Canadian National Railway Co (CNI) 2012 Q4 法說會逐字稿

Welcome to the CN fourth-quarter and full-year 2012 financial results conference call. I will now turn the meeting over to Mrs. Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Mrs. Drysdale.

Thank you, John. Good afternoon, everyone, and thank you for joining us. I would like to remind you of the comments already made regarding forward-looking statements.

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

The rules have not changed. In order to be fair to all participants, I would ask you to please limit yourself to one question. I will be available after the call for any follow-up. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Thank you, Janet, and thank you to all of you to join us on the call in the middle of the day. I know it is a busy day for you, so we will try to keep things moving and be as informative as we can on our fourth-quarter results, which have been excellent. I think the CN team of railroaders have turned in an impressive quarter, capping a solid 2012 year. In fact, when you look at it, 2012 for us is really a record year, record in terms of volume, record in terms of earnings, record in terms of safety. So we have been able to finish the year strong and are very, very pleased with these results.

Revenues was up 8%. I'm talking about constant currency. JJ will give you some of the details, but the good news is we had strong growth in certain sectors, but growth in all of our business units. So pretty balanced growth across the board is what drove this 8% revenue increase for the fourth quarter.

Our operating ratio was 63.6%, which is an improvement over last year and a testament to our ability to accommodate that revenue growth at low incremental cost. And I'm particularly pleased with that, because frankly, this year, December was not an easy month. Winter came in early in Canada, and Keith and his team were able to maintain our strong performance metric, both on the operational efficiency side, but also on the service side, importantly. And Keith will give you more detail in a minute.

In terms of bottom line, our diluted EPS was CAD1.41. That is up 8% on an adjusted basis versus the fourth quarter last year. Solid performance. And the full-year cash flow topped CAD1 billion, just over CAD1.006 billion for the full year, and that is despite very significant pension contribution next year; we took advantage of some of the cash that we generated from the monetization that Luc and his team were able to conclude in the early part of 2012. So Luc will give you more detail on these results in a minute.

Let me just say a few words on 2012. I said earlier that in many ways, it is a record in the Company's history, and I'm pleased that we achieved this record performance based on our strategic agenda. We have been able to outpace the economy with record volumes during the year. We really outperformed what the economy would have given us, across the board really. Crude, obviously, is a big area where we outpaced the market. It is a new market for us. Intermodal, we grew much faster than our peers and much faster than what the economy would give us on the strength of market share gain.

Same story, more market share against truck, but the same story of gaining more inroads in the marketplace with merchandise products. So all of these things adding up is why we significantly outpaced the economy and were able to drive record volumes in 2012. And we were able to bring that to the bottom line and deliver the record earnings as well.

Balancing operational and service excellence and our new supply-chain agenda are what is driving those results. They are driving it at the top line, but they are also driving it to the bottom line, because, frankly, we are now getting to a point where our supply-chain partnership is helping us improve not only service, but also seek new ways to gain efficiency. And that bodes well for the future, because if you keep that paradigm going, our partners and us are working together to improve slot utilization, to streamline cycle times in important bulk sectors and to generally focus on better service outcome looking at it end to end. And it is helping us, as a result, grow both the revenue and bring it to the bottom line.

So clearly, we have a good agenda. We are pleased with how we finished the year in terms of driving shareholder value. In terms of our important constituency here, if you look at it, we are trading at an all-time high. Our premium is in line with the fact that our story is coming together and people have confidence in the future. And I'll say a few words at the end to wrap up after Luc gives you the guidance, because I think we have solid potential and prospects going forward and that we will not disappoint our shareholders and continue to drive shareholder value for many years to come.

With that, I will turn it over to you, Keith.

Okay. Thanks, Claude. It was indeed a great fourth quarter to close out a great year, as you pointed out. In fact, these are the type of results that have continued to provide compelling proof points that our agenda of operational and service excellence continues to gain momentum. So let's spend a couple moments providing some color on our performance.

As you can see, we delivered productivity gains across the board. On a year-over-year basis, each one of our key productivity measures improved, which I'm especially proud of considering 2012 business levels marked the highest volumes in the Company's history. Again, a powerful proof point that our operating team continues to execute in a meaningful, disciplined way handling this growth as a low incremental cost.

Turning specifically to Q4, as I said, on a volume basis, fourth quarter was strong. In fact, it was the second strongest quarter ever in the Company's history. When faced with the heavy volumes, we produced significant gains in yard productivity, which was up 11% versus 2011. We realized gains across all three regions, but our shining star was Chicago, where productivity actually improved 16% versus the fourth quarter of 2011, which, not surprisingly, again, our investments in Kirk Yard and the EJ&E property continued to pay dividends. We opened our renewed Kirk Yard during the fourth quarter, allowing us to shift the major switching from Markham to Kirk, which is another step in our plans to consolidate switching activities in this critical Chicago hub.

As you can see, we had incremental gains from trainload productivity as we continue to take advantage of our distributed power fleet to safely run larger, more efficient trains, laid on the foundation of our network. There was a little bit of slippage in some of our velocity-based metrics in the fourth quarter that you will see, but I refer to those as minor bumps in the road. We had some very meaningful operating challenges in the western region, where we lost our main line to Vancouver for five, almost six days in late November following a major rockslide. So making no excuses, but also we realize that winter does exist in Canada. It hit us a little early, especially compared to 2011. So against the backdrop of very favorable winter comparables in 2011, we did have some slippage. But regardless, we've got a solid winter operating plan in place and we've already realized and produced improvements in those metrics; so no concern on a go-forward basis.

Shifting to a service focus, we continue to raise the bar on productivity, while at the same time driving meaningful service improvements for our customers and for our supply-chain partners. Our focus on delivering our reliable end-to-end service is working. We strongly and firmly believe that by having shared metrics with our partners and meaningful fact-based dialogue and an understanding of the entire supply chain will continue to improve the service that we provide to our customers, while driving continued incremental productivity gains for CN and also for our customers and supply-chain partners.

In the Merchandise segment, a few key points to share. First, we continue to leverage our car management excellence process to drive improvements in our car order fulfillment. 2012, we met 94% of the unconstrained demand for the CN fleet. This success was enabled by ensuring constant communication with our customers, by having a good handle on their requirements and working with them continually to minimize any shortages while we optimized our car movements.

Second point, we continue to focus on the critical first mile/last mile of our service, which is what directly touches our customers day to day. Our customers know the window when they will be switched. We measure our performance against that expectation. 2012, as you can see, we achieved 91% switch window compliance.

Thirdly, one of the first supply-chain focus areas we tackled almost three years ago was grain, where we've developed and implemented a scheduled grain plan. As opposed to (inaudible) success by hitting the right week with request to car supply three years ago, we are consistently providing cars on a scheduled date 82% of the time.

This supply-chain reliability has enabled a partnership that starts with the loading elevators in the prairies to the unloading elevators at the ports that have actually produced record grain movement levels for us during the fourth quarter. In fact, we set an all-time record for grain deliveries to the West Coast, loading and sustaining an unthinkable 5000-car-per-week spot program for an eight-week span, which in contrast to CN's history, we had a record of two total weeks in our history where we've loaded and shipped 5000 cars, and they were not simultaneous.

So in closing, I want to reemphasize the obvious; our strategy to drive operational excellence while driving service excellence is absolutely working both for CN, for our customers and our supply-chain partners. We've got momentum on our side. The operating team and plan is firing on all cylinders.

So with that, I will turn it over to JJ to highlight how our colleagues in the marketing department are converting this momentum into future growth opportunities.

Thank you, Keith, and good afternoon to all of you who are joining us today, and a special welcome to Janet for this quarterly roundtable.

In the next few minutes, I will review the last quarter and then I will give you our commercial outlook going forward. The revenue was up 7% from last year and the breakdown is as following. Same-store pricing on same-store sales came in just short of 4%. Volume was up 5%. Our (inaudible) was up 7%, carloads was up 3% and the revenue ton mile was up 8%. The revenue increase from fuel surcharge added another 1.5%.

Then, the weak US dollar conversion took out CAD44 million or 2%, and other items were slightly negative by less than 1%.

If you go on and join us on page 10, you can read the result by business unit. And this time around, I would only add color on the more relevant variances. As usual, all my comments will be a tax-adjusted basis.

I will start with crude. Crude was up CAD50 million of incremental revenue during the quarter, an incremental 9000 carloads. But more relevant than just carload, we had very strong revenue ton miles coming from crude. CN is the long-haul carrier among the Class I railroads when it comes to crude.

Iron ore had a major drop of 15,000 carloads, but the revenue impact of iron ore was less than CAD5 million in terms of reduction. Iron ore in case of CN is a very short-haul business; in fact about 60 miles.

Next is steel pipe and the booming North American energy sector. We had our large-diameter pipes, which are used in the construction of pipeline, and our OCTG pipes, which are used for drilling, produced an incremental CAD12 million in the quarter. That is a 50% growth for that sector.

Domestic lumber and panel, which are driven by US housing starts, saw a revenue increase of 6%.

Next, the CN good and steady story on coal. Our coal and pet coal business unit grew again last quarter, and the revenue was up 17% or CAD25 million. US grain and the Midwest drought, our US grain segment actually grew a solid CAD28 million in revenue, mostly because of very strong export as the Mississippi River was a little weak.

Fertilizer was up 27% or CAD18 million. We handled more volume of fertilizer, and we especially handled more potash in the quarter.

Finally, the bright spot for many years to come, Intermodal. Overseas revenue was up CAD24 million or 8%. Domestic was up CAD14 million or 8%, as well. Highlight -- the Port of Vancouver did very well for us last quarter. We had very good increase in the import from the CN Shipping line. The domestic business was also strong, and in that case, the momentum was basically good across the board of all of these sub-segments.

For the full year 2012, the Intermodal business reached CAD2 billion in revenue, with an annual compounded growth of 12% since 2010.

Concluding on Q4, we produced CAD200 million of exchange-adjusted growth, almost 4% of same-store price increase and 8.2% of RTM growth.

Now turning to the commercial outlook, and I will start with Intermodal on page 11, and you will see on Intermodal, this year, the story is about new products, new terminals and new customers. Starting with organic growth, new products, we are introducing new products such as [returnable] sled inserts in-use service, which is aimed to move long steel product in domestic containers to compete with long-haul flatbed trucks.

We also are going to be introducing this year cross-border reefer services for the reefer market, starting with domestic reefers for Canada-US movement; but also with international reefers, which we aim to bring from the West Coast ports that CN serves.

To expand our Intermodal geographic reach further, we are adding new terminals. You saw the press release; we are opening -- in Indianapolis, we are opening in conjunction with a partner a new terminal. This terminal will open in June and it will offer CN direct service from both Rupert and Vancouver to serve the Indianapolis market.

In Joliet, Illinois, a new terminal will also be open by the summer, also with direct service from both Vancouver and Rupert. And this is a very large logistics market -- has huge potential for CN.

In Calgary, we just opened on January 10 our new terminal, and we now have the capacity to expand our business in southern Alberta for years to come.

Finally, we are also welcoming new customers in our portfolio. You remember that APL joined CN last October the Port of Vancouver. [MOL] is now joining CN this month at the Port of Vancouver. And a large-name US retailer is opening stores this spring and they will be joining us sometime this spring. So all in all, we believe our Intermodal franchise has the scope for another year of up to 10% revenue growth.

Looking at bulk on page 12, our fertilizer volume will benefit from the restocking of inventory in North America, as well as from our Canpotex contract. On the coal side, the Rupert export terminal just came back, in fact, last week, from an expansion shutdown. The new nameplate capacity at the terminal is now 18 million tonnes from the 13.5 million tonnes that it was. So therefore that is a significant, significant revenue opportunity for CN going forward.

The low water level in the Mississippi River will continue to benefit our US grain rail program to (inaudible), at least in the short term. And on the Canadian side, you've heard Keith talk about our fantastic program of last fall, so his service will really keep us ahead on the export program in 2013 as well.

Manufacturing -- I'm on page 13 -- starting with crude. What really drives the crude by rail is the spread in the crude selling price, the spread between Western Canada Select and the Brent Index. And we definitely have the scope to more than double our revenue of last year. When you look at (inaudible) revenue a carload, this could be a significant business for CN in 2013 and beyond.

Housing starts will lift our domestic lumber, panel and Intermodal revenue. And in fact, some idle panel mills in our networks should reopen later in the year, probably in the second half.

The booming energy sector will drive many of our commodities, namely the large-diameter pipe, the drilling pipe, the Alberta aggregate, the Wisconsin frac sand franchise, movement of condensate; all these businesses are very good prospects for 2013.

On the negative side, paper, iron ore and steel product do have a weaker outlook.

In conclusion, to wrap this up, we have a solid momentum in pricing, which we will be maintaining this year. And you should see CN as a disciplined growth story, a story that is leveraging our 63%, leveraging our leading supply chain service and reputation in the marketplace and leveraging our bountiful and diverse energy franchise.

So on that, I will answer your questions at the end, and I will turn now to Luc.

All right. Thanks very much, JJ. Starting on page 15 of the presentation, let me walk you through our key financial highlights for the quarterly performance.

Revenues were up CAD157 million, or 7%, at CAD2.5 billion. JJ, Keith and their teams combined efforts to help us achieve a solid volume increase in most commodity sectors. And once again in the fourth quarter, we performed better in several categories than prevailing base market conditions.

Operating income was CAD922 million, up 10% versus last year. This was driven by strong revenue growth handled at low incremental cost. Our operating ratio was 63.6% in the quarter, which represents an improvement of 110 basis points versus last year.

Other income was actually a CAD5 million expense in the quarter compared with CAD21 million of income in the fourth quarter of 2011. As we pointed out in previous earnings calls, this category is always difficult to forecast due to both timing and activity levels. The caption also combines income and expense items, so it's really land and property disposals, income from passenger rail projects, offset by expenses relating to real estate, foreign exchange, investment and other costs.

So in 2013, I would point out that I anticipate the activity level in this category to be significantly lower, as we expect both fewer land sales and passenger rail projects. On a full-year basis in 2013, I would expect other income to be more in the CAD20 million range; in fact, closer to our 2012 run rate for the second half.

Turning to our net income for the fourth quarter of 2012, it stood at CAD610 million, up 3%. And the reported diluted EPS was CAD1.41, up 7%. Removing the impact of the income tax adjustment in 2011, the adjusted diluted EPS of CAD1.41 in 2012 represents an 8% increase over last year's fourth quarter. On a constant currency basis, this is an increase of a full 11%.

As Keith pointed out, we came through with another solid quarter in terms of operational productivity and customer service. Yet this performance did not come at the expense of overall cost management. The operating team continued to make progress in improving some of our key productivity and service metrics.

Turning to page 16, let's talk about operating expenses. Operating expenses were CAD1.612 billion, up 7% versus last year on a constant currency basis. At this point, I'll refer to the changes in constant currency.

Labor and fringe benefit costs were CAD463 million, a decrease of CAD43 million or 8% lower than last year. This was the result of four elements. The first element is an increase in overall wage costs for approximately 5%. This was the product of wage inflation, up about 3%, overtime was up 1%, and we also had an increase in headcount by less than 1% in the quarter versus last year. Now, GTMs were up 6%, so clearly we enjoy some 5% plus labor productivity gain in the quarter.

The second element is higher capital work during the quarter, which actually offset the increase in wage costs.

The third element is a lower increase in stock-based compensation expense in this quarter versus last year, accounting for five percentage points of the favorable variance. This was obviously given a lower increase in our stock price through this quarter versus the same period last year.

Finally, the last element relates to lower fringe benefit costs for about three percentage points. And this was due in part to recognizing a benefit from terminating our former CEO's retirement benefit plan.

Turning to purchased services and material expense, it stood at CAD340 million, up 17%. This was mostly a factor of higher volume and business activity levels. About half of the increase is due to more repairs and maintenance for cars and locomotives, as well as higher expenses for contracted services and volume-related activities. The balance of the increase is really for other project work, including information technology, business development, safety and engineering.

The fuel expense stood at CAD400 million, an increase of 8% versus last year. Higher volume represented six percentage points of the increase, while higher prices accounted for the balance.

Casualty and other costs was CAD108 million, CAD53 million higher than last year as we incurred higher legal claims, lower environmental credits versus last year, higher costs relating to workers' compensation as a result mostly of carrying out an actuarial evaluation in the quarter, and generally higher audit costs.

Our full-year results for the C&O category were CAD338 million of costs. We anticipated 2012 costs to be higher than last year, and for 2013, I would expect a similar range of expenditures; that is, averaging approximately CAD85 million per quarter.

Speaking of our full-year results, they are summarized on page 17. We wrapped up 2012 with over CAD9.9 billion in revenue, an increase of 10%. Our operating earnings grew 12% to reach CAD3.6 billion, almost CAD 3.7 billion. The operating ratio stood at 62.9%, so below 63%, at 60 basis point improvement over last year. Net income was up 9% at CAD2.680 billion. This translated into a 13% increase in reported diluted EPS of CAD6.12.

Excluding the impact of major asset sales in both years and some income tax adjustment in 2011, the adjusted diluted EPS for 2012 stood at CAD5.61, a 16% increase over 2011's CAD4.84.

Turning to free cash flow on page 18, this was another strong year. We generated CAD1 billion in free cash flow. This compares to CAD 1.175 billion last year. This year's performance benefited from higher net income and lower income tax payments. This was offset by higher working capital for about CAD425 million, mostly resulting from voluntary pension contributions that were done to the tune of CAD700 million in 2012, partly offset by higher Accounts Payable. Also, capital expenditures in 2012 stood at CAD1.825 billion, including capital leases.

Meanwhile, our balance sheet remains strong, with debt ratios and leverage within our guidelines. We continue to progress our stock buyback program of CAD1.4 billion announced last October, consistent with our strong shareholder return agenda. In that spirit, the Board of Directors has approved and we announced today a 15% increase in our quarterly cash dividend. Since the IPO in 1995, CN's dividend has increased every year, growing at a compound annual growth rate of 15% over those 17 years.

Finally, on page 19, allow me to address our 2013 financial outlook. We continue to see a gradual, although modest, improvement in the North American economy, combined with opportunities in domestic energy-related commodities, as well as other export resource markets. We assume North American industrial production will increase by approximately 2% in 2013.

On a brighter note, we do expect US housing starts to continue their strong progression and be in the range of 950,000 units or so.

As for US motor vehicle sales, we expect about 5% growth to approximately 15 million units in 2013. These and other key assumptions underpinning our outlook should translate into a 3% to 4% growth in carloads in 2013.

As we've seen in 2012, we expect this carload performance to convert into stronger RTM growth from continued gains in [land-to-haul]. On the pricing front, we maintain our inflation-plus pricing policy.

Having said this, our annual guidance has us aiming for high-single-digit EPS growth in 2013 over the 2012 adjusted diluted EPS of CAD5.61. Our objective is to achieve this despite accounting headwinds of approximately CAD150 million that we see in 2013. These headwinds relate to increased pension expense and depreciation studies.

On the pension front, we finished the year with a further increase -- sorry -- a further reduction of 70 basis points in the discount rate used to establish the pension obligation. This change and related assumption augments the accumulated actuarial losses which must be amortized to the P&L annually. The result will be an increase of approximately CAD120 million in our pension expense for 2013.

The balance of the headwind is our best estimate of about CAD30 million in additional expense resulting from depreciation studies carried out periodically every couple of years to adjust the useful lives of certain assets in our balance sheet.

Our guidance also calls for free cash flow in the range of CAD800 million to CAD900 million. In 2013, income tax payments will revert back to a more normalized level of approximately CAD850 million, given lower voluntary pension contribution. This means nevertheless a threefold increase over 2012. So the 2013 cash tax rate will be much closer to our effective tax rate, which in turn is expected to be in the range of 28% to 29%.

Our free cash flow guidance assumes a capital investment program of about CAD1.9 billion and a 15% increase in dividends announced today. So the CN team remains committed to delivering superior results and creating value for shareholders as we continue to unfold our strategic agenda and leverage a solid pipeline of growth and productivity initiatives in 2013 and well beyond. On this note, I will turn it back over to you, Claude.

Thank you, Luc and team. As you can see or have just heard, we did deliver outstanding performance, not just in the fourth quarter, but for the whole of 2012. We've had record volume with a 10% revenue growth. We've had record efficiency with our industry-leading operating ratio below 63%. We've also had record safety performance. CN and the rail industry are a very safe mode of transportation and it is a key component of our service offering. So when 23,000 railroaders deliver impressive performance like this, they want -- basically, it shows that the game plan that we are following is gaining momentum. And it is this momentum that we believe will carry us through into 2013.

As Luc said the economy is sluggish, but it is constructive. We are determined to outpace base economic conditions by leveraging our franchise diversity, our pipeline and strategic initiatives, and our continuously improving service level to drive our top-line growth above economic conditions. And if we bring that to the bottom line, despite the CAD150 million of expense headwind that Luc talked about, we are in a position to deliver EPS growth in the high single digits and solid free cash flow for 2013.

And it is on that basis and with the confidence that I have, my team has, and the Board has, that we've increased our dividend 15% again this year, and our team is committed to continue to drive solid shareholder value for many years to come.

With that, John, we will go to questions.

(Operator Instructions) Jason Seidl, Dahlman Rose.

Thanks, guys. Wanted to circle on some of the growing intermodal business that you have, as well as the expansion at Prince Rupert. Can you talk to us how that business can come on throughout 2013 and the impacts on RTM that you expect?

The intermodal business at Rupert is really part of an overall game plan. Rupert, the terminal itself is expanding. There is a fourth vein coming up sometime this spring which will be installed.

As Keith mentioned, we have also expanded our long-siding on the Rupert-Edmonton corridor, and we are anchoring that with new capacity in Joliet and Indiana (inaudible), which will come out this summer. So this is the whole effort to connect all these links to by and large for the US Midwest, import or export, as well as take our place, fair place in Eastern Canada, Montreal and Toronto. Obviously, this is long-haul business and it has a big impact on RTM. From an RTM point of view, I think (inaudible) mixup. I don't know if that helps or is what you were looking for.

That helps a lot. I appreciate that. Guys, can you talk about as you expand this, are there any upfront costs in running additional trains, or are you guys just going to increase your train lengths out of Rupert?

I think we are, as we speak, we are running for the last several weeks now -- Keith, correct me if I'm wrong -- we've been able to run two trains a day out of Prince Rupert every day for basically the last two to three weeks because there is very, very strong demand. So these trains are running at train length capacity subject to weather and our siding capacity. So we already running long trains, and we hope to run more of them in the future in line with business growth.

Gentlemen, thank you for the time as always.

Cherilyn Radbourne, TD Securities.

I just wanted to ask a question on Ridley terminals, actually. It would seem that in a more subdued outlook for domestic coal, an export outlook like that that has got expansion potential has become all the more strategically valuable. Could you just give us some kind of color on what length of time you think it may take to fill up the additional capacity that has just been completed up there?

Well, the terminal today now has the capacity to [be tested] (inaudible) of roughly 18 million tonnes. Some of that will be (inaudible) B.C. coal, so it is related to the production increase in those mines and its success in the marketplace. By and large, it is met coal, good-quality met coal.

Then you have some PRB coal, which is moving today through Rupert. And I think there is a long-term future for PRB coal to Asia via the terminal that will exist.

And then there also, as you know, is a major project in Alberta, the first coal project, which is thermal coal, which is three years from now. And that is a major mine that could be up to 10 million, 12 million tonnes.

In fact, I think the people who run the Ridley terminal have plans to going from 18 million to 24 million tonnes because of the outlook they have on coal. Some of those commitments are actually reserved by people like First Coal, who actually reserve capacity in the future to be sure they have access to [water.] So there is a business case there for a strong coal business.

What is the ultimate scale of that footprint from a tonnage perspective?

From 18 is 24. From 24, there is also plans and space and land and water [logs] to get up to 40 --.

The short-term is to get to 18, the midterm is 24, and I think the -- as JJ said -- and he did not mention (inaudible), a mine that (inaudible), which is in the pipeline to reopen hopefully sometime in early 2014. So there is clear visibility to fill that 18 to eventually 24 million tonne capacity. But the layout and all of the components, including the road-rail utility corridor that we are building as we speak -- because I think they are about to break ground -- is lined up to eventually expand all the way to 40 million tonnes if there is demand for it.

Okay, thank you. Hopefully, that was one question.

All right. That was 1 1/2, but you can always (inaudible), Cherilyn.

Chris Wetherbee, Citi.

Maybe a question just on the competitive dynamic with intermodal. You picked up the MOL business, and I think, JJ, you mentioned another retailer moving over. Just want to get a sense of kind of if there has been any material changes in the competitive dynamic between you and your counterpart in Canada, or if this is more of kind of a service improvement in some of the terminals you've been opening up. Just want to get a sense of maybe how that relates to the pricing side of intermodal going forward.

Thank you, Chris. I would say by and large, it has been organic growth. When you talk about new retail, obviously it is business that doesn't exist today; it is new to any carrier. When you talk about new terminals that we are opening in the US, that is where really we are not competing in that marketplace with a smaller carrier from the west, because now, when you're talking Indianapolis and Joliet, it's a different geographic area. So it is coming from truck, and in order to come from truck, that is why we introduced these new products. Or it is coming from US market. Or it is coming from -- in some cases, there is some business going back and forth between the two of us and these are the two contracts that moved around.

Okay, that's great. I'll keep it at one. Thank you.

Scott Group, Wolfe Trahan.

Thanks. Good afternoon, guys. So one for you, Luc on the headcount side. So a good year of headcount growth relative to volume and for sure relative to RTM growth. With the guidance for 2013 of 3% to 4% volume growth, even better on the RTM side, how are you thinking about the need for people this year and headcount growth relative to volumes in 2013?

Thanks, Scott. First of all, we finished 2012 with roughly -- just a little bit under 2% growth in terms of headcount, and we finished the fourth quarter with less than 1%. So we've done a lot of adjustments. I think we are enjoying good productivity.

Next year, we are probably looking at just around 1%, is what -- I guess what we have in mind at this point. Of course, we will have to keep monitoring the volume and how it unfolds. But once again, I think Keith and the team are looking to achieve some productivity growth so we are going to try to contain it within 1%.

What is driving such a big differential that you feel like you can continue?

Well, what is driving it effectively is our ability to leverage our investments in our siding, in our DP trains, longer trains, heavier trains, fewer train starts, fluidity in our corridor. Chicago is helping out tremendously in and of itself. With Chicago, with the conversion into Kirk Yard, we realized synergies there from a headcount standpoint on the operating side just from the jobs that we saved from running the multi-launch facilities to the one which is very efficient and becoming more efficient hub facility.

Something like that here in there across the board, you sprinkle them out, and it all adds up and you are able to absorb several percentages of productivity versus what your revenue or your RTM growth is.

Keith, do you think that is (multiple speakers) --

You are pushing it a little bit with two. I want to keep Janet here; I want to have a smooth transition. We had Bob before with the whip, and we'd like to keep it streamlined. You can come at the end.

All right. Fair enough. Thanks, guys. Appreciate it.

Cameron Doerksen, National Bank Financial.

Thank you. I just wanted to get a little more clarity around this crude by rail business. I think you in the past you've talked about 30,000 carloads as a run rate in 2012, going to 60000 in 2013. Is that still your expectation? And I guess related to that, if I look at the incremental numbers you gave us for Q4, it looks like maybe the revenue per carload is sort of north of 5000. Is that accurate?

The revenue per car in the Q4 was quite significant. I think one thing I said, which I think is a fact, is that we do have the longest haul on average. So our rate per car is higher, that means the other railroads when it comes crude -- I mean, we go all the way to Mobile, we go all the way to Louisiana. You can go all the way to both coasts. So we do have long-haul. And often, we start from Alberta as opposed to the [Bakken].

I mean, it has huge potential. The interest in the crude industries for rail is huge, either because pipeline capacity is not quite done for them, or they want to go to a market which provides a netback that physically the pipeline industry can't quite get there.

So it is a question at this point of how fast we can move these different projects and executions. We have -- we are public about some of the projects with like Southern Pacific and others and the potential is real. We are sticking to the same forecast that we've offered, but time will tell how some of these things actually come together, week by week, month by month.

There is clearly a huge opportunity. I mean, Canada is an energy power house, if you look at it. I mean we have gas, we have oil, and if we play our cards right and develop the proper transportation solutions, pipeline and rail, to open up the export market and to open up the supply chains that provide good netbacks, there is a huge potential for transportation and infrastructure companies to help booming oil and energy markets for many, many years to come.

Great. Thanks very much.

Tom Wadewitz, JPMorgan.

So wanted to get some of your thoughts, JJ. On the intermodal side, you mentioned a couple customer wins. I know it's a finite number of steamship customers. Do you have more -- are there more contracts or customers, their contracts are expiring in 2013 that you would see opportunity for share gain? Or do you think these two, the MOL and APL, are kind of it for the moment and you have stability?

And I guess to what extent do you have concern about you take too many away from the other guy; then you run the risk of a little more negative pricing dynamic? Thanks.

Your question is quite specific. I won't go down that level of detail. But every year -- I think every year, all railroads -- most railroads have major renewal, including intermodal, and that is just the way it is. That's how the marketplace works out.

And we do compete in the Canadian marketplace with one specific railroad. And when we -- when a business gets us cross-border, we compete with other railroads, other gateways, other ports. And when you look at the domestic business, which is also a very significant part of our business, we are now to the different landscape, we are in the Eastern US, we compete mostly with trucks and other supply chains in the west; it is mostly with our competitor from Calgary.

So when you look at how intermodal franchise and how we are going to be growing this year and the years to come, it will be like in the last two years. It will be from a range of different things, not just see CNCP type thing, where it is new location, new product, new supply chain, new destination. In the case of CN, because we do go to three coasts, we want to exploit that. So that gets us into markets where we overlap other folks.

I would say -- just to echo what JJ said, we sell service and we have a tremendous service advantage. And we sell product innovation. And we have a huge pipeline of new product innovations, and we sell a beautiful franchise that is three coasts and offers, I think, an unparalleled ability to provide support and help our customers win in their end market. And that is what we do and we try to bring it to the bottom line.

And we do.

Walter Spracklin, RBC Capital Markets.

Good afternoon, everyone. Just wanted to come back to the volume growth guidance that you provided. Just when I was looking at the last -- just roughly the last six months or so, noting that carload volumes versus RTM, there is a differential about 500 basis points here. And just curious whether you see that contracting in 2013 as we lap those or as we lap the longer-haul business that you established in the back half of the year. Or is that a good metric to use in terms of forecasting our RTMs?

I guess on a follow-up to that, just related, though, is you went out of your way to kind of note that you had made some market share gains due to some service disruptions. Just want to understand whether you are factoring that into that 3% to 4% and say that we are likely to see that seat back, or we are going to keep it regardless and we just wanted to highlight it in the last press release.

All right, Walter, I will just say you are trying to test Janet here with the one question.

You're not helping me, Walter.

Let me say the following. I think the pattern between carload and the RTM growth, you should expect it to be generally the same. Now, there is a lot of moving parts. Is it exactly the same from year-over-year? We'll see where the markets are and how they all come about.

But the fact that we expect to grow our RTMs faster than our carload I think is a good bet to bank on, because the things that are growing are the long-haul markets, Intermodal, export potash, export coal, long-haul business in crude, et cetera, et cetera.

So that is the best we can give you at this point in time. And it is our goal to position ourselves where the markets are looking for our services. It so happens at the moment the markets that are hot are longer haul. But we are pursuing every opportunity where there is a profit to be made, whether it is a shorter-haul traffic or a longer-haul traffic.

If I might add, we do have on the flipside some segments which are very, very short-haul, which are already declining in 2013. Iron ore year-over-year will have less carloads, but that is not a whole lot of revenue. We have a legacy contract on the EJ&E, a plastic plant, that is also going to be going away. That is very short haul; that was from Chicago to Chicago. And we also have the gasoline contract that is also going to be going away. They are converting the pipeline; that was also very short haul, Quebec City to Montreal. So carload is kind of a tough measure really to have a sense of the CN volume.

Matt Troy, Susquehanna.

You obviously have a competitor who is geared up to improve their operations. In a competitive business dominated by two players, there is obviously risk of brain drain or talent diversion or poaching.

Claude and Keith, I would just be interested in your perspective. Have you seen any increased turnover? Have you seen inquiry? And how do you secure talent or what is your game plan should that kind of poaching inquiry pick up as their plans get underway in the next two to three years?

As I've said before, we have a great agenda. We are gaining momentum. And there is nothing like having fun together, winning in the marketplace to keep a team together. When your stock price is high and the bonuses are paying, when your stock price is high and the long-term incentive compensation is paying, and when you're having fun driving an agenda that resonates with your customers and your employees, you have a winning recipe. And we have a winning recipe. It has been working for three years. And I think we have a winning team and I think we are having fun together and I don't see us losing people. If we do, we have a huge bench strength and we will carry forward and continue to win in the marketplace.

Keith, do you have anything to add to that?

No, I think Claude summarized it pretty well.

All right. Thank you, guys.

Brandon Oglenski, Barclays.

Good afternoon, everyone. Maybe not directly following that question, Luc, but something that we've had some trouble with is modeling the comp and ben line here. You've had a lot of volatility in the past two years. You've gone from CAD400 million in a quarter up to CAD510 million.

But looking forward -- in the second half of 2012, you were running CAD470 million to CAD460 million. Is that the type of run rate that we should be expecting with additional wage inflation, but some efficiencies that Keith was speaking to earlier?

I think, again, you can see what we are looking at in terms of headcount. So we are anticipating wage inflation probably around 3 -- we are looking at probably headcount being up about one through the year. We did indicate that we have got CAD120 million of headwind on the pension side. And when you are trying to factor all of this together, you should be mindful of some of the potential credits that we have discussed in the fourth quarter. So that, I think at this point, is the additional guidance I would give you.

And stock-based compensation will continue to be a headwind that we have to deal with, because it is volatile from quarter to quarter. But when you have strong shareholder returns and your stock price goes up, and given that a lot of our LTI at CN is actually restricted stock units, we mark to market, so we carry the load with the benefit and pleasure of our shareholders.

Understood, but it sounds like maybe a similar outcome over the last couple years, where you are getting inflation here but less than your overall revenue growth. Is that fair?

That's what we are trying to do, protect the pension.

Yes, and I would be very careful, because again, I wouldn't personally use the run rate of the last couple of quarters. Those would tend to be low. I think given what I've told you. And typically, we run about 21% or thereabouts in terms of labor cost to revenue, so you've got to be careful not to take necessarily the run rate, because there are a number of things that are changing. And hopefully, as Claude said, the stock-based compensation will continue to be a little bit of a headwind.

Turan Quettawala, Scotiabank.

I just also had a quick question on the changes that are going on at CP right now. I know, Keith, you've spoken in the past about how this might benefit CN with coproduction influence and so forth. I'm wondering if you can give us a sense of whether you are seeing any tangible benefits flow through at this point in time, or maybe some color on timing on that or when you expect to see that come through. Thanks.

I'll give you one very compelling example, and that is what we were able to do grain movements. I think you can see that both CP and CN, through increased fluidity, that both railways enjoyed that fluidity, enjoyed that better operating environment, that more disciplined operating environment. And I think that you will see that it allowed us both to do some meaningful things for our customers and export grain at the levels we otherwise never thought possible. So that is a very powerful proof point.

Anything else on that front? Or where else maybe you will see some more in the next year or so?

I would expect -- I don't know if we will see something to that quantum, but similar improvements in results anywhere we touch each other and interact and interchange cars. And case in point, again, back to the holidays, CP has a much more disciplined approach to running their traffic as opposed to shutting down the railway, which they used to do, which allows us both to realize car productivity savings and car velocity savings by not bunching up and congesting traffic lanes.

As I said before, to have two strong teams competing hard for the business, to have two strong teams to emulate each other and to have two railroads that are amongst the best in the world is not a bad thing for shareholders and it is certainly not a bad thing for Canada.

That's great. Thank you very much.

Ken Hoexter, Bank of America.

Claude, can you just talk about the exposure to housing? Are you surprised, given the strength you are seeing on the rebound here, that you're not seeing more of a bounce in forest products? And I guess leading that into your overall carload growth target of that 3% to 4%, what would get you to, I guess, be more excited on maybe even a -- what opportunities do you see for a faster growth?

I think we have some pretty strong expectations for growth. And if the economy is stronger, obviously we will raise with that tide. But at this point in time, I think Luc gave you our assumption, 950,000 housing starts or thereabout. We carry the vast majority of export lumber from Canada into the US, so it is a pretty direct link to our ability to grow if housing starts do increase to that level.

In the last few years, we've been able to offset the tough conditions in the housings starts in the US by growing with our customers' lumber exports to Asia. So that market may take a little bit of a sideways and the US goes up at the same time, or if both markets were to go up at the same time, then perhaps there is upside. But we will ride the markets the way they come at us, and I think lumber into 2013 is an area that is very constructive, very positive for us.

Wonderful. Thank you.

David Tyerman, Canaccord Genuity.

Good afternoon. My question is on the Rail Service review in Canada. I'm wondering if that has impacted your outlook materially yet, and whether you have enough clarity right now to understand what the full impact could be and whether that could be material at some point in the future.

As I've said before, we really, genuinely, sincerely believe that supply chain collaboration and a commercial framework is the best way for CN and the rail industry to help its customer win in end markets. We've made that case. We are concerned about the impact of regulation in terms of unintended consequences.

But having said this, there is no better recipe than improving service and delivering day in/day out to make sure people stay on the mutual trust and commercial framework. And so we will be engaging the government as they come forward with the new law, and we will be making sure it is balanced, and that hopefully it doesn't get used, if they do pass the legislation, by working hard every day at satisfying our customers.

It sounds like it is not clear enough right now to state in terms of impacts.

Yes, we will make this a moot issue by providing good service every day.

Okay. Thank you.

David Vernon, Bernstein.

JJ, just a quick follow-up on the crude by rail volumes. You mentioned that the growth in demand there was really based on a spread between coastal and inland prices. And I guess I was trying to figure out -- or get your opinion on at least -- at what point -- if that spread were to start coming in, at what point would that spread need to get to before you started getting worried about volume growth in that segment.

I think when you look, firstly, the different crude producers, when you talk in a range of CAD8, CAD10, CAD12, the spreads start to be tighter and rail is more expensive -- it is a question of depending where you go and how that works out -- but rail is not the cheapest mode to haul crude, but it is a very good mode to get to more profitable markets. So CAD8 to CAD10.

But, you know, we are a long way from that. Again, that is a general number. Because if your crude is high in sulfur and some of these other things which are tougher to refine, your spread is even higher than just that. So it depends on the quality of the product. We talk about crude, but not all crude is crude is crude. Some is better than others, and it does have either a penalty or a premium in the marketplace.

And when you are talking bitumen, then rail is much more competitive with pipeline, even on a cost basis.

Yes, Claude is right. When you move Bakken crude, you move it as is; when you move bitumen, we don't need the diluent. The diluent was not already with the product, meaning it is not coming out of the pipeline, then we don't have to move the diluent. It is an extra saving.

The people who produce crude, if they are really just crude producers, they are not (inaudible) refineries, and they produce this heavy crude, rail is a really, really compelling story for them.

Great. Thank you.

Keith Schoonmaker, Morningstar.

This question is probably for Keith Creel. Operations obviously are running particularly strong and continue to run best in class. Are there particular initiatives or CapEx projects about which you are most optimistic for improvements this year or is it more incremental, little-by-little gains?

I would say it is more rifle-shot strategic, just a continuum of the story. We've got some more investments to make in Chicago that will allow us to take some incremental steps. Pretty excited about the investments we've made east of Edmonton in the Edmonton-to-Winnipeg corridor, which we'll start realizing benefits from. We've put some additional signals in. We've got some plans to put some additional double-track capacity in that lane, which will prove well for us as well.

And then we will continue our B.C. corridor on the strength of the seven sidings we put in this past year, which increased our capacity by about 50%, with year three or four of a five-year plan to add some additional siding capacity up here. So nothing earth-shattering, but more of the same, which will allow us to continue to pace with increased productivity on a year-over-year basis.

It is rifle shot, but he has a big magazine.

Steven Paget, FirstEnergy Capital.

Good afternoon and thank you. You talked about loading pipe onto containers in some way that would replace flatbed trucking. Could you please give more details on that?

Yes, basically, we are talking 53-foot domestic container, and it is basically an insert that looks like a flatbed truck. It is a platform. You load the steel, for example, a tubular tube example that will go into Mexico to plants who make parts for automotive and need to be protected from the rain and snow and dust and what not. So they would be moving on a flatbed under a tarp.

You load that on that insert cradle, if you wish, and then you slide it in the container, and that is how the container products becomes a direct competitor to flatbed truck. And we actually have a video on that. Janet could probably link you to our website where we have a two-minute video; you could actually see the loading of the equipment.

Excellent. Thank you.

Quite exciting. Our focus on supply chain services, we innovate with new products. This is just one that JJ has talked about, but we are looking to move finished vehicles in containers, for instance, in certain markets. We are looking to load plastic tank, Flexi-tanks, so that we can move liquid in containers. We've always moved bags and other such commodities.

But selling -- using the intermodal product to sell to different markets and selling one CN are key thrusts in our ability to continue to outpace base market and gain market share against truck.

And have more than one source of growth and not always rely on just the one market or the one rivalry to be able to grow. So a lot of focus on organic growth, where we can come up with product that doesn't quite exist today.

I made an error earlier, Cherilyn, when I answered your question on coal. The coal mine in Canada I was referring to that might actually open for thermal coal is Coalspur. I think I said First Coal. I really meant Coalspur.

That concludes our Q&A, Mr. Mongeau. Please go ahead.

All right. Well, thank you. This was a good call. It is awfully cold here in Montreal and it is pretty cold across Canada. I know that because it stops the railroad when it is cold. But we have momentum on our side. We are focused on coming through the winter with a solid service record. And if the market demand continues to materialize the way we've seen for the last couple of weeks, we should have a very solid first quarter to report when we next get you guys on the call at the end of the first quarter. So have a safe day and look forward to talk to you soon.

Thank you. The conference call has now ended. Please disconnect your lines at this time, and thank you for your participation.