Canadian National Railway Co (CNI) 2013 Q1 法說會逐字稿

The CN's first-quarter 2013 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 first-quarter 2013 financial results, press release, and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially.

Reconciliations for any non-GAAP measures are also posted on CN's website at www.CN.ca. Please stand by, your call will begin shortly.

Welcome to the CN first-quarter 2013 financial results conference call. I would now like to turn the meeting over to Ms. Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Ms. Drysdale.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us. I would like to remind you the comments that were already made regarding the 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; Jim Vena, our Executive Vice President and Chief Operating Officer; and JJ Ruest, our Executive Vice President and Chief Marketing Officer. Once again I would ask you to please limit yourself to one question in order to be fair to all participants.

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 on the call to join us. We are here in Edmonton. I have to say it is a sunny day. There is still snow on the ground, but I can feel the spring and it is a good thing, because we have had our set of challenges this past winter. It clearly impacted our results in many ways. You will hear Jim talk about some of the challenges that we face and what we are doing about them.

It impacted also our revenues and expense. You will hear a little bit about that. But more importantly, it hit our service level in a way that is not what we are trying to do at CN.

We have an agenda of supply chain enabling. We are determined to help our customers win in their marketplace, and winter is a hard reality in railroading. It is extremely difficult to face up to the challenge. We have had our fair share of issues, and we found also that we need to build up our resiliency.

But at the end of it all, service was not where it needed to be, and we are going to be working hard to recover. We are, as we speak, regaining fluidity. There is a lot of demand in front of us, and we are trying to move the traffic and deal with the backlog so that we can have a strong finish to the year.

So on Q1, the revenues were up 5%. JJ will give you the detail, but I will say to you that I am pleased. Despite the challenges this is a record level of volume. I think in our history we only had one more quarter with performance at that level. So to be able to handle peak of volume in a difficult winter period is a very positive statement on our ability to drive value for our customers and shareholders, despite the challenges.

The operating ratio was impacted. It is up a little bit more than 2 percentage points versus last year, once again impacted a little bit by issues that we have to face. But still solid margins, solid free cash flow, and reasonably solid EPS. That is CAD1.22.

We're up 3% on a year-over-year basis. That is not where we had planned to be for the beginning of the year, but it is still in a range that we can make up between now and year-end and finish strong.

So our first order of priority is to restore or the high service levels that our customers expect of us, and from there everything will work. We can create value for our customers and continue to create very solid shareholder value.

With this, I will turn it over to the team to give you a little bit of detail.

Okay. Thank you, Claude. Good afternoon. As you can see from the operating highlights, the first quarter was an operating challenge. Even with improvements in GTMs per train mile and yard productivity, our key metrics were impacted.

Until the changes in mid-February, I was -- as Claude has reminded me a few times -- (inaudible) [roses] South of Chicago. The metrics on the Southern Region were strong, outpacing the previous year as a result of our strategic investments around Chicago and hard work by the entire team.

I do not want to dwell on our first quarter other than to discuss what we can do different. The network has improved in April to the point where car velocity is lapping last year. In fact, we had five days of GTMs over 1.2 billion, with train speed, locomotive utilization, and terminal dwell where they should be at this time of year.

All this with our revenue loads and trailing GTMs up. I am proud of the work the operating team performed during the tough first quarter.

I would like you to turn over to slide -- on page 7, where I will present our plan moving forward. We have seen the significant increase in traffic on the 797 miles between Edmonton and Winnipeg. We have dealt with an extended winter, which was similar to a 15-round heavyweight fight.

We got hit with a storm, then got hit by a Native blockade; and when we were starting to recover, we got hit by another blow. Winter is tough. It's an outsource sport, and we have taken many steps to try and deal with the prolonged winter.

We have invested in DP, power operation, snow-clearing machinery, centralized recover operations, and increased placement of switch heaters, and deployed air repeater cars. Even with these investments, winter can be mitigated, but it is tough to knock out.

A few years ago when I was heading up the Western Region I still remember shutting down the railway completely around Edmonton and Winnipeg for two days because of cold. Even with the shutdown we were able to recover, because it was a single event.

In order for us to deliver on our goals of operating and service excellence and to provide more resiliency to the system, we will be investing an additional CAD100 million on the line and yard capacity so we can deal with many obstacles and recover quicker. The plan is to increase capacity in the line between Winnipeg and Saskatoon and upgrade our line between Saskatoon and Edmonton and our Prairie North Line so we can shift cranes away from the main corridor when required.

As I have already stated, winter can't be knocked out, but we can mitigate its impact on a vital corridor. So, JJ, why I don't pass it over to your turn?

Okay. Well, thank you, Jim, and good afternoon to everybody on this beautiful afternoon in Edmonton. As Jim mentioned, overall a very challenging first quarter from a service standpoint. Having said that, though, our customers' goodwill, our customers' demand remain intact.

I will start with a quick review of our first-quarter results and after that I will give you an outlook of what is ahead. Our total revenue was up 5% in the first quarter or an equivalent of CAD120 million.

The breakdown is as follow. Volume and mix accounted for roughly half of that increase. Price was the other portion of the revenue growth. The impact of foreign exchange and of fuel was negligible in this quarter. Same-store price on same-store sales was just over 3.5%.

Now going over the more specific market segments -- and I will do this as usual on the FX-adjusted basis. Petroleum and chemical, the revenue was up 16% on only a 3% carload growth. Crude by rail revenue was up 300%, and we now have roughly CAD75 million of our book of business in first quarter which was directly crude. As you know by now, crude is a very long-haul business for CN, and we at CN are directly serving single line to US Gulf and all of the Eastern Canada refineries.

Looking at metals and minerals, it was up 3% in revenue. We had a 20% to increase in revenue ton mile for frac sand, a direct impact of new frac sand plant located in our Barron subdivision in Wisconsin. In metal, we also had a strong movement for pipe related to pipeline projects; however, we had an offset by a softer steel-related market.

Forest product revenue was up 2% in revenue. Overall, the lumber and panel demand was strong in the first quarter, but the winter challenged us in the way of us being able to fully capitalize on US housing starts.

Shipment of pulp were also impacted by the winter. However, in that case, we were able to coordinate more use of intermodal as an alternate service.

Coal revenues were flat in the quarter. Carload was down 8%, but the length of our haul for coal was up 6%. US coal revenue was up 4% and Canadian coal revenue was down 5%.

For our Canadian business, a number of export supply chain issues negatively impacted our volume. For our US coal business, exports were higher and domestic was lower.

Grain and fertilizer segment was up 7% in revenue. Canadian grain was down 13% in both carload and revenue dollars.

The business in Canada was directly impacted by the difficult winter operating condition. However, our US grain business was up 6% in revenue on flat carload. We had a very strong soybean export early in the year.

Fertilizer revenue was very strong, one of the strongest, a strong 41% growth in revenue and a strong 30% in carload. Potash demand led the segment, both for export and for domestic market.

Finally, intermodal, which was up 7% in revenue. Our international business grew mostly from the Port of Vancouver and the Port of Halifax. Our domestic business grew mostly from industrial customers as well as other -- as well as from our direct retail program. Here again, a tough quarter from an operating standpoint.

Now looking at the future, our outlook for Q2 and beyond is constructive. As Jim described earlier, our network has regained velocity and fluidity, and we will exploit that in the weeks and months to come.

I will start the review on intermodal; I am on page 10. In the case of intermodal, we expect a continued growth of that segment in both international and domestic. Our new terminals in Joliet, Illinois, and in Indianapolis will begin operation this June, sometime late in the quarter.

The way we have redefined transportation time in intermodal, in cooperation with our supply chain partner, the port terminal operators, will continue to reshape the Canadian port landscape with more traffic going to the US. Rupert, Halifax, Vancouver, will see the deployment of bigger ships late this quarter. Finally, I expect a sustained progress from our carload sales force on selling intermodal services to our industrial customers and compete with trucks.

Next, the outlook for the bulk market. We expect a decent second quarter for Western Canadian grain as well as for Western Canadian coal export as the operational supply chain issues get progressively sorted out. Our US grain business will be negative. It will be affected by the fact we have low corn and low soybean stock on our line.

Our US coal export program will remain positive, providing Center Gulf, and that should continue to be one of the silver linings on the coal segment. For potash, currently Q2 volume are very strong in the potash market for us, both domestically and export.

Finally, overall for bulk, the ports -- meaning the Ports of Rupert, Vancouver, and the Ports in Louisiana -- are the gift that keeps on giving to CN. CN will continue to generate large volume growth from global trade.

Now my last segment, merchandise. On the merchandise side, from an outlook point of view, we expect solid growth, solid revenue ton mile growth from our crude by rail. CN's story in rail in crude is a story of revenue ton miles.

We expect new crude loading terminals to open on our line in the coming months. Rail complements pipeline; in fact, CN and pipeline companies cooperate where it makes sense.

The organic growth prospects for crude by rail at CN are very significant. We also expect solid demand from the buoyant North American energy sector, what I would call the energy consumables, like frac sand, pipe, construction aggregate, and many others, which are solid, profitable, and diverse business for CN.

We expect solid demand resulting from US housing starts. It will drive our carload for panel, drive our carload for lumber. It will also support our West Coast container imports into the US Midwest.

Our lumber and pulp container exports to Asia will also be solid. And as we expect -- and we also expect a few Canadian panel mills to reopen between now and the end of the year.

The same constructive environment applies to US automotive sales, which are steadily improving. This is good for our finished vehicle carloads. It is also positive for our international container import business, namely, to the Detroit Terminal.

In conclusion of all of this, the economy is constructive. Our customers' goodwill and our customers' demand remain strong and remain intact. With Jim's network velocity coming back, the marketing team is focused on making up the lost ground from the recent winter.

Luc, do you want to take it from here?

Yes, thanks, JJ. I'm going to turn to page 14 of the presentation. Let me walk you through the key financial highlights of our first quarter's performance.

As JJ mentioned, revenues were up CAD120 million or 5% at just over CAD2.4 billion in the quarter. Needless to say we were going up against a tough comparison, given the outstanding revenue growth of 13% which was achieved in the first quarter of 2012.

On the positive front, our volume was up 3% in terms of RTM. And as Claude mentioned, this performance weighed in as our second-highest volume quarter ever.

Line-haul pricing was up on a same-store basis in the 3% to 4% range. And our yield was actually up 2% on a rail freight revenue per revenue ton mile basis.

Our operating income was CAD780 million, down 2% versus last year, as higher (technical difficulty) expenses in the quarter overshadowed (technical difficulty). Here again keep in mind that the operating income was up 23% in the first quarter of last year.

The operating ratio was 68.4% in this quarter, which represents an increase of 220 basis points versus last year. Last year, you may recall, benefited from a very mild winter; and so a better winter benchmark would probably be looking at the first quarter of 2011, where our operating reissue was actually 69%.

Other income stood at CAD42 million in the quarter, compared with CAD293 million in the first quarter of 2012. This year we completed the sale of a small portion of one of our greater Toronto subdivisions for a gain of CAD40 million, whereas last year we had a similar transaction but of a larger scale with a gain of CAD281 million.

Our reported effective tax rate -- or actually our adjusted effective tax rate was in the quarter 25.1%. We had the benefit of a CAD16 million adjustment relating to state tax apportionment. However, I would warn you that we are seeing some pressure in terms of the Provincial budgets and the corporate income taxes that are still heading higher for the balance of the year.

Our reported net income for the first quarter of 2013 was CAD555 million and our reported diluted EPS was CAD1.30, down 26% versus last year. However when removing the impact of the gain on disposal of assets in both years, the adjusted diluted EPS stands at CAD1.22 in 2013, which represents a 3% increase over last year's first quarter.

Turning to page 15, let me address the operating expenses. Operating expenses were just under CAD1.7 billion, up 9% versus last year, or 8% on a constant currency basis, or CAD126 million. At this point I will refer to the changes in constant currency.

Labor and fringe benefit costs were CAD569 million, an increase of CAD58 million or 11% this year versus last year. Now this was really the result of three principal elements.

The first one is an increase in overall wage cost of 5%. This was the product of wage inflation, up 3 points, and overtime, up 2 points. We also had an increase of about 1% in headcount in this quarter versus last year. The headcount dynamic continues to be driven by advance hiring ahead of attrition to allow for training, along with our assessment of future volume growth.

The second element was higher pension expense for CAD21 million or 4 percentage points in the quarter. This was expected.

The third and final element is a higher stock-based compensation expense in the quarter versus last year, accounting for 3 points of the unfavorable variance. Now this is the result of an increase in stock price through this quarter versus a decrease in the same period last year, for an unfavorable variance of CAD35 million, partly offset by the reversal of stock-based compensation awards attributable to former CN executives for approximately CAD20 million.

Looking at purchased services and material expense, it stood at CAD328 million, up 9%. This was mostly a factor of higher volume and costs incurred in dealing with the difficult winter operating conditions.

5 percentage points of the variance or CAD14 million of the increase is due to more repairs and maintenance for cars and locomotives, as well as utility costs and other related costs. We also had higher expense for contracted services with third-party carriers in part due to volume increases in intermodal trucking, for about 3 percentage points.

The fuel expense stood at CAD405 million, an increase of 7%. It was due to higher volume, representing 4 percentage points of the increase, while higher prices and lower productivity accounted for most of the balance.

Turning to free cash flow on page 16, CAD20 million of free cash flow was actually used by the business in the quarter this year versus CAD48 million generated last year. Now CAD321 million of cash was generated from operating activities. This was higher than 2012 by almost CAD200 million.

This came as a result of lower pension contributions, to the tune of about CAD450 million, partly offset by higher income tax payments, which were -- for CAD284 million. As well, looking at investing activities, in 2013 CAD161 million of cash was actually used for investing activities versus CAD90 million generated in 2012. This is a function of lower proceeds from non-core asset sales done in the comparable period.

Capital expenditures were essentially flat to last year at CAD228 million while the remaining difference is a factor of higher dividends by CAD18 million. Our balance sheet remains strong with debt ratios and leverage within our guidelines.

Finally, on page 17, our financial outlook. We continue to see a gradual (technical difficulty) modest improvement in the North American economy, combined with opportunities in domestic energy-related commodities as well as other export resource markets. We continue to expect 3% to 4% growth in carloads for 2013, and on the pricing front we maintain our inflation-plus policy.

So in spite of a challenging quarter start, we have regained momentum and are looking for a strong performance for the balance of the year. Accordingly, we are maintaining our annual guidance, which calls for high single-digit EPS growth in 2013 over 2012 adjusted diluted EPS of CAD5.61.

Our free cash flow guidance also remains in the CAD800 million to CAD900 million range. Our free cash flow guidance, however, now assumes a capital investment program, as Jim pointed out, increased by about CAD100 million to now the tune of CAD2 billion for the full year as we put more infrastructure in order to increase the resiliency of our network in the busy Western Corridor.

This also takes into consideration a voluntary pension contribution of CAD100 million which we have made in the first quarter -- after the first quarter, rather. Just last week, as a matter of fact.

So on this note, I will turn it back over to you, Claude.

Okay. Well, thank you, Luc and team. Just to wrap up, it is clear that we have had a tough start to the year, but this is a strong team and what doesn't knock you down makes you stronger. We are as we speak basically focusing on preparing for next winter. As Jim said, winter doesn't go away and it is difficult for railroads given our technology to deal with that adversity without impact on service. But the outlier impact this year is something we don't want to repeat in the future, and so we are preparing ourselves to have stronger service into next year, as we speak.

We are also determined to take advantage of the strong demand that is in front of us. We do have a good outlook in intermodal, in energy markets, in bulk markets. If the economy stays with us, which I have no indication is not the case, we should be able to come in with the full year in line with our guidance and have the back end of the year very strong.

With this, we will go over to your questions from the audience. Patrick?

(Operator Instructions) Scott Group, Wolfe Trahan.

Hey, thanks. Good afternoon, everyone. So wondering if you can help frame the impact of the weather in the quarter, maybe from an expense standpoint. And then, is there a sense on how much revenue maybe you missed out on in the quarter because of weather, and how we should think about the pent-up demand in 2Q related to that?

You know what, Scott? Winter is winter, and I don't think it really serves a purpose to try to parcel out how difficult this winter was and how easy last year. As Luc told you, last year was extremely mild; this year was much tougher than usual.

Whether it is CAD50 million or CAD60 million, the important point is we are focused as we speak to recover it. We will -- we can't deal with the expense that we face; we can only get productivity and efficiency to help offset it.

The revenues, much of it is still available for us. We did lose some business; it's tough to measure. The important point is we are focused on finishing the year strong and are staying in line with our guidance for the full year.

Yes, that's helpful. Is there a sense on -- we have seen sometimes in the past in Canada when you've got a rough winter and then heavy snow sometimes you get things like a spring melt that can be hurtful. Are you confident that the network is coming back and we are not seeing other operating issues, or maybe some of the grain elevators are going to the other rail, just from a market share perspective?

It's Jim. Let me just talk about the snow. We do have some heavy snowfall, snowpack in areas. Most of it is away from our main line and our main corridor through the prairies. But still we are monitoring it.

And if everything goes the way we would expect that we should -- a nice cool spring is helping us. And unless we get an effect with a lot of rain I don't see anything that we are monitoring on a daily basis.

But it is a guess like anything else. If everything went bad for us, I guess it would be bad for everyone.

But at the end of the day we have gotten a lot of factors that are positive. Cool spring, it is not on our main corridor, and I am being told by the experts that even the ground is not saturated with water, so we have a better chance for it to dissipate in and not run off against our track.

Scott, it's JJ. On the grain question, we are moving grain just as well as anybody else right now. We do have good fluidity in our network, and we are going to our backlog nicely.

All right. Thanks. I appreciate it, guys.

Turan Quettawala, Scotiabank.

Yes, good afternoon. I guess my question, maybe I will just talk a little about the coal volumes. Again, JJ, maybe you can give us a sense of how much inventory is piled up here in the mines, maybe; and if there is any ships or something waiting around for you to ship the coal to the terminals.

And also added to that, I guess I think CSX was talking about weakness on the thermal coal side to Europe. I know you mentioned that as a strong point. Are your customers, I guess, faring better? Is that the way to look at it? Thank you.

Thank you, Turan. Starting with the thermal coal, the thermal coal comment was in relation to our business in the US, where all of our export is thermal coal from the Central Gulf. We had year-over-year growth in that coal business in the and Central Gulf, I think (technical difficulty) looking at the same thing in the second quarter.

Maybe it is just the way the CN network is laid out (technical difficulty) still do that. On the Canadian coal, the West Coast coal, the Canadian mine -- I would say broadly without going into specific name, they do have inventory at the mine and therefore we do have available a pent-up demand for them to get to the port and sell it to Asia, whether it is, in some cases thermal coal, in some cases met coal.

But right now I think we are moving coal slightly above the production rate, week by week, month by month, we're going to go through what they have on hand.

Great. Thank you very much.

William Greene, Morgan Stanley.

Yes, hi there. Good afternoon. JJ, can I ask for your views on some of the comments you made on crude by rail are just the strength and the amount of runway you still see for growth. Of course all of us look at things like differentials and say -- well, maybe opportunity is diminishing a bit.

Could you just talk about how you think about the durability of this demand? Could it go away as fast as it arrived? How do you think about that?

Yes, thank you, Bill. We actually had a discussion just before the call. In looking at a differential, just the differential itself as the bellwether or signal is maybe too simplistic. There is a number of things at play.

There is a number of crude producers involved that don't necessarily get access to these prices, either because they are geographically challenged or their product is not quite the product that is a product easy to process and refine.

Also from point of view of the refiners, the refiners today are still extremely bullish on leasing cars, buying cars, doing backstop capital investment for those who are willing to build a terminal for the product to move. And they are still very much of the view that getting product by rail allows them to get a price that they can't get from a pipe. So we are still very positive on -- well, not still. We are very positive on crude by rail, and a number of people around us are also very positive.

The refiners are investing into fleet. You see pipeline companies getting interested in doing multimodal with the railroad and themself investing in some terminal to load. A number of people in the US Gulf on our CN line are investing into receiving facilities. More and more players are looking at going the way of unit trains.

So this is just still picking up momentum from one quarter to another. And the capital investment by all these different players is very encouraging.

So you have the confidence; yes. When I look at this crude by rail or any of these mix effects -- I think your same-store sales pricing came down. So is that a mix comment where that came down? Or are we seeing something in the pricing that is causing it to be weaker on a sequential basis? Thank you.

Overall, the same-store pricing was above 3.5, around 3.6, basically. And the way we publish our same-store pricing is all-in, including coal, including everything, including all commodities.

The run rate from late last year slightly lower. I would say it is a combination of mix; some markets are tougher than others; we are quite happy at the range the way it is right now. It is still very much above inflation rate, especially when you take into account that we really, really deal with fuel inflation with the fuel surcharge.

I am not a big user of RCFU or anything that deals with -- that brings a fuel into my same-store pricing. So I think at 3.6, 3.5 and dealing with the fuel surcharge, already addressed fuel, is a good model.

Thank you very much.

Walter Spracklin, RBC Capital Markets.

Thanks very much for. First I want to just say congratulations, Jim, welcome to the call, and congrats on the new role.

Thank you.

Starting, I guess my question is on your forestry business in particular; but in general your customer reaction. Obviously you've had a lot of volume on your network. That is a good thing, obviously. But with the winter problems it probably affected your service level.

I am just curious as to where exactly you are seeing bottlenecks. Which customers are complaining I guess the most. And certainly we have read in the media here that forestry products customers are complaining quite a bit.

I am just curious, Claude or JJ, how you would -- is that something weather-related only? Or is it a little bit more than that?

There is no question, as I said earlier, that our service was not where we want it to be. But frankly, I am not sure I would take what the associations are saying as necessarily a good barometer of our true service level.

We did miss on a number of orders because of the cycle times and the difficulty to bring our fleet back into a position to load effectively. This has impacted not just forest products but basically all of our merchandise.

Customers, especially from the middle, early February to late March -- unfortunately, the picture that I had on my first slide, Walter, that train, which is dug in about 12 feet of snow was on March 22. So we did have a lot of adversity. It did impact service, but we did move more business across all of our segments and are committed to restore the service levels that our customers expect and to finish the year strong, dealing with their backlogs and meeting all of their demands for months to come.

And the bottleneck outside of forestry, is there any other ones that concern you at all?

We did have issues also in bulk. Some of it is because of CN, some of it is because of the difficulties in the supply chain with our terminal partners.

So coal for instance to Western Canada did not move as strong as we would have liked. But we are, as we speak, recovering ground there.

Bulk potash would be a similar story. We did have a couple of weeks there, particularly late February, early March where we were getting behind. But as we speak, we have a very strong export program. We are moving [for sets] for Canpotex, are doing our level best to get them to have hopefully a record export quarter.

We are getting caught up on our domestic potash. So it is not by commodity. The issue that we faced is what Jim explained. We had extreme adversity to deal with and an issue of resiliency in our corridor between Edmonton and Winnipeg.

We are dealing with the issue of resiliency by adding infrastructure. And we are going to be dealing with adversity by being even more prepared into next year for our locomotives to be running and all of our initiatives to be kicking, so that we reduce the risk of an outlier impact.

But it is what it is, and I am not sure I would take the press as a good barometer of our true service level.

Okay. Makes sense. Thank you very much.

Ken Hoexter, Bank of America Merrill Lynch.

Great. Good afternoon. Claude, maybe just to review here a bit on the staging and prepping; or maybe it's even for Jim. But in the past you have always talked about how you have prepped for things that have gone on whether it'd been storms or other factors that you have to deal with in dealing with outside weather.

Did something change here? Or was this, as you mentioned, just a factor of so many different events one after the other?

I guess we are starting to see that rebound now. And in that same kind of thought process, maybe talk about the speed with which you snap back.

Ken, bottom line is it was just the length and breadth. If it was one or two events like we would normally see, then you bounce back real quick.

But I have been working on this railroad in a number of different jobs across, and every so often it happens that you can have the best-laid plans, and it doesn't matter what you have in place, when it starts to hit you, and you start recovering and it hits you again, I don't care what it is. You can't put enough capital into the system to be able to get you to the point where you can alleviate everything.

So also it wouldn't make sense for us to do that. But at the end of the day, what we have done is we have got a plan moving forward in an area where we have seen substantial growth over the last two years, two to three years. In fact, close to 17%, 18% in number of cars that are running through there, that we need to do something to give us that flexibility.

Now we recovered real quick. Second part of the question was -- how fast can we recover? Once we got a week without anything happening we recovered.

But it took a while. We have dropped our total cars down by 6,000, so that is excellent. Our car velocity, which is the number that I have used because it is an all-in -- you don't fool around with train speed or dwell; those are sort of subsets. We're better than we were last year on the time.

So with business up -- I will let somebody else tell you how much -- but business up substantially so far in April and -- so I'm very happy with the system. We just need to fix, and that is why we are going to spend that CAD100 million to make sure we fix and give ourselves some resiliency if we have a winter that is normal, even be able to bounce back quicker.

Appreciate that insight. If I could get my follow-up on -- I think you mentioned or maybe JJ mentioned something about larger ships and prepping at the ports. Obviously as you prepare for the Panama Canal expansion, what does that do for trains in terms of whether you are handling more on a per-train basis, increasing the train lengths? Does that mean more investment for sidings? Or is this a temporary fix before some of the vessels start to move through the canal?

Can you just maybe round out some thoughts on that?

Okay, Ken. They canal I think would only open in 2015. So what is happening is the bigger ships are planned to come in service this year. And because they have been cascaded around the use of the canal is not yet to be open.

So there will be, for example, bigger ships in Rupert from Costco. They will increase the size of their ships on one of their rotation to CN. You will see the same thing in Rupert, in Halifax, in G6 coming in Halifax sometime in late June. And in Vancouver also some of the ships have been upscaled.

So what that means is you have a bigger discharge, potentially bigger discharge. I think, Jim, we are ready running these train as long as we can be. So if you have bigger discharge, eventually you run bigger -- you run more train, because the train length already today is probably maximized to the best horsepower ratio.

What that means really is you have bigger ship; you have to have places for them to go and get market. But you can only get put so many containers in Montreal and Toronto. So one of our success here is why some of the lines are attracted by CN, is that if you are going to bring in bigger ship, you better have a bigger discharge, because you don't want to add the number of port of calls. Therefore you need to have access to bigger [hinterland], and so our effort to make Detroit a real place to go for CN on both East of West, and that is why we are opening Joliet and Indianapolis.

We are trying to attract these bigger ships to us by giving them a bigger catchment area. Now come 2015, when the canal opens, we will see what happens. All kind of speculation is -- what will be the fee that is holding that canal? And what are the tolls going to be to make the canal extremely attractive? Don't know.

You know what? That might help our coal business coming out of going Convent going to Asia, because now you will be able to put some bigger coal vessels, grain vessels from the US Gulf going back to the canal. And that is not to be dismissed also as one of the impacts of the expansion.

Okay. Thank you, Ken. I don't know about that follow-up question, but it was a good one.

Cherilyn Radbourne, TD Securities.

Thanks very much and good afternoon. In terms of the volumes that you moved this quarter, they were a new first-quarter record; and as you alluded to in your comments, not far from an all-time record for the property. So I would just be curious if your assessment of how much of the issues you encountered in the quarter were a function of winter weather versus setting new volume records and perhaps bumping up against capacity constraints in a few key areas.

Good question. I will let Jim add to this, but for sure you have to stay ahead of the curve when you are growing. But we are not growing beyond what we were expecting.

It really is an issue of -- effectively it is a little bit like a downward spiral. When cold weather forces you to have more trains, when you have more trains, and you are hitting problems you get to a point where you need more locomotives. And you get -- if you don't have enough resiliency capability in the network and the impact that you face is larger than usual, you can get into a situation where you just don't have enough time to recover in between weather disruptions.

And that is what happened to us during 2013. We had punches; we would start to recover, but didn't have time to recover enough; get punched again; get punched again. And it stayed like this until the big blizzard all the way to the first official day of spring.

So it is much more the difficulty that we face and the resiliency on that corridor than growth. But of course, growth is what you have to move, and it plays at the margin. But it is not the reason why we faced issues in 2013.

No, Claude, the only thing I could add is I think overall we have a real thorough plan of where our pinch points are, depending on where the growth is specifically. So in this corridor it just makes sense for us to add some capacity just because of the traffic flow that we see moving forward in there, plus to give us some resiliency to.

We spent money on the B.C. North for the coal and the intermodal running through there, and we have spent money on the over the lakes to get to Toronto. And of course we spent money on the EJ&E and tie-in in Chicago to help put capacity and resiliency.

So there isn't, Cherilyn, any specific area. But this one here we needed to deal with, with what we just encountered and the growth that we see.

Okay, thank you. That is my one.

Jason Seidl, Cowen Securities.

Maybe next question and Jason can come back, Patrick?

Certainly. Jacob Bout, CIBC.

Good afternoon. Just a question on your expectations of growth in intermodal volumes over the next couple of years. Maybe talk a little bit about -- if you can put it in the buckets of either new products, supply side, collaboration, or how much of this would actually be from taking market share?

Well, the supply chain -- the supply-side is something where we try to create a product which is unique, not only just to serve Canadian cities, but also US market. Import and export, by the way. We often talk about import but also export.

Then you have the new destination which we said earlier is there to attract bigger ships. Not to dismiss the domestic market where we actually bring in new product; for example, we are already working hard to give what we call industrial customers a reason to use a container as opposed to all the boxcar on the gondola. We got some new product coming up this summer to move steel inside of a 53-foot container box.

So some cases we will take it from Canadian trucks; some cases we will take it from cross-border tracks; some cases we will take it from one of our US railroad competitors; some cases it might be flowing from us from our Canadian competitors. I think it will come from all of these different areas, and organic, and we are aiming a lot of different things the same time.

What are you targeting for overall growth?

Definitely better than CN average. So if you take the CN average, you would think intermodal, because it is a product which is more nimble and it does a job for more as opposed to less, intermodal should be able to outperform the CN average. And the CN average, I think we have guidance that covers that well.

Thank you very much.

Tom Wadewitz, JPMorgan.

Yes, good afternoon. Wanted to ask you a little bit more on the intermodal, if you talk about the specific terminals that you are adding and review -- I think you mentioned a little on the timing; I didn't catch all of that.

And I don't know if you have talked about the capacity in terms of lifts and percent of total capacity, but if you could perhaps run through that from a capacity perspective and also maybe give us a sense of -- do you harvest that in a year, or does it take three or four years to fill that? So a couple on intermodal. Thank you.

Okay. So one of the terminals -- the one that is maybe most talked about is Joliet, Illinois. It is on our rail line; it is an old merchandise yard that we are converting partially to an intermodal ramp. The terminal will be open in June.

In June we will start the import service, the export service, and we will also start the grain passing facility on-site for those who want a higher payload per container.

And we have a number of pre-sellings. Before we made the announcement we had some deal with some shipping line about how many containers they will bring into this site.

Now, how long will it take for us to load up the terminal? Time will tell, right? The terminal is not even open yet, so I think I will let it open and see whether these pre-commitments actually come in all as said, or even bigger.

The other one is Indianapolis. Same thing. This one will open in June for both import, export, and grain transloading facility on-site. Same thing there. We have done some pre-selling before the opening of the terminal.

And in both cases they are starting of a size that, without getting too specific, is very reasonable. It is not a very risky capital investment for us. And then from there we can add in based on customers' reaction and the profitability of these sites.

And, Tom, we trying to keep our network of intermodal terminals kind of in balance. Some have more capacity than others, obviously.

The obvious example would be Calgary. We just opened it officially last week. This is a brand-new facility. It has loads of growth in terms of the available capacity.

Terminals like Toronto and Detroit. Detroit has been a fabulous growth story. So we obviously have to be nimble and watch capacity and stay ahead of the curve.

Same thing in Toronto; it's our hub terminal. We have to make sure we stay nimble and ahead of the curve.

So we try to always stay in line and have the ability to serve our customers as the growth materializes.

That having been said, is there any way to frame it? It just seems like it is quite a bit more capacity addition than would be normal. Is it like 5% add to your total lift? Or is there any way you can frame the capacity?

Well, I guess we have capacity more than just for 2013. Whether it is Calgary, as Claude mentioned, or Detroit, Montreal, a (inaudible) terminal opening up, and we still have room in the case of the other terminal.

We have capacity more than just for 2013. So we do have some runway ahead of us to be able to exploit that.

Okay. Thank you.

Jason Seidl, Cowan Securities.

Hey, guys. I guess this is take two. Sorry about the phone issues. I want to touch back on crude to rail a little bit. You said there was going to be a new terminal opening up on your lines. Can you talk a little bit about the size?

And also, if you will, should we expect sequentially that petroleum revenue per carload to tick up as that becomes a greater percentage of the whole?

The terminal, there will be terminal opening both in the Center Gulf, US Gulf, on our line as well as in Western Canada. These terminal, some are brand-new, meaning they don't have any shipment today.

There is a tendency for investors to look at ways to either put a rail loop where you could do unit train, or take an existing one that is doing carload service and see if they can extend their footprint to unit train operations.

So these are two tendencies. One is more site, closer to the oil well. The other two is a site, that eventually are unit train capable or will be transforming to unit train capable. And obviously when you get to the destination you need to be able to receive that. So those that are buying the crude more and more are looking at expanding their footprint on the receiving side, either at the refinery itself or their terminal, which is close by, where they barge in or truck in.

So there is a significant infrastructure, more and more on loading, offloading, to make this a larger scale, more unit train operation over time, something where the cars really turn fast, load fast, move fast, get there, come back, next load.

I would say, Jason, it is quite exciting and it goes to the durability question that was asked earlier. We went from initially a smaller terminal by smaller player being built to origin the crude traffic.

As of late, what we are -- the discussions and the dialog and the agreements that we are reaching are with larger-scale refiners that are looking at building capabilities to unload at their refineries, but also are getting involved in partnership or themself in creating the loading facility at the origin point.

They are investing in very large number of cars and investing in loading and unloading facility. And I would think that they are investing in all of this infrastructure to move crude by rail for many years to come.

And investing in coil and insulated tank cars, meaning that there is a lot of people out there who would use the long-term [viable share] of rail to move heavy crude, the one which is when you can buy the crude before it gets diluted, therefore you need a coil and insulated car to be able to hold it.

Okay. Gentlemen. Thank you very much for the time, as always.

Thank you, Jason, and we also had our take-two issue earlier. Someone from our office in Montreal apparently was on Edmonton time when the issued our results.

Yes, I noticed that.

We did too. Next question.

Steve Hansen, Raymond James.

Yes, good afternoon. With respect to the Canadian crude by rail phenomenon, particularly as it relates to heavy oil, you have obviously been very successful at signing up many of Western Canada's small to mid-sized heavy oil developers over the past year or so. And that speaks to your originating capability in Alberta, I suppose.

What I am curious to know, though, is whether or not you have had any positive indication from Canada's larger, bellwether heavy oil producers; and whether or not they might be willing to embrace crude by rail here as discussions around Keystone continue to extend out.

I will let JJ answer, but as I just said a minute ago that is the phase that we are entering. We have a number of larger-scale refineries or integrated producers with which we are having dialog as we speak. But, JJ, within the confines of our agreements, what else can you say?

Some of these hopefully major terminals are going to be built in Alberta, [although] unit train actually being backed by the bigger business producer have enough volume and tonnage to back those into a viable investment. These same producers, some of them integrate also, going out and buying and leasing fleets.

So you are going to get to see some of the bigger players now backing some of these capital investments with some of their product. Either a seller or a buyer.

The part that is interesting is it is not just rail. It is rail and barges to get to the destination refineries, and use the ship unloading capacity. It is a pipeline then rail.

We are seeing a range of new avenues being created and new players getting involved, and all of which point in terms of the prospects for the future to something that clearly shows that rail and pipeline are complementary and that we are helping moving energy to market in an efficient way, and I believe for many years to come.

Yes, Steve, think of crude by rail as really becoming an intermodal solution. Many of these terminals are going to be fed by a pipeline and then rail. So it is a combination of one more than one mode from origin to destination.

That's very helpful. Thank you.

Matt Troy, Susquehanna.

Yes, thank you. Jim, I just wanted to ask you a question. You've obviously been at it for three and a half decades now, and you picked one heck of a quarter to assume the helm. But if I were to look beyond the current weather-related issues, you know this railroad well. If you look out on a three, five, seven year basis, what are the opportunities for you to bring and add value given your skill set and experience in the railroad?

You are obviously coming a long line of very good COOs; but I am just curious as you look at the network and its needs and its opportunities, maybe if you could just give us a top-three list or a focus list that you see as what you will be doing to leave your mark over, let's call it the next half decade.

Well, great question. First of all, what the heck? I could have showed up in July and we would have been having a different discussion on how the second quarter was so nice and thank you very much. But at the end of the day you have got to get back to the basics.

What you have to start -- and I have been out to some of the terminals to look at ways that we can move the box cars, moved all the cars with less cost. And looking at the locomotives to make sure we've got full utilization.

So you develop the skills over a number of years. I guess you're right, it is 35 years. It is a long time.

But at the end of the day, I think there is value in looking at it. It is a simple model; really it is not that complicated.

We went to Prince George, myself and Mike Cory, and walked in there and figured out a way with a yard that had 13 assignments and taking two out of there and being able to handle the same number of cars. And I want to do that and spend as much time on the ground as possible with a few of the other things I have to do.

So I am looking forward to it. I have been doing this for a long time, and if any of you have followed where I have been, we have got to improve it and drive the most you can to have -- though a balance; you can't just drive the operating metrics to the point where we limit our service to the customers that we commit, because in the long run, we hurt ourselves.

So I am looking forward to developing that good, clean operation that allows us to handle the business that is there in a smart manner.

Okay, thank you.

If I could add, I have been watching Jim over the last couple of weeks in fairly tough conditions, and I like his no-nonsense approach. He is rallying the team and he is already having a huge impact, not just on fixing today but on laying for the future.

There is quite a good buzz also with the rest of the team. We have had quite a bit of other promotions as part of this transition to the leadership team in operation, and there is a lot of people that are a bit tired about the winter but excited about the future and geared up to deliver a strong back-end to the year.

Great. Thanks, guys.

Benoit Poirier, Desjardins Capital Markets.

Yes, thank you very much. My question is on the crude by rail. Looking at the percentage derived from light, I think it is about 60%. But as the trend moves towards heavy oil, I just want to know what is your expectation in terms of percentage of heavy oil in the next few years, and how your network compares to CP when it gets to the heavy oil business?

Well, we think we are very well positioned for the heavy oil market because that comes from Canada and the North of Alberta in particular. There are places like the Peace River area, Grand Prairie, where we clearly are the one railroad to support the development of that particular group place.

Similarly, with the ANY and our strong presence in Edmonton, all the way down in Saskatchewan to the Manitoba border, we have a beautiful or origination franchise. But I think if anything differentiates us it is our combination of that origination franchise with our destination reach.

We go all the way to St. John, New Brunswick. We serve every refinery in the East, starting from Quebec City, Montreal, in and around Toronto, Chicago, down all the way to the Gulf, stopping in Memphis. So we are able to go places.

And if people are looking to get the best out of the fleet they are buying and to also be able to manage their supply chain of crude, to feed in the crude in the right sequence for their refinery, we think we have a very great offering. And I think as the market evolves we will be a strong player in that segment.

Okay. That is my one. Thank you.

Brandon Oglenski, Barclays Capital.

Hey, good afternoon, everyone. JJ, I just wanted to come back to your comments about some potential panel mill openings on your network and what that could mean for the lumber business looking forward, and how you balance that against a pretty challenging paper market.

And just along with that, we're also hearing from the media this morning about constraints for railcars and capacity for the lumber shippers. So can you just talk through what this opportunity presents for CN?

Okay. Well, panel price are up. They were up last year. That is why some of these mills which have been mothballed in the last housing start recession now have the guts and the money to reopen.

And there will be panel mills reopen. There has been a number of them announced, some others are not announced.

Most panels typically ship in boxcar. However we do see some customers who are looking at using a centerbeam because even though it is not the usual way of doing it they can get a bigger payload of shipping on a centerbeam That means a little more capital on their side, on the way they wrap the bundle.

So the panel resurgence is positive. It will require some equipment; in some cases box cars; some cases centerbeam.

The discussion today about the newspaper about lumber, yes, we had a tough winter, no question. Especially out west where a lot of the lumber mills are located.

The demand is also strong, stronger than what I think even the lumber producers were forecasting themselves last fall. It's a great thing. Price of lumber is up. Stock price of lumber company is up.

We deployed -- as Jim said, deploying more fleet when you do network the philosophy there is not going to be moving more lumber. So now that we have network velocity will work on that, and already our lumber revenue are pretty good in April. And we will just keep it one week at a time.

We have been flirting around this April number. Our April to date numbers are up 10% and lumber is up something like 30% on a year-over-year basis. So we are dealing with the business in front of us.

And as we are regaining fluidity we will be serving our customers to help them reach their markets. That is what helps them win in their marketplace, and that is what helps us create value for our shareholders.

All right, thank you.

Chris Ceraso, Credit Suisse.

Thanks. Good afternoon. Just a question about the addition of capacity to your network, which you mention will help you better prepare for dealing with tough winters in the future. Do you think that on a through-the-cycle basis that will end up pumping up or pushing up slightly your normal operating ratio, if you are carrying a little bit of extra capacity for those outlier circumstances?

No. I will let Luc add to this, but clearly we are doing this for service improvement and for efficiency improvement both. So that should help us drive more productivity going forward and more resiliency.

You just have to look at our first-quarter results. You don't want to be caught without enough network to recover, because once you get into that downward spiral the cost impacts are fairly significant.

So this is not about adding cost. This is about adding capacity, adding resiliency, and adding throughput so that we can create more value for our shareholders and help our customers win in the marketplace.

Luc, anything else on that front?

No, I think again you lose a little bit of business when you don't have the capacity. And the resiliency is another issue, because then your customers start to wonder what actually can you do.

So as far as we are concerned we are seeing the growth, we are seeing the opportunity, and we are investing. And I have no question in my mind that this is a worthwhile investment and in fact will maintain if not improve the operating ratio. So I think it is a good thing.

Is it a function of -- that you perform a little bit better during the stress periods, so that even if you're carrying a little bit of extra cost during the nonstress periods on average you end up a little better?

Well, we will also gain velocity during the non-winter periods, so we will gain efficiency as a result. So I think it pays throughout the year.

A good example of that is just when you have a busy corridor, it is not just busy in the winter, it is also busy in the summer when you have to have work gangs do the scheduled maintenance. So adding a little bit more resiliency -- the detour route through the Prairie North Line, for instance, that is going to help us deploy our engineering gangs more effectively and have less impact during the summer months when we are trying to maintain the railroad.

So this is an all-weather investment. We are basically just advancing investments we would have had to do a year or two from now, to make sure that we mitigate the risk of having another unusual winter next season.

That's right. It will be useful for the coming fall peak.

Okay. Thank you.

Chris Wetherbee, Citi.

Thanks. Good afternoon. Maybe a question on crude by rail. Just thinking about the targets for this year, I think you've talked about doubling, I guess, the carloads moved. Run rate is around 60,000 carloads as we stand right now.

I guess, how should we think about maybe potential growth opportunities that might come incrementally over the rest of this year?

And then maybe on the back of that, how do we think about the mix of unit trains versus non-unit trains right now? And then maybe how does that mix shift as we go through the rest of the year, as you guys have gained some scale in that business?

Most of our business is still carload business as supposed to unit train business. I would think by the time we get to fourth quarter probably most of our business will still be merchandise business and not yet all -- not yet more than half of it unit train business, might still be picking up at that point.

In terms of the guidance that we have talked about, we still feel comfortable with these numbers. We will probably do a little better than that.

And I would encourage people to look at revenue ton-mile. When you look at CN for crude, revenue ton-mile is what gives you the best indicator of how well we are going to be doing as opposed to carload or barrel.

Okay. That's helpful. Thank you.

Okay. I think we have one last question, maybe. No? Okay. So thank you for being on this call. We are sorry the results were issued a couple of hours early, and I kept you on your feet.

Certainly got Janet and her team noticing; I think it is an issue of a time zone error. And we will be working hard here in the next few months to develop the rhythm that we need to show you that not only are we improving service but we have resiliency and we are able to create solid returns for our shareholders. So look forward to the call at the end of Q2.

Thank you.

Thank you.

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