel -- President and Chief Executive Officer

Our facts haven't changed, again I'd be speculating because there is no presence in this, Tom. So it's just my guess, and my view is based on the facts are facts which uniquely allowed us to be granted. The trust under the old rules uniquely allowed us to be granted. The overall consideration as long as those facts don't change and they don't, it's pro-competitive, it's in the end for all those reasons, I would only assume that we get the same consideration, but again, there's not a presence, and I don't want to get ahead of my skis here, ultimately the STB is the decision-maker. But I do believe our facts are compelling, and I would suggest to assume that we get the same consideration.

Tom Wadewitz -- UBS -- Analyst

Sure, OK, thanks for entertaining the question. Appreciate it.

Keith Creel -- President and Chief Executive Officer

Thank you, Tom.

Operator

Next question will be from Brian Ossenbeck at JPMorgan. Please go ahead.

Brian Ossenbeck -- JPMorgan -- Analyst

Hi, good afternoon and thanks for taking the question. I wanted to switch over to the end-markets for a minute, obviously, there's been quite a few challenges on the network as we've talked about earlier, but you're still reiterating the guidance for double-digit EPS growth assuming that still has the highest single-digit RTMs in there. So maybe John, you can just walk us through where you feel more convinced in terms of hitting that target where you expect to see some growth. I know you gave us a few commentaries before, but maybe if you put a finer point on that and kind of what underscores confidence, and then separately, just how you feel about staffing up and resourcing to that level of growth? Thank you.

John Brooks -- Executive Vice President and Chief Marketing Officer

All right, Brian. So, yeah, definitely standing by strongly our guidance of double-digit RTMs. I could tell you that first half of '21, as everybody seen, it feels like we've been through dog's breakfast of issues, cold snaps, chip shortages, mine outages, fires, supply chain disruptions, strong demand and in now droughts and we've delivered. And frankly, as I look across all of our business units, maybe grain being a little bit uncertainty around the drought, but my experience in the grain side of the businesses as you approach harvest and you get into harvest, we're going to see probably pricing moderate and farmers wanting to monetize their success and what they have produced on the crop will produce a strong push during harvest.

So I feel confident that that's going to give us a strong grain book toward the end of the year. As I said, I see no change in the consumer side of our business in terms of the domestic intermodal. We've set records. We're going to continue to set records. Our retailers are strong. Our reefer businesses is growing strongly.

The international side of the business is, it's there for the taking. I think all the things that the other roads have talked about, we've felt some of those pressures. But I also think we're going to not only catch a tailwind in that space, as some of those things improve as we move through the back half of the year, you couple that with our market wins in, and I see a significant upside in our international business. Frankly, I see upside if you think about all the challenges. The U.S. ports have had in some of the challenges into Chicago, we're open for business in Vancouver and Saint John.

We've taken a few additional add to plan vessels at those ports to feed the Chicago market as others have had challenges. And I can see some of those opportunities continuing into the back half of the year. We're blessed by an automotive book that is it makes up on the mix of the automotive products that our OEMs produce are strong, they're the top selling vehicles. So they're getting, I think in most of those companies areas, they're getting the chips versus maybe other models aren't. So not that we won't face challenges in the auto space but I continue to feel very strong in that area. We've got potash upside. We've got makeup from the fires and the coal. So and frankly, I don't see the forest products and steel business slowing down either Brian. So I'm completely bullish. We could use a little luck in some of these supply chain issues, but if we don't get it, we'll continue to make our luck. And then second part on resourcing.

Brian Ossenbeck -- JPMorgan -- Analyst

Yes, yeah, about resources given all that?

John Brooks -- Executive Vice President and Chief Marketing Officer

I don't know -- yeah, yeah, I'll -- maybe I'll say it this way and Keith may want to add. But frankly, we've built this railroad with the capacity to bring on business. We do it in a lockstep way. My teams constantly tied to hip to Mike Foran and Mark Redd on understanding those flows. So frankly, I don't have concerns. Then as I said, we're actually chasing some opportunities that we see in the intermodal space because we have the capacity.

Keith Creel -- President and Chief Executive Officer

Yes, I would only add on the resources side, there is no concerns at Canadian Pacific, we're ready for the business. We ramped up last year, we had pandemic. If we think about back in the days when we thought crude was running away and there was a big demand, we pulled forward capital. We've got over 100 locomotives in storage ready to engage as we need. We're fine on workforce. We did some very unique things back during the pandemic to compensate our employees in a way that we didn't have to do. In fact to help them get through the pandemic those that were laid off. So we enhanced the benefits, and in exchange for that, our employees have stuck with us, they're committed to us and we've not had the same ramp-up challenges perhaps that the industry has had. We're in a good place on training and we're prepared for the business. So we're going to work closely with our customers to continue to bring it on or bring it to the bottom line in a very efficient manner, so that we satisfy our customers' needs.

Brian Ossenbeck -- JPMorgan -- Analyst

All right, thank you, guys.

Operator

Next question will be from Justin Long at Stephens. Please go ahead.

Justin Long -- Stephens -- Analyst

Thanks, and good afternoon, I wanted to see if you could comment on truckload conversions and how they've trended recently on the network, you've talked a lot about the truckload conversion opportunity related to that merger. But when you just think about the organic opportunity for truckload conversions going forward, any way you can help us think through what that addressable market looks like?

John Brooks -- Executive Vice President and Chief Marketing Officer

Yeah, Justin. So a couple -- maybe a couple of comments there. First of all, and actually I was on a call with my team earlier [Technical Issues].

Operator

Please standby, it appears that Mr. De Bruyn has disconnected. One moment, please.

Chris De Bruyn -- Managing Director, Investor Relations and Treasury

John, are you still there? Operator, do we still have our guests?

Justin Long -- Stephens -- Analyst

This is Justin, I'm still on. I think we may have lost, John.

Chris De Bruyn -- Managing Director, Investor Relations and Treasury

No, John is here.

Operator

Yes, one moment while we reconnect.

Justin Long -- Stephens -- Analyst

John is on.

Chris De Bruyn -- Managing Director, Investor Relations and Treasury

John is on. Go and continue, John.

John Brooks -- Executive Vice President and Chief Marketing Officer

All right. Yeah so, Justin, I was saying I was working with my team earlier today focusing on a couple of those areas specific the truck conversion. Our major retailers across Canada have felt the trucking pinch similar to what maybe a little more intensified pace have faced, the U.S. side has faced. So there is a fair amount of effort to look at how we can convert and dive into the book of our major -- retail companies in Canada to convert those truck options, in particular of focus on some of the cross-border opportunities, not only between say, Eastern Canada in the Chicago market, but also looking at how we work with our Eastern carriers as they're very -- NS and CSX, they're very focused on truck conversion and looking at those opportunities to utilize our capacity up into the upper Midwest, up into the Twin Cities markets, and ultimately maybe even into Western Canada. So I'm always having a CAD20 million to CAD30 million road to rail conversion target from my domestic intermodal team, and those are some of the areas that we're focusing on.

Justin Long -- Stephens -- Analyst

And is there a way to think about the opportunity outside of domestic intermodal as well, if it's CAD20 million to CAD30 million there, if you look at merchandise traffic, what would be a reasonable target on that front?

John Brooks -- Executive Vice President and Chief Marketing Officer

You know what, I look at specifically, I can tell you, we just converted a significant piece of steel business, I think about CAD8 million a year through our new Saint-Luc transload. Previously business that was trucking, believe it or not, all the way down in the Mexico in down into the Minneapolis market. We've converted that to where it will be truck now into our transload and rail down to those marketplaces. So it's a little hard to quantify, Justin, big picture, but it's really the foundation of why we've created these transloads across our network to go after that, that type of business. It wouldn't be surprised if it's similar type numbers.

Justin Long -- Stephens -- Analyst

Okay, great. I appreciate the time.

Operator

Thank you. Next question will be from Scott Group at Wolfe Research. Please go ahead.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Keith. I wanted to ask you a question, you referenced the capacity challenges in the industry, and I know you said it's, you're not seeing them, but I'm sure it doesn't help you with respect to your interchange business. And I just want to get your perspective here, what's the fix for the industry, is it just as simple as more people and more equipment, does it mean maybe the rails, the other rails didn't do PSR in the right way, just curious, your thoughts about how to fix this?

Keith Creel -- President and Chief Executive Officer

Yeah, that's a pretty global question and it'd be a very global answer, I think it's different stories, different railways. I mean, I can imagine, think about the tidal wave with the tsunami of traffic that's came in on the West Coast, if you're a Western rail to have to digest that all bringing it in East and having things out of balance, that's the key here.

While we reset in this economy, PSR and OPSR, there's going to be a lot of noise. You've got supply chains that are completely out of sync, I think about our network alone, I think about all the empty moves I've made on intermodal equipment and all of the lost revenue because I'm hauling air just to get those containers back to the West Coast ports, so they can get back over fees to get the next load to bring the next tsunami. So it's going back and forth. It's like sloshing a -- water sloshing back and forth inside of a big tank.

Some of this is inevitable. I think if I look at overall, the way the industry has handled this for the customer experience and the pain of it, I'm not going to suggest that it's pleasant, but at the same time, overall, I think the industry has done well, and if not for PSR, the outcome I believe would have been a whole lot worse. Given all the additional resources in cars and congestion in terminals that quite frankly, we've had to depend upon now having more fluid operations to get a better outcome.

So I don't think it's a matter of any of the railroads not doing a good job, I think that PSR is a learning process obviously. Those of us that have been doing it for 20 years, we've learned a lot. We've learned a lot over the years and we apply it. We're frankly pretty efficient. Our results speak for themselves. I don't want to pound our chest, but we know how to manage it coming down. We know how to manage it coming up. We know what to look for, and sometimes you just don't know what you don't know.

So overall, the industry I think has done well. I think the outcome because of PSR is better than it would have been otherwise. What I see the other railroads doing and the hiring that they're doing and the investments that they're making, once you get some of this choppiness out of supply chain, I think you're going to see extremely impressive outcome for the customers and for the industry. So again I know for those that have been adversely impacted, it's not an easy answer, and I'm not going to minimize that. But at the same time, we trust this process we go through and you're going to see as we all get better at doing this across the industry, a much improved outcome.

Scott Group -- Wolfe Research -- Analyst

Thanks for the thoughts.

Keith Creel -- President and Chief Executive Officer

Thank you, Scott.

Operator

Next question comes from Steven Hansen at Raymond James. Please go ahead.

Steve Hansen -- Raymond James -- Analyst

Yeah, good afternoon guys. Just a quick one for me is, is in relation to the grain side again. John, I know you've already spoken to it to some degree, but I'm just trying to get a sense for how you think that grain move starts off. We've obviously got a dry period. We're coming up against a dry and early harvest last year as well. But you still think that the back half can be quite strong as the farmers move the product they do have, I guess we'll see the derivative benefit, the derivative hit into 2022, I guess the way to think about it?

John Brooks -- Executive Vice President and Chief Marketing Officer

I think that's the right way to think about it, Steve. Obviously, we're staying super close to our customer. There is no doubt yields are going to be impacted by this. It frankly could be a pretty strong sort of quality crop in terms of proteins and different things, which will bring some uniqueness in terms of maybe needing the blend in some different movements. But I think we're -- the message we're getting is the peak will be as close as normal is we've seen in recent years.

And then the impact will be in -- more in '22 depending on what the total size end up being. I think the other thing to keep in mind is, we're going to see some unique movement. The U.S. had some deficits in some areas, where I think is going to present actually the Canadian farmer and producer some good pricing opportunities right out of the chute to feed the U.S. markets. So we're doing the things we need to do to be nimble to be able to handle this crop once it starts up here.

Steve Hansen -- Raymond James -- Analyst

Okay, very helpful. Appreciate the time.

John Brooks -- Executive Vice President and Chief Marketing Officer

Yeah.

Operator

Next question will be from Jason Seidl at Cowen. Please go ahead.

Jason Seidl -- Cowen -- Analyst

Thank you, operator, Keith and team, appreciate the time. As we look into '22, a lot of companies are starting to say, hey, we see strength out into the year. Could you talk a little bit on the intermodal side that you mentioned about restocking, how long do you think that's going to continue and what are your customers telling you in terms of where they want to get their stock back to, was it back to prior levels or are we looking at even going beyond that because people are rethinking the supply chain?

John Brooks -- Executive Vice President and Chief Marketing Officer

Well, I can start, Jason. Actually, Keith and I just met with a major international shipper last week, and they were extremely bullish that this is going to push right on into 2022 and probably be the better part of the whole year. They were quite bullish on the contracting opportunity that they see sort of the demand profile, and frankly some of the challenges that continue at the overseas ports continuing and that just creating this longer and longer tail. They had recently met with a number of their big BCO retailers and that was the exact same settlement that this has really pushed itself, a couple of months ago, I would have said just right past, maybe the Chinese New Year, and now the settlement is, this is likely to push well through 2022.

Jason Seidl -- Cowen -- Analyst

And just for clarification, was this an intermodal shipper that you met with?

John Brooks -- Executive Vice President and Chief Marketing Officer

It was, yeah, yeah.

Jason Seidl -- Cowen -- Analyst

Okay, perfect. That's great color. Appreciate the time. Nice quarter.

John Brooks -- Executive Vice President and Chief Marketing Officer

Thank you.

Keith Creel -- President and Chief Executive Officer

Thanks, Jason.

Operator

Next question comes from Konark Gupta at Scotiabank. Please go ahead.

Konark Gupta -- Scotiabank -- Analyst

Thanks, operator, and good afternoon, everyone. Just wanted to dig into the pricing and mix. So you guys mentioned pricing mix was combined, I think 8% seems like a very good support from mix as well. But just kind of looking ahead, how do you see or what kind of visibility you have on same-store pricing and given the supply chain being tight here, and then how does the mix evolve over the next couple of quarters with potash coming back and green obviously being a little bit volatile in the short-term here, as well as DRU starting up? Thanks.

John Brooks -- Executive Vice President and Chief Marketing Officer

Yeah. So I expect the pricing to remain strong. I've now probably sound like a little bit of a broken record here, but we started to see a uptick into what I consider the upper range of our guidance on pricing, actually all the way back in Q4 of last year, it accelerated in Q1 and it's -- it has hit even stronger levels in Q2. I don't see that changing. Just looking at our book of renewals for Q3, particularly our intermodal and our merchandise carload business at the top end of our high-end range in terms of pricing.

On the mix front, it was quite strong here in Q2. I expect it as you described is maybe the potash picks up to moderate a little bit, but I do expect mix to remain positive over the next two quarters. Probably, we're still seeing a little bit of a headwind and FX and fuel combo, and we probably expect that to moderate a little bit as we move through the year two. So that gives us I think a little bit of a tailwind on that front if you think about our cents per RTM going forward.

Konark Gupta -- Scotiabank -- Analyst

That's right. Thank you.

John Brooks -- Executive Vice President and Chief Marketing Officer

Yeah.

Operator

Next question comes from Benoit Poirier at Desjardins Bank. Please go ahead.

Jean-Francois Lavoie -- Desjardins -- Analyst

Yeah, thanks for taking my question. It's actually JF on behalf of Benoit. So I just wanted to come back on the contract with COSCO and OOCL, congratulations for these new ones, could you provide a bit more details about the timing and kind of the seasonality of this contract, please? Thank you very much.

John Brooks -- Executive Vice President and Chief Marketing Officer

Yeah, so the contract actually is, starts up immediately. We're actually seeing some freight convert over to our rail lines this week, and I expect it to ramp up into through August. And we should be at a full run rate at some point here in Q3. It's a partnership that, that just flat out works. It, we've got good capacity coming from the South Shore. This will allow us to use that train capacity, and frankly, takes our share at our Centerm Terminal, which is on the South Shore, which we serve up to over 50%. And why that matters is the Maersk business, a lot of that will flow through Centerm, the COSCO, OOCL business will run through for that terminal also, and it allows us to begin to really leverage and build direct trains out of there into not only Eastern Canada, but also the Chicago market. So we're quite service -- quite excited about the service product that we're able to provide COSCO, OOCL, Maersk and our other customers coming out of that terminal.

Jean-Francois Lavoie -- Desjardins -- Analyst

Thank you very much. Congrats again.

John Brooks -- Executive Vice President and Chief Marketing Officer

All right, thank you.

Operator

Next question comes from Brandon Oglenski at Barclays. Please go ahead.

Brandon Oglenski -- Barclays -- Analyst

Hey guys, good afternoon, and sorry I got disconnected, so I hope I'm not being repetitive with my question here. But, Keith, I think in response earlier, you were talking about how marketing alliances with other North American carriers could help drive further organic growth for CP. I guess maybe this question is for John as well, but do you guys really look beyond your network for the next five years to 10 years of growth or do you think some of these organic opportunities you guys have been driving the past three years to five years can continue well down the road here?

John Brooks -- Executive Vice President and Chief Marketing Officer

I can start, Brandon, it's John. So two things. One is Keith nailed it on the head earlier when he said our land capacity something we talked about previously, it's a currency that can continue to provide growth on this network as I look ahead. And you combine I think that with the ability to convert the truck business, there is a, I think an extensive focus, particularly in the U.S. with U.S. roads to look at how bringing -- they can bring more to the rail.

And I think the opportunity as you think about alliances and other marketing partnerships, as Keith spoke to is how we take that interline rail move and make it truck competitive. A lot of the opportunities we always talk about are focused on just maybe our long-haul single-line shipments, but if you really think about as more and more PSR evolves on the U.S. roads, you get more like mindedness in terms of opportunities and service, how can you combine networks to really drive that truck conversion. So look it's a combination. We're constantly looking at what we got to do with our own network and where those opportunities are and how we use our land, but also you begin to think about, well, if M&A doesn't happen, what are these areas that you can create this seamless model to potentially better service those truck markets.

Brandon Oglenski -- Barclays -- Analyst

Thank you.

Keith Creel -- President and Chief Executive Officer

Thank you.

Operator

We are now out of time. I will turn the call back over to Mr. Keith Creel. Please go ahead, sir.

Keith Creel -- President and Chief Executive Officer

Okay. Well, let me wrap up with where I started, thanking everyone join us today to go through our results. Certainly, extremely proud of this team's execution during the quarter, but even more excited about the balance of the year. We're going to finish 2021 strongly. Expectations meet or exceed guidance and carry that momentum into a strong 2022 looking forward. We look forward to sharing our third quarter results soon. Have a safe and productive day.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Chris De Bruyn -- Managing Director, Investor Relations and Treasury

Keith Creel -- President and Chief Executive Officer

John Brooks -- Executive Vice President and Chief Marketing Officer

Nadeem Velani -- Executive Vice President and Chief Financial Officer

Jonathan Chappell -- Evercore ISI -- Analyst

Fadi Chamoun -- BMO Capital Markets -- Analyst

Allison Landry -- Credit Suisse -- Analyst

Chris Wetherbee -- Citi -- Analyst

Tom Wadewitz -- UBS -- Analyst

Brian Ossenbeck -- JPMorgan -- Analyst

Justin Long -- Stephens -- Analyst

Scott Group -- Wolfe Research -- Analyst

Steve Hansen -- Raymond James -- Analyst

Jason Seidl -- Cowen -- Analyst

Konark Gupta -- Scotiabank -- Analyst

Jean-Francois Lavoie -- Desjardins -- Analyst

Brandon Oglenski -- Barclays -- Analyst

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