Canadian National Railway Company - Q2 2018
July 24, 2018
Transcript
Operator (participant)
CN second quarter 2018 financial results conference call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN second quarter 2018 financial results, press release, and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please stand by. Your call will begin shortly. Welcome to CN second quarter 2018 financial results conference call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.
Paul Butcher (VP of Investor Relations)
Thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's second quarter 2018 earnings call. I would like to remind you about the comments already made regarding forward-looking statements. Before I introduce the speakers on the call today, I would first like to congratulate JJ Ruest on his nomination as President and CEO of CN. I've known JJ for over 20 years, and I'm very honored to work under his leadership. Accompanying JJ on the call today is Mike Cory, our Executive Vice President and Chief Operating Officer, and Ghislain Houle, our Executive Vice President and Chief Financial Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question. The IR team will be available after the call for any follow-up questions.
It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. JJ Ruest.
JJ Ruest (President and CEO)
Thank you, Paul. Thank you, and good afternoon, everyone. Welcome to our earnings call. First off, I want to say that I'm very honored to be here today with my colleague, railroaders, all of us having each two decades of building CN from the ground up. Back in March, the Board asked me to act with a sense of urgency, and the team really delivered as one. We produced, we produced adjusted EPS growth of 13%, a best-in-class operating ratio of 58.2, revenue growth of 9%, which was from solid same-store price of 4%, and revenue ton-mile volume of 7%.
We generated nearly $1.3 billion of free cash after the first two quarters, and we also made good progress on our midterm agenda of development of talent, safety culture, and strategic growth to outperform the economy. And it is, therefore, it is with this confidence in our business and confidence in our railroading acumen of the team that we are raising the 2018 guidance. Ghislain will provide a specific in a few minutes. Despite the very challenging first quarter, our team of railroaders is definitely not giving up on delivering solid year-end result. I will now provide an update on our top line, followed by Mike's overview of our operation, and Ghislain will follow with financials and our updated guidance. Demand is currently strong, and the demand outlook for the remaining of this year is strong as well and broad-based.
This is why we are working diligently on adding capacity and resiliency to our network. Volume, as expressed in revenue ton-miles, in the last quarter, was up 7%. Same-store price for Q2 was up a solid 4.0%. Sequentially, remember in the last quarter, it was at 2.7%. Core pricing from recent renewals, concluded in the last 90 days, averaged about 4.4%. You will recall that same-store price is a backward-looking measure of price on our full book of business as executed in the last quarter. Core pricing from recent renewals is a forward-looking measure of price trend from only the deals concluded in the last 90 days. On revenue by commodities, coal revenue grew 39%, mainly from Canadian export coal of met coal to Asia and U.S. export coal of thermal coal to Europe.
Grain and fertilizer revenue was up by 12%. Our grain volume was up in both Canada and United States. This year's Canadian crop and carryover look fairly promising. Our frac sand segment executed in the previous quarter was exceeded, I'm sorry, our previous quarter record, and it was driven mostly by strong demand in Western Canada. We see the same outlook in the short term as in regard to the frac sand business. We are constructive about continued volume growth in lumber and in base aluminum volume. Our steel, on steel, our largest steelmaking account is in the United States. Crude by rail, the revenue was up compared to last year because of better pricing. In the second half, we will have more capacity, therefore, we will also be able to execute a bigger book of business of crude.
We are taking delivery of 60 new GE high-horsepower locomotives, and that will be helpful to our crude business. Lastly, on intermodal segment, the revenue grew by 6%.... The increase last quarter was mainly traffic related to the Port of Prince Rupert and the Port of Montreal. And on domestic revenue, which was also up, it was especially up on ramp-to-ramp business with our wholesale account. We did have a new shipping line customers at the Port of Vancouver, as well as the new shipping line customers at the Port of Prince Rupert. Concluding on the commercial re-- overview, price trend is up from renewal and also from new business, reflecting tighter supply of transportation capacity. On volume, our growth will follow the completion of our new sidings and new section of double track capacity.
I will now turn it over to Mike, so Mike gives you an update on our operation. Mike?
Mike Cory (EVP 1 and COO)
Well, thank you, JJ. Even though Butcher beat me to it, I just want to congratulate you on a well-deserved promotion.
JJ Ruest (President and CEO)
Thank you.
Mike Cory (EVP 1 and COO)
We're all very proud, and we're honored to work for you and with you. Hello, everyone. I wanna, first of all, thank the railroaders of CN for their efforts in delivering these results. It's been in an environment that really is still lacking resiliency when you think about our operation. While we still have work to do, these results show the commitment of this operating team to both our model and especially to our customers. As we stated on our Q1 call, this quarter was centered on catching up on the volume, gaining back the confidence of the customers, and sequentially improving our operating metrics in line with reducing costs. Overall, we saw better operating performance in a quarter where we handled the largest workload in CN history.
To put this into perspective, gross ton-miles were up 8% versus Q1 2018, and this was 5% greater than the highest workload in our history, and that was recorded in Q1 of 2017. Further, our overall workload was 23% higher than during the same period in 2016. Now, the importance of this comparison is that in Q2 2016, we had the low point of workload in recent past due to the downturn in demand. In the two years between then and now, the infrastructure has changed very little, especially in the high-growth areas in Western Canada and our Southern Region, where we've seen growth as high as 35% on some of these corridors. Outside of winter conditions being behind us, a large factor in our ability to deliver this volume is our hiring and qualifying of operating employees.
In the second quarter, over 350 employees qualified as conductors. In the quarter, we hired close to another 900 conductor trainees across our system, and they'll become qualified in Q4. On the safety front, these new employees have had an impact on our performance. Now, safety is a core value at CN, and this leadership team stands united in making the culture the safest in the industry, regardless of the challenge that that volume growth and that new employees bring. In Q2, our FRA accident ratio increased versus Q1. Although, with our commitment to investment in hardening our infrastructure, our mainline accident ratio continues to improve. Our area of increased accidents is within yards. Over 2/3 of the overall accidents are on non-main track, and those are primarily in switching yards. These are lower risk because they generally occur at slower speeds.
In addition, it's where the majority of the work is performed by new employees. Our FRA injury ratio improved over Q1. We're focused on, and we're improving our approach to proper onboarding and integration of these new employees. To various initiatives, such as targeted regular interventions, especially with employees with less than two years experience, we're engaging on the front line, and that's where the rubber hits the road. As well, we're completing an overhaul of classroom and field training programs, and we're working with our union partners to provide on-the-job training with qualified instructors. We fully expect that focus, and especially leadership, will result in the improvement we seek, and each one of us around this table and out in our vast, railroad is committed to making this happen.
Looking specifically at Q2 operating metrics, train speed increased 4% versus Q1, and this in itself drives locomotive utilization, which was up 7%, car velocity, which is up 23%, and terminal dwell, which was down 20%, all versus Q1. Now we expect sequential improvements as we take possession of the locomotives, new rail cars, and more employees become qualified to perform work. And of course, with the completion of our capacity projects in Q4 of this year, we're gonna see the resiliency we've not had in the near past as volumes have grown, especially over our busy corridors. In the past few weeks, we completed the majority of our major work blocks for basic track infrastructure. Most of this work was over our less resilient core main line between Western Canada and Chicago.
Along with some flooding in our Minnesota and Wisconsin corridor, these work blocks have impacted our performance over the last two weeks of Q2 and for the first three weeks of Q3. But we are certainly rebounding as I speak. If you flip to the next page of my presentation, you'll see an overview of where capacity projects are being built in 2018. Now, growth isn't equally spread across the network. It's prevalent mostly in our Western and Southern Regions, and this is where most of the projects are taking place. The projects, and they're an all-time record, are progressing quite well. Five projects are completed, primarily in the Southern Region, with one of those being in the west, and the majority of the projects will be completed and produce benefits into Q4.
Finally, with all the volume growth and capacity improvements we are making, we're adapting our scheduled operating plan to meet the changing demands. This will ensure our Precision Railroading model continues to lead the industry in both operating ratio and service offering. Our design team, with operators in the field, are at work. They're using our Precision Railroading standards to convert the volume growth opportunity into lower OR and better service delivery. Our focus on scheduling the workload of assets, whether they be car inspectors, locomotives, or track capacity, is embedded in our DNA. To put it simply, it works. This focus will produce the right balance of cost and profitable growth as we continue to leverage our Precision Railroading model.
From a quarterly perspective, workloads have grown 23% since 2016, and the challenge is to adapt our precision model to this and more as we continue to grow CN's business efficiently. The mix of business has evolved over this time, with more unit trains and more Western Canadian activity with intermodal to the U.S. In addition, we see growth in our branch line feeder systems throughout our Southern and Western Regions. These are all great challenges we are facing, and we're facing them head-on. We're showing the Precision Railroading model works through high volume growth and through low volume growth or decline. In closing, how we work is not gonna change. Precision Railroading is our gold standard, and this is crystal clear in our leading, industry-leading operating ratio.
This leadership team knows that we can use this strong base while evolving our operating and service plan to fully realize the results of our comprehensive strategy. We're pleased with the performance of the team this quarter, but in no way are we satisfied. We know as we add our capacity and assets, we schedule the activities as we know how, we'll deliver the results our customers, our shareholders, and all of you expect. With that, thank you, and over to you, Ghis.
Ghislain Houle (EVP 2 and CFO)
Thanks, Mike. Again, congratulations, JJ, on your appointment. It's, it's well deserved. I'm very pleased with our turnaround, which is demonstrated by our strong financial performance in the second quarter. Starting on page 10 of the presentation, I will summarize the key financial highlights of this quarter performance. As JJ previously pointed out, revenues for the quarter were up 9% versus last year at slightly over $3.6 billion. Fuel lag on a year-over-year basis represented a headwind of roughly $30 million or $0.03 per EPS, mostly driven by an unfavorable lag this quarter. Operating income was slightly over $1.5 billion, up $104 million or 7% versus last year. Our operating ratio came in at 58.2% or 70 basis points higher than last year.
Higher fuel prices accounted for 150 basis points of this increase. Also, the new GAAP pension accounting reclass resulted in a 210 basis points increase to the operating ratio in the quarter. Net income stood at $1.31 billion or $279 million higher than last year, with reported diluted earnings per share of $1.77 versus $1.36 in 2017, up 30%. Excluding the impact of non-recurring asset sales in 2018 and the impact on deferred income tax recovery from the enactment of a lower provincial income tax rate in 2017, our adjusted diluted EPS for the quarter was up 13% versus last year.
The impact of foreign currency was unfavorable by approximately $30 million on net income, or $0.04 EPS in the quarter. Turning to expenses on page 11, our operating expenses were up 10% versus last year at slightly over $2.1 billion, impacted by higher fuel prices, stronger volumes, and operating metrics that still remain below last year's levels. Expressed on a constant currency basis, this represented a 13% increase. At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were $648 million, 8% higher than last year. This was mostly the result of higher wages, driven by increased headcount and training costs for new hires, partly offset by higher capital credits and a U.S. payroll tax credit of roughly $15 million, resulting from a Supreme Court decision.
Purchased services and material expenses were $478 million, 13% higher than last year. This was mostly the result of higher outsourced services and repair and maintenance costs, and higher level of activity in trucking and transload services, partly driven by higher volumes. Fuel expense came in at $436 million, or 37% higher than last year. Higher fuel prices accounted for close to $100 million of this increase, while higher volumes were a $16 million unfavorable variance versus 2017. Fuel productivity was favorable by 1% in the quarter versus last year. Depreciation stood at $330 million, 3% higher than last year. This was mostly a function of net asset additions, partly offset by the favorable impact of some depreciation studies.
Equipment rents were up 14% versus last year, driven by lower car velocity that increased our car hire expenses and from additional locomotive leases. Finally, casualty and other costs were $108 million, which was 4% lower than last year. Now, moving to cash on page 12, we generated free cash flow of $1.296 billion through the end of June. This is $363 million lower than in 2017, and mostly the result of higher capital expenditures and cash taxes, partly offset by higher net income. Finally, let me turn to our 2018 financial outlook on page 13.
While we need to be mindful of current trade tensions, the demand environment remains solid in a number of different sectors, and we continue to see favorable economic conditions in North America, including positive consumer confidence. We are on track in our plan to hire crews, and on the 60 new locomotives to be delivered in 2018, we have received 10 in June, and we expect 10 more by the end of July. We are progressing on the construction of our aggressive infrastructure capacity investment plan, which is still projected to be completed in the fourth quarter of this year. We now assume that the Canadian dollar to U.S. dollar exchange rate will be in the range of $0.75-$0.80.
With this in mind, and following a solid second quarter performance, we are revising our 2018 financial outlook and now expect to deliver adjusted EPS in the range of CAD 5.30-CAD 5.45, versus the 2017 adjusted diluted EPS of CAD 4.99. This compares to our previous financial outlook, which was for EPS to be in the range of CAD 5.10-CAD 5.25. This revised guidance assumes volume growth in terms of RTMs in the range of 5%-7% for the full-year versus 2017, compared to our previous expected volume growth of 2%-4%. Overall pricing remains solid, backed by our 4% same-store price performance in Q2.
On the capital front, we are committed to investing in our business to support safety, service, and organic growth. We are further increasing our capital envelope for 2018 by $100 million to approximately $3.5 billion, versus our previous outlook of $3.4 billion, mainly due to the acquisition of additional lumber cars and weakening of the Canadian dollar. This record CapEx supports our commitment to restore our network fluidity and resiliency and accommodate long-term growth at low incremental costs. Furthermore, we continue to reward our shareholders with consistent dividend returns, and we are on track with our current share buyback program of approximately $2 billion, having repurchased over 13 million shares for an amount of $1.3 billion since last October.
In closing, we remain committed to our agenda and continue to manage the business to deliver sustainable value today and for the long term. On this note, back to you, JJ.
JJ Ruest (President and CEO)
Well, thank you, Ghis. Before I turn it over to the Q&A, I would like to add a few comments to wrap this up. Our railroaders are energized and are strongly behind the business plan. We are ahead of our turnaround plan, and we expect progressive improvement during the second half. We have a strong pipeline of portfolio of growth opportunities, volume is available. We're investing capacity CapEx in the business. We're investing critical talent, in critical talent to execute, and we are investing in technology to drive efficiency and improve cost leadership. In regard to our operation, we will have quite the network by the fourth quarter, entering 2019, very fit to serve our customers and to produce results in our strategic agenda of organic growth at industry-leading costs.
We're optimistic about our future, and that's why we revised the 2018 guidance upward. Operator, we can now turn it over to the Q&A.
Operator (participant)
Thank you. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Ken Hoexter from Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director)
Great. Good afternoon. And JJ, congratulations again. I'll throw it in, it's just been great working with you over the years, so congrats on the new title. But when you think about your long-term target, now, you're a 58 OR. Are we looking at, despite the pension adjustments, are you still aiming to get to the mid-50s? I just want to think about this, because before you launched the big CapEx program, your EPS outlook now is actually above that original target. So it seems like you've more than offset all of that impact. I just want to understand your thoughts on operations and costs as you think about the top line growth you've put in.
JJ Ruest (President and CEO)
Well, thank you, Ken, and thank you for the kind words. On the OR, rather than get targeting a specific numbers, what I'd like to put out in relation to where the industry will be in the next few years, based on exchange, based on price of fuel, based on economy, our objective is to be in the leading pack of operating ratio, if not the pack leader. So if the industry is able to do slightly better than what we've done here today, then we think we can probably achieve that as well. So in relation to our peer and where the economy and the cost of fuel is, we want to be in the leading pack and, you know, hopefully, the pack leader from time to time, like in this quarter.
Ken Hoexter (Managing Director)
Great. I think there was just one—no follow-up, right? Thank you.
JJ Ruest (President and CEO)
Thank you, Ken. Thank you.
Operator (participant)
Thank you. The next question is from Cherilyn Radbourne, from TD Securities. Please go ahead.
Cherilyn Radbourne (Managing Director of Equity Research)
Thanks very much. Good afternoon and congratulations, JJ.
JJ Ruest (President and CEO)
Thank you.
Cherilyn Radbourne (Managing Director of Equity Research)
I think I'm gonna pick up on, Ken's question there. As he observed, your revised guidance is a nickel higher on both ends versus the original guidance given at the beginning of the year. Ghislain, maybe you can help us sort of think through the, the moving parts there in terms of the volume backdrop, you know, a more positive pricing environment, and then, you know, clearly, you surprised yourselves in terms of the operational performance in Q2.
JJ Ruest (President and CEO)
Okay, so let me start, Cherilyn, and then just Ghislain can add a few things. So definitely, when we look at our network, we think our network will be able to execute more volume in the second half. And because that volume, we already had line of sight on that volume, we were able to put that volume back into the forecast because we think we can execute based on the onboarding and capacity that we're doing right now. That's number one. Number two, the pricing situation is slightly better than what we had forecast, what we had in mind back in April. And, you know, our 4% same-store price is indicative of that, and the pricing environment, I think, for all of us, is also getting slightly better. And then you have the moving part on exchange rate.
I don't know if you wanna add some comments?
Ghislain Houle (EVP 2 and CFO)
No, I would reiterate, JJ, first of all, the strong Q2 is obviously something that we are factoring in into our year-end outlook. And as you know, Cherilyn, every quarter, the team sits together with the marketing team, operating team, and we look at, you know, what we see forward, and we do that exercise, you know, every quarter. And this quarter, we did that exercise, and to JJ's point, we feel very comfortable that demand is out there. We definitely performed better in Q2 than what we expected coming in into the quarter.
We feel that this capacity coming in on the infrastructure investments, including the locomotives and the crews, will allow us to deliver the volume growth that on a full-year basis that we've outlaid between 5% and 7%. So now, we have some work to do. You know, this is not gonna be a walk in the park. You know, this is... But this, for now, this is our best foot forward, but we have, we have work to do to deliver, to deliver this. But I think as a team here, we're comfortable that that we can deliver.
Cherilyn Radbourne (Managing Director of Equity Research)
Thank you.
JJ Ruest (President and CEO)
That's right. We had, we had a fairly solid second quarter, maybe slightly better than what we thought, we were gonna get from the last time we had a call in April.
Cherilyn Radbourne (Managing Director of Equity Research)
Thank you. That's my one.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.
Allison Landry (Senior Equity Research Analyst)
Thanks. Good afternoon, and congratulations on the good quarter. Another question on pricing. I mean, obviously, very strong in the quarter, and looking back, it looks like the last time you put up something of this magnitude was in the fourth quarter of 2014. So, I'm just trying to get a sense of whether you think the pricing momentum has reached a peak. And I apologize if I missed this earlier, but if you talked at all about what the renewal rates were trending at. So really just looking to get some color on some of the factors that we need to consider in terms of what might push that 4% up or down in the second half.
JJ Ruest (President and CEO)
Okay, thank you, Allison. So the same-store price for the second quarter was 4.0%, and what we call the forward core pricing, which was based on the renewal of the last 90 days, stood at 4.4%. Regarding what we might expect in the midterm here, remember, our view is really based—our strategy is based on inflation-plus pricing, and also based on having a compounding effect over time. It's a marathon, it's not a sprint. So if inflation today is at 2%-something, and we have 4% same-store price, that's really what we, you know, that's really a very good range, sweet spot range for the rail industry.
I think that's, you know, we have to be mindful that that being a marathon, I think that's a range that for it to be sustainable, we need to be mindful of the overall marketplace. So I would describe 4% as a very, very, very solid same-store price, and I think take into account where rail inflation is today, net of the fuel, I think that's pretty good. I don't know if that-
Allison Landry (Senior Equity Research Analyst)
Okay, great. Thank you.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Fadi Chamoun, from BMO Capital Markets. Please go ahead.
Fadi Chamoun (Equity Research Analyst)
Yes, good afternoon, and congratulations, JJ, on the new role as well.
JJ Ruest (President and CEO)
Thank you, Fadi.
Fadi Chamoun (Equity Research Analyst)
So I just wanted to go back to the demand side. So your work that you've done on the network, I'm just trying to gauge if next year is as strong as this year, say demand is somewhere between five and high single digit, is the network going to be in shape, given the project that you've completed and what you plan on doing to handle that? And also, if you look at your yard and what you've been doing on the yard, are you gonna be in kinda good shape enough to handle that growth, or are there more that you have to do from a capacity point of view in order to keep that a growth momentum kinda going?
Related to that as well, your RTM guidance, 5%-7%, with 1% in the first half, really implies kinda double-digit in the second half. If you can give us kind of, you know, one or two key drivers of that volume as we go into Q3, Q4, and if this is kind of biased toward the fourth quarter, or how does it kind of play out between Q3 and Q4?
JJ Ruest (President and CEO)
Okay. So there's many aspects to your question, but this is a very good question. That's something where we've done the work lately, and we're still going through some of the detail. I will start, and then Mike can add up. If you look at page eight in our deck presentation today, the one with the map, it gives you a sense of what is it that we're working on capacity-wise, and also where the business is coming. So when you look at the second half of 2018 and what business we would like to onboard in 2019, our guidance for 2019, when we put it up in January, will be the trade-off between demand and capacity. So demand, I think, is gonna be... Is not really the issue.
I think we foresee being able to have generated demand or could obtain demand that will be, you know, keeping our network very busy in Western Canada. Just think in terms of Chicago going west, especially from Winnipeg to west, there's a corridor, a lot of demand, and the challenge is not so much the demand, the challenge is how much capacity can we create in time. So what we're building this year, this summer, is not only to meet the demand of November, December, it's really to build a railroad for the first five months of 2019. And then after that, Mike is going to be provided by the end of the summer of a capital plan for 2019 to build a railroad for the month of, you know, May beyond.
And that's where, depending on how much capacity we can execute next year with a capital budget that we will decide to go forward with, that will be where we will put the trade-off in terms of the RTM growth. So I don't know, Mike, if you want to add about what we're doing in terms of adding capacity just in broad term for 2019 in the West.
Mike Cory (EVP 1 and COO)
Yeah, you know, Fadi, we'll be looking at, I wouldn't say identical to what we're doing this year, but obviously Western Canada, there's still pockets of of resiliency we're gonna need with volume growth to attack next year. But we'll really be focused also on our corridor, to JJ's point, from Winnipeg to Chicago. Minnesota, Wisconsin, all through that area is gonna be the next piece of the bubble as it moves. But, other than doing a bit more there, our focus will still be to the breadbasket of the Prairies and to the West Coast ports. That's where the majority of the traffic is looking to be growing, and that's where we'll we'll look for the capital programs for next year.
JJ Ruest (President and CEO)
Yeah, and in terms of giving you colors as to what market is conducive to generate volume growth, you have the port business on the West Coast, Prince Rupert and Vancouver. You have Canadian coal mine, a number of them. Three of them actually are going to be opening up between late this year, early next year, the three of them exporting via the West Coast. You have the Canadian forest product, which is doing very well in pulp and in lumber. We're still not quite able to meet fully lumber business demands, just yet.
Sand in the Northern B.C., Northern Alberta, oil drilling activities, the petrochemicals around Edmonton, the grain business, is the carryover this year is gonna be one million tons more than last year, and the one that we talked about, which is crude-by-rail, which you start from Edmonton, and then you start going east and south.
Mike Cory (EVP 1 and COO)
Yeah. And they all traverse over those corridors we spoke about.
JJ Ruest (President and CEO)
Yeah. Yeah.
Fadi Chamoun (Equity Research Analyst)
Okay, and
JJ Ruest (President and CEO)
Yep.
Fadi Chamoun (Equity Research Analyst)
Yeah, and how about the yard capacity? Are you okay now in terms of yard and terminal capacity, or is there more to do?
Mike Cory (EVP 1 and COO)
Well, Fadi, this year, we're doing yard work in both Edmonton and Winnipeg, two major hubs. You know about our work we've done in Chicago. We're good in our facilities in Eastern Canada. If anything, we'll be looking at smaller projects anywhere those commodities come together, like Prince George, but we've done work in Thornton Yard. Our yards are in very good shape. They need fluidity, and to be able to get cars out of their yards onto a fluid network. So that's the big focus on top of what we're doing right now.
Fadi Chamoun (Equity Research Analyst)
Okay, great. Thank you.
JJ Ruest (President and CEO)
Thank you, Fadi.
Operator (participant)
Thank you. The next question is from Jason Seidl from Cowen and Company. Please go ahead.
Jason Seidl (Managing Director)
Thank you, operator. And, yeah, I want to echo my congratulations to JJ. JJ, your, your Canadian competitor outlined some potential exposure to the tariff situation and gave investors some color. We do get a lot of questions on that, and I was wondering if you guys could do the same.
JJ Ruest (President and CEO)
Yeah. Thank you, Jason. Regarding tariff, if we look at what we know, which is what's in place today, which is duty on lumber, duty on aluminum, and duty on steel, at this point, there's actually no material effect on our result. Our lumber business is actually up, and we are increasing the size of our lumber fleet because we're not able to keep up with the increase in export of lumber to United States. On the aluminum, what we move is base aluminum. We don't do the semi-finished product, so therefore, the 15% duty on big ingot and then the likes is basically going to be transferred to the marketplace in terms of price inflation. So what that means for CN, we also foresee moving more aluminum to the producer in Quebec.
And on the steel, it's kind of a mixed bag because we have customers, as you know, on both sides of the border. And as it turned out, our largest steel customers at CN are in the United States, and, you know, they are like—they're more likely to benefit, more so than what we might lose in Canadian side. So really, the question is, you know, what might happen more in the future in terms of trade with China and or NAFTA, and these things are unknown at this point. But so therefore, what I'm saying is, so far, the impact has not been material, and two of the three commodities where there's a duty, the volume is actually increasing on the cross-border activities.
Jason Seidl (Managing Director)
Okay. Well, that was my one. Thank you very much.
JJ Ruest (President and CEO)
Thank you, Jason.
Operator (participant)
Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead.
Brandon Oglenski (Director and Senior Equity Analyst)
Thanks for taking my question, and, congrats again, JJ.
JJ Ruest (President and CEO)
Thanks, Brandon.
Brandon Oglenski (Director and Senior Equity Analyst)
You know, I guess as you find yourself in, in the big chair now, you know, can you just give us the postmortem on what happened? Because, you know, I think at any other railroad, this would have just been normal seasonality, like you guys hit a pocket on volume. I think CN, you know, created more of a crisis around the service issue and, and got things, you know, under control pretty quickly. So I guess as you look out and maybe in the context of potential big trade barriers here, you know, do you still have the same CapEx outlook that you should be spending in the low 20%? I think to an answer to a question earlier, you know, you said you're, you're giving a capital budget to Mike to building the railroad for the next, you know, few quarters into 2019.
But should we be expecting to get, you know, mid-single-digit RTM growth? You have to spend at these levels, too?
JJ Ruest (President and CEO)
Yeah. So thanks for the question, Brandon. So really, our capital budget for next year is really tied to the volume target that we have, right? So the more business we move this year, the more we're gonna be consuming the capacity that we're actually laying down right now. And the more ambitious or the more business we think we will have next year, then the more CapEx we need to expand, you know, from the month of May to be able to meet the demand of 2019. So it's really maybe unlike, you know, some of our peer, we do have strong demand, and some of that demand was definitely not met in the fourth quarter, second quarter. Even in the second quarter, we didn't meet all the demand. So we're still in this, you know, partly catching up mode.
Then we're building resiliency, so we can have a decent winter, and then building capacity for the business I talked about earlier, that we would like to serve in 2019, and we have very good line of sight. And some of it, when you get down to the crude, which is the last piece of capital we deployed, because that business may not be there two years from now. We also ask the customers to commit with, you know, with what we call take-or-pay agreement. So the capital spend, in our view, in my view, will remain high because, or higher than others, because we do have volume opportunity that provide a good return on that capital. So that's really in that...
We're in that phase where we have good operating costs, and now for us to really exploit the franchise that we have, we need to deploy the capacity from Winnipeg West or Chicago West so that we don't disappoint our customers, but also that we don't disappoint our shareholders by not generating the EPS, which is available to us from the volume and price. So we're really kind of at a different point of, you know, the evolution of Precision Railroading, and we wanna be sure that we can exploit the line of sight that we have and the volume potential.
Brandon Oglenski (Director and Senior Equity Analyst)
Thank you.
JJ Ruest (President and CEO)
Thank you, Brandon.
Operator (participant)
Thank you. The next question is from Chris Wetherbee, from Citi. Please go ahead.
Chris Wetherbee (Senior Research Analyst)
Hey, thanks. Good afternoon. Congrats, JJ, again. Yeah, I guess I just maybe wanted to pick up on that a little bit and try to make sure I understand. So the RTM outlook in the back half is pretty robust, and pricing, I think, as you said, in renewals was running north of 4%. So we're getting good volume, good price. When you think about the incremental margins you can generate, I know there's still some service recovery going on, but can you think about sort of, you know, is the 11%-17% implied second half EPS growth indicative of the type of incremental margins we should be thinking about going forward for the business?
Or are you sort of still in that recovery phase, and then maybe when you look out to 2019, things can kind of resume to what you've been before? I know you're well on your way through Precision Railroading, but I just wanna get a sense of maybe how to think about that.
JJ Ruest (President and CEO)
Yeah. Ghislain, you wanna pick up that one?
Ghislain Houle (EVP 2 and CFO)
Yeah, sure. So, Chris, we are still in the recovery phase, obviously. As I said, we did better in Q2 than what we thought before the quarter. You know, Q3, we've got our work cut out for ourselves, because again, most of all the infrastructure capacity investments won't be online. Some of them will come. Again, this doesn't come in one day. These come on a week-by-week basis, but most of them will come in Q4. So now when we look at incremental margin, I'm happy to report that if you look at Q2, even without the infrastructure capacity investments, on face value of our financials, you can see that our incremental margins was 35% positive.
If you adjust for higher fuel prices and foreign exchange, then those incremental margins were 55% positive. So, you know, we're still in a recovery. Again, as I said, Q3, we have our work cut out, and Q4. I mean, I think it's a pretty aggressive guidance that we put in front of us, but I think again, I think we're confident. We're happy to report that our capacity infrastructure investments are on time. I mean, they're coming on time. We are keeping a close eye on it, and we feel that, you know, what we have as a guidance and the volume that's coming at us, we feel, you know, confident that we'll be able to deliver that.
You know, it's not gonna be a walk in the park, but we'll, we feel we can do it.
JJ Ruest (President and CEO)
That's right. It's about the construction we're doing right now. So, you know, Mike, in his comment, referred to, you know, all the work blocks that we have, which slowed down the network a bit, and the major rain issues that we had in the south of the border that slowed down our network, too. We had some track, you know, which was. We had water issues. But as we actually deploy this capital, and some of it is actually just straight maintenance capital, which means that we have to... We have some downtime on the line of six to eight hours on when the crew is working on.
As these things get done, after that, we get a very good network, and, we have the demand out there that, you know, that, we could exploit. So yeah.
Chris Wetherbee (Senior Research Analyst)
Okay. That's very helpful. Thank you very much.
JJ Ruest (President and CEO)
Thank you, Chris.
Ghislain Houle (EVP 2 and CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Walter Spracklin, from RBC Capital Markets. Please go ahead.
Walter Spracklin (Canadian Equity Research Analyst and Co-Head of Global Industrials Research)
Hey, good afternoon. Congrats, JJ. I guess you made it a pretty easy, easy decision for the Board here.
JJ Ruest (President and CEO)
Thank you, Walter.
Walter Spracklin (Canadian Equity Research Analyst and Co-Head of Global Industrials Research)
The two areas that you mentioned came in better. Ghislain, you indicated your operating ratio, obviously, the expenses came in a little, a lot, a lot better in the second quarter than you were anticipating. And JJ, you also mentioned the pricing came in better. Can you kind of drill down on what, on the pricing side? Was it certain segments that came in better? Were you just picking up more business that allowed mix to come in better? What was the factor there? And same way, Ghislain, on the OR, what areas did it surprise on the upside? I'm trying to get a sense of sustainability going forward if these items came in better than what you were forecasting.
JJ Ruest (President and CEO)
Ghislain will start on the OR, and I'll finish it up on the price.
Ghislain Houle (EVP 2 and CFO)
Yeah, Walter, the... on the OR, I guess, you know,
...As I said, as we've said before, our granular understanding of what capacity can do for us is still not there, and we have a team looking into this in detail, and we'll get better at this as we move forward. But frankly, what happened was that, you know, our cost and the fact that we now have crews and locomotives did much better for us than what we thought at the beginning of the quarter. So again, expenses at the margin came in better. Now, expenses, in our view, is still higher than it should. I mean, if you look at our operating metrics on a year-over-year basis, they are lagging, and therefore we knew that, and we told the market that this was gonna be the case.
And we told the market that we feel that they'll come more in a flattish range in Q3, and then should be better on a year-over-year basis in Q4. So because these operating metrics were still lagging, our expenses are still higher than what they should be, because we need this infrastructure capacity investments. Because again, remember, that if you don't have the infrastructure, then you have a choice. You either restrain growth or you accept growth, but at a higher cost. So now, these costs were lower than what we expected, and this is partially why the OR came in at what it came in. Mike, you wanna jump in?
Mike Cory (EVP 1 and COO)
Yeah, Walter, one big benefit we had coming out of Q1, we had a backlog of coal and grain. Both those commodities moved to the West Coast. They don't necessarily... Now, grain does to a degree, but they're not stuck in that tough area of the Prairies where we still have no resiliency. So at that time of the year, going to Prince Rupert, going to Vancouver, we're very fluid. So we took advantage of that. We caught up, and that really reduces your operating costs, as Ghislain's point, and that drove up our operating metrics also. As we, as we saw some of that, you know, grain softens at this time of year, we're back in that main corridor where it's pretty tough slugging until we get the capacity put in.
JJ Ruest (President and CEO)
Yeah, main corridor being east of Edmonton.
Mike Cory (EVP 1 and COO)
Yeah, east of Edmonton, Walter.
JJ Ruest (President and CEO)
Yeah. And just on price, so we, we have been doing and are doing some what we'd call repricing, and the, the level of which we've been able to, to do in the second quarter was maybe more what we thought. We were doing what we call upscaling, because capacity being tight, at this point, capacity has a value, and that value is recognized by those who, who want to have more of it. And in some segment, I'm not gonna get into the detail, but in some sub-segment, we're also doing what I would call weekly capacity management-
Mike Cory (EVP 1 and COO)
Yeah
JJ Ruest (President and CEO)
... where we manage the mix, up, and we upscale the mix from week to week to week. So these different things, these different singles, these different, you know, inches that we grab around us, eventually add up to a bigger spread between rail inflation and rail pricing.
Walter Spracklin (Canadian Equity Research Analyst and Co-Head of Global Industrials Research)
Okay, thank you very much.
JJ Ruest (President and CEO)
Thank you, Walter.
Operator (participant)
Thank you. The next question is from Scott Group from Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks, and congrats, JJ.
JJ Ruest (President and CEO)
Thank you, Scott.
Scott Group (Managing Director and Senior Analyst)
So I understand some of the weather issues at the beginning of the quarter. When do you think we'll start to see the RTMs get to that high single-digit, low double-digit range that we need them to be to kind of hit these numbers? And then separately, on the pricing renewals, I think you said 4.4% this quarter. I think last quarter was 4.8%. I guess I would have thought pricing momentum would still be building. Is that just a timing mix issue, different sorts of customers? Maybe just any thoughts there.
JJ Ruest (President and CEO)
Yeah. On pricing, when you look at the overall market environment, looking at all the railroads and identical company, I think, although there's, there's a view, right, that, you know, price momentum is building up, I think there may be a lag in perception. I think pricing momentum has been building up from longer and earlier than maybe observers think. And therefore, you know, in my view, at least in the rail space, when you look at bulk commodities and carloads and the likes and long-term contract, the, you know, the, the, the running rate that we have right now is a very solid running rate. And, you know, the proof is in the pudding of the same-store price. You know, if it doesn't show in the same-store price, eventually kind of, where, where is it?
So I think, taking the view of long-term sustainable and creating compounding effect over time, we, we feel, you know, this 4.8% becoming a 4.4%, I think is really, really reflect the reality of the marketplace, at least in, maybe in the rail space. Regarding capacity, the issue, as mentioned, Mike earlier, Mike mentioned earlier, is when you were going west of Edmonton, that network didn't need as much work, capital work, than the one east of Edmonton. And in the second quarter, with having backlog of clean coal at the mine that need to go west to the port, and having backlog of grain Alberta, they need to go west of, to the port, allowed us to really railroad in a place in heavy volume, in a place where we had capacity.
Now that some of these backlog are caught up, for example, we are caught up on moving clean, clean coal from Canadian mine to the coast, then you have to go east, and the east network is not as fluid, because the east network has these major work blocks and construction to add sidings and double track. And as soon as you got to the, you know, across the border, we had this flooding for three to four weeks, where we had water in some places above the track. So lots of speed restriction, you know, on a steady basis, not for half a day, but for days and weeks. And, it, you know... So the flooding issue is resolved, but the construction is ongoing. I know our RTM right now for the last three weeks are weak, and that's the reason why they are.
I don't know if you want to maybe a few more comments to that.
Mike Cory (EVP 1 and COO)
Yeah, Scott, we're, you know, we're planning the latter half-
JJ Ruest (President and CEO)
Yeah
Mike Cory (EVP 1 and COO)
... of Q3, and then at the same time, we'll see an uptick in grain, hopefully some of the coal, because they're doing some maintenance at some of the mines, also taking this time right now. And then we'll start to see that capacity in that eastern, east of Edmonton corridor start to take hold. And so not only will we be able to take the volume, you'll see the metrics go up. You'll see, you'll see the trains move faster, you'll, you'll see the costs come down. So that'll all start-
Scott Group (Managing Director and Senior Analyst)
But-
Mike Cory (EVP 1 and COO)
... way to Q4.
Scott Group (Managing Director and Senior Analyst)
So, back half third quarter is when we should see the RTMs get to that double-digit run rate?
JJ Ruest (President and CEO)
... Yeah, so eventually the RTM will get very strong. Pricing is, we talked about it, and the costs will improve as we're able to, you know, get the velocity back up in our network. Absolutely. And that will be helpful as well, you know, kind of you have these three, three pillar for the OR and the EPS.
Scott Group (Managing Director and Senior Analyst)
Okay. Thank you, guys.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Turan Quettawala from Scotiabank. Please go ahead.
Turan Quettawala (Director of Equity Research)
Yes, good evening. Thank you for taking my question, and congratulations, JJ, on the promotion there. I guess I wanted to just touch upon OR a little bit as well. Clearly, obviously, things are going, you know, better than expected here with regard to your operations. And I understand that there are obviously some issues still that, you know, you'll work through as the capacity builds up here. But I'm wondering if you can talk a little bit about 2019. I know, Ghislain, you've talked about, you know, an OR with a 5% in it next year. You know, can you talk about your level of confidence around that number, maybe, you know, just going into next year, especially as the capacity ramps up? I know fuel can mess it up a little bit, but just assuming sort of flattish fuel here.
Ghislain Houle (EVP 2 and CFO)
Yes. I can't have Ghislain guide for OR in 2019, but he can talk. We're not going to, Turan. Well, exactly. We're not gonna guide for 2019. We're gonna do that as we usually do it in January. But I can tell you that, and reiterating on what JJ has said a few minutes ago, we are bullish on demand for 2019. I think the demand that's out there is real. This demand and, you know, this pipeline of opportunities that we highlighted at the Investor Day between $1.5 billion-$2.2 billion is real, it's there. We've talked to you guys about it on a regular basis.
I think that to JJ's point, I think we see capital to be in line with that volume, to be in line with that bullishness. So I think we see CapEx to remain, you know, similar next year to this year, because, again, that volume is there. And frankly, as we've mentioned before, if you don't do that, then your OR will naturally go up because you will just be slower as a network, and therefore, you will see things that we saw in Q1, and some of it in Q2, where our operating metrics are still lagging on a year-over-year basis. Or you've got to constrain growth, which is what JJ was mentioning. So I think that, you know, we're catching up, definitely. We still are catching up on employee productivity, on...
If you look at our employee productivity this quarter, we were down. If you look at our million GTM per employee, we were -5%, but, again, sequentially better than what we was in Q1, because we still have a lot of people that are being trained. We feel that we will recalibrate our workforce sometime in 2019, and we feel that with this capacity, that our OR will come in line in a range of what you guys have been used to see CN deliver.
Turan Quettawala (Director of Equity Research)
That's helpful. Thank you very much. Congrats on a great quarter there.
JJ Ruest (President and CEO)
Thank you, Turan.
Operator (participant)
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
David Vernon (Managing Director and Senior Analyst)
Good afternoon, thanks for taking the question. So, Ghislain, you mentioned the $3.5 billion should be roughly the rate that you guys expect to be spending again in 2019. And that's gonna keep your sort of cash conversion levels down at the lower end of the range relative to the peer group. Obviously, the operating ratio is a little bit higher. But, I mean, isn't there a third option here? Can't you push price a little bit higher to make sure that you're not necessarily over-investing in the network to take on this volume growth?
Ghislain Houle (EVP 2 and CFO)
We're, you know, David, we're pushing on every lever. So, we're pushing on price, where we want to accommodate growth. We wanna make sure that we provide good service for our customers. We are happy that we are, actually, growing organically. But, but yeah, and JJ mentioned it, at the end of the day, the reason why we have solid pricing, or partly the reason why we have solid pricing, is because our capacity is a precious, is a precious commodity, and we're getting as much price as we can. And, and, and of course, we're looking at capital to make sure that we can accommodate the growth at low incremental costs and continuing to grow this business. And, and the beauty with us is we are growing organically.
We're growing more than our peers, and we're pretty pleased and bullish about it. But we're gonna spend in lockstep with the growth. Yeah, it is. The capital is to replenish the capacity that's been consumed. The more volume we move - Yeah - the more we need to replenish the capacity with capital. And
David Vernon (Managing Director and Senior Analyst)
So should we-
Ghislain Houle (EVP 2 and CFO)
Go ahead.
David Vernon (Managing Director and Senior Analyst)
Oh, sorry to interrupt. So, so should we think that that number then is also gonna be a little bit cyclical, then in the event that there is gonna be a little bit of a downturn, there will be some room to, to trim that budget as well? I would imagine that, that a lot of that resource is also kinda staff and people on, on, on the payroll, that's in the capital line. Is that also-
Ghislain Houle (EVP 2 and CFO)
David, absolutely. We, you know, our plans, as you know, our business is dynamic. Our business changes. Yeah. You know, cycles are changing. I mean, if anything, there's more volatility in the environment than there was 10 years ago. So obviously, we do react. We've demonstrated, in 2016 that we can react quickly. Obviously, it's easier to react to a downturn than it is to an upturn. We've learned our lesson, in 2017. And, but yeah, absolutely. I mean, if there's things that happen, and therefore, to JJ's point or Mike's point, that volumes, we see volumes being softening, then we'll adjust our capital, in line with that. Absolutely. Immediately.
JJ Ruest (President and CEO)
... Yeah, so we have a base plan based on our view of what the economy and our customers will produce in 2019. But at the same time, we also have fallback plan based on, you know, what the economy might be slowing down or things on the trade side-
David Vernon (Managing Director and Senior Analyst)
Yeah.
JJ Ruest (President and CEO)
starting to have material impact. So, this is not frozen in cement.
David Vernon (Managing Director and Senior Analyst)
Yeah.
JJ Ruest (President and CEO)
Really, even though we have put a base plan for 2019, which we're about to put together right now, we are, you know, we revise it once a quarter, and we will adjust accordingly, either up or down. So definitely, CapEx is related to volume. If volume slow down, then we don't need as much CapEx to replenish the capacity in our next Western network.
David Vernon (Managing Director and Senior Analyst)
All right. Thanks for the time, guys.
JJ Ruest (President and CEO)
Thank you.
Ghislain Houle (EVP 2 and CFO)
Thank you, David.
Operator (participant)
Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.
Ravi Shanker (Managing Director)
Thanks, good evening. JJ, can I just ask you to elaborate on how you see crude-by-rail as an opportunity over the next 12 to 18 months? Your Canadian peers spoke of potentially doubling their run rate over the next 12 months. Is that something that you guys see as well? And also, kind of compared to how you were looking at the space a couple of quarters ago, how are you thinking about resource allocation, the kind of contracts you're getting, the kind of pricing you're getting in that space right now?
JJ Ruest (President and CEO)
Yeah. So maybe first comment, as I refer to what performance and crude by rail in the second quarter, where our revenue was up, but the volume was fairly flat. So the increase in revenue was coming from price, and that was job one. Job one was to reprice crude by rail in a way that you would like to reinvest fresh, new capital that requires a return. That was job one.
Job two is, if we are able to generate enough capacity on our network, we're talking Edmonton, going east and going south, and that you generate a capacity such that we don't shortchange the grain industry, the potash industry, the lumber industry, I mean, all the other industry use the network, then we will deploy this incremental capacity to move more crude to United States, because, because some of these customers, even though they may not be with us long term, are waiting now to pay for a price that generates a return on fresh capital.
So rather than giving you how much crude-by-rail we will move in the second half of 2019, my answer is really, we will look at a book of business that will be long-term and make sure we serve that demand and be a good supplier to these long-term segment and customers, and we will move as much crude-by-rail as we can based on how much capacity is left to serve those market.
Ravi Shanker (Managing Director)
Got it. Understood, and, congratulations on the, on the new title.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Benoit Poirier, from Desjardins Capital Markets. Please go ahead.
Benoit Poirier (VP and Industrial Products Analyst)
Yeah, thank you very much, and congrats, JJ, for your new role. Well deserved.
JJ Ruest (President and CEO)
Thank you.
Benoit Poirier (VP and Industrial Products Analyst)
My question is on a follow-up on the crude by rail. Could you talk a little bit about the upcoming grain crop, your expectation, and whether you are waiting for more color about the grain crop before assessing kind of the crude by rail capacity for 2019? Thank you.
JJ Ruest (President and CEO)
The grain crop at this point looks, I mean, it's still early. You know, we can have a drought, we can have excessive rain, and we can have an early frost. Many things can happen, but at this point, it looks good, and it looks to be in the last three years average or maybe slightly better. Also, remember, the carryover from last year, we already are on August first, is one million ton more than what we had last year. So last year, we had an 11 million ton carryover. This year, it's 12. So I would think that the grain crop coming at us this fall is gonna be pretty good. And based on our challenge of last winter and last fall with the grain industries, you know, we want to be sure that we are delivering, you know, services for them.
Benoit Poirier (VP and Industrial Products Analyst)
Yeah.
JJ Ruest (President and CEO)
So as it relates to crude by rail, it's really not about crude by rail demand, it's about, you know, what I just said here, how much capacity can we build this summer?
Benoit Poirier (VP and Industrial Products Analyst)
Mm-hmm.
JJ Ruest (President and CEO)
You know, and Mike can add to that, but it's...
Benoit Poirier (VP and Industrial Products Analyst)
I agree.
JJ Ruest (President and CEO)
We're actually not so concerned about the overall demand on network for 2019. That's why we're talking about the capital program that will be on the high side, and we don't want to take capacity from those that are going to be growing grain for the next 50 years in the Prairies and put that in the crude business if we can't serve the grain this fall. So that's-it's a trade-off that we talked about, and also that's why I talked about how we price crude. Crude pricing that supports new, fresh capital dollar. I don't know if, Mike, you want to add about the grain and how we're getting ready for the next crop?
Mike Cory (EVP 1 and COO)
Yeah, no, I mean, our mission, Benoit, is to deliver every kernel or seed or whatever it is that's out there. That's a big item for CN.
JJ Ruest (President and CEO)
Yeah.
Mike Cory (EVP 1 and COO)
But I'll go back. JJ, I think, spoke about it earlier about any opportunity for capacity that we see, and we played this in, in Q2, and we saw by week by week, capacity open up, we jumped on it, and we alerted our, in some cases, crude customers, other customers, that we could see it coming, and then we acted on it. We'll continue to do that. So Ghislain had spoken that right now we're doing so much capacity, we're not exactly sure on a granular level, what the exact outcome is gonna be. We feel confident it's enough, but if we see capacity show up, we will definitely go after whatever cargo load is out there, and if it's crude, it's crude.
JJ Ruest (President and CEO)
Yeah, that's a good point. I forgot to mention that, but in second quarter, you know, within the executive team and, you know, the senior guy on the commercial side, we were managing capacity week by week.
Benoit Poirier (VP and Industrial Products Analyst)
Yeah.
JJ Ruest (President and CEO)
So if we had a window of two weeks of some capacity going west or going east, where the sales force out there basically-
... securing orders to use up the available window capacity. And that was one of the way we've actually produced pretty well, pretty good volume in EPS the second quarter, is using what we have to be more nimble. As an industry, we need to be more nimble to use capacity when capacity window open up.
Mike Cory (EVP 1 and COO)
And we've got a pretty strong supply chain group that aligns between both operations-
JJ Ruest (President and CEO)
Yeah
Mike Cory (EVP 1 and COO)
and sales and marketing, that feeds into us, every piece of intel we can use to get, to fill that capacity.
JJ Ruest (President and CEO)
Very, very tight in working between the network group and the marketing group.
Benoit Poirier (VP and Industrial Products Analyst)
Okay. That's great color, gentlemen. Thank you very much for the time.
JJ Ruest (President and CEO)
Thank you, Benoit.
Operator (participant)
Thank you. The next question is from Brian Ossenbeck from JPMorgan. Please go ahead.
Brian Ossenbeck (Managing Director and Senior Analyst of Transportation)
Yeah, thanks. Good evening, and congrats, JJ, on the promotion.
JJ Ruest (President and CEO)
Hey, Brian.
Brian Ossenbeck (Managing Director and Senior Analyst of Transportation)
Just a quick one on the five major projects. You mentioned they were all completed on time. The CapEx went up a bit on FX, but how's the overall cost profile been versus the budget? And, do you feel like you've got the construction capacity, labor workforce to continue expanding at the current pace or the pace that you expect for the next couple of years?
Mike Cory (EVP 1 and COO)
Hi, Brian, it's Mike. Yeah, the five projects completed on budget. We don't see anything presently standing right in our way to not complete the other projects we have. And, you know, things can happen between now and the end of project completion. But from a permitting standpoint, from a manpower standpoint, we've got the resources. It's been a really big project for us just to get the materials and logisticate that throughout all the other commodities that we move. But the engineering team, along with our operations team, have worked, you know, hand in hand with Ghislain and the finance and supply procurement people. Very comfortable that we'll come in on budget. He's staring at me right now. Very comfortable we'll come in on budget, on time, and with the projects that we said we would do.
We track them extremely close from me on down. It's a weekly exercise with everybody. Hope that answers your question.
Brian Ossenbeck (Managing Director and Senior Analyst of Transportation)
Yeah, it does. Thanks for the details.
Mike Cory (EVP 1 and COO)
Thank you, Brian.
JJ Ruest (President and CEO)
Thank you, Brian.
Operator (participant)
Thank you. The next question is from Seldon Clarke, from Deutsche Bank. Please go ahead.
Seldon Clarke (Research Analyst)
Hey, thanks for squeezing in. I just wanna get to, back to CapEx for a minute. Can you give us an idea of what percentage of CapEx is designated for growth versus maintenance? And just I'd imagine 2018 had some catch-up maintenance projects. So I'm kind of just curious as to why CapEx shouldn't come down next year or kind of longer term as those maintenance projects kind of go away.
Ghislain Houle (EVP 2 and CFO)
Okay, Seldon, this is Ghislain. I can give you a bit of a rundown of our $2.5 billion inflow. If you look, we have about $1 billion on capacity, and if I break that down, you have about $500 million related to infrastructure capacity investments. $400 million, that's in Western Canada, that Mike and JJ have alluded to. And there's another $100 million of infrastructure investments that we need in our intermodal terminals. And then, so that's $500 million, and then we have another $500 million for equipment, which is basically locomotive, cars, and intermodal equipment. And in there is some of the lumber cars that I referred to in my remarks.
On basic infrastructure maintenance, that's $1.6 billion, and then growth and other maintenance is $500 million, and then PTC, Positive Train Control, is $400 million. So that's the rundown of our $3.5 billion CapEx envelope. As we've said-
Seldon Clarke (Research Analyst)
I guess-
Ghislain Houle (EVP 2 and CFO)
Yeah, go ahead.
Seldon Clarke (Research Analyst)
I guess my question was just more in terms of, like, how much of that $1.6 billion in some of those infrastructure and maintenance was really catch up, because you're obviously caught a little off guard towards the end of last year. So I'm just trying to,
Ghislain Houle (EVP 2 and CFO)
There's no maintenance.
Seldon Clarke (Research Analyst)
-quantify that.
Ghislain Houle (EVP 2 and CFO)
Yeah, there's no maintenance that's catch up. The maintenance we've been, we've been ongoing, providing maintenance. Remember in 2016, when the volumes, our volumes were down 5%, some of you guys wanted us to reduce basic maintenance, and we didn't do it, and it was, it was a good, decision. Because for my team, it was easier to get the work blocks, and when you look at the installation, unit costs of putting ties and rail, it was actually down 15%-20%. So we are not catching up on basic maintenance. We will not catch up on basic maintenance. We got caught with a lot of volume coming at us in 2017, and we're catching up on capacity. Capacity, meaning infrastructure, sidings, double track, mostly in Western Canada, and on crews and on locomotives.
Mike Cory (EVP 1 and COO)
On our core main line. These are 100-year investments.
Ghislain Houle (EVP 2 and CFO)
Yeah. Yeah, maintenance is safety, velocity, operating ratio.
Mike Cory (EVP 1 and COO)
It's sacred.
Ghislain Houle (EVP 2 and CFO)
Direct capacity addition is siding, double track.
Mike Cory (EVP 1 and COO)
Yeah
Ghislain Houle (EVP 2 and CFO)
bigger intermodal yard, reach stacker.
Mike Cory (EVP 1 and COO)
Now.
JJ Ruest (President and CEO)
Okay, thank you.
Ghislain Houle (EVP 2 and CFO)
Thank you.
Seldon Clarke (Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah, good afternoon, and, JJ, congratulations to you. I was just a little surprised that the Board took so long to figure it out, but, I guess in all seriousness, congratulations. Well deserved.
JJ Ruest (President and CEO)
Thank you, Tom.
Tom Wadewitz (Senior Equity Research Analyst)
Let's see. The question I had, I don't know if this is for you, JJ or Mike, but looking at one of your slides, it shows the western corridor. Do you think when you look at Edmonton to Winnipeg, that ultimately that needs to be fully double track? And when you think about it, just wonder if you could go through some thoughts on, you know, what's the mileage between those two and kind of, you know, what percent is double track, you know, how do we think about that longer term? Is that a five or, you know, 10-year project, assuming that ultimately needs to be double-tracked?
JJ Ruest (President and CEO)
I think we'll give that to Mike. He's my top guy, and he was born in Winnipeg, so he knows this track very well.
Mike Cory (EVP 1 and COO)
Tom, Tom, absolutely, before I pass this earth, I'm hoping to see the majority of a double track. That is, you know, from, from where our commodities go through, so it's our big bridge. It's the toughest of weather conditions of any Class I railway. That's, that will be, every year we'll go back, and we learn we will not stop even when volumes go down. These are, again, 100-year investments we're making through there. I don't know the second question you had. I don't know if that answers all your questions.
Tom Wadewitz (Senior Equity Research Analyst)
How many miles between?
Mike Cory (EVP 1 and COO)
There's 800 mi and change, and probably, off the top of my head, prior to these, these, five pieces of double track we're doing in that quarter this year, there's probably less than 100 mi of double track. 50 of it is from my hometown in Winnipeg to a place called Portage la Prairie, and then for some reason, in the 1970s, we stopped. But our, we have a, a pretty solid plan, a strategic plan, regarding, not regardless of the volume, but any volume that comes on, that over the next, you know, few months or the next few years, we will always go back in and do another piece of double track, if not more. Again, this year, five. Next year, we're-- if volumes continue, we're looking into probably another four to five stretches.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. I mean, is that like a five-year plan or a 10-year plan, or just you gotta see what volumes do?
Mike Cory (EVP 1 and COO)
You know, it depends on volumes, obviously, but it's a forever plan.
JJ Ruest (President and CEO)
Yeah.
Mike Cory (EVP 1 and COO)
This is, this is really, in our breadbasket.
JJ Ruest (President and CEO)
It's a long-term plan.
Mike Cory (EVP 1 and COO)
Yeah.
JJ Ruest (President and CEO)
The volume pace of the CapEx depend on how CapEx come in.
Mike Cory (EVP 1 and COO)
Yeah.
JJ Ruest (President and CEO)
It's a long-term plan, but the way we pay for the adding capacity-
Mike Cory (EVP 1 and COO)
Yeah
JJ Ruest (President and CEO)
is how much volume we have from year-to-year to, to pay for the capital deployment.
Mike Cory (EVP 1 and COO)
Yeah.
JJ Ruest (President and CEO)
There's no specific timeline. It's more volume related than anything else.
Mike Cory (EVP 1 and COO)
Yeah.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah. Okay. Thank you.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. This concludes today's question and answer session. I would like to turn the link back over to Mr. Ruest.
JJ Ruest (President and CEO)
Well, thank you for joining us today. We're really, really proud of it, of the team results and how we put the quarter together. It was a challenging winter. It was a challenging also from a, for, for our customers, the people who do business with us. We did it. We know we had a very strong month of May and the month of June. July, we're, you know, we're, we have this major construction here, east of Edmonton, but as we're making more inroads in with these work blocks and construction, the network will pick up velocity, and we'll be able to meet more demand. So demand is strong. Pricing looks good. The morale is very strong. We really work as one.
The team is energized, and with that, for that reason, we've increased our guidance because we're optimistic about the future here at CN. We're also, regardless of the discussion back and forth on trade, no material impact yet on our volume, and we think everything being equal, things coming together the way they should, 2019 should be a very solid year as well. So thank you. Operator, this will conclude our call.