Canadian National Railway Co (CNI) 2010 Q4 法說會逐字稿

This is the forward-looking disclosure. CN's fourth-quarter 2010 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's fourth-quarter 2010 financial results press release and analyst presentation documents that can be found on CN's website.

As such, actual results may differ materially. Reconciliations for any non-GAAP measures are also posted on CN's webcast at www.CN.ca. Please stand by; your call will begin shortly.

Welcome to the CN fourth-quarter 2010 financial results conference call. I would now like to turn the meeting over to Mr. Robert Noorigian, Vice President Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Thank you for joining us for CN's fourth-quarter and total year 2010 results. I'd like to remind you again about the statements we've already read about forward-looking statements.

With me today is Claude Mongeau, the President and Chief Executive Officer; Luc Jobin, Executive Vice President, Chief Financial Officer; Keith Creel, Executive Vice President, Chief Operating Officer; J.J. Ruest, Executive Vice President, Chief Marketing Officer.

After our presentation today we'll take questions from those of you who are listening on the call. Could you please identify yourself when you're asking the questions? And in order to be fair -- and also I realize that we're doing this in the middle of the day and you have other calls that you're going to have afterwards. We're going to limit this to one hour and could you limit your questions to one. With that brief introduction I'd like to introduce Mr. Claude Mongeau, CN's President and Chief Executive Officer. Claude?

Thank you, Bob, and thank you all for taking time to listen to our call. This is -- we have the full CN leadership team here today to give you a good update on our results and they are good results. Our fourth quarter came in with solid performance across the board both from an operational service and unfolding of our strategic agenda and the results are showing that.

We're capping a very good 2010 year and basically I'm very, very pleased with the fourth-quarter performance. Our revenues were up basically 15% if you adjust for currency on strong double-digit volume growth. J.J. will give you the details, but we've had growth across all of our commodity group. And it's actually quite encouraging; the level of performance in terms of volumes during the fourth quarter are not only good for results but they bode well for volumes into 2011.

Our efficiency, our ability to grow at low incremental cost allowed us to finish the year with an operating ratio of 63.4%, that's almost 2 percentage points less than last year. And so we're continuing to show that we are able to grow the top line and accommodate it with very good margins and bringing it to the bottom line.

Bottom line is CAD1.08 in terms of EPS. If I adjust for last year's nonrecurring items, the EPS growth is a full 20% on a year-over-year basis adjusted. Luc will give you some detail, but I think it just continues to confirm the thesis and the ability we've had during the year to transform top-line growth into solid profitability, both earnings and free cash flow.

Free cash flow for the year CAD1.1 billion, very strong performance. And all of this, including our prospects into 2011, give us the confidence. Our Board this morning -- or yesterday actually -- agreed to a 20% dividend increase, clearly an indication of our confidence in the future of this Company and a recovering economy.

Similarly, in terms of rewarding our shareholders, we have a solid balance sheet. Luc will give you the details, but we are launching another share buyback program of 16.5 million shares. So all in all very solid fourth quarter and capping off a great year.

Let me just spend a moment, before I turn it over to my leadership team for more details, to take a bit of a time on the year overall and how the transition has taken place. I am very pleased with the chemistry of our leadership team, how we're coming together and how our basic unfolding agenda is being carried out.

We discussed this with you earlier in the year at an analyst meeting. What we're trying to achieve is clear, the vision is well articulated and we are delivering on it. And I think the proof points are coming through across a number of areas. In short, we have the benefits in 2010 and that's the destiny that was helping in terms of transition of having an economy that came in stronger than anybody expected last fall.

But this story is a lot more in taking full advantage of this economic recovery -- it's about our agenda. Operational and service excellence are coming through. In the year we had the strongest carload growth of any railroad in the industry and, if you look at the metrics that Keith will describe in a minute, we have maintained or improved all of our core operating metrics.

We have also launched a bold agenda in terms of customer engagement, innovation and supply-chain collaboration and it's coming through not just in intermodal where we've had a number of agreements during the year, but also in merchandise and more and more in the bulk sector as well.

So the agenda is helping us gain market share, it's helping us improve service and it bodes well for the future in terms of delivery solid value for our customers and our shareholders both. With that I will turn over to Keith to take you through the operating highlights.

Okay, thank you, Claude. Let me start by saying I'm extremely proud of the fourth-quarter results that this operating team was able to produce across the board. It certainly is a positive reflection of pure intensity execution and focus on doing a day-to-day, all departments, not just transportation, mechanical engineering, it's a team sport, team event and team results here.

Let's take a quick look back at 2009. We showed what this team can do and what this operating model does, managing expenses down against our reduced business demand. But believe me, in 2010 it was quite a bit better ride, much more fun to manage growth while we executed on the supply-chain innovation and the service excellence vision that Claude laid out for us over 12 months ago.

So throughout the year in 2010 our team, our operating team enjoyed partnering with J.J. and his team and our customers and our supply-chain partners to grow the top line for all the parties involved pursuing these initiatives. So with that said, let me take a few minutes to review the quarter from an operational perspective and we'll talk about some of the initiatives that helped us deliver on those results.

What you're looking at -- most a few are familiar with the metrics that you see on the slide there; they serve as good indicators of our key service and expense levers of this Company. A quick reminder, mid-year 2010 we changed the way we measure terminal dwell and train speed, which you see on the right side of the chart, to align with the AAR reported measurements, which is why we only have two years of comparative data.

As you can also see, all the 2010 performance was flat to quite positive against increased volumes; it's quite significant as far as I'm concerned. We faced 11% GTM growth, 10% carload growth and either maintained our operating metrics or improved on most counts, in spite of even weather challenges, specifically in the fourth quarter.

We got back to it being an outdoor sport, winter came a little bit early in the West, we experienced some challenges in November and then that continued in December with blizzards and went across to include Eastern Quebec, the Maritimes and then quite a bit of snow in the Winnipeg Gateway as well as cold weather which compounded the challenges in the operation.

On the GTM's per train mile for the quarter or train load, that's a direct reflection of our road crew and locomotive productivity. You see a 5% improvement, which basically reflects our continued strategy to deploy our distributed power fleet, our [rifle shot] investments and our sightings in our terminal bypass strategically in our ongoing focus to match our train service plan which we provide day to day against our forecasted traffic.

Cars per yard switching hour, again that's a measurement of our yard crew productivity and our yard fluidity. Our breakeven performance here reflects the great job we did in 2009 taking terminal expense out, but most importantly keeping it out during 2010, as those volumes grew we stayed focused more on our service side.

You see a good story on the terminal dwell side, which reflects both service and asset utilization, again continued focus on matching the service plan to the shifting traffic patterns. In the lower right flat performance on GTM per available horsepower.

This was more of a conscious decision to go a bit long with the locomotive fleet in the fourth quarter to meet high demand levels, especially grain, which provided some market opportunity there late in the year and to assist keeping the network fluid in the face of those winter conditions that we were faced with November and December that I mentioned.

And it worked, the strategy worked well for us. As you see in the car velocity metrics, we again reflect positively improvement there in both service and asset utilization improvements.

And finally, on train velocity, we were able to maintain it in the face of increased volumes as well as those winter challenges I talked about. That speaks to the power of the operating model and the fluidity of the network in spite of weather, in spite of increased business.

All right, let's talk about distributed power a little bit. We've spoken quite a bit about it over the past, specifically BP's ability to help us in our long train model operating system maintain those train lengths in the dead of winter. Typically with winter, as we've talked before and discussed before, you often have to reduce train length due to air leakage when you get into some extreme cold temperatures, which we face here in Canada quite a bit.

I'm happy to say that in the face of real winter, which I mentioned, we're able to not only maintain our train length but increase our train length greater than ever before. Everything else being equal, before we used DP power this cold weather affect train load would drop off a bit in the fourth quarter and the first quarter. This year, as you can see, the results do in fact in part -- large part to the fact this DP power is helping; we're overcoming the air issue, our trainload is actually up 2% Q4 versus Q3 comparison.

The other real pop with this is what we avoid in congestions in our yards and gumming up the networks, so to speak, in driving additional operating costs in the yards. When you have to reduce these trains you hold the cars back, customers' freight gets delayed and you see adverse impacts in your car velocity and your yard expense. So that's working well for us.

And even now in the face of some real, real serious winter operating challenges we've been able to do some great things with DP power. Last week, just anecdotally I'll share this with you; we faced some temperatures of about 45 below zero and before that around 30 below zero. In the face of 30 below zero weather we ran with DP power deployed on a train an 11,700 foot train across the NOD.

Those 1,200 miles and temperatures like that, before you would have told me we had to do that without DP power I would have said it's and possibly because frankly it is. But with the way the DP power promulgates the air to the train and keeps the air pumped up, we're able to do some great things that will help us long-term in our operating strategy maintaining our metrics.

Okay, and finally, talking about DP power, right now we ended 2010 with 415 DP equipped locomotives. If we continue that strategy by the end of this year we'll be about 450 which is about 42% of our fleet with a view to go to about 500 locomotives when it's all said and done based on our current business mix today.

On the fuel efficiency side, we made some progress there as well. I'll just remind you that a 1% improvements in our fuel productivity numbers reflects a cost take-out of about CAD10 million bottom-line. We ended 2010 with about a 3% improvement year over year on top of a 4% improvement that we achieved in 2009.

Looking forward for 2011 we're targeting 2% to 3%. If you compound this over three years that's about CAD100 million real cost take-out in this operating model. And all of this is made possible not through any silver bullets, but through an integrated approach. We've got a -- you drive trainload DP deployment, you sprinkle some new locomotives in there that are more fuel-efficient, or innovate a throttle notch limitation which we started at the end of 2009 and just gained traction with in 2010.

And then recently we initiated some measurement and audit tools that will allow us to make sure we drive compliance with those engine isolation and throttle notch initiatives to help us achieve what we've got to achieve in 2011.

And finally, speaking on behalf of this operating team, delivering on the new dimensions in service, success is an area that we're really excited about. Under close leadership, working closely in (inaudible) with J.J.'s teams we're effectively rewriting the book on what improved service and flexibility means to our customers at CN. It's a service definition that reflects working collaboratively and much closer with our customers, focused on our total supply chain performance bases.

The key foundational theme here to remember is mutual accountability and shared measures and that's both for the customer, for the supply chain partner as well as for CN. So we're all in, CN succeeds, customers succeed, it's a we succeed approach.

So to wrap it up, a solid operating quarter, closing out a solid 2010 operating performance which definitely provides us some solid momentum going into 2011. With that said, I'll hand things over to our Chief Marketing Officer, J.J. Ruest.

Well, actually, Keith, thank you and good afternoon to all of you. All in all 2010 was a very good year. I'm going to guide you to on page 10, our book of business, and as usual I'll do this on the currency adjusted basis.

Versus 2009 the fourth-quarter revenues were up 15%, 11% came from (inaudible) volume, that is 10% in carload and 11% in RTM. Our intermodal and (inaudible) [British] unit both produced the best fourth-quarter RTM volume since 2006. Net of fuel same-store price on same-store sales increased by about 3%. Fuel surcharge increased about 1% and you should remember the two months lag on our universally applied fuel surcharge program. The mix was positive and exchange reduced revenues by CAD48 million or 2.5%, a full CAD0.04 on the dollar exchange.

Let's look at the fourth quarter now in detail, again on an FX adjusted basis business segment by business segment. Petroleum and chemical was up 13%, chemical plant operated in the range of 85% in the quarter. Metals and minerals was up 16%, steel inventories remained tight and we gained more historical truck volume.

Forest product increased 11%; we had strong demand in Asia for lumber and pulp which kept more mills running at very high operating rates. We also signed during the quarter two supply-chain level of service agreements with (inaudible) export terminals in Vancouver. Automotive increased 13% on the strength of a 9% increase in North American production over the fourth quarter of 2009.

Coal was up 25%, our best quarter RTM volume since 2006 mainly driven by offshore markets. Canadian and US grain were both up 15%, the grain pricing in world markets created a strong export environment and our excellent scheduled grain service added a full 5 points of Canadian market share which is the third quarter of this year. Fertilizers revenue were up 17%.

In intermodal overseas revenue increased by a nice 24%. CN's Port of Montreal and Rupert business have set forth quarter RTM records. The volume at Halifax and Vancouver are also on a strong pace. Domestic intermodal revenues increased 14%. Our door to door retail service to the consumer and grocery segment led the way with very high volume right into Christmas. Non-rail revenue increased 11%; the big drivers were our Great Lakes iron ore fleet, our coal export dock in Louisiana as well as our auto port services.

Now turning the page towards 2011. We are broadly optimistic on our book of business. If you go on page 11, the intermodal outlook. Our supply-chain agreement with all four Canadian port terminals are creating positive customer response with both the overseas shipping line and their big retailer customers here at home.

In the first quarter we expect strong overseas shipments to precede the Chinese new year and then to resume in March. We also have good traction in the domestic market. The trucking industry is facing increasing mid-term issues like higher fuel price and CSA 2010 regulation, which both of these things can only help us. We are and we will be making targeted investment decisions to support our growth intermodal segment during 2011.

On page 12, bulk outlook. The Canadian Wheat Board has increased its guidance for export grain to 17.4 million metric ton which is up 2 million ton. With our very fluid winter operation we are well positioned to capitalize on that during the first quarter.

Potash demand is strong in both the North America domestic market as well as overseas. This has created a situation where CN can showcase its bulk service again this winter. Coal offshore demand is strong and this will provide Gulf Coast and West Coast growth potential for both our terminal and met coal market Canada and US.

Finally merchandise, [steel] operating rates are back over in the 70% range supported by automotive production here in North America, energy projects and relatively low inventory in steel service center. The year is also looking good for iron ore in the US, but January will be down near 10% in car loads.

Petroleum and chemicals will see progressive recovery during the year, in line with initial production in North America. We are also expecting US automotive sales to be around 13 million units with strong production out of the CN [served] facilities in our network.

As I conclude I want to thank Keith and his operating team for an excellent winter operation which, as Keith mentioned, really started late November. Operation and marketing are working closer than ever and is producing the kinds of results that you see. Luc.

All right, thanks, J.J., and good afternoon, everyone. I'm pleased to report on CN's financial performance which continued to improve significantly through the fourth quarter of 2010. As Claude said, this strong finish wraps up an outstanding year and I'll have -- I'll comment further on our full-year results in a few minutes. So let's first discuss the fourth quarter.

Revenues grew 12% versus last year to reach CAD2.1 billion, that's a 15% growth on a constant currency basis. As J.J. described, this was achieved with the benefit of a solid performance across every product category with carloads up 10% and RTMs up 11%. Meanwhile our operating expenses continued to be tightly manage, as the increase from last year was largely attributable to significant increases in fuel costs and higher volume. This cost management focus helped us generate a 19% improvement in operating income.

Our adjusted EPS came in at CAD1.08 versus CAD0.90 in 2009 for a full 20% increase. Now this is -- it's worthy to mention that this was achieved in spite of an FX headwind due to the strength of the Canadian dollar and a fuel lag of about CAD0.03 of EPS. Our operating ratio was 63.4% in the fourth quarter of the year. This is almost 2 points lower than last year for an overall improvement of 3%, which demonstrates our continued ability to cope with additional volume at low incremental cost.

Moving on to expenses on the next page, in the fourth quarter operating expenses totaled CAD1.3 billion, a 9% increase from 2009 or up 12% on a constant currency basis. The fuel expense increased 29%; this is the result of a significant increase in fuel prices as the WTI went from an average price of $76 up to $84 during the quarter. In addition, we brought on higher volume of business to the tune of 11%. Fortunately we continued to improve our fuel efficiency by 2% in the same period, offsetting part of this cost pressure.

On the labor and fringe benefit cost we had an increase of 4% versus last year. This was pretty remarkable performance achieved in the face of an 11% increase in volume while our average manpower headcount only went up by about 3% in the quarter. The rest came down to wage inflation partly offset by lower [fringe] costs.

Going into the fourth quarter you will recall that we wanted to hire ahead of attrition, deal with increased volumes and get an early jump on our winter program. And so we advanced our recruitment and training for key traits. In spite of this we still managed to improve our labor productivity by 8% in terms of GTMs per average number of employees and labor and benefit expense per GTM, certainly a great job from Keith and the operating team.

On the purchased services and material our expense went up 12% and the increase is mostly attributable to higher use of contract services associated with larger volume on the trucking as far as the intermodal is concerned and ships on the iron ore side of the business. In addition, we also had slightly higher repairs and maintenance expense. Our depreciation expense was up 13%, mostly from asset additions and the impact of the first phase of our depreciation studies which will have their full effect in 2011.

Now turning to our 2010 full-year results, we delivered CAD4.20 of adjusted EPS, an increase of 30% versus last year which was at CAD3.24. Considering the sizable currency headwind which we were facing of some CAD0.22 of EPS this is a notable 36% growth on a constant currency basis. Revenues were CAD8.3 billion, up 19% FX adjusted, on a car load growth of 18%.

Now what these numbers don't indicate, however, is that we delivered innovative supply-chain solutions to our customers and improved our service and flexibility throughout the year. We also advanced our partnership with key stakeholders in the supply chain with groundbreaking collaborative service agreements. Expenses were stood at CAD5.3 billion, up 12% on a constant currency basis as we delivered stellar operating productivity metrics.

Our ability to bring onto the network additional volume at no incremental cost is best captured by our operating income which stood at just over CAD3 billion, up 33%. It all translated into an impressive operating ratio for the year of 63.6% which is a full 3 percentage points lower than last year for almost a 5% improvement.

Moving on to the free cash flow for the year, we delivered a very solid CAD1.1 billion of free cash flow, up from CAD790 million in 2009. We completed our capital expenditure program for 2010 at CAD1.7 billion as we took advantage of our strong cash generation to accelerate our fleet renewal for locomotives and selected car categories. This was opportunistic on our part as we were able to negotiate attractive prices from our suppliers' idle capacity and low commodity prices. We also made an additional voluntary contribution of CAD300 million to our pension plan during the year.

Our balance sheet at the end of the year is very strong with our debt and coverage ratios well within our targets. We also completed a 15 million(Sic-see press release) share buyback program in 2010 with CAD913 million of cash thereby returned to shareholders.

Now let me turn to our financial outlook for 2011. We continue to see a gradually recovering North American economy in 2011. Obviously we don't expect the pace to match 2010, which benefited from sizable government stimulus and inventory level readjustments. Meanwhile we do expect emerging economies to continue growing and driving strong demand for North American supplied commodities over the course of the year. So this bodes very well for CN as we intend to continue to leverage the recovery.

A number of key assumptions underpin our outlook, such as North American industrial production growing in the order of 4%, US housing starts of about 675,000 units and US motor vehicle sales of approximately 13 million. In addition, we're assuming a weaker 2010/2011 Canadian grain crop partly offset by larger stock carryover.

Now we see this translating into mid-single-digit carload growth in 2011. We also intend to continue with our long-term policy of achieving real price increases throughout the year and in line with the quality and value of our service offering. We do see a few headwinds coming our way, however, which should be kept in mind. Namely as it relates to the strength of the Canadian dollar.

We assume that Canadian-US exchange rate will be around par for 2011 versus an average of CAD0.97 in 2010. The other area is depreciation cost which will be rising as a result of detailed studies of our assets and their useful life. These reviews were started in 2010 and will be completed in 2011. The higher cost impact is expected to represent some 50 basis points of operating ratio if we judge by our past experience.

Having said this, our guidance for 2011 has us aiming for double-digit growth from our adjusted diluted EPS of CAD4.20 achieved in 2010. In addition, we are guiding for solid free cash flow generation in the order of CAD850 million in 2011, and that despite cash taxes being more than CAD225 million higher than in 2010. This cash flow forecast also assumes a 20% increase in dividends approved by the Board of Directors.

In addition, we have every hope to return to shareholders as much as 30% more cash versus 2010 as we look to complete the 16.5 million share buyback program in 2011. This clearly reflects the strength of our operating performance in 2010 combined with our strong balance sheet and positive outlook for 2011. Our free cash flow guidance assumes a capital program of approximately CAD1.7 billion, which is in the same range as where we completed -- as what we completed in 2010.

The mix in 2011 calls for about CAD1 billion to be invested in track infrastructure to maintain a safe and fluid railway network, same as last year. In 2011 our other investments, however, will shift emphasis from equipment renewals, specifically locomotive acquisitions, to large projects supporting a number of growth and productivity initiatives. This is quite exciting as we're looking on the development of such things as a major logistics center in Calgary to serve as a platform for revenue growth in this important Western distribution hub, a project of well over CAD100 million in scope.

On the productivity enhancement side we'll also invest over CAD100 million in 2011 to advance significantly the connections and integration of the EJ&E and pursue the optimization of our footprint in the Chicago area. This will set the stage for productivity improvements as we will consolidate satellite operations, improve efficiency and accommodate future growth.

In closing let me assure that you that we have very strong plans for 2011 as we continue through supply-chain management and innovation to evolve this franchise to the next level of operational and service excellence for the benefit of our customers while maintaining our focus on delivering strong value to our shareholders, and that consistently. On that note, back to you, Claude.

Well, thank you, Luc, and as you can hear, we are clearly delivering on our agenda and the last days just remind you what it was all about and hope that you can find, and through your questions in a minute and through what you've just heard from Keith, J.J. and Luc, that we are working on basically every one of the key points. And that gives me a good setup to talk about one area where we've made good progress in 2010 and it's our ability to negotiate labor agreements with our workforce.

As you know, we were able to reach an agreement and negotiated one in the fall with our running trades represented by the Teamsters. And I'm pleased to report, for those of you who have not picked it up on the newscast, that yesterday we reached an agreement with our employees represented by the Canadian Auto Workers. And these employees are working for us across a range of activities in intermodal facilities, in our mechanical shops, in our clerical workforce and in our owner/operator trucking partners that are helping us day in/day out to deliver the goods, so to speak, to our customers.

So we're pleased, we hope it will ratify -- it was done -- the agreement was reached in the late hours yesterday night and a full 24 hours ahead of the deadline because we were able to solve issues constructively over the weekend. The CW bargains hard and we had the sense of what we could do and ended up with a win-win, particularly in the area of working to find ways to accommodate a track and retain a new generation of employees which will come to us over the next several years now as we face attrition and renew our workforce.

So it takes solid labor agreements, it takes an engaged workforce, it takes a management team that is connecting together, and it takes a solid agenda to do what we said we would do and to deliver value to our customers and shareholders both, and that's exactly what we're doing.

In terms of guidance, I think Luc's guidance is very constructive. And you heard J.J. talk about the strong demand involved that we have, the good economy that's helping us across a range of businesses, intermodal and merchandise, the areas where we're gaining market share against truck particularly in the intermodal sector. You heard Keith talk about the solid operating momentum even through a difficult winter to focus on efficiency, but also to focus on service and our ability to continue to drive the business at low incremental cost.

And when you put it all together, I think Luc put it well, it's basically a guidance for double-digit EPS growth, a 20% increase in the dividend and up to 30% increase in the cash we use to reward our shareholders through a buyback. And that's, in my view, solid shareholder return anchored on a solid game plan overall. With that I will open up to questions with the rest of the team.

(Operator Instructions). David Newman, Cormark Securities.

Good afternoon, gentlemen. Solid quarter. And thanks for reporting during the day, it makes it easier. Just a quick question on the headcount. You managed the headcount very well in the quarter and I know you're hiring ahead of attrition. But on a net basis and given the broadening out of the economy here overall, what is going to be your net headcount addition for the year and how can we expect it's going to roll for the quarters?

Yes, as far as the 2011 is concerned, David, we're looking at probably attrition in the order of 1,700 or so employees. And obviously our objective is to place less than attrition. So that's kind of where we're looking and how we're looking at 2011.

How is the timing on that, Luc, I mean how does that come by quarter?

Well, we continue to try to hire ahead of attrition so we'll be monitoring to the extent to which the volume unfolds during the course of the year. But at this point we're not providing quarterly guidance on that.

Okay. And just a quick one on the Forest products. Obviously the Chinese demand could be very significant here and my understanding is the gap between their own internal demand and supply could be equal to the Canadian harvest. What are you seeing of the Chinese associated as it relates to Russian export taxes and they are obviously looking at the Canadians for more lumber? What is the dynamic that is going on there?

It's J.J., David. The dynamic is yes they have been looking now for quite a while for large quantities of lumber. Russia was their historical supplier, from them that is not as easily available right now. And what they do is they do a deal where they buy a whole mill production so they come in they will look for somebody that has an idle mill or a mill that's not running for the US market, by the full production for further planning, that is how these things restart.

In order for us also to support that, we are working closely with our overseas customers or container line to make sure there is a sufficient amount of import to create the export return as well as helping to create [stuffing] facilities namely in Vancouver and/or Prince Rupert.

How significant is it, J.J.? I mean how has the mix changed for you guys over the years? I mean what percentage would be offshore now and how has that changed and where could this go?

I think broadly we would say obviously we have more cargo than in the past which are going directly to the West Coast meaning Vancouver as opposed to long haul to southern US. So there is a bit of a shift right now in the rhythm of carload growth and RTM growth, the carload growth is growing faster than the RTM. But also we are integrating ourselves in the supply chain that is we also sell our service in some cases our stuffing of the activities. So we have a bit of an added value.

Over time we will see where that goes. The lumber price is up in North America not so much because of the housing starts; it's up because the buying -- the Chinese are buying the surplus. And that has -- that bodes well for our large lumber customers make them more financially healthy.

Exactly. Very good. Thanks, gentlemen.

Bill Greene, Morgan Stanley.

Yes, hi there, good afternoon. I'm wondering if we look at kind of the puts and takes here that you outlined for us when you think about the biggest source of growth for you next year, which one of the key buckets do you think gives you the biggest opportunity for surprise? Is it really just volume and macro or are there sort of levers that you can pull here on maybe productivity or pricing that could surprise?

I think if we look in volume in terms of what are RTM or carload, I prefer RTM generally. The biggest potential for growth in 2011, as I said, my hope would be in the areas of intermodal, intermodal overseas or intermodal domestic.

Sorry, and just to be clear, that's the biggest source for growth in EPS, right, that's the biggest source for surprise?

Well, we're focused on running a business, Bill, and what we do in terms of top-line growth is so close to the bottom line. And so what J.J. was commenting was not so much EPS as he's commenting on our ability to grow through market share in an economy that will support good volume in both overseas and domestic intermodal.

Okay, fair enough. As a follow up to that, we used to say that the Canadian dollar at parity was a very significant headwind for Canadian exporters. I haven't heard so much commentary about that -- and maybe that's because of where I'm based. But I'm just curious eye you think about -- have the manufacturers up there sort of adjusted to this new environment where it's not as big of a deal, where they've fixed cost structures and whatnot? Or is it still a pretty big headwind that if you have a change in that currency it could mean a big upside for you?

I think it's fair to say that we've been living in a world of CAD0.95 to close to parity for some time now. And adjustments, both because of exchange and because of the recession in the supply side of the equation in our customers the opportunity has taken place. So it's always -- for some of our exporters in Canada it's always a little bit more difficult with a higher dollar. But I don't think it's driven out of a difference between CAD0.97 last year and CAD1.00 this year.

I think it's more how they follow the market. To your questions earlier, I think we have a nimble group of producers for instance in Forest Products. They are opening these markets in China; it is big growth because China is a big when they enter into a segment. And the opportunity, just to take that one, if China was to start to have lumber in its building code on a more prevalent basis is huge over time.

So people have to adjust, they have to adjust the currency; they have to adjust to market trends. And we are trying to help them with our superior transportation service to deliver their goods wherever their markets are.

All right, that's great. Thanks for the time.

Cherilyn Radbourne, TD Newcrest.

Thanks very much. Good afternoon. When you first introduced this idea of collaborating more deeply with your customers and the focus on the first mile and last mile initiatives, one of the metrics you introduced at that time as a measure was your car spotting performance. Can you update us on how you've progressed throughout the year from that perspective?

Yes, I'll let Keith comment further on this. But there's a range of measures, it depends on the specific market. And as Keith said, they are shared measures on the basis of creating a framework of accountability that drives continuous improvement.

The measures that depend on the segment in intermodal were focused on slot utilization, were focused on dwell time at the terminal, were focused on the timeliness of the car supply in and out of terminals. In the merchandise sector the first mile measured that is the most important indeed for customers is our car supply ability and our order fulfillment rate. And that's what we're measuring. Keith, do you want to comment on what we've been able to do in merchandise?

Yes, I can say on the merchandise side on the car supply we've consistently exceeded 90%, 93%, 94%. It's not an uncommon number as we progress through the year. And on the spotting performance for the system mid 80s and even some parts of the system, eastern Canada mid-90s. So we've had quite a bit of success across the board.

The key there is making sure that what we're measuring actually adds value to the customer; we're not just measuring for the sake of measuring. So being able to convert that and being there and spot when it's convenient and optimal for the customers as possible without jeopardizing our operating model is the objective here to hit the sweet spot.

And that's -- as you look at an order against we see cut off. But our innovation doesn't stop there. During the year J.J. and free cash flow and merchandise sat down with the team and we looked at how we can be more responsive for instance for -- as it relates to meeting orders that are more short lead-time orders. And of course you cannot expect to be 90% when you receive an order only a couple days ahead of the required placement.

But even there we have been able to increase our fulfillment rate in some weeks 65%-70%. So you have an order fulfillment against cut off order in the low 90%, high 80% and you have short lead-time orders in the 65%-70%, that's a good product for a rail-based supply chain and one that we can hope over time to drive into results growing with our customers.

Thanks for that detail, that was my one.

Thank you for being one.

Ken Hoexter, Bank of America-Merrill Lynch.

Great, good afternoon. Claude, let me just follow up on the grain subject for a second. So maybe it's a little basic, but if you talk about gaining share on the grain side and your volumes are up 12%, yields up only 1%, is this a game where you can gain share but because of the revenue capture you're kind of limited in the profitability as you take that share? Or can you kind of describe how, if you can kind of go in and take the share, how you're able to not meet those limits?

You know what, we would like the grain business that's regulated in Canada to have higher revenue because it is not the highest profitability business we have. In fact it's closer to the bottom of our business segments. But it is a profitable business at the moment and we are following the needs of our customers.

The scheduled grain plan that we introduced at the beginning of the year in my own humble view is nothing short of transformational. We didn't use to measure spotting performance to the day; we measured it to the week. And today we have a scheduled service and we measure it to the day and to the hour and we are achieving the levels of performance throughout the year that have been in the 90%, 91% range.

Last week was a brutal week in terms of the weather in Canada and we were at 70% and we're just under 70% for our spotting reliability to the date. And this is what our customers are seeing. And so they're shipping more of their grain through CN points and we have been able to gain a little bit of market share. And the price is set by regulation.

So that's the equation we work with and it's good business to have and, more importantly, we are following the market and the demand that comes our way and we believe we have a very, very good product and a construct which has opportunity for the future. Because once you've laid out the scheduled grain plan and you've anchored your origin in the countryside, then you can work on the pipeline and how you flow cars to the West Coast and how we work on making sure we have a level pipeline that maximizes throughput on the waterfront in Vancouver and Prince Rupert.

And those are the dialogues we're having with our customers at the moment, and we have a good thing going both operationally and from a marketing standpoint with the grain sector.

Very helpful. I appreciate that, Claude. On the -- I guess when you talk about the weather, I've been in Saskatchewan when it was 45 below, so I guess I can kind of understand what you're talking about on that side. But when you talk about rolling out more distributed power and keeping your trains at 11,000 feet, is that something we could continue to see more of? Is this kind of a limited example?

Is this -- can you kind of -- you talked about going up to 500 locomotives? Is that a kind of theoretical limit? Can you keep going beyond that to get it to the whole network? And if you can, is there any reason to stop at some point?

Let me start with the 500. Once you get beyond that you get to a point of diminishing return. Because effectively when you have a three engine contest only two of those three had to be DP equipped. So we don't have to spend the money to equip 100%.

The second issue as far as the weather, it is an outdoor sport; we have faced some significant weather challenges. But when you get to talking about a 12,000 foot train, that's an intermodal train, you've got a very tight train line, that would be the optimal.

But even outside of the optimal, when you come to our manifest trains as we deploy the DP power, when it's 35 below in the past we'd be limited to say a 5,000 foot train. I can run an 8,000 foot train today consistently and reliably with DP power deployed on it. So it creates significant capacity and operational savings as you deploy these assets.

Thank you, Ken.

Great, I appreciate it, thank you for the time.

Tom Wadewitz, JPMorgan.

Yes, good afternoon. I wanted to ask you a little bit on the expense side. Where do you see or do see some cost pressures coming in? I guess it sounded like a little bit on the depreciation side. But are there other areas where you think the pace of cost inflation ramps up in 2011 or we generally think about the pace of cost inflation pretty similar to what we've seen?

It will be pretty similar I would say, Tom. I mean, I think depreciation is clearly the one that stands out and I think to some degree we were pleased to see how the year ended in terms of pension as we don't expect in 2011 the pension cost to be significantly higher than in 2010. So I'd say generally pretty well in line with general inflation.

And then in terms of facility closures you mentioned as you do some work on EJ&E and some other areas, is there anything that ends up being kind of chunky that you can identify that you can put a cost number around or a range around? Or is that kind of a similar benefit to what you've seen the last couple years?

I think it's a whole range of blocking and tackling and focusing on bringing the pieces together. I mean we have talked to you in the past about our mechanical shop consolidation strategy, which is linked to the Kirk Yard investment that Luc referred to and that's certainly a meaningful element.

Our ability as we get the facility in Chicago that will be a more -- basically a hub yard that has more classifications, the capacity -- our ability to bring other satellite yards down to a role of being only industrial yard and limiting -- concentrating all of our activity in fewer yards in the US is helpful. But there's no big number, it's an addition of a lot of small numbers that makes it add up to a meaningful amount of productivity going forward.

Okay, great. Thank you for the time.

Jacob Bout, CIBC World Markets.

Good afternoon. Ridley terminals just awarded long-term coal contracts to a number of companies including Arch Coal. Does this change things for yourself as far as how you're looking at growth in coal longer term or is that really just a displacement issue for Canadian coal?

I think long-term it has to be good news. The interest on the Canadian West Coast terminal allow these West Coast terminals to get the capacity -- the money to be able to expand and generate capital investment for the years to come. So one would think that the Ridley Terminal overall capacity over the next few years will go up and therefore that has greater potential for carload export.

Short-term there is a bit of nervousness with the Canadian coal miner and we empathize with that as to whether or not -- how the next two years will pan out. I think long term the fact that more and more mine -- Canadian mines as well as Wyoming or Montana mines are looking at Canada as a place to export -- you know, has to bode well.

Let me just add to this because I think J.J. is bang on. This is a very constructive story. We have all the capacity in our business, the rail network; we have all the capacity to handle a whole lot of growth on the West Coast whether it's at Ridley or whether it's in Vancouver.

At the moment the booming business is putting pressure on terminal capacity, but every crisis brings an opportunity. And the opportunity is present to firm up their business cases to expand and to add to their throughput and as they do this we will be able to accommodate the growth going forward and it's very constructive.

In the short term this is where supply chain collaboration comes together. This is not just J.J. and his team dealing with the coal companies and the coal terminals, it's Keith and his team basically trying to find ways to de-bottleneck, trying to look at opportunities to create capacity.

For instance at Ridley recently Keith had I think two or three of its top people coming in and visiting the facility and we agreed to change our mix of car steps to go a little bit more towards steel step as opposed to aluminum step and to focus on how we flow the trains into the terminal.

When you have a mutual measure and you have an understanding of what we can do together as a supply chain and you have more business than the current capacity can handle, it's a quality problem to have and we are geared up to help solve that and grow our business going forward.

Maybe just a part B here, different commodity, but crude shipment by rail car to the West Coast here, obviously topical in the papers right now. Where are you at with that? How do you see that as a -- what type of opportunity is that for you and have you signed any agreements yet?

We've been working on this project for a couple of years and obviously right now there's a much stronger interest in this quarter than there was two years ago when we started this initiative. There's also a stronger interest as to whether or not one day the Canadian Oil Sand will export to Asia or not.

So we've had interest from people in China, have been involved in some of those meetings, we have interest from people in the Calgary oil patch, there's an interest from US Midwest, interest for US Gulf in terms of the West Coast. What we have so far is a number of trial shipments, we've done demonstration shipments of product from origin to destination and we have a number of discussions with a number of players about whether or not this would unfold into large quantities. So, time will tell.

But at this point there's no contract per se?

At this time there is nothing to announce to a large contract, we're still very much in the commercial discussion.

Okay, thank you very much.

Scott Group, Wolfe Trahan.

Thanks, good afternoon, guys. So a quick question first, on casualty and other of CAD65 million, it's a good amount lower than we've seen earlier in the year. Were there any benefits or reserve adjustments in the quarter? And if not, can you just give some guidance on this line for 2011 since it tends to be pretty choppy?

Yes, Scott, I mean basically as we do every year in the fourth quarter there's a natural review of some of our legal costs with respect to asbestos-related claims and so on and so forth. So this year the adjustment as a matter of fact was about 20% less favorable than last year, which accounts for the lion's share of the difference in the number that you're seeing in the fourth quarter. We're still lining up for about $90 million a quarter, but that's -- again as you said, it's choppy. So from quarter to quarter the number can actually fluctuate. So that's what we have in mind.

So you're saying there was a benefit this quarter but less of a benefit than fourth quarter last year?

That's correct. I mean --.

Do you have those two numbers?

The benefit this year was CAD19 million.

Great, thanks. And then just second one if I can. It's been four quarters in a row of about 3% pricing. With the focus on market share is this kind of the number you guys are targeting going forward or is there a chance to get back to that 4% pricing range that you guys were at for a few years prior to 2009?

We're targeting inflation plus pricing and then time will tell how the inflation will go. I mean all the time we are evaluating our pricing in light of our evolving and improving service as well as our pricing in light of the Canadian transportation marketplace. And in light also of how inflation is evolving. So that will set the stage for a few years to come.

Scott, just to add to this -- we certainly don't have price in mind when we're talking market share. We sell service, we sell expertise, we sell capability and we sell to a market and we've been at this game of taking our pricing up longer than any other railroad, we operate in a market environment and to be able to price consistently above inflation and drive the value to your customer is the game we're in. But I think your question in terms of relating pricing with market share is not the way we think about it at CN, we sell service.

Okay. Thanks for the time, guys.

Chris Ceraso, Credit Suisse.

Thanks, good afternoon. Can you give us a rundown on what idle capacity you have left in terms of locomotives, cars and people?

Sure. I mean effectively we still have 100 plus locomotives in storage and we have a few more that are coming on first quarter. On the locomotive side just a rough number I'd say static what we have now, there's still 25% capacity opportunity there assuming that we don't improve on productivity which is not a safe assumption for this railroad.

On the car side we've got in the neighborhood of about 12,000 cars stored still, that's at capacity there as well. So not constrained, physical plant, we continue to improve our operations, our rifle shot investments day to day, our chokepoints. On an annual basis we've got an execution plan that we're operating to and it's just going to continue to increase. So capacity wise no issue at all on this railway.

Okay. And then as a follow-up, some of the other Class 1 rails have begun to talk about mid-term, longer-term operating ratio targets that are more in the CN neighborhood? What's CN's longer-term target, have you thought about that?

Well, let me put it to you this way, you're cheating with your third question, but I'll answer it. We're going to make it tough for them to catch up. But if they do that's all a good thing.

Okay. Thanks.

Jason Seidl, Dahlman Rose.

Good afternoon, gentlemen. Two quick questions from me. One, did I hear you guys correct on employee attrition is about 1,700 expected to retire, but because you kind of hired in front of that that you expect to replace less than that this year?

I think one for one with an ability to have more product, maybe a little bit less than one for one would be a better way of thinking about this, because it takes six months to recruit people. When you are in a growth mode, and we are, you want to make sure that you have the assets and the resources, workforce well deployed.

And the good news is if we get it wrong a little bit and we hire a couple months too early, it's easy for Keith to dial down and wait for the growth to catch up. So I think a constructive model assumption for you to work with is if we have a 1,700 or 1,800 attrition next year we might be able to hire a little less, but do it at the right time and accommodate the business if it comes our way.

Okay, that's helpful. And on the intermodal front, can you talk about the capacity in your network on the intermodal side, what's left?

Well, it's actually capacity as well that's near or less. Last year we started putting some money in, so we're expanding our capacity both from a lift standpoint as well as a footprint in Toronto which is our flagship operation, Calgary as well will give us quite a bit of extension there. Supply chain partners West Coast, export/import, that's working well with us and of course Prince Rupert is not an issue at all, and Halifax is -- we'd love to put double the business out there. So across the board no issues in capacity intermodal terminals as well.

But if you had to put a number on it, what do you think excess capacity right now that you guys have in intermodal?

I think it's pretty much -- it's a large number; I don't know that we've measured it. But I don't see any capacity bottleneck except our Toronto facility, Brampton, that we always have to be on top of. Across-the-board we have track capacity; we have the assets from a rolling stock standpoint. And we are actually, as we speak, creating capacity with our terminal partners on all ports, so there's lots of capacity to grow over time.

Okay, guys, I appreciate the time as always.

David Tyerman, Canaccord Genuity.

Yes, just on the depreciation, I'm just trying to get a handle on what kind of level we're looking at. Is the CAD220 million that you did in Q4 sort of the run rate we should look at? Or you mentioned 50 basis points increase on the operating ratio, that sounds like a much bigger number than CAD220 million per quarter?

Well, I mean you have to factor in the asset additions on top of the normal depreciation and this particular adjustment that I was referring to was on top of that.

Okay, so the total would be 50 basis points?

The total impact that we estimate at this point for depreciation studies would be about 50 basis points, yes.

Okay, and that's for -- does it sort of slide in over the course of the year, so we start at a lower level and end up at a higher level through the course of the year, I would imagine?

Yes, pretty well, although it will be a bit lighter on the first quarter and it will be a little bit higher through the last three quarters of the year.

Okay. And then just on the equipment rent and the purchased services, rent's been really low in the last year and not really moving. I'm wondering if that has to move up. And the same thing on purchased services, it's basically the same in 2010 as in 2009. Do either of these things -- can they stay at such low relatively no growing levels or at some point do we have to see some growth there?

Well, I think equipment rents are -- again are going to probably move closer to in-line with volume. So I'd expect some movement there. Purchased services, again I think will -- it tends to run about 12%-13% of revenues. So I mean I would expect things to stay within that kind of range generally. But it can be a little off.

Thank you, David.

Perfect, thank you.

Matt Troy, Susquehanna.

Thank you for taking the question, I'll keep it to one. But I'd like two answers I guess, I'll cheat a little bit. I guess posed to Keith and then to Claude, and leveraging on the earlier question about margins. We've heard the other UNP, CSX targets of 65% in five years, you guys are already there. I'm just curious, Keith, operationally, tactically do you see the possibility that your operating ratio could have a five handle on it, i.e. in the 50s?

And then Claude, same question but from a regulatory or optical perspective. Is it in your best interest to get there or does that invigorate your focus on perhaps lower margin but less capital intensive businesses? And that is my one question. Thank you.

That's a good one, Matt, and let me answer it this way. We have said consistently that we do not manage our business on the basis of a percentage ratio. We manage our business on basis of generating cash flow, generating earnings and following the markets that are in front of us. And I mean that, I'm not trying to evade your question.

But we are transforming our product in some sectors; we are working hard to create new capabilities from a supply-chain standpoint. We are trying to look at ways to enter markets that were more difficult for railroads like the more spot, the more flexibility intensive, the business and the carload sector. And as we do this, if we succeed we will grow the top line a little faster than what the economy provides for.

We will have the capacity to support solid pricing. And we will continue to drive earnings and margin and we might surprise ourselves on the operating ratio. But we don't reverse engineer it, the others have to catch up and they have to give you a number to shoot for. And as I said earlier, we're going to make it awful tough for them to catch us and if they do it's going to be a good story for the rail industry.

Got it, thank you.

Thank you, Matt.

Benoit Poirier, Desjardins Securities.

Yes, thank you very much. My question is related to your CapEx plan for 2011. You were talking about the CAD700 million toward growth opportunities and productivity. You gave some very good color about the CAD100 million in Calgary and also CAD100 million to improve the connection in Chicago. But what about the remaining CAD500 million? Could you maybe provide more color about those opportunities? Thanks.

Well, I mean one of the items that we're investing some money in is the positive train control. As you know that is a -- that's a fairly large expenditure over time. But we're looking to invest about CAD40 million next year in that particular arena. We also continue with the upgrade and overhauls of our locomotives, so that clearly continues to be an area where we want to keep the assets in good shape and fresh.

And we continue to look at, in terms of the cars, whether we have the right mix of cars and the right quantity in order to support the growth namely in the intermodal side of things. We've seen a good chunk of growth there, so we want to make sure that we're in a good position.

We also continue to work on our system, so from an IT standpoint we continue to put some money in terms of helping us improve managing the business and that continues on. We also are maintaining our fleet in terms of the iron ore business and the steel, the service we're providing and there's been a lot of growth there and we continue to invest on that front.

So a number of areas, again we continue with siding extensions to continue productivity improvements, retrofits for DP power that Keith referred to which is instrumental to the quality of the service that we're providing and further extending our trainload. So a number of areas like that.

Okay, thanks for the time.

You're welcome. Thank you, Benoit. And we have said we would try to do one hour, we did one hour eight minutes. So we'll just say that that lines up with our EPS for the fourth quarter and that's how much flexibility we give to Bob. And these were good questions. We are glad that we are entering 2011 on a solid note and that we are looking forward -- we just need a little bit of warmth here because it is cold in Canada. But we are looking forward to have a good first quarter and to have you on the call pretty soon reporting good results. Thank you very much.

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