Canadian National Railway Co (CNI) 2011 Q3 法說會逐字稿

All participants, thank you for standing by. The conference is about to begin. CN's third-quarter 2011 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 third-quarter 2011 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.

All participants, thank you for standing by. The conference is ready to begin. Welcome to the CN third-quarter 2011 financial results conference call.

I would like to turn the meeting over to Mr. Robert Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Good afternoon. Thank you for joining us for CN's third-quarter conference call. I would like to remind you about the comments that have already been made regarding CN's forward-looking statements.

With us today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, Executive Vice President and Chief Financial Officer; Keith Creel, Executive Vice President and Chief Operating Officer; and JJ Ruest, Executive Vice President and Chief Marketing Officer. After the presentation we would like to take questions from those of you who are listening on our call today. Could you please identify yourself when asking the questions? And in order to be fair to everybody, could you limit the number of questions that you are asking to one.

Thank you very much; and now it's my pleasure to introduce Mr. Claude Mongeau, our President and Chief Executive Officer. Claude?

Thank you, Bob, and thank you all for joining us on this call. We are announcing our third-quarter results, and I am very, very proud of the results. We have had strong performance pretty much across-the-board and we are delivering on our agenda in all aspects that matter at the moment.

We had record revenue performance, good balance between the solid volume increase, good pricing. And overall if you adjust for currency, our revenues are up 12% over last quarter. That's reflective of our ability throughout the quarter and since the beginning of the year to outpace the general rate of economic growth.

This top-line momentum was translated into solid bottom-line result. We were able to turn in an operating ratio of 59.3% for the quarter. Our earnings on an adjusted basis are up 16%, and our year-to-date free cash flow is in excess of CAD1.3 billion.

So all in all, solid results driven by our delivering our strategic agenda. With that, I will turn it over to the team to give you more detail and get back to you at the end with a wrapup. Keith?

Okay. Thanks, Claude. Let me say for certain your comments are greatly appreciated by the men and women of this operating team that execute day in and day out, enabling this performance at CN. If you combine that with the first strategic agenda, which is centered around our customer innovation and supply chain optimization; secondly, JJ and his team's strong book of business; and finally our precision railroading operating model -- we were able to deliver an outstanding result for the third quarter.

So with that said, let's go straight to the third-quarter operating performance, and I will touch on some of our key measures. I'll comment again on the key metrics we report quarterly. They always provide us a useful summary of our performance in the high cost and service impact areas.

As you can see, the GTMs per train mile, the trainload, continues to grow at CN, which drives reduced crew, locomotive, and fill expense. This performance specifically is made possible in significant part from our continued execution of what I call capacity enhancement investments in extended sidings and distributive power, which has allowed us to absorb a lot of this incremental growth at a very low cost.

Cars per yard switching hour, terminal dwell, roughly flat year-over-year. This is against higher volumes in some switch crews as we go through our transition with our demographics through a steep part of the learning curve, particularly in the West where we have experienced the most amount of growth.

Trailing GTMs per total horsepower, this is an all-in measure of our locomotive productivity. What may appear to some to be slippage year-over-year is more reflective of our decision to err on the side of being a bit long on locomotives left in service in order to finish cleaning up some of the traffic we impacted during the very tough winter we had and the spring, as well as prepare ourselves to ramp up for grain and potash, which is in full steam now.

I'm very pleased to report things are going extremely well in that regard. We are operating a very robust pipeline to the West Coast on the bulk side as well as a very fluid and robust pipeline dealing with the potash business to US destinations.

You see a similar story in car metrics per day, where we have consciously took a bit of a hit on the metric side, deploying available assets to enable improving our first-mile/last-mile initiatives. With that said I will point out and JJ will expand on this, we have gained 4 points of car order fulfillment overall and about 20 points on the short-time lead orders, which are more akin to truck competitive-type markets.

Finally, train speed. Quarter to quarter it's off slightly, in part due to some lingering weather challenges from the spring carried into July, and some marginal impact in the West from the larger trains, longer trains that we are handling dealing with this volume growth and low incremental cost. But I am happy to see that so far in the fourth quarter -- effectively really in August and September -- we really started to gain stride with our operating metrics; and we are seeing performance fourth quarter now that exceeds same time fourth quarter last year, so it is all moving in the right direction.

We will continue to gain some traction as we cut over some of the key infrastructure programs that we completed -- that will be completed late November to early December. Which is a nice segue into the last slide.

I can tell you this engineering team now continues to put final touches on a number of our capacity enhancement projects, including a total of about 10 siding extensions, four sections of second and third main track in different parts of our network, a number of yard improvements and speed increases. And I would be remiss to not report to the Group that we just finished our most critical connection, which was part of the EJ&E transition, linking the EJ&E to our existing network at Matteson. This specific connection allows us to make head-end moves in any direction, be it North, South, East or West, on to or off of the EJ&E and the CN just south of Markham Yard in our Chicago intermodal facility.

This is a move that previously required running around the train in some cases, which was about a two-hour ordeal. We do it now in about 10 minutes. So a very significant piece of asset improvement for us with that investment.

So as the slide says, operationally so far this fourth quarter we are firing on all cylinders. Our operating metrics are very strong against the record volumes we are handling, especially in the West.

With that said, as we go into fourth quarter, winter of course is something that we have planned for, we have been aware of, and we are certainly ready for this year. It is around the corner.

We have effectively taken the approach that prior planning is going to prevent poor performance. We started planning for this winter actually when last winter ended.

In the spring, we had a group of people sit down, brainstormed. We identified the things that we did well. We identified the things that we didn't do so well, and we created an action list -- an action item list that we have been executing on since that time.

I am happy to say that certainly we are prepared to not miss an opportunity meeting or exceeding the performance we produced last year in what was extremely tough operating conditions. We are going into this winter with about 100 more DP locomotives than we had same time last year. We have got the infrastructure upgrades I've talked about.

We've made huge strides in joint elimination out of the main line. We have purchased and deployed more snow fighting and road repair equipment among a long laundry list of other items. So suffice it to say, this has been a very active fall for this operating team, and we fully expect to perform this winter.

Finally, the stable base of operations that we enjoy, my senior team and I have continued to spend quality time with JJ's folks, our customers, and our supply chain partners. With the help of Luc's IT team we have built some outstanding well-based systems together and share information about our coal, grain, iron ore, and potash supply chains.

And we are seeing the results. The success of our focus has enabled us to exceed what we previously felt was coal export capacity at RTI. And on the grain side today we are busting through what was historically a 4,500 car per week capacity cap of loading and shipping western grain. Now, due to the supply chain integration, better communication with our supply chain partners, we are approaching the 5,000 mark on a weekly basis.

We have had a week that has exceeded 5,000. We have had consistent weeks that are running between 4,800 and 4,900, and we fully expect to continue that.

So in closing, a very exciting quarter to report on, Claude. But even more excitement on the success that is yet to come in what I know to be is the best-in-class operating team in this industry as we continue to execute our business strategy in line with your strategic agenda. So now over to JJ to speak about the growth these efforts have supported.

Well, thank you, Keith. Let's get right away to the revenue. As Claude said, the third-quarter revenue increased 12% on the currency adjusted basis. Simply broken down, 4.5% of that came from volume. Our carload increased 3.7% and our RTM increased 6.3%. Same-store price increase 3.8% last quarter, which is in line with prior trend.

As a reminder, same-store price apply only three-quarter of our book of business after the removal of fuel surcharge revenue. 4.5% came from fuel surcharge; mix was basically flat. And finally exchange reduced revenue by 3.5%. The Canadian dollars was 0.06 above last year.

Now looking at the quarter in detail, I am on page 9, and as usual, all my comments will be FX-adjusted basis. Starting with petroleum and chemical, which revenue was up 10%. During the quarter we capitalized on market shortage of heavy fuel by moving long-haul volume. We also had more crude shipments as we continued to deploy our crude business model. In chemical, the significant increase in citric acid as all the plants on our line ran at full capacity during the quarter.

Metals and minerals was a very strong story. The revenue was up 26%. Oil and gas related business, namely pipe, frac sand, and the likes, were roughly up 30%.

Shipment of semifinished steel also increased, driven by good demand but also, as Keith mentioned, by our more responsive service to that demand, including the short-lead orders. Scrap iron and domestic iron ore volume were up in the quarter.

Nonferrous mineral was also up. We grew market share. But also our customers made a concerted effort to reduce their on-site inventory at their mine.

Forest product revenue was up 12% in the quarter on an FX-adjusted basis. We have seen an uptick in lumber and panel volume to the US during the quarter. Lumber volume to China increased almost 70% versus last year. For many quarters in a row now there is little correlation between US housing starts and our very strong lumber business.

Wood pellet export kept on increasing as a result of new production in Northern BC, where we basically serve all the wood pellet plants in Northern BC. Wood pulp was down in the quarter; and this was related to extended shutdown at two of our major customers in Western Canada.

Automotive revenue was up 15%. Finished vehicle traffic increased for the Big Four in Detroit as production at CN's serve plant increased during the quarter.

However, although production for the Japanese manufacturers has returned back to normal after the tsunami, our West Coast import traffic remained impacted, this time by our labor dispute at a major waterfront auto terminal in Vancouver. Ships were diverted to Tacoma, came to us by the Chicago gateway, producing lower RTM on the same carloads.

The coal revenue for the quarter was up only 4%. As discussed, our last quarter Q2 results, the Q3 carloads were actually negatively impacted by production issues in Canadian mine in Northern BC. As you remember, there was a lot of flooding and wet conditions last spring; and these, as we predicted, impacted last summer's production.

Thermal coal in US utilities continued to be negatively impacted by long-term cheap natural gas, which we do benefit in fraction and the pipe; but it does impact the coal business. And also because of slow economic growth, the overall electricity consumption is not as robust as it was years ago.

Despite overall carload being down 9% for our coal segment, our total RTM was flat for the quarter. That is because we generated more long-haul PRB coal to the Port of Prince Rupert, which was enough to offset the weakness in other segment of our coal portfolio.

Grain and fertilizers revenue was up 9%. Carload of Canadian wheat and barley were off this summer as our CN catchment area was out and emptied of its stock in the season before. However, in September, the crop came in early and we have had very strong carload ever since, as Keith described earlier.

Our US grain, we had very strong demand for ethanol as well as increased corn for domestic processing plants. However, the grain export is weaker in the third quarter, and it will be weaker in the fourth quarter.

On domestic potash, 33% carload growth from strong demand and also from an early fall application by the farmers.

Overseas intermodal was up 10%. CN import volume on the West Coast outperformed the overall West Coast port average. During the third quarter, CN grew 12% and the North American West Coast port declined by 6%, which mean that the CN coordinated supply chain model is definitely gaining market recognition in the marketplace.

Domestic ethanol revenue was up a strong 20% overall. All of our domestic segments continued to grow across-the-board, whether it is groceries, consumer goods, manufacturing sectors -- mostly in the US but also in Canada.

Finally, our non-rail business was up 9%. Similar to last quarter the growth was driven by the Great Lakes vessels that we run for iron ore and the likes, as well our CNTL local trucking services which complement our integral service. This was partly offset by the sale of our Convent coal terminal which took place on August 1.

Now to the outlook. If you can join me on page 10, starting with intermodal -- and intermodal will definitely remain a core engine of our growth for the fourth quarter and for 2012. This year's fall peak will remain subdued and, as predicted back in July by all of our ocean shipping line, the lines have already started to withdraw the transpacific service in order to deal with excess capacities. Retailers are inventory cautious, and consumers are purchase fickle.

Regardless of the market condition that is ahead of us, we believe our import/export supply chain model is designed to continue on a sustainable one box at a time market share progress.

Recent trend in inventory to sales ratio is holding steady. There has been no change since May 2011. So far in the fourth quarter -- it has only been three weeks; but so far in the fourth quarter, CN overall intermodal volume is up 10%.

In the case of the bulk, if you could join me on page 11, bulk segment for CN in the fourth quarter will be driven first and foremost by the Canadian grain. We were prepared for an early crop in Canada; and our Western operation led by Mike Cory really deployed all the assets back in early August to be ready for it.

In the last five weeks we have experienced record order book, which we have been blitzing with records scheduled unit service at levels unsurpassed before.

Our US grain business, however, is another story. The crop in the US this year, even though it will be flat on corn and up -- flat on corn and soya bean will be down 8%, the crop is expected to be down as much as 13%. And that will impact negatively our Gulf Coast export.

Canadian coal mine operations are returning to normal after a difficult summer. We are already seeing that in our carload in the month of October.

Coal export in the US via the Gulf Coast will see a progressive ramp up in our Convent terminal. In fact since the August 1 transaction with Cline we have seen a definite runway, an increase in the amount of coal going to that terminal. On the terminal side, the demand remain weak and that segment will remain anemic.

On manufacturing, if you want to join me on page 12, US housing start are expected to remain flat versus last year for the quarter. However, regardless, up to this point the CN lumber volumes we believe should see an uptick in the fourth quarter. We have some sawmill that will restart, and we also are further expanding our lumber container export infrastructure on the Canadian West Coast.

Overseas market pulp price have weakened last month because of the pullback of the Chinese buyer. However, CN shipments should ramp up because we have these two pulp mill coming back from their maintenance shutdown.

The ISM Purchasing Manager Index is at 51.6%, which is slightly in expansion territory. So there is some hope in the manufacturing sectors for things to be steady and slightly improving.

Overall, North American finished vehicle inventory is at a less risky 49 days' supply, which is nine days down from last year, which actually bodes well. Dealer inventory for Japanese manufacturers remained very low at 37 days.

Our iron ore mine are expected to run at capacity throughout the year end, in advance of the vessels season closing. The chemical commodities price outlook is slightly down, and our customers are mindful of keeping inventory low.

In closing, so far in the fourth quarter after -- from week 40 to 42, we have a 5% carload growth and a 4.5% RTM growth. Our leaders in that volume is Canadian grain, both intermodal segments; metals, minerals and lumbers. And our laggers this year will be US grain -- and in fact US grain will probably be negative in the fourth quarter.

We stay cautious and optimistic and we built supply chain solution which are aimed at helping our customers win in their marketplace regardless of the economy. And on that note I would like to thank my sales and marketing team for their innovation and tenacity. CN people is what powers CN.

On that note I will turn it over to another CN person who powers CN, Luc Jobin, our CFO.

All right. Thank you very much, JJ. Now turning to page 14 of the presentation, let me walk you through the key financial highlights for the third quarter of 2011. Revenues were up 9% at CAD2.3 billion. All sectors were positive and several categories actually delivered a performance that outpaced base market conditions.

Operating income was CAD938 million, up 12% versus last year. In the Other income category we recorded a CAD60 million gain in this quarter from the sale to the Cline Group of the IC RailMarine Terminal Company located on the Mississippi River. As part of the sale, we have also entered into a 10-year rail transportation agreement with Cline that will see us haul their coal from Illinois basin mines.

So, our net income for the third quarter was CAD659 million, up 19%. The reported diluted EPS was up 23% at CAD1.46. Excluding the IC RailMarine Terminal gain of CAD0.08 per share, the adjusted diluted EPS stood at CAD1.38, up 16% versus 2010.

Note that we continue to face an unfavorable foreign exchange headwind amounting to CAD0.05 of EPS as the average Canadian to US dollar exchange in the quarter averaged CAD1.02 versus CAD0.96 last year.

Our operating ratio was 59.3% in the quarter versus 60.7% last year, so an improvement of 1.4 points.

Now let's turn to the operating expenses on page 15. Here we came through with another solid quarter, both in terms of operational execution and overall expense management. Keith and his team continued to make progress with a 2% improvement in trainload, a 2% improvement in fuel efficiency, and we also achieved a 1% gain in overall labor productivity.

Operating expenses were CAD1.369 billion, up 10% versus last year on a constant currency basis. By far the biggest increase in operating expenses was CAD121 million on fuel, as prices in the quarter were up over 40%, while the balance of the change was attributable to volume increase, partly offset by efficiency gains.

Labor costs were CAD400 million, 7% lower than last year. So let me break that down for you.

Wage and fringe costs were actually up 5%; this was the result of wage and benefit cost inflation of about 3% and also higher headcount of about 5%, which was partly offset by about 3% of increased capital work in the quarter.

On headcount, let me give a little bit more color. We were actually up 5%, as I indicated, versus the same quarter last year. This is in line with our GTM growth, which was 6%. The headcount increase was driven by a 3% higher base workforce and a 2% increase related to advance hiring, ahead of attrition, to allow for training.

The wage and headcount increases, however, were more than offset by the impact of a lower stock-based compensation expense, as our stock price declined in this year's third quarter, for a favorable impact of CAD20 million, while the stock price increased in the same period last year leading to an unfavorable variance of CAD30 million at that time. Now, keep in mind that our stock price has largely recovered since then, and this will now become a headwind in the fourth quarter.

So, total operating expenses were actually up 6%, FX-adjusted when you isolate the net impact of the fuel price increase and this stock-based compensation variance. This translates into a 60.1 operating ratio, an improvement of 0.6 points over last year's 60.7.

Looking at 2002 we do expect headcount to stabilize. But we continue to monitor our business levels and economic indicators to adapt as needed. I should remind you as well that in 2012 we expect our labor and fringe costs to be under more pressure as our pension expense will likely increase in the range of 1 point of operating ratio, assuming the current trend in discount rates and investment returns continues.

Turning to purchased services and material, it was up 13% mainly from increased repairs and maintenance, higher crew transportation, and incident costs. Last, casualty and other costs was CAD74 million, a 16% improvement from last year as we continue to incur lower G&A and experience lower claims. This follows the trend that we have seen all year.

Now, turning to free cash flow, year to date as Claude mentioned we generated CAD1.3 billion. This is CAD390 million higher than last year.

This is the product of better operating results, higher proceeds from asset sales, and lower working capital due to the timing of last year's CAD300 million special pension contribution, which was made in the third quarter, whereas we now expect to make a special pension contribution in the fourth quarter of this year; and it will be on the order of CAD350 million.

So, these free cash flow improvements were partly offset also by higher cash taxes to the tune of about CAD137 million and higher capital expenditures, just shy of CAD200 million.

Okay. So finally let me speak to our year-end outlook. While it is obvious that we have an uncertain economic environment as a backdrop, we continue to experience steady volume growth. Obviously, we monitor any and all emerging trends carefully. At this juncture we are not seeing the signs of another recession, but a continued -- although somewhat bumpy -- road of modest to moderate growth ahead.

So having said this, we are now reaffirming our 2011 annual guidance. That is, that we expect up to 15% growth in our 2011 adjusted diluted EPS, above last year's CAD4.20. We also continue to call for free cash flow in the order of CAD1.2 billion in 2011 and after making the special pension contributions that I have referred to earlier.

We continue to leverage a very solid pipeline of productivity and growth initiatives well into next year. While we expect some headwinds on the pension front and substantially higher cash taxes next year, the CN team is committed to delivering superior results and of course creating value for our shareholders.

On that note and on the strength of our performance, our balance sheet, and a positive outlook, our Board has approved a new share buyback program for 17 million shares to be achieved over the next 12 months through a normal course issuer bid. So on that note, Claude, back to you.

Thank you, Luc, Keith, and JJ. As I said earlier, our agenda is unfolding. Clearly, whether it is our DNA of innovation or the benefit of our supply chain collaboration, you can see that it is driving very strong and solid results.

We are helping our customers grow in their own markets. We are growing at low incremental cost, and it's allowing us to deliver very solid value for our shareholders.

Clearly the third quarter is showing a lot of momentum, and we feel cautiously optimistic about the current environment leading us into 2012. We are positioned to finish 2011 on a very positive note.

We're watching the economy, but we are sticking to our game plan. We know we can deliver results in good times, as we can deliver results also in bad times. The key for that is to leverage our strengths.

Our precision railroading and our focus on productivity and accountability and driving results day in, day out is absolutely [life], and our growth initiatives are just building momentum. What we need to do is to take our game to the next level and to continue to deliver solid results.

So with that, Patrick, we will turn it over to questions from the audience.

(Operator Instructions) Cherilyn Radbourne, TD Newcrest.

Thanks very much. Good afternoon. I guess I will lead off with a question on the outlook. You sound reasonably optimistic, notwithstanding the headline.

Can you just comment on to what extent you think customers generally have erred to the low side on their inventories? Such that if we get any kind of unexpected lift in demand it has to pull through in terms of freight demand.

Let me give you my top line and then JJ can comment on his channel checks. But of course when you listen to the headlines there is a lot of risks out there. People are concerned about Europe; people are concerned about China slowing down. And I think those are valid concerns.

But when we look at our traffic patterns and the growth that we are seeing at the moment -- and JJ gave you some of the most recent statistics over the last three or four weeks entering into Q4 -- we are seeing good growth in every one of our commodity sectors except US grain, which is not economically related.

So we are continuing to see growth. The key metrics and the inventory levels are -- on balance they are tight. So they are driven by end demand.

We are all, like everybody else, concerned about potential shocks, about confidence. But honestly when we look at our traffic patterns we can't see a recession in the making at the moment. JJ, you want to add to this?

Yes, I think most of our customers, whether they're on the retail side or the manufacturing side, are really making a conscious effort to keep their inventory low, meaning that they want to produce to the order; they don't want to produce to inventory. So they want to produce to the order and to avoid what happened in 2008.

At the same time, though all of them -- most of them, I think -- they really want to be ready in the starting blocks. So when the demand start to pick up, you want to be able to capitalize on that because the price still good.

So low inventory means reducing the price pressure that they have. The only industry that hasn't been able to do that really well is the overseas company. They brought in too much capacity on their shipping line.

Most industries are mindful of this inventory issues and capacity to mitigate pressure on price and yet be ready in the starting block if and when the economy starts to pick up by whatever amount.

Okay, that's helpful color, and that is my one. Thanks.

Chris Wetherbee, Citi.

Great, thank you. Maybe just a bit on the incentive comp, and I apologize if I missed it a little bit. Just wanted to get a sense of how we should think about fourth quarter and maybe some rules of thumb to use when we are calculating the fourth-quarter run rate relative to incentive comp.

Yes, I mean typically if you look at this quarter, what happened was the stock price was down by about CAD7.00 in the quarter, whereas last year it was up about CAD5.00. So that totals to about a delta of about CAD12.00.

Roughly speaking we use about CAD3 million to CAD4 million impact for every dollar change in the stock price. So you can -- we finished the quarter at CAD70. So you can just figure out where you think the stock will end up by year-end, and you can back into it.

Just to make sure there are no other puts and takes when you think about -- I think you mentioned where headcount was rolling out. But that is kind of the key driver as we think about the potential change into the fourth quarter?

Yes, I think stock-based compensation is just the volatility that Luc described. As for the other elements of our labor expenses, they're actually very well behaved.

We are hiring a little bit ahead of the curve as we discussed in prior calls, to make sure that we are able to get ahead of the game in terms of attrition. But we have done that; so on a go-forward basis we expect to hire more in line with attrition.

And we will be monitoring demand levels just to make sure that we are not caught too long if demand was to reduce in the case of a recession.

Sure, so you will leverage the headcount going forward. That's helpful. Thanks very much for the time.

Turan Quettawala, Scotia Capital.

Hello, good evening. My question was on the coal side. There is obviously a pretty solid long-term opportunity here out of Rupert. I know there has been some temporary issues here in the quarter. But I am just wondering if you can share a little bit on how things are progressing on that front.

Is it so far tracking better than your expectations, or worse? And maybe how long of a growth curve is this?

It's JJ. If we talk about Rupert only, the facility is actually going to have a shutdown coming up mid-November to replace a dumper. They will be down roughly, let's say, 20 days.

So what that will do is that will give them an extra 2.5 million ton of capacity entering Christmas. So that is bode well for us in terms of 2012. That is on that front.

What we have done on the sales side is we have been generating business from the US, namely PRB business. Our objective is to try to make sure that they kept these terminals running near capacity, combining first and foremost serving Canadian mines -- which are coming back to production and also have some expansion plan -- and then complementing that capacity with the PRB coal.

So I think right now we are on track. We don't want to get ourselves -- we don't want to get ahead of the terminal capacity. But the terminal is expanding in November. It will also expand in the fourth quarter next year, when they add the other stacker/reclaimer.

And that is the game plan, is to keep in pace with capacity that they have at the waterfront.

And how about the mines, JJ? How is the mine development going there? I guess there is a lot of growth still to come, right?

Some of the existing mines really didn't produce that well last summer because of production issues, recruitment issues, mostly related to the heavy rain and flood of last spring. But they are coming back.

And typically they run very well in wintertime, because the road gets very solid. And mining in wintertime, for whatever reason, seems to be easier than it is in the springtime.

Most of them have expansion capacity. They definitely have the cash. Even though the price of coal in Asia went down 10% October 1, because now they have quarterly pricing, all of these mines are way above reinvestment level. And it is good money to be made by investing.

So we feel confident that Canadian mines are expanding, and we also feel confident that we are bringing and will be able to bring more PRB coal. And we feel confident that the Ridley terminal has a good plan in terms of replacing a dumper this fall. The stocker/reclaimer is already on order and being put together; it will come in fourth quarter next year. So all these things are lining up pretty well.

That's great. Thank you very much.

Thank you, Turan. And don't forget our little franchise for export coal down in the south through Louisiana. That is another area where we are growing pretty strong.

Thank you. That's great.

Chris Ceraso, Credit Suisse.

Thanks. Good evening. Just a quick question on the international intermodal business. It is clear that you have picked up some share. Can you talk about strategies or efforts that you are making to make sure you hold on to that business?

Yes, to hold the business you have to provide service, service better than anybody else. If you are a shipping line and you are doing a transpacific trade, you have a choice of a number of ports and at least four railroads that I know -- and maybe a fifth one down to Mexico.

So the name of the game is you got to provide service on the import, you got to provide service on the export, and you got to find a way to help them win in the marketplace.

So it is way beyond maybe how the game was played many, many years ago. Now we really compete with everybody, transpacific, ports, terminal operator, railroad, import-export.

And it gets really to the supply chain. If we do a good product from the time the container get on the dock to the terminal operator to the time it gets delivered to the assembly plant in Ontario or an assembly plant in Michigan, then obviously we make the shipping line look good and you can hold on to business.

And vice versa, same thing on the return trip. We got to help these guys finding monies to pay for the return trip. That is an export or a domestic refill.

Is there any investment that you have made or need to make that give you an advantage and let you provide better service?

We have made investment. For example, in Prince George we have put in a small intermodal ramp. We have also put in a lumber reload; we are loading a lot of lumber in container in Rupert.

We have an investment that we are doing this fourth quarter to load the container in Thornton Yard in Vancouver. We are opening a ramp in Chippewa Falls, which is not too far from Minneapolis.

We are making investment to either generate export or making some investment to generate more destination that we can offer to the lines that do business with us.

Thank you.

Of course, we also made the investment of the EJ&E, which is not only for intermodal but it is for all of our traffic, to be able to get across Chicago and serve the Detroit market or serve the Memphis market with a more seamless service.

Tom Wadewitz, JPMorgan.

Yes, good afternoon. So I think it is a follow-on, on the topic you were just talking about. But as CP had indicated on their call earlier today they had some conviction of some of that intermodal volume that had been lost to you would come back, and they were starting to see that take place.

Are you seeing evidence of that? I mean I guess, how much conviction do you have that your current favorable trend continues, looking at the next couple months?

You know, Tom, we have as much conviction as the strength of our supply chain collaboration approach. I think we have been growing one box at a time ahead of the West Coast port levels in general for many years now. We intend to continue to provide outstanding service, to do it inbound and to do it outbound, and to innovate every day. So that our customers, the shipping lines that we serve, and their customers, the ultimate box owner, continue to believe that CN has a good service.

In an environment with higher fuel price our ability to go across the Rockies and to do so with fuel surcharge component that is much more competitive than the rest of the industry; our ability to provide DRP service, domestic repositioning, to help load the boxes on the return move -- all of these things coming together is what is helping us grow the business one box at a time. And we intend to continue for many years to come.

Okay, great. Thanks.

Bill Greene, Morgan Stanley.

Hey, this is actually John Godyn filling in for Bill. I know you have a 65% long-term OR target; but you have been exceeding that target for a bit and even getting better. If we look out the next few years, is there a scenario where you continue to see year-over-year OR improvement for the next couple years from here?

And how do I think about that? What are the triggers that drive that scenario? Is it just better than expected macro, or could that scenario happen? I am just trying to think about that.

Just to start off, I will let Luc answer that tough questions which keep coming back. But our OR target is mid to low sustainable operating ratio. So it was never a bright line at 65%, and we intend to continue to grow faster in the economy, to get good pricing, and to bring in the business at low incremental cost.

We haven't set a bar and we haven't set a floor in terms of our operating ratio. Luc, you want to have another angle on that one?

No. I mean again, obviously we keep pushing the envelope and we make the important trade-offs between operational efficiency and the level of customer service that Claude and JJ have referred to. So that is where we make the trade-offs.

We always said sustainable mid to low 60%s. And, frankly, I have told the team -- prove me wrong. But at the same time we are very focused on growing the franchise and continuing on our path of operational excellence.

So there will be elements that will come and put a little more pressure. I mentioned one is the pension expense. So clearly that is going to be a little bit of a pull on the OR. But meanwhile, we are looking and we do have a good pipeline of productivity initiatives which will help us keep it in line.

Thanks a lot.

Jason Seidl, Dahlman Rose.

Good afternoon, guys. I hate to beat a dead horse on the intermodal side, but you mentioned that you are going to retain your business based upon the service levels that you provide. Am I reading that that you are not seeing any pressure from any of the business that you might have picked up from your competitors -- any pressure to reduce pricing to keep that business?

There is always -- in any dynamic marketplace there is always pressure. There was pressure; there is pressure; and there will be pressure. In the end you have got to compete first and foremost on service.

When you look at intermodal, especially if you look at your overseas company, business move from one shipping line to another based on overall service. So sometimes a shipping line decision to retain their business with a railroad may not be sufficient for them to retain the business with their own customers. And that's most of what happened here in the last 18 months.

Some business have shifted back and forth, not so much from one railroad to another, but from one shipping line to another because the different shipping line have assembled different supply chains which have won in the marketplace.

So is there pressure? There is always pressure. Nothing is different. The pressure come as I said from all ports, all terminal, all channel to market. Canadian West Coast, US West Coast.

Real quickly, you mentioned that you were going to be picking up some of that new coal business from the Illinois Basin. Is this going to be in connection with the mid-American corridor initiative that you have going on? Or is this something different?

We were referring to the -- referencing to the Convent terminal. We sold the Convent terminal August 1 to Cline (technical difficulty) mine in Illinois. The reason why they bought the terminal is to use it as their gateway to export via the US (technical difficulty)

Okay. Thanks for the time as always, guys.

Walter Spracklin, RBC Capital Markets.

Thanks very much. Just a quick one here first of all, to ask you about. Perhaps, Luc, if you could comment on any potential dispositions of further assets that you see over the next 12 months. Is there any assets you consider non-core that we could look at in terms of freeing up more cash?

No, at this point we don't really have anything on the slate. So obviously we continue to look and explore opportunities. But at this point we don't have anything of substance to talk about.

Okay. Just back on the coal side up at Ridley, we have been chatting with some of the West Coast ports, who have been indicating that the flow going up to Ridley has been -- is a costly haul. There was some question as to the long-term sustainability of that coal going up North. I know this is a key line for you guys and you have talked about keeping up with capacity.

But is there any scenario where you might question the long-term sustainability of a thermal coal haul with that kind of length to it for export markets, given some of the historical volatility in demand for PRB coal on the West Coast?

Well, let me put it to you this way, Walter. It takes an awful long time, and that may happen; but it takes an awful long time to get a permitting and to build a waterfront coal terminal infrastructure. So if that business is good for the next five or six years and we increase it in the meantime, that is a pretty sustainable pace of growth for us. We will ride it out as hard as we can for all those years to come.

If eventually there is a bigger market, if there are terminals that get built that are closer to the Powder River Basin mines, of course they will have a better shot. By then hopefully we have more met coal from Canada to fill in the slot in Ridley.

So I think of it as a very sustainable piece of business that we are going after aggressively within the construct that JJ described. We want to make sure we serve our Canadian mines and we want to make sure we manage end-to-end supply chain and we don't flood the terminal over and above its capacity.

Okay. Thank you very much.

Ken Hoexter, Merrill Lynch.

Hi, this is Steve Sherowski in for Ken Hoexter. Just a quick question regarding the Canpotex contract that is due to expire mid-next year. I was just wondering. Of that volume, how much of it do you see as a natural to the CN network?

Well, the negotiations have been under way here for a little while, and I think it would not be proper to really expand on what is happening. The negotiation obviously are confidential. So I think at this point, we are in the quiet time.

I mean you can't just comment, though, like in terms of current volumes how much you see? Like how much of it currently touches your network?

We serve all the potash mines, whether it is for domestic traffic or export traffic effectively. So we have an ability to grow with those potash suppliers, whether it's in their domestic market or through Canpotex in the export market.

Okay, thank you.

Matt Troy, Susquehanna.

Yes, thanks. I just wanted to congratulate Keith on perhaps the most efficient summary of industry operations when on slide 7 he says -- railroading hard in Q4. Couldn't say it better.

Keith is a man of few words but he drives the puck in the net.

I know, I know. I had just one simple question if I could. If I am looking at basically the last-mile initiatives, it is something we have heard from CN about for a couple years now. Could you talk about the decision to build versus buy?

I know it is looking at the rail network and going deeper into that last-mile/first-mile. But might there be an opportunity to deploy capital given softer international trends, to actually go out and buy something small of a tuck-in nature or potentially something bigger? Thanks.

In terms of our first-mile/last-mile, Matt, it's really how we come about interfacing with our customers, from better forecasting to understanding their requirements from a switch window compliance standpoint, and how we get our car management distribution activities to the next level so that we have not only higher order fulfillment, but also more responsive order fulfillment. And I think Keith gave you a few statistics that are very important.

Our basic order fulfillment performance, if I just look at the last four or five weeks, is in the range of 95%. And I think during the quarter it was up 4% versus last year.

Our short lead-time order performance is in the 80% range, and that is up 15%, 20% versus last year. That is why we are able to grow our business against truck competition and outpace the economy in general. That is really what we mean about the first-mile/last-mile.

As it relates to tuck-in extension, obviously if we find a network that allows us to get closer to end markets and serve them on a first -- on a single line basis, we have done a few acquisitions over the past several years and we would continue to be ready to move on such an acquisition if they became available.

Okay, thank you.

David Newman, Cormark Securities.

Good afternoon, gentlemen. Just in the freight markets overall we are seeing on the trucking side pricing appears to be doing very well. Obviously supply constraints on the trucking side.

Are you seeing any acceleration on repricing, especially on your truck competitive products? And is that leading to some share gains there as well?

The pricing situation in the trucking industry from a price point of view is better in the US than Canada. The capacity also is more constrained in the US than in Canada because of driver shortage is more severe and these new regulations came in the US and not in Canada.

So our volume in the US for domestic intermodal is growing faster than our volume for domestic intermodal in Canada for that point. The pricing is more robust in the US than there is in Canada. It is really a fairly different market right now, in terms of pricing and capacity.

Are you seeing the pace of change, change, JJ? That it's actually picking up a little bit?

As in?

Just the overall pricing. Are you seeing on the truck competitive side, especially US, is it accelerating, I guess?

I wouldn't say so much in Canada. But in the US, I don't know if we can call it pace accelerating. It was already -- when the regulation came into effect that had a major impact on the market.

Intermodel is definitely an attractive product. Either you deal with a retail product like CNTL or you deal with a wholesaler. No; I wouldn't say it is accelerating, but it is definitely a good market in the US to do, to compete with truck. Because truck capacity and pricing is better than it was.

Right. Then a quick one for Luc. The CAD350 million that you're making in Q4 on your pension, will that be enough to keep you out of the deficit? I know the year is not closed out here, but obviously the long bond rates and Operation Twist has affected a lot of companies with a defined benefit plan. So is it going to be enough, do you think?

No, I do not think that will be enough. Certainly if the discount rates and the interest rates stay where they are today, that wouldn't be sufficient.

But we will look at the situation as the rates will ultimately get fixed at the very end of the year. And we will also look at where the investment returns will go for the balance of the year.

If you recall, last year certainly we had a very good strong finish in terms of investment return. Just towards I guess it was mostly in December, and the discount rate picked up a little bit.

Having said that, currently if I was looking at where things are today, we would not be -- this would not be sufficient to offset the deficit.

Okay. Are you corralling some money aside perhaps next year on a cash flow -- from the cash flow for next year, maybe? Perhaps for another true-up of some sort, if that is the case?

Well, we're constantly monitoring it. So we will revisit the situation when we see -- when we have a better fix on the year end.

Excellent. Great results, guys.

Benoit Poirier, Desjardins Securities.

Yes, good afternoon. Claude, there is a lot of talk about the big mining opportunities in Northern Quebec called the Plan Nord. It seems that you are the best railroad to benefit from that.

So could you comment, provide some color about the opportunity? Maybe quantify the size of the opportunity and how you intend to approach this potential opportunity? Thanks.

Thank you for your question, Benoit. There is certainly a lot of talk about the potential opening of mines, but it is a difficult market to read. You are talking about mine developments that are four, five, six, seven years out, and it's always difficult to judge.

You have a lot of junior players that are talking about opportunities and they line up a big volume. Ultimately, how much of that comes onstream and what timeline is difficult to judge.

We are assessing this opportunity because if it was -- if it turned out to be large volumes, there might be a need for additional railroad infrastructure. And we will give you an update as it unfolds.

At this time, I couldn't tell you just how big and how real it is. And I can certainly not tell you what we would do about it, because it is too early to make such judgments.

Okay. Thanks for the time.

Keith Schoonmaker, Morningstar.

Hi, thanks. Based here in Chicago, naturally I am interested in the EJ&E. I am wondering where is the EJ&E in its plan to divert from St. Charles Airway and general traffic that inefficiently moves through the congested city?

We have probably -- we have moved a significant amount of the business. We are close to what we thought with the STB, but there is still quite a bit left opportunity I guess, first, as the business grows.

We have got -- with the transition of Matteson, put about four more train starts out there on a consistent basis. We are being very careful to make sure that we continue keeping our commitment to the communities that we have negotiated volunteer agreements with. So we are sort of walking before we run, being very cautious and being pragmatic about it.

So there is still a lot of capacity out there. There is still some business down the line once we finish all of the work we're going to do on interchanges that we will be able to shift. But for now, we have shifted what we're going to shift and we are going to continue to convert it.

Thank you.

David Tyerman, Canaccord Genuity.

Yes, good afternoon. The question is on casualty. It has been bouncing around quite a bit this year and it is certainly down, as you pointed out, a lot from last year. I was wondering if you give us some thoughts on where you see this settling out?

I think -- you know, I tend to think that the run rate will be at the low end of the range. I provided a range, was probably about CAD80 million, CAD85 million on a quarterly basis for this year. So I think we will end up clearly at the low end of that range.

But again as you said sometimes this can be a bit bumpy. So, so far we have been able to manage the cost in that category quite well.

Do you think that that is a good way to think, obviously with inflation over time, in terms of the long-term?

It's probably -- I would say if you look at the longer term we have been averaging a little more than this. So I have used as a rule of thumb something closer to about CAD90 million a quarter.

Okay, that's great. Thank you.

David Vernon, Bernstein Research.

Hi, just a quick question on the metal and minerals business unit. The yields were up pretty substantially. Is there something specific, some longer-haul traffic in there that is going on? Is there a little bit of color you could share on that yield increase?

The yield as you were looking at the revenue per car, or the --?

Yes, the revenue per car. The revenue per ton mile is relatively flat. But the revenue per car is up pretty high.

So it's a function of the length of the haul, I think. This is one of the segments our length of haul on average was up. So it's the business mix.

So price is going up, like in other segments. Fuel [isn't]; while also on average we had a longer length of haul.

Was there something specific that was driving the length of haul increase? Or is that going to be -- is that like a one-time thing or is that ongoing?

Well, one of the things that -- one of the driver of the length of haul in M&M, one of my longest haul is frac sand from Wisconsin to Western Canada, and that is business that is growing. Hopefully it is going to be steady business.

There is no sign out there that drilling activity is going to reduce. That is one of the long haul that is increasing in volume at faster pace than the other M&M commodities.

Okay, great. Thank you.

Thank you. Jeff Kauffman, Sterne, Agee.

Thank you, actually all our questions have been answered.

Okay. Thank you very much. There was a lot of good questions. We are very pleased with our third-quarter results. And as you heard, we have good momentum into Q4.

JJ is drumming up the business, Keith is railroading hard, and Luc is collecting the dough. So we will try to keep it that way and see you on the call for January. Thank you very much. Have a good day.

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