Canadian National Railway Company (CNR) Earnings Call Transcript & Summary

Good morning. Welcome, everybody, to the first day of the UBS Industrials and Transports Conference. I will -- my name is Tom Wadewitz. I'm the freight transports analyst at UBS. I will be hosting panels and fireside chats through the day focused on transport. It's a real pleasure for me this morning to kick things off with Canadian National. I think they've got a lot of interesting things to talk about. Obviously, we've got JJ Ruest, the CEO; Sean Finn, the Chief Legal Officer; and Paul Butcher, the Vice President of Investor Relations. I'm going to hand it over to Paul, and we're going to get into the fireside chat fairly quickly. But JJ, Sean, Paul, thank you for joining us.

Thank you, Tom.

Yes. So thank you, Tom. So before we begin, I'd like to draw your attention to the forward-looking statements and additional legal information, which are available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the U.S. and Canadian securities law. These statements are subject to risks and uncertainty that may cause actual results to differ materially from those expressed or implied in these statements, and are more fully described in our cautionary statement regarding forward-looking statements in our presentation. So I'll now turn it over to JJ Ruest, our President and CEO.

Good morning, Tom, and it's a pleasure for Sean and I to be your opening act today for your conference. We will start -- I will start with some prepared comments. And after that, we'll do the Q&A. Sean and I will do the Q&A with you. So we'll go on Page 4, which is what's on the screen, and we'll start by talking about leveraging the economy and the recovery underway. So 2 months into the quarter, we wanted to provide an update on the ongoing business. Volume is strong and RTM is up 13% quarter-to-date. We have strong same-store pricing ahead of rail inflation. The North American economy is driving consumable, manufacturing and construction. Our propane export is ramping up with our second terminal in Prince Rupert. We have inventory restocking and strong consumer demand, which drives that to model at the ports and domestically. The lumber and panel pricing is driving strong carload demand from construction and renovation. And the USMCA manufacturing is driving our steel and aluminum carload. But we do have 2 transitory headwind coming into play in our second quarter result. First, the exchange rate. The Canadian dollars is leveraging about USD 0.82, which is about $0.72 in the second quarter of last year. And you will recall that each $0.01 of appreciation in Canadian dollars will negatively impact our EPS by $0.04 on an annualized basis, or in the case of the second quarter, approximately $0.10 of headwind on the earnings. The second headwind is diesel price. We have seen a significant increase on the diesel price with the on-highway diesel price currently at about $3.25 -- $3.26, up about 20% from the beginning of the year, creating a few lag negative headwind on the operating ratio for this quarter. Our operating metrics are strong. We have improvement in train length, train weight and terminal dwell. We lead the industry in fuel efficiency, and we have improved another 3% fuel efficiency year-to-date from an already industry-leading starting point. Another important ESG prerogative, our FRA injury rates and our FRA accident rates are down about a full 1/3 from last year. And our employee engagement survey is also showing important people progress. We'll go on Page 5 and talk about the outlook. We are encouraged by the economic recovery and the vaccine rollout, which is giving us confidence heading into 2021 and 2022. We have stored locomotives and are hiring and training train crews for the economy ahead. The increase in initial production will drive our carload segment, such as in chemical, in forest products, steel, aluminum, fuel and plastics. We are also preparing for the consumer and back-to-school fall peak, the return to a strong reefer food market and the next crop year. Our financial outlook for 2021 is targeting double-digit adjusted diluted EPS growth. To be clear, this is the same guidance we provided in our Q1 earning release. Our outlook is underpinned by high single-digit volume growth in revenue ton mile. We expect to deliver free cash flow in the range of $3 billion to $3.3 billion, which will drive further improvement in free cash flow conversion, all of that with a current headwind of a strong Canadian dollar. We'll go to Page 6 and start to talk about our end-to-end merger. This is a historical moment for CN, and we're very excited about the future, and I want to take a few moments to revisit some basic fact. The CN and KCS will deliver significant value and benefit to customers, to our employee of both companies, the shareholders of both company, the port operators who are connected to our network and the railroad communities along our right of way. We will enhance competition by pricing current gateway with transparency. We will enhance competition by adding new choice without taking away any existing choice. There will be new carload and intermodal single-line service like single-line intermodal from Mexico City to Detroit and Toronto, or direct carload service from Detroit to Kansas City. We are committed to divest a 70-mile overlap, making our combination a true end-to-end merger. In our very first announcement back in April of our proposal, we committed to address the Baton Rouge to New Orleans overlap. This divestiture is the execution of that commitment. I also want to make it clear that other claim of overlap arising from the fact that CN-KCS will have 2 parallel north-south line are false. It is true these lines are parallel, but just in the same way that the Interstate 5 on the West Coast and the Interstate 95 up on East Coast are also parallel. They are separated by hundreds of miles. They're surrounded by intense competition from big Class I, by competition from the Mississippi barge river system and by competition from interstate long-haul traffic. The lines serve different markets and different customers. Lastly, I would like to highlight that we now receive over 1,400 letters of support for our transaction and more are coming. Letters from all 3 countries, letters from payers of freight, letters from supply chain partners, letters that voice our support of our use of the voting trust -- the support for enhanced competition under the existing rule and for our end-to-end combination. We're very excited about the CN future with KCS. This will be a transformative combination, creating jobs, better jobs and creating a cleaner supply chain with a lower carbon footprint. And gateway will be open and we'll have transparent pricing. This is the right time and the right partner in the combination. This will result in meaningful new products choice, new cost synergies for user, new ESG-driven highway conversion and new ways to compete in the future, pro-growth. The premier Canada-U.S.-Mexico network for the 21st century is the what continental economy and trade -- are needed at this point. Having said all that, as we pursue the combination, the team will remain very focused on our CN core operation, serving our customers day to day, ensuring that we prepare capacity for 2022, and ensuring that we deliver a result under our guidance for 2021. So Tom, I think we -- from this point on, if we can go to questions to myself and Sean or either on the business or on the combination.

Great. That sounds good. Thank you, JJ. Thank you, Sean, for joining as well on the call. Why don't we start off with a question on mitigation. You made a proactive step for the line between Baton Rouge and New Orleans, the KCS line. What would your response be if -- to potential further mitigation measures through the process if that was helpful in addressing concerns. Do you think there's potential for that? Would there be willingness on CN's part to consider further mitigation measures?

Sean, do you want to maybe touch on that one?

Yes, sure. Yes, sure, Tom. Thank you very much. And we've done this process before. IC is a good example where, clearly, when you have a controlled application at the STB, post the voting trust, post the shareholder voted by KCS, we'll close into the trust in October. Then we'll be on this for a year. As people submit comments, views on the combination, be it the customers, customer associations, communities. And as you know well, the STB's expectation is that the applicant will deal with these comments as they come in and attempt to settle them. So to answer your question, CN is always willing to sit down with any stakeholder involved in making a submission or comments to the STB to try and work out a settlement. And if we can't, then obviously, the STB will -- could impose conditions or mitigation. But we're comfortable that besides having undertaken, if the STB so desires, to dispose of the asset between Baton Rouge and New Orleans, that we can, to your point, engage with stakeholders, customer associations and find ways to address any concerns they may have. And ultimately, call it mitigation. If there is mitigation required, the STB will raise it. But we're very confident that with our experience in past examples of a Class I merger being IC, and even on the EJ&E, we're very successful entering into agreements with stakeholders to adjust their concerns, and it will be no different in this CN-KCS combination.

When -- I guess, when you mentioned the Baton Rouge to New Orleans line, I think there was a commentary about maintaining access, I guess, trackage rights. And also -- so I'm wondering, is that something which like why you would choose to do that or if you think that could be a sticking point. And also, how good is the connectivity at the other end? Is it pretty easy to find a connecting carrier that you could sell that line to, whether it's an Eastern railroad in New Orleans or Union Pacific in Baton Rouge or how would you think about the kind of ease of making that transaction take place?

Yes. So we committed this in our joint KCS-CN voting trust application. Obviously, it's subject to the STB's view on this, and it's a bit premature. I mean, obviously, this will not happen for possibly 2 years. It will most likely be if we work to get to that point of condition of the approval of the combination, And obviously, we have lots of time to engage with various parties who wish either to acquire. When we asked -- we talked about running rates, it was just to make sure that -- our trackage rights, excuse me, was that we recognize the STB, welcome to decide, first of all, if we decide to dispose of it in the context of the combination, they want to approve much likely who will be the acquirer. And secondly, how we ensure, is ultimately the test to customers on the line will continue to have several choices when it comes to getting their goods to market. And there is good connectivity to ensure that a short line or another railway could access this. So premature a bit to get into details of the conditions. But obviously, we wanted just to make sure that this very little overlap is 70 miles which now makes this transaction an end-to-end combination no different than the other bid that was made. And to say that it's not the end is untrue, is inaccurate. My view is that clearly, there are no 2 to 1 points. And if there are any issues that's -- keeping the gateways open and addressing this issue is a good way for us to proactively address any concerns about this transaction not being pro-competitive. It is pro-competitive. It provides more choices, not less at the customers and shippers and it'll be no different when we talked about how the line is disposed that we'll ensure with the STB, as they go through the approval of the ultimate control decision. How is the best way to dispose of the asset to ensure that customers on the line continue to have several choices to move their product to market.

And Tom, it's JJ. There's already significant interest from other potential buyers, either Class I railroad, short-line or infrastructure investors. So definitely, we will have another owner to step in, in the shoes of KCS and our merger will be end-to-end and those customers who have 2 choices today will have 2 choices post-merger.

Great. Thank you. So I've heard a perspective that it's hard to know how much some of the perspectives are theoretical versus how broad the impact would be. But I've heard a shipper perspective, that would say, well, while these 2 North-South lines are separated by 400, 500 miles, if you're a shipper in the middle, then you're 200, 300 miles away from either line. And if you're a transload shipper, then you might previously have a choice of both lines and then you would lose a choice. I don't know how much that's kind of a theoretical comment versus how broadly that would apply. But what would your response be in terms of some shippers that might be between the 2 lines that actually could have access that would be reduced?

Yes. So if you go on Page 6, where we showed that map of all the ways to go from north to south, and actually we're going to create even a better way by starting a single-line railroad service that starts in Mexico and terminates in Canada and the Midwest. But it is very theoretical. It's really -- it's not real. And this is -- so ultimately, what customer, in general, they all care about service, the quality and cost of that service and they want to have option. And at CN here, we're going to create option. We're going to maintain gateway open, which is quite critical to our own growth. We need growth from the carload sector. And keeping the gateway open will allow us to grow these -- the carload from this interchange. But we will do that by offering Rule 11 rate pricing. I don't know if you're familiar with Rule 11 pricing or what we call sometimes at CN, gateway pricing. It's something we practice now for probably 15 years. While you actually price to a gateway, more than 1 gateway, you put that in your customers' contract. And after that, you let the customers go in, negotiate with connecting carriers at different gateways, terminate this combination, terminate this negotiation on price escalation for each component. And after that, we publish the remaining price as a combination. And/or the customers has different contract with more than one railroad and he would pay the 2 invoices separately. So Rule 11 pricing is really something that is not necessarily practiced widely. But under the commitment of keeping the gateway open, and making sure there's no bottleneck, we will offer those choices. And frankly, I think from our own point of view, having gateway open and Rule 11 pricing at this gateway and let the customers pick the best price, best option after he's done his shopping, best service, will also allow us to actually get business back on the railroad from the highway or get business back on the CN-KCS competing with some other choices. So this whole thing about the 2 lines, the north-south is really a stretch. And then as we mentioned a number of times, we will use both line sometimes as a redundancy for the intermodal network that we want to put together from Mexico to Toronto, but also sometimes to move grain down to Mexico via Kansas City. And/or moving petrochemical or crude from Alberta over the Kansas City gateway and allowing the payer freight to have a Rule 11 pricing from the combination company and determine what's best for them in terms of routing. So I think, really, we are creating a new way to compete with this proposed merger, which is end-to-end. And I think that's what customers and associations should focus on, is the new ways of competing that we are about to create here.

JJ, I think when shippers think about railroads and they think about large railroads, railroads with strong origination franchises, I think railroads getting bigger, sometimes causes concerns. CN obviously is bigger than CP. And so I think there's probably a little natural inclination from some shippers to say, at CN-KCS causes -- or KCS causes more concern. How do you address the kind of broader market power concerns from shippers?

Yes, go back to basic. It's not about big, small or medium. And when you talk about size, CN in the United States, and I'm talking CN and KCS combined in the United States, will still be the fifth largest railroad. We're still going to be smaller than CSX and NS and much smaller than UP and BN. And because we're going to be more on Western side, we're going to compete with 2 big guys and then we -- and we're fine with that. I think that's why it creates competition. It brings in another choice to compete with existing choice from very strong and big railroad, much bigger than us. We will be only #5. But from a customer's point of view, it's not about the sizes. What are you offering? What am I getting out of this? What new service do I get? Do I get other options? Am I going getting potentially a better price, lower cost? Am I going to get some pricing over the gateway in a transparent way that will allow me to do my shopping for price and service? And maybe try both route? A longer route, the shorter route, a single-line route, a combination route. And over time, just like we've seen in Canada for the last 25 years, went into switching. And over time, I will migrate to actually what's best for me either because -- I like the transit time or I like the consistency or it's a combination of 2 railroads. The transit time is not as good, but one of the railroads really dropped the price, and I enjoy the fact I have a lower cost, even though my supply chain might be 3 days slower on a round-trip basis. So it's down to customers' choice. Customers are not really asking, are you a big railroad or a small railroad. The customer is asking, in my specific case, with my plant in state A and shipping to location B, what do you have for me? And this is what this combination has to do. Like anybody else, we have to compete and provide better choice at better costs and then after that, let the market do its thing.

If I may, it's Sean, to just jump in to add. I think JJ has hit it sort of very well. But think about this also, Tom, from the competition perspective, it is true if you thought that it's interesting to say, if you're bigger, you have more competitive issues, but maybe think about it this way. You think about CN as the NAFTA railway from Canada to the Gulf of Mexico. Think about KCS from Kansas City all the way to deep into Mexico. Both railways have very much leveraged both the NAFTA, now the USMCA agreement going forward. Put the 2 together, and yes, CN has a bigger footprint in Canada, KCS has a large footprint in the U.S. into Mexico, obviously. But I think in this case, scale probably brings you more choices for customers, more destinations, therefore, more competition, first of all. Secondly, providing a secure and sustainable supply chain to the North American continent after coming out of COVID, obviously, by having it on one single line obviously brings a lot of -- from a security perspective, to make sure our supply chains remain efficient and sustainable. So I think when you look at this, take a step back, this combination will be great for the North American continent. It would be great for our employees, our customers and the 3 countries who will be no doubt now looking on onshoring, but also using USMCA as a treadmill back and forth between Canada and the U.S.

Yes. One thing that, Tom, you have to remember. So today, we've identified the $6 billion total available market that's on the road that's been trucked north-south between either Texas or Mexico to the Midwest and Canada. And neither UP, UBN have actually converted that total available market -- I don't know, the proportion of it, not enough of it, by putting a single-line service that starts from Mexico City to Toronto to move consumer goods or single-line service that starts from San Luis Potosí, which is an industrial area that goes to Detroit and back for automotive parts. Then we can compete with truck, then we can remove CO2 from the environment, then we can create a better job, better paying job with better lifestyle for working in the railroad that's supposed to be a long-haul trucker who's gone from home one week at a time. So the product of today actually are still in a north-south market. And I know east-west in the United States, there's pretty good combination with some of the big intermodal company, not so much on the north-south. In the north-south, you start on KCS, you have a handoff at the Mexican border. You get in one of the big U.S. Western railroad. You have another handing off in Chicago. You hit the road and then you drive toward Michigan or you drive toward Ohio or you drive toward Eastern Canada. What we're going to be proposing here is when you get on a railroad in Toluca or in San Luis Potosí, you will stay on that train. There will be no interchange. There'll be one point of contact with customer service. We will not stop at every station. We will probably create a destination train with 1 or 2 or 3 cities maximum. You get to the first stop, which is maybe Detroit, second stop, Toronto. You get off the train and you have a short dray of truck at both ends. And by doing that, you do have a shot at converting frozen french fries from Canada to Mexico. Or you do have a shot at converting packaged food and processed food from Mexico to the Midwest and Ontario. But by providing a service that start to resemble more the truck service, but it is also cheaper than the truck service. These things don't exist today. And that's why highway are so busy with 53-foot dry run.

Great. Okay. Yes, that's helpful. When we think about the -- moving to the kind of public interest consideration, thinking about the voting trust and thinking about the various factors that STB might consider as part of public interest. I think the hardest one for me to kind of get my arms around is downstream effects. So I think you guys did a great job in your filing, addressing financial integrity. Very clear. I think the voting trust issue seems pretty straightforward in terms of the trust structure. But when you get to a couple of other items, I think downstream effects, in particular, I think it's just hard for me to get my arms around what would your case be to say, "STB, you don't need to worry about downstream effects." Or -- so how do you think about addressing that potential consideration that might come up in voting trusts, maybe that way you come up and sell the merger evaluation?

Yes. I think that's important, Tom. You hit the nail on the head. As we filed our joint application to voting trust on 26th of May, we felt important to address the public interest issues that were raised, the comments raised by the STB on the decision of May 17. You'll recall, by then, they had approved the other voting trust. Our voting trust is identical to the voting trust already approved at the same trustee. And we felt in our submission that we cover off 3 aspects of the public interest. As you know well, will KCS be under independent control by the trust, which where the CEO -- the trustee is the same as the CP trustee. Dave Starling, the former CEO of KCS. Secondly, we've made the case, I think, very compelling -- in a very compelling fashion that we don't have to worry about the so-called CN's financial integrity, both CN and KCS. Obviously, there's a market for KCS. The last several months have shown that. And secondly, we have demonstrated in our submission that if we were called upon -- and in an unlikely situation, we're called upon to dispose of the asset, we're comfortable that we can dispose at our price that will allow us to pay down the debt. There is obviously a market available, be it another railway or private equity. And finally, to your point, because of the confusion created around the downstream effects and the lack of competition, we were very forthcoming in setting out the fact that we have committed to dispose of the asset that nowadays clearly is an end-to-end merger, and felt that this is pro-competitive and with the verified statements of both JJ and Pat Ottensmeyer, obviously, and it really sets out the path for us addressing the public interest test at this stage with the STB based on their comments in their decision on May 17. When it comes to the downstream section of the overall transaction, obviously, as we're preparing the STB application. We're looking at that in detail. It's a bit premature to decide exactly what we're going to address and how we're going to do so. But I can tell you, we selected to go under the current/new rules. We didn't ask to be exempt in those rules. So we did so with a clear understanding of what that contemplated for us going forward with us being able to make our case by which we understand very much both railways, CN and KCS. And we're confident that in the context of the STB application, the control application, which we will file probably in October -- September, October, we'll address those issues, and we're looking at them in great detail. But obviously, when we decided to proceed under the so-called current rules because they're no longer new, they're now 25 years old, we did so with a clear understanding of what the downstream impacts might be and how we would address them in the overall application.

Okay. What -- how do you think about the paths that, I guess, the breadth of the public interest analysis, that STB could do. Do you think that it's possible that they do kind of a mini-merger analysis and look at things, the 5 criteria in some detail and potentially take comment periods as building a record, recognizing there's less ability to build a record with a short comment period versus a full review? And then also, how do you think about the potential for them to consider a comparative analysis? CP has continued to move forward with their applications, even though they no longer have an agreement with KCS. So how do you think about the kind of the breadth of what STB may look at in voting trust? And also about, is it even possible that they end up doing kind of a comparative analysis as part of a voting trust or merger review.

Well, obviously, the agency is a very competent and has expertise in a lot of areas that are addressed in the overall voting trust applications. So we're very confident that they'll do the work that has to be done to get satisfied, that is in a public interest that the KCS shareholders have access to a voting trust. And obviously, the ultimate test here is we should allow the KCS shareholders to decide who is the best partner for them with respect to the sale of their interest in the KCS or the company itself. Obviously, we've submitted a very detailed joint petition. So obviously, we felt compelled to make sure that we had all the facts and all the law in front of the STB. So we think we've done pretty detailed already submission. And I think that it's recognized that in some cases, the comments we made in the overall voting trust submission is almost as strong as some comments you would have seen in the overall control application. But notwithstanding that, we want to make sure it's in front of the STB. As you know, we've asked them to adopt a procedural schedule. We had proposed a 10-day comment period. We're still waiting that decision from the STB on what would be the procedural schedule for the voting trust. Obviously, they've already approved one voting trust. This one is identical. We think we have addressed the comments that were set out in the decision of May 17. So we'll await to see how the STB proceeds when it comes to the procedural schedule. But we're comfortable with a 10-day period, 20-day period of comments. But obviously, that will be determined by the STB in the coming days. And there'll be a period for comment, and that's under the current rules that was provided for. With respect to having a parallel control application. As you probably saw last night, the STB issued a decision providing the full 20 days for KCS to comment on the request by the other bidder to continue to have access to all the information that KCS were sharing with them prior to them terminating the merger agreement and signing up with CN. So we're obviously of the view and we'll have a chance to review this with KCS that, that is not in the best interest of the party to have 2 parallel applications. And we think the STB will decide that in due course. But we'll be looking forward to see KCS' response to the application by CP. Continue to be exchanging information with the KCS, notwithstanding the fact that their merger agreement has been terminated. And obviously, I think the STB by ruling yesterday that they would give the full 20 days to KCS. They want to make sure that KCS has the time and the reflection to provide appropriate comments where that would not be a good idea.

Right. Okay. I've had a couple of questions that have come in that I'll try to work in here. I think one, you were talking about the procedural schedule. Do you have a specific date in mind that is a time frame they're required to give you a response on procedural schedule? And are there any other kind of I guess, decisions or elements of feedback you're looking for from STB in the near term?

Yes. There's no deadline per se. Normally, it would have been 20 days. And it's important to realize, we filed our procedural schedule on May 18. And then obviously, our petition for voting trust on May 26. So if it's 20 days or 10 days, depending on the deadline of the 2, but we expect in the coming days. The STB is quite busy. They have a lot in their plate, obviously. So we're very understanding that they have to do this in an organized and structured fashion. And we're looking forward to see a procedural schedule as soon as possible under the circumstances. So we're not going to push -- we're letting the STB take their time at best to ensure that this is done right and that they're comfortable that the delay they will select when it comes to comments will allow parties to make comments in an organized and structured fashion.

Which of your -- I mean you mentioned the 20-day rule, but you're saying you're not sure if that 20-day rule applies or not.

Yes. Well STB has a certain amount of discretion, obviously, but we would expect in the coming days to have a decision on the procedural schedule based on 1 of the 2 dates, either May 18 or May 20.

Okay. Let's see. What about appeal, I think there's some debate about how would an appeal work. How -- do you do -- I forget the term, an appeal within STB, I forget the technical term for that. Or are you going to straight to appeals...

Yes, reconsideration is the term you're looking for, Tom?

Yes, right, right. Reconsideration, petition for reconsideration if that's the right term, or do you go straight to an appeals court. So I guess the first question is just is your understanding that decision on voting trust would be viewed as a final decision that could be appealed? And then second, what's your understanding of what the appeals choices and process would be?

Yes. So on the -- we're confident based on the fact that the STB has already approved the voting trust, which was identical that -- well, first of all. Secondly, we have addressed the issues of independence of the trust and the trustee versus KCS being an independent run from next -- during the control period. Obviously, we addressed the issue of financial integrity of both entities. And finally, we addressed all the comments that were contained in the STB decision of May 17. So we remain very confident that the STB will come to the conclusion that it is in the public interest under the current circumstances to provide both KCS and CN with the right to use or the right to use the voting trust under these circumstances. And that doing so will allow the KCS shareholders to dispose of their shares in a way that they feel is in the best interest of both the KCS and the company. And we think we are the -- obviously, a very good partner for KCS, the better bidder, the better partner, and we're confident that we'll get a voting trust. I'm not going to speculate that it will depend very much on what the decision says. But obviously, we remain confident that we're going to get a voting trust, and we would have done so in the context of what we submitted to the STB on May 26. And we think we addressed all the concerns they might have. And if that's the case, then we can't really see a reason why voting trust would not be granted under the current circumstances.

So I understand that you made a strong case, you addressed the issues that they raised, but it's still possible that they would choose to reject the voting trust. Just, I guess, procedurally, is your understanding that there is an avenue for appeal? Or is that dependent on what the decision looks like?

Well, we'll see what the decision looks like. We'll have a conversation when that happens, if it were to happen and the unlikely situation with KCS. But again, there's always an open right to reconsider to appeal. It will depend on what the decision would say. But again, that's highly speculative. And based on how we've looked at this and the test, we have a voting trust approved in an end-to-end merger. We have another end-to-end merger once you address the issue of -- there are very little overlap, and we're very confident that based on the same criteria, the STB will have a chance to -- well, first of all, to approve the voting trust, then we can close the deal. And ultimately, they retain the right, as you understand very well, Tom, if you look at the overall transaction. So I don't want to prejudge the outcome and there are 5 commissioners. I respect their views enormously. But I think it's premature to start discussing what would be a right to appeal a reconsideration. Let's get the voting trust approved, and then we'll have a conversation if that's what the case after the fact.

Right. Okay. JJ, I wanted to get your kind of high-level thoughts. What's the game plan if you end up with a voting trust that's rejected and you've got -- you could appeal, you could go forward without a voting trust, you could kind of walk away from things. How do you think about the various choices and kind of the reasons why maybe you would move forward even if that initial -- if that ruling went against you?

Yes. So let's start with the basic. We're working the voting trust. And we're confident of all the effort we're putting together will get us there. If ever it does not, then both the Board of CN and the Board of KCS would consider at that time based on the fact of the time. So we can't speculate ahead of time what that might be. But CN has had a great path and it will have a great future based on organic growth. We have a great network. We make things out of the marketplace. When we look at this combination, we find lots of different ways to grow and be accretive. But we could do that also in other scenarios. This is a scenario that we really like. We've been looking at KCS for the last 25 years. Ever since Paul Tellier was the CEO of CN at the IPO, we had a marketing alliance with KCS, which was only for United States, not for Mexico. And we admire what they've done, putting together in the last 25 years. So we like -- we really want to combine with them for the reason that we mentioned earlier. But on a stand-alone basis, CN has really grown from our market cap of what we had after our IPO. We did a series of acquisitions, big and small. We bought Illinois Central. We bought WC, we bought BC Rail, we couldn't quite get the merger with BN. In the meantime, we created a very strong port strategy which, by the way, we would deploy on Lázaro Cárdenas, on Veracruz on Mobile on New Orleans. As part of this combination, we would want to get the transatlantic trade ahead of Port of Montreal to connect directly with Kansas City. So there's a lot to be said about the value of rail franchise and a franchise like CN. And no matter what happened, we will be in good shape. You look at operating matrix for this year, quarter-to-date, people may feel that we're busy or too focused on the merger, but at the same time, we run a very good railroad right now. Train length, train weights are up. Customer sentiment we, have -- we run customer sentiment index with -- from a third party. And we have good results right now. So these things, I think, are all conducive to, a, get customers and shipper support; b, get more of their business. And by this combination, we think that we can provide a unique way to compete stronger. And a unique way also to provide a product that don't exist today, which is namely an intermodal service that starts right in Mexico and terminate in Michigan and Ontario or an intermodal service that starts at Port of Montreal or Port of Quebec City and go all the way to the hinterlands. So -- but short term, as mentioned -- as Sean mentioned in lots of detail, we're focused on avoiding trust. The STB is quite busy, and they'll look at all the filing that we've done, us and others. And in time, hopefully soon, they will come back with their first opinion on what we filed almost 2 weeks ago.

Right. Okay. I've got a sort of -- just a quick question and then maybe 2 more that are probably suited for a little longer response potentially. But a quick question is just is there a scenario where the KCS shareholder vote would take place without ruling from STB on the voting trust? Or is that really something that you would expect to take place, the KCS shareholder vote after ruling by STB on voting trust?

I think it would be a -- yes, go ahead, Sean.

Yes.

I think that will be a decision by KCS, but they could do that with the condition of the vote.

But again, I think that, that is a possibility, I think. What we're contemplating is getting the voting trust approved by the STB, so that we can then proceed with the proxy circular and look at our shareholders' vote sometime hopefully in August, late August, and then close the voting trust in October or November. And that's the ideal scenario. I think it just makes it a lot clearer for the KCS shareholders. It's not a legal requirement per se, but I think that is probably the best track towards getting a clear approval by the STB. And then obviously a shareholder vote and then closing the voting trust and then us getting in our STB application the control approval, and then looking to decision in late 2022, early 2023.

That's right.

Okay. So it's possible if the STB voting trust ruling gets delayed beyond August that you would still have a KCS shareholder vote. Obviously, that's not the base case.

Yes. It hasn't been decided yet, obviously, we're just drafting the processes as we speak. So we haven't just picked a record date yet, but we will do so in the coming weeks with, obviously, the discussions with the KCS Board and how best to proceed. But again, we're confident we can get a voting trust prior to the KCS shareholder vote.

Okay. Great. We're approaching the end of the time here. We can run a few minutes over. I don't want to run too much over. But JJ, I want to ask you 2 questions about -- if I go back to, I think it was June 2019, you held an analyst meeting, you gave a lot of really helpful detail on growth drivers on a -- I forget whether it was a 3-year basis or longer. If we say, "okay, a scenario where you don't end up acquiring KCS." And are those growth drivers in what you laid out at the analyst meeting, are those all intact? Or would you say, well, some of those could be reduced if Canadian Pacific ends up with KSU. How do you think about that kind of stand-alone CN growth story? And then I guess the second -- well, I don't know. Why don't -- I'll give you the second one. You can weave them together if you want. What about the OR framework as well? So CN stand-alone has had great growth. The OR performance has not been as strong last several years. Do you say if you don't go forward with KCS that you kind of double down on OR improvement strategy in addition to having that attractive underlying growth?

So maybe I can start with the Investor Day that we had 2 years ago in the spring time. At that time, we talked about technology, and we've made a lot of progress with technology, especially related to automated inspection. That's one of the reason why our FRA accident are down over 30%, 35% year-to-date, very solid. And if you did deploy that on a bigger network, the KCS, it obviously provides payback. At that time, we also talked about our port strategy on all 3 coasts, Gulf Coast, East Coast and Western Canada. And if we were to buy the KCS, we would even make -- extend that strategy to a bigger network, including Lázaro Cárdenas. By the way, Port -- Hutchison Port, who is our joint venture partner, Port of Quebec City also has terminals in Lázaro and Veracruz. So the port cluster strategy would continue to grow. We love trade with all continent. We talked about the people side of the strategy. We track employees engagement the same way as we track customers sentiment. We also brought a lot of talent from outside. CN as a company, we like to have a melting pot of talent. People have rail background, no rail background. People have rail background at CN, people have rail background, other railroad. I would say I really define -- and going back to your point on the operating ratio. If you look at the compensation system for the CN executive in the last 10 years, and I think that's telling in itself, our focus is on growing the free cash flow. Our focus is on the top line growth. Our focus is on growing total operating income. Our focus is we also have Performance Index on safety, people safety, accident safety, customer satisfaction, as measured by the outside firm. I talked about employees engagement on ESG, the one we picked is fuel efficiency. So we have a mindset about growing the business mostly from profitable growth. Controlling costs but not looking to be the lowest cost operator. We're looking for the -- to be the one who has the best potential in terms of growing the total operating income of the company, therefore, driving EPS. So these things are intact. And I would say that a lot of those things, as you saw, we're actually bringing in, in combination with KCS as part of our game plan.

Okay. So you would say the growth drivers you laid out at the analyst meeting in 2019 would be intact at stand-alone CN. The strategy on OR and focusing on operating income growth as opposed to OR would also be intact.

That's right. And some of the business since then have changed a bit. At that time, crude by rail and frac sand, which is related to crude by rail, had -- it was very strong. I would say today, those things are not as strong as they were. However, we created a new supply chain for export propane via Rupert. We got 2 terminals now, and these are our 25-year business. And also the consumer side has been bigger. And what one thing COVID did is that it challenged the crude industry. I know the price of diesel is high right now, but people are not necessarily ramping up capital investment to get more crude out of the ground in North America. But what's really, really strong is the consumer economy and the consumable. And that's all the whole world of intermodal. Hence, that's why we're so focused. I think the North American industry, to be really successful, we're going to have to find a way to compete with truck in a much more effective way than in the past. Rail are cheaper than truck, but rail are complicated to use. And then in the case of Mexico, it gives us such a length of haul, Mexico City to Toronto. We've been the longest intermodal haul of any movement in North America. I mean, it's really long, long distance, but it's also a great market. So consumer, consumable, maybe less reliant on energy, we'll see what energy does. And then manufacturing is -- right now is running strong. And Mexico has a good shot at attracting some manufacturing or at least being more successful than industrial production than maybe other parts of the continent.

Great. I think with that, we're a couple of minutes over here and we should go ahead and wrap up. JJ, Sean, Paul, thank you so much for joining us. Thank you for the great insights you provided. And I appreciate you participating in the conference. Next up is at 9:00, we have Union Pacific. So thanks again for joining us.

Thank you. Thank you for having us today, and we always appreciate participating in your conference. So enjoy the day. Thank you.

Thank you. Thanks, Tom.

Okay. Thanks, JJ. Thanks, Sean.