Canadian National Railway Co (CNI) 2013 Q3 法說會逐字稿

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

Thank you, Marcus. 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; Jim Vena, our Executive Vice President and Chief Operating Officer; and JJ Ruest, our Executive Vice President and Chief Marketing Officer.

In order to be fair to all participants, I would ask you to please limit yourself to one question. 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 who are joining on this call. We are pleased to report very good third-quarter results. Clearly, our transformation journey is continuing and the key elements of our agenda are gaining momentum.

If you look at it during the quarter, we had a slow start in June and July from a revenue standpoint, but all revenues rebounded nicely in September. And more important than that, we were able throughout the quarter to continue to outpace base market conditions. That helped us deliver solid top-line growth. JJ will give you the key numbers in a minute.

We were able to accommodate that growth at very low incremental cost. If you look at Jim's report on his page where the key operating metrics are all laid out, it is basically all green. So this is solid operating performance, but also very good service outcomes for our customers. We are balancing operational and service excellence the way we are aiming for.

Perhaps the most important number on this page is at the bottom of the page. During the quarter we had a very solid safety record, our FRA accident ratio was 1.31, which is roughly 43% better than last year for the third quarter. This means that we have only 1.3 accidents for every 1 million train miles that we move of goods across the country.

Obviously, we do have accidents from time to time. We had a very serious one this weekend with fire involving propane cars in Alberta. I think our response, which was led by Jim who just came back from the site, was comprehensive and we are focused as we speak on returning service levels to our customers.

Delivering safety and responsibility is a foundation for CN and we are continuing to focus on improving our record in this regard.

So very solid third-quarter results. Jim will start the operating overview and JJ and Luc will wrap it up with the revenue and financial performance. Jim?

Okay. Thank you very much, Claude. So how do we judge success and did the team perform? Our goal is to balance operational excellence with solid customer service and have an unwavering commitment to safety.

And as Claude just mentioned, we just had an incident in Western Canada in Alberta that we had to deal with. The processes and all the people that we have involved I think we had to deal with it. We have dealt with it; we have moved on.

We are going to learn what we can. We are going to make sure we understand what happened there and do everything we can to improve our safety record even further than what we have done over the last few years.

So let's take a look at the operating metrics here in some detail. As Claude mentioned, the operating metrics -- if we take a look at what we are able to perform in yard productivity, terminal dwell, and how we are working through the terminals, I think good metrics.

13% in yard productivity, meaning we handled more cars with the same number of hours and people. The terminal dwell better; we have been able to put them through at a rate about 5% better, which is in the right direction.

Our train productivity, we have been able to add more tonnes on the trains per mile, so that means that the increase in business that JJ and the marketing team has been able to deliver has allowed us to put the trains at bigger size. And also we are working always hard to optimize the number of trains we have and using supply chain views to make sure that we are running them when we are supposed to be running them and make sure that we run them efficiently when we operate.

If we take a look at the metrics as far as locomotive utilization, again a 4% improvement from where we were last year and the year before, so it ties into the better handling of the train. Train velocity a little bit better. Not quite where I would like to have it, but better than before.

And of course, my favorite; anybody who has been listening to me since I got the job, the metric that tells me whether we have got the right systems in place and we are heading in the right direction is car velocity. We ran at about 5% better, 223 miles per day.

I am very proud of the team. I think I have got a lot of talent that works directly for me, but even more importantly, we have got talent right through the whole team. And the culture is headed in the right direction. I think we are close.

I think there is more to give, but at the end of the day on four of these six metrics we had record performance. So good job by my old team right from top to bottom and bottom to top. Excellent.

But it is truly a balancing act of what we try to do. You could get even better operating numbers if you didn't worry about service, but at the end of the day you don't get customers if you don't have service. So for us it is the balancing of a two.

We have been pushing hard as part of our cultural shift to make sure that we drive the decision making down to the front line. We want our employees at the front line to be capable and make the right decisions and at the right level so that we get even more push and more value out of our operating metrics.

The network and the capital that we put in, and I am sure that Luc is going to talk about it here in a minute, is very important to us. It allows us to be able to move the traffic in an efficient manner. We committed to putting CAD100 million more into Key Edmonton-Winnipeg corridor and have it completed by the end of the year. It is nice to report that we are on track and I would expect in the next four or five weeks to be on there.

I guess the nice challenge JJ -- I mean, JJ, before I pass it on to you is we got a record grain crop. It will be interesting to see how well our supply chain view of how we move products from origin to destination and how we look at it more than just on the railroad, how well we do so, it will be interesting to see what happens.

And with that, JJ, I will pass it over to you.

Thank you, Jim, and building up on what Jim just mentioned in some of the efficiencies and very strong asset utilization, the revenue in the last quarter increased 8%, which is a new quarterly record, as it should be. The team is on track to use service to grow the business. That is service as defined by customers who are making decisions every quarter and every month.

Volume and mix produced 2.5% of the overall third-quarter growth. The exchange rate added 2.5%, fuel surcharge another 1%, and same-store price -- same-store sales, including coal, was 3.0%. CN is focused on better product, not cheaper price. Product which produce a lower supply chain cost for the customer and product that becomes a competitive edge for our customers and helps them win in their own marketplace.

I will now do a quick rundown of the quarter, as usual on an FX-adjusted basis. I will start with petroleum and chemicals which revenue was up 13% on flat carload. Chemical revenue was up 9% with solid growth on basic chemical and plastic pellets, in line with the positive auto and construction sector.

Crude revenue also experienced very strong growth. The run rate for the third quarter was about 70,000 carloads annualized and about 80% of our business mix currently is what we call heavier crude.

Metals and minerals revenue was up 7%, led by frac sand revenue which grew a very solid 60%. We continue to see production ramp up in Wisconsin on our Barron Sub, namely the Superior Silica Sand, 2.4 million tonnes plant which started up last year. And the CSP plant which is currently under construction. At least two new plants should be built on our Wisconsin division in 2014.

Forest product revenue was up 5%. Our lumber and panel to the US was up 10% and 17%, respectively. Our Asian lumber export was also up 23%. CN will largely dominate for years to come the lumber and panel originating space in Canada.

Pulp and paper commodities were flat to last year.

Our coal franchise was relatively stable in the quarter. Revenue decreased only 3% and remember our coal makes up only 7% of the CN total book of business. Both the met coal and pet coke business were positive in the last quarter. Thermal coal was negative. We have secured a new thermal contract which will help shore up our thermal coal results in early 2014.

Grain and fertilizer revenue were down 5%; however, as Jim mentioned, we experienced in September a positive sharp transition in the grain after a very weak July and August. The grain export supply chain is now running at maximum capacity and the fertilizer revenues were flat on currently a very confused world potash market.

To be noted the pricing for the regulated Canadian grain cap will transition from the plus 9.5% that it was last year to a minus 1.8% as of August 1, 2013. This will create a year-over-year headwind comparable for grain same-store pricing.

Automotive revenue was up 4%. The consumer vehicle sales in cities on our network drove our business, namely imports from Vancouver was better. We estimate CN currently moves about 50% of the new finished vehicles sold in Canada, that is before the addition of Chrysler in mid-2014.

Intermodal revenue kept its relentless pace of growth revenue was up 12%; units were up 8%. The international segment grew 13%; domestic grew about 10%, which is a nice balance.

Our recent investment in destination terminals are producing good results. I especially like our progress in the market of Detroit, Saskatoon, Joliet, and Calgary. The way we redefined supply chain transportation time has changed the Canadian port business. As a result, as you know, in 2013 we attracted the business of APL of Singapore, MOL of Hong Kong, [UAS] of Dubai, and, therefore, our third-quarter revenue for the Port of Vancouver was up about 30%.

On domestic we benefited from new supply chain product, namely coal supply chain, with some new customers like Target Canada and Hudson Bay, as well as a double-digit growth in the industrial sector. Our carload and regional salesforce gives us more intermodal boots on the ground than anybody else in the country when it comes to the industrial sector.

Now moving to the outlook, the fourth quarter carload and RTM will grow. They will grow sequentially from the third quarter and they will grow versus last year. Our volume in the fourth quarter will be driven by housing starts; automotive sales; a better grain crop in both Canada and the US; ethane and natural gas feedstocks, which are more affordable than ever for the petrochemical customers; energy consumables like frac sand and crude.

As is usually the case in our well-balanced, diversified portfolio, some pockets will be weaker, namely some of the coal, potash, sulfur, and pet coke. The Western Canadian crop production is estimated to be in excess of 60 million tonnes and our Canadian grain supply chain will run at full capacity during the fourth quarter.

Also worth noting, our unutilized network between Chicago and Halifax will gradually benefit from new and profitable business, namely crude, recent Canadian refineries, OOCL container as of January in Port of Montreal, and later next summer Chrysler in Ontario.

In intermodal we already have the foundation laid out for 2014. We estimate our Port of Montreal rail share will move from 40% to 50% during the course of the year and our (inaudible) rail business in Vancouver would also be very strong.

In conclusion, the team is on track for growing the business based on service. We are using our overall service as a major competitive edge and we are doing so at very attractive margin. As Claude mentioned earlier, our operating ratio was at 59.8%.

We invite you to join us in our December investor day where we will go into more detail for our go-forward business plan. On that I will pass it on to Luc, our Chief Financial Officer.

Thanks very much, JJ. Starting on page 14 of the presentation let me walk you through the key financial highlights of our third quarter's performance.

Revenues, as JJ pointed out, are up some CAD200 million, or 8%, to nearly CAD2.7 billion. Operating income was just shy of CAD1.1 billion, up nearly CAD100 million, or 10%, versus last year. As we saw solid productivity, safety, and service levels which were coupled with cost management in the quarter to complement revenue growth. This is an all-time record for CN in terms of quarterly operating income.

Our operating ratio is 59.8% in the quarter, which represents an improvement of 80 basis points versus last year. Other income stands at CAD5 million in this quarter, the result of lower activity levels as expected compared with CAD18 million in 2012. On a full-year basis in 2013, I would expect other income to finish in the range of CAD10 million on an adjusted basis.

Our reported net income for the third quarter is CAD705 million, up 6%. The favorable impact of the currency change was CAD14 million on net income. The reported diluted EPS reached CAD1.67, up 10% versus last year.

In the third quarter, however, we recorded a CAD19 million increase in deferred income tax expense resulting from the enactment of a higher provincial corporate income tax rate in the province of BC. This broad our effective tax rate to 29.5% in the third quarter. Excluding the impact of this one-time deferred income tax expense, the adjusted diluted EPS is CAD1.72, which represents a 13% increase over last year's third quarter.

Turning to page 15 operating expenses were CAD1.6 billion, up 7% versus last year or 4% on a constant currency basis. At this point, I will refer to the changes in constant currency.

First, labor and fringe benefit costs were CAD521 million, an increase of CAD37 million or 8% versus last year. This was the result of three elements. First, an increase in overall wage cost of 4%, mostly the product of wage inflation for 3 points, and 1 point for increase in average headcount in the quarter.

The second element is higher pension and health benefit expenses were 6 percentage points of the variance. The third and last element partially offsetting these cost increases was a 2 percentage point favorable variance relating to more capital work being performed in the third quarter this year versus last.

Looking ahead to the fourth quarter, keep in mind that we expect some headwinds. Some of it will come from stock-based compensation given where the stock price is currently at. Also, last year I will remind you that we had the reversal of a former executive's compensation benefits. So these elements alone could represent some CAD30 million of unfavorable variance in the fourth quarter.

Turning to purchased services and material expenses, they were CAD318 million, up 3%. This was due to higher volume resulting in increased intermodal trucking expenses combined with higher repairs and maintenance expenses, but partially offset by lower project related contracted services.

The fuel expense stood at CAD390 million, an increase of 1%. Higher volume represents an increase of 3.5 percentage points in the quarter, while improved productivity constituted an offset for 1.5 percentage points. And price was also favorable by 1 percentage point.

Depreciation is CAD11 million higher than last year, or 5%, due to a combination of asset additions as well as Canadian and US depreciation studies. Some of these depreciation studies will be completed through the fourth quarter and some into 2014.

Given the timing for completion, I now estimate that our depreciation expense will increase by approximately CAD40 million. But the impact will be about CAD20 million through 2013 and we will see an incremental CAD20 million or so in 2014.

Turning to page 16, let's talk a little bit about free cash flow. We generated nearly CAD2.5 billion of cash from operating activities. This was CAD114 million, or 5%, higher than in 2012, mostly as a result of improved working capital.

The main element contributing to this year-on-year improvement in working capital was lower pension contributions this year for approximately CAD365 million. This was partly offset by higher income tax payments as cash taxes to date were CAD516 million more than last year.

Our 2013 year-to-date over CAD1.1 billion of cash was used in investing activities. That is CAD327 million more than last year and the differing results mainly from lower proceeds from non-core asset sales for CAD259 million and CAD64 million of higher capital expenditures this year. We are still on target for a CAD2 billion capital expense budget for the year.

And so after deducting dividends CAD778 million of free cash was generated for the first nine months of the year. Meanwhile, our balance sheet remained strong with debt and leverage ratios well within our guidelines.

We have completed the stock buyback program of CAD1.4 billion announced last October. Consistent with our strong shareholder return agenda, our Board has approved a new stock buyback program allowing the repurchase of up to 15 million shares over the next 12 months. And I have set aside about the same budget as in previous years, about CAD1.4 billion, to get this accomplished.

We also announced a 2-for-1 stock split and the payment of our quarterly cash dividends.

Finally, on page 17, our financial outlook. With the benefit of our third-quarter performance and assuming a stable economic environment through the fourth quarter, we expect to finish 2013 on a strong note. As such, we are, therefore, reaffirming our annual guidance which aims for high-single digit EPS growth in 2013 over 2012's adjusted diluted EPS of CAD5.61 We also continue to target free cash flow in the range of CAD800 million to CAD900 million.

On that note, I will turn it back over to you, Claude.

Thank you, Luc and team. Clearly the solid Q3 results show that we are gaining momentum. We are entering Q4 with a hope to finish the year strongly, as Luc just explained.

Our short-term focus -- with the residents of a gain for now safety back at home our focus is on recovering a fluid network. We have a lot of work to do to catch up in terms of traffic for the benefit of our customers, and we are also this week focusing on concluding, hopefully, a labor agreement with our conductors. The discussions are ongoing and I am hopeful that we will be able to reach a win-win agreement in the next few days.

As we look out, strengthening our supply chain mindset and our capabilities, effectively embedding our strategic agenda, is what we are focused on. There is a lot coming our way in terms of initiatives. We are getting good response from our customer base and stakeholders understand that we are a true backbone to the economy.

At the end of the day, it is all about creating solid value for our customers and our shareholders. And that is our commitment to all of you on this call.

With this, I will turn it over to the operator for Q&A.

(Operator Instructions) Brandon Oglenski, Barclays.

Good afternoon, everyone. Congrats on a good quarter. I wanted to ask about the contract wins that you guys have announced here.

I know you have said that this was all based on service, not a price decision by the customers. But can you talk about some of those service aspects and whether or not taking on all this business you will be able to maintain that really good progress on the OR that we saw this year and this quarter?

Well, that is our game plan is to outpace base markets and to be able to accommodate the growth on a go-forward basis. If you look at our volumes through the third quarter and particularly in September, we are really ramping up the last few weeks of September. The first few weeks of October we are actually delivering record volumes; more than 1.2 billion GTMs per day is what we have been able to do.

So we are geared up. We have a lot of investments to add to our resiliency. Jim and I were actually visiting our Prairie North Line and our new investments on the mainline between Edmonton and Saskatoon. We really liked what we have seen there and we are gearing up all of our resources -- our assets, our people, and our network -- to be able to handle the business that our customers have trusted us with.

So that is the game plan and we have every commitment or every -- all of our efforts are designed to actually deliver flawlessly.

Thank you.

Scott Group, Wolfe Research.

Thanks. Afternoon, guys. So, Claude, you mentioned a couple times how things feel like they are accelerating, momentum is building. You got, call it, 13% earnings growth with a few percentage point headwind from pension.

As you look out, not to fourth quarter but over the next year or so, is there any reason you think in a stable economy with the market share gains you are getting why you can't continue to get kind of 15% plus underlying earnings growth?

We are going to be sitting down with every one of you who are going to visit us early December -- I think it is on the 10th or the 11th -- for our investor day. We will give you more specific guidance at that point into next year.

But, clearly, we have good momentum so we are pleased with how things are going. We are certainly aiming to deliver solid -- continued solid growth in EPS and solid free cash flow. It is a bit early to guide into next year, but we like our results in Q3 and we are geared up to finish Q4 on a strong note.

Walter Spracklin, RBC Capital Markets.

Thank you very much. Good afternoon, everyone. Just on -- I guess this one is for Jim.

Obviously, you have had some pretty impressive statistics here on an operating side through the summer here in the third quarter. Looking back at last year when we did have winter -- obviously winter is going to come again and let's assume for the moment it is a difficult one like it was last year.

Can you talk to us a little bit about what you have done in the intervening months or period that has better prepared you for the winter period? Especially given a lot of this new volume that JJ has done a good job of bringing over onto your network. A lot more volume, potentially a tough winter; how are you preparing for that?

Walter, I hope you are wrong. I've been looking forward -- I have gone to charm school and everything else and I'm hoping that we get one of those nice, easy Canadian winters. But if we don't, let's say we get a winter like we had last year, it is multifaceted.

You have got to look at the locomotives. We have gone through the locomotives top to bottom. We have looked at their resiliency to make sure that they perform well in the cold weather and we don't have some of the issues. We learned some things on some of the different fleet that we have.

We are getting new locomotives in the fourth quarter delivered which will help us make sure that we get through the winter better.

We have looked at people to make sure that we have a few extra people in place so that we are ready to go. On top of that, we have trained 800 conductors and we have a number of locomotive engineers that are qualified and ready to run if we need them in Canada to help us out. I don't think we will get to that point, but if we do we have some backstop on it.

We are very careful on the cars and how we are going to manage the railroad. I think one of the biggest things will be how fast we react to the network and the fluidity of the network. It is truly a science and something that I think we have got a good plan going forward.

The last part is we have invested capital, not only the CAD100 million to help us between Winnipeg and Edmonton. When Claude and I went on the inspection trip we went from Edmonton over the Prairie North Line to see the siding growth, the track structure, making sure that the wells are completed so we have nice, safe track on the Prairie North Line to give us that option. Plus on the mainline piece, the double track pieces that we have put in.

So it is a long list. I guess I could go on for an hour and then Claude and everybody else would be wondering why I took all the time. But, Walter, we are as ready as we can be.

Sounds like it. Okay, thanks very much. Congrats on a good quarter.

Tom Wadewitz, JPMorgan.

Good afternoon and congratulations on the good numbers, the strong results. I had a question for you. I don't know if it is JJ or Claude, or maybe both, but how do you think about the impact to the competitive dynamic as you have taken some share?

Do you think of it as being there was some opportunity; you take some business and maybe see stability and less movement of share in 2014 or 2015? It just seems that there is a finite number of big intermodal contracts and if you push too hard then you might hurt the pricing dynamic, or maybe it is fair to think there is stabilization in share. I just wondered if you had any thoughts on how you thought that share and pricing dynamic might play looking forward.

Tom, we don't price to gain market share. We provide service to attract customers if they believe we can help them win in the marketplace. We are pleased that some believe we can actually help them win in the marketplace, but at the end of the day there is a market out there.

We have a very competent competitor across the street and we don't take anything for granted. We just hustle every day. We have a good supply chain product. We have an end-to-end approach to how we actually deliver value and we are getting very, very good response in the marketplace.

The more we do that, the more opportunities for having more business over time. But it is not at all about price, it is about servicing our customers. JJ, you want to add to that?

Yes, I think in both cases there were definitely long sales process over, in one case over a year and the other case probably over three years. In both cases explaining and selling what we can do, how we do it, and how we can add value to these two accounts in a way that was fitting their own need for, in one case, supply chain and the other one, people like us who are in transportation, and they have a product to sell. We'll [stick to it] and try to make it better.

So a lot of effort on explaining the product and the reach and the service that we have. In the end, yes, [feel] price like everybody else, but price was not a reason for them to make such a switch.

So I guess assuming that it is service driven and maybe there is a piece of price or maybe not, you think the component about maybe less movement in share looking forward is that reasonable or not necessarily?

I would say, Tom, it is not assuming. It is absolutely service. The recent customers that are coming to our way are solid, profitable customers. We are servicing them and that is why they came over.

We are going to go in the marketplace following our customers, not chasing customers through price. That is not our approach. It is not good for the industry and, ultimately, it doesn't create a good marriage.

As JJ said, some of these customer dialogues have been going on for several years. They chose to come over because we have a good service, not because we have a low price.

Okay. Thanks for the time, appreciate it.

Cherilyn Radbourne, TD Securities.

Thanks very much. Good afternoon. So the record Canadian grain crop is certainly a welcome development in the context of a slow growth economy.

I wonder if you could just speak to what, if any, tweaks you are making to your service plan to maximize capacity and whether you think your supply chain focus can be a competitive advantage in this context.

I will let Jim answer this, but it is definitely a big challenge. There is a record crop out there and we have really got to step up to put all of the pieces of the supply chain in sync to be able to get our spotting well above 5,000 every week.

So obviously this week we are going to have a little challenge with the derailment over the weekend. But the last couple of weeks, Jim, we have been doing 5,300, 5,400 spots a week and we got to keep it going through the November/December period to meet customer demand. But what is your recipe?

I think if we focus from end to end that we got to make sure that we have got the right plan of origin, working closely with the elevators, Cherilyn, so that they are ready for us. We are not wasting car time and we are not wasting load time and locomotive time. I think that is really important.

And at the West Coast and in Thunder Bay and even up in Churchill -- we are moving some grain up in Churchill -- we make sure that we partner and we understand what the flow of the ships that are coming in, what they can take out, and make sure that that all works together so that we can react and go to the right place. Whether it is the Prince Rupert, the Vancouver, North Shore, South Shore, and to Thunder Bay.

So if we get that all in the mix we should be able to maintain the number well over 5,000. You can see I didn't go as high as Claude, over 5,000 from now moving forward.

Thanks. That is my one.

Chris Wetherbee, Citi.

Thanks. Good afternoon, guys. Maybe just touching on the pricing environment.

When you look into 2014 you have seen some of the share move around a little bit. Just kind of curious to get your sense on the sustainability of sort of this 3% run rate that you guys have been able to consistently put up. Just want to get a sense of how the pricing environment feels right now and maybe what to think about for next year.

I don't if we are going to get into guidance for next year, but the current run rate is a run rate that we think -- there is a number of puts and takes in our current run rate, obviously, with different businesses and different segments. And I talked about the Canadian grain cap, for example.

But we are comfortable -- the run rate are something that we can sustain, probably not necessarily sustain with the same mix of business. But every year we have got some strength and some weakness and that is how we make up the average goal.

Our goal is definitely to price above inflation in line with the value of our service. I think the fourth quarter is a good indication of what we believe we are able to do in the next year or so for sure.

Great. Thank you.

Jacob Bout, CIBC.

Good afternoon. Just maybe you can give us your thoughts about the outlook for crude by rail given some of the recent derailments. Specifically thinking about, from a regulatory perspective, what is being discussed there and also from an insurance perspective.

Let me -- JJ can fill in with some of the customers that are coming online, but let me restate what I said at the beginning. We have an unwavering commitment to operating a safe railroad. It is true of all the dangerous commodities that we move.

To be able to have so few accidents in any given year with so much volume is quite remarkable. We move in excess of 1 billion tonnes of commodities every year to the benefit of the economy on both sides of the border. We have about 10% of that volume which is the dangerous goods, and we have a handful of accidents every month. Two to three would be our average.

It is difficult to get better than that, but we are committed to continue to improve to make sure that we have as few incidents as we can. And that, when we do have incidents, we are reacting to them with a comprehensive response; owning up to it like we did this weekend. So that is our strategy.

I think that when you go beyond the short-term impact, because it is disrupting the lives of the people of Gainsford over the weekend. There are a lot of people that need to be reassured.

At the end of the day the facts are clear, we move more than 99.997% of dangerous goods to market without incident and we have to keep getting better. If we do, I believe we are a viable alternative to move all the energy products, including crude. And as JJ will tell you, we move more heavy crude than we move light crude, and we believe this is there to stay with us as long as we continue to operate a safe railroad, which we are committed to do.

JJ, you want to add to this in terms of some of the things that are online?

As I said in my comments, our run rate for crude is about 70,000 carloads annualized, which is basically the same sequential run rate we had in the second quarter. But our RTMs are up because we moved last quarter same number of cars, more or less, but we moved them more miles and that is why the revenue in crude was up.

With the increased infrastructure in Alberta, which is where the heavy crude or more heavier type of crude is, this is why our movement is getting more toward the heavier crude. In the case of CN, over 80%. We should see sequentially an increase in the fourth quarter versus the third quarter, probably in the case of the fourth quarter not just RTM, but also carload.

As the infrastructure is laid down more and more in Alberta we will also see 2014 showing growth in carload and RTM revenue. Then we will -- without getting into the specific of how much, but it is still a growing story from a number point of view. Our customers are all investing heavily in infrastructure as well.

The challenge is on us, Jacob. If we continue to do a good job at moving these products safely, we believe we will continue to grow in this market.

William Greene, Morgan Stanley.

Good afternoon. Thanks for taking my question. Luc, can you just offer a little bit of color about what the trend is for the pension expense?

I assume it will be coming down next year, but maybe you can kind of help us think a little bit about how that would change what the magnitude of the change is if this were year-end now.

Good question. Of course this is all going to depend on where the discount rates will settle down at the end of the year, but if we were to look at where things are right now indeed we would have an improvement over 2013.

This year the pension headwind, as I mentioned earlier, is about CAD100 million to our pension expense. So next year I would hope that we are going to see things probably flat to 2013 and potentially there could be also a slight improvement. We are monitoring that and I think there is probably a little bit of positive news.

But we also are looking at what the Canadian Institute of Actuaries is doing with respect to the mortality tables. They will be implementing new tables, which unfortunately point to people living longer.

Why do you say unfortunately? I think it's fortunate that we live longer.

From my vantage point that is a bit of a problem, Claude. So that will probably offset a little bit of what otherwise would have been a more favorable situation, but I am still optimistic that we will be at least neutral to slightly positive on the pension expense.

Thank you.

Benoit Poirier, Desjardins Securities.

Yes, thank you very much and congratulations for the quarter. Just with respect to Prince Rupert, you have been experiencing a slowdown back in Q2, but could you please give us an update related to the quarter? And also discuss about the upcoming opportunities, including the potential opportunities with the Northern Gateway alternative and maybe Canpotex?

So starting with intermodal the business over Rupert has been year-over-year softer and I think we are slightly negative. The two shipping lines that we deal with in Rupert have taken pricing actions. [There is an incidence of] people who are doing business with us in Vancouver and some of that business has moved from one shipping line to another, partly explaining why our revenue in Vancouver are up 30%.

So it is what it is. Business moves from shipping lines to shipping line, and in the case of Rupert, the two which are players in Rupert have actually maybe not done as well in the last six months than the boys in Vancouver.

Regarding Canpotex, so potash is really nothing new. It is a major capital program. The world market for potash, I would say, have looked better in the past. I'm not so sure that there isn't (inaudible) of a major announcement in Rupert for a terminal at this point. The market for potash needs to sort itself out first.

I'm thinking, what was the third part?

But in the meantime we are running very hard on grain. I think last week we were close to 1,500 cars unloaded in Prince Rupert. That is a key advantage we have.

Very good cycles and the three owners there are really committed to have strong volumes towards Prince Rupert to make sure that we create car capacity in this period of high demand.

And our coal business is holding well. There is a lot of investments that have been made by RTI. The supply chain has never been more efficient; we just need the price of coal to come back up a little bit and volume to get a bit more growth. We have lots of upside, I think, over time in coal for Prince Rupert.

On the coal definitely there's lots of capacity there. When the market comes back, and those markets do come back; it's a question of when, there would be lots of capacity. Even more capacity at RTI at that time to handle the coal and the met coal.

Very good color. Any opportunity to rail oilsands crude to BC Port?

There is no project -- there is no infrastructure on the Canadian West Coast to receive crude by rail. There is no project proponent; there is really no support. I don't think it is any kind of the near-term type of potential.

Okay, thanks again for the time.

Ken Hoexter, Merrill Lynch.

Great, good afternoon. I guess the prior management really maybe wasn't as focused on client relationships and, Claude, you have made a big focus on reconnecting with many customers. Do you think this is an impact on recent business wins in terms of the cost-cutting pace going on at your competitor? And are you seeing customers make some move there?

Just trying to understand some of the recent intermodal shifts and the potential for the additional pace on customer change. I understand that you focus more on getting stuff from the highway, but I think maybe the recent intermodal wins were a real eye-opener and the pace that we are seeing the switching there.

Good question, Ken. Let me put it to you this way; we have an absolutely customer-centric agenda. We want to become a true supply chain enabler and our mantra is to help our customer win in the marketplace. And there is good reason for that.

We want to be able to outpace base market positions year in, year out. We want to win market share against trucks with innovation, like our new selling [One CN] approach; our new coal reefer products; our new initiatives to create intermodal flex that is helping, on the one end, our customers deal with issues, particularly in the winter, but also help us gain market share at the margin versus trucks.

We want to gain market share against all railroad, not just our principal competitor in CP. At CP we want to gain market share to the extent we can offer good service and energy product against pipelines. If we do that and if we innovate and we add value to our customers to help them win in the marketplace, that is what we need to do to actually outpace the base market and grow faster than what the economy would give us.

That is what we have done for the last four years. That is what we plan to do again in 2014 and for many, many years to come. That is the strategy and we are sticking to it.

So, Claude, if I could just maybe reconfirm what you had said earlier; in terms of winning the most recent intermodal contract, you said it is still extremely profitable business. So I guess is that our interpretation that you are not using price to win these contracts, or that maybe even the price that everybody was going to charge was still an incremental step up so it would have been still profitable business?

Yes, that is (multiple speakers) what I answered Tom. Those are very good customers. They are profitable accounts and they fit very well in our portfolio. They came over to us because of our service, not because of our price.

Service, just to maybe help put some color on what we define as service. We spend a lot of time understanding what service means to somebody who is in a shipping line and what they go out there and sell to either assembly plant or a retailer. They sell a service from the time the box arrives at the port to the time the box is released to a major city.

So with having a rail service from terminal to terminal is not good enough, that is not what they sell. What they sell is from the time the box arrives at the port the clock starts and the clock stops when the box is released at the terminal at the destination where they need it. So the total transportation time includes more than just CN obviously.

It doesn't hurt if we can move the cars fast, right?

Definitely.

That is your contribution, Jim. Also to add to what JJ is saying, in a world of larger ships having more destination reach is a huge asset. They need to fill those larger vessels or ships in order to get their economics to work, so they need more destinations. They need good transit time to promote asset efficiency.

And they need match back. They need to be able to load as many boxes as possible on the return movement and that is exactly what our strategy is designed to provide. More destinations, more -- faster transit times, and significant opportunity through partnership to have higher match back, better overall economics for the customers.

Thanks for the insight, appreciate it.

Fadi Chamoun, BMO Capital Markets.

Good evening. Back on the intermodal side and looking at it from the international side, I mean we have seen for the past few years I guess some conversion from US to Canada and sort of containers that would have gone through the US ports going through Canadian ports. And we see it in the Canadian port market share.

My question is what is a typical end market to this cargo that you are converting instead of bringing it through? And how big is this market that you can tap into?

Like in the US market?

Yes.

So obviously it has to be in a geographic area that we can actually serve, so we are talking US Midwest or connecting with Eastern US railroad. And it probably is something that has a little time sensitive to it.

Meaning that it may not be the type of product that can go on a slower boat all water to the US East Coast and then be trucked in. Or a product that [trans-shifted] more than one or two times, so it is something that the ultimate customer would like to have this long rail bridge to US Midwest or Detroit or Hawaii.

So typically auto part fit it in that category that is kind of higher value type of supply chain. Think it also has to do with seasonality in the retail business. In the retail business when you have a product on the shelf in November and it is seasonal you have a good price for it. Pick something three weeks late you will have to sell it discount and now you are eating your shirt.

So the product we have tends to be the product that has the dimension where service and [consistency], not so much speed because speed -- people can figure out the speed unless you have a real slow service. But consistency and some element of speed is important to them, including the speed through the port, because having a fast train from Vancouver to Chicago does not mean your container is on that train.

If your container is at the port for three days, sometimes four, sometimes one, sometimes six, a fast train to Chicago does not really meet what they need at the assembly plant. And that is one of the key parts of our service is playing in teams with the terminal operator for the shipping, because that is what we try to have for the ultimate customer.

In terms of the size, I think we are still growing. To do that we have had to get in into new geographic pocket like Joliet, Illinois; like in Indianapolis. And we are also doing and growing still in places like Detroit.

Okay, thank you.

Jason Seidl, Cowen.

Evening here. When I look at your book of business as it goes into 2014, what percent do you have under contracts in terms of stuff that is competitive with, say, CP or other rails, and what percent is going to be coming up for renewal?

There is no substantial change in how much business we have for renewal for the coming year versus past years. Our book of business in terms of contract versus tariff, short-term versus long-term contract is no different in 2014. Like every year, I think we manage renewal risk going forward in the same fashion. No difference going forward.

And real quickly on a follow-up, to piggyback on a question that was asked before, have you guys seen any changes in terms of your insurance for handling any hazardous materials?

No, we haven't. Actually, we have a very strong safety record. As I said earlier, our Q3 performance was close to a record performance in terms of our accidents.

I think and I'm hopeful that by the time we finish the year we may be, if not the leader in terms of safety, one of the top railroads. We have more detection technology deployed. We have a very structured response, and at the end of the day, the insurers look at facts in setting your premiums.

So there is always up or down from a year to year, but our conversations in terms of renewal into next year have not indicated any major increases. It is more the normal ongoing, depending on demand and supply in the insurance market.

Guys, thanks for your time, as always, and I will keep my fingers crossed for you on the safety record.

Steve Hansen, Raymond James.

Thank you. Good afternoon. Just as a follow-up on the grain pricing outlook, I'm hoping you can help us understand a bit better how we should think about the 1.8% price revision from the CTA in the context of your broader portfolio, both regulated and non-regulated grains and how the severe strains on the system that we are likely to see here in the next months might impact your decision to implement that decision throughout the course of the grain crop year.

I think, JJ, you can be more precise, but at the end of the day all of the regulated grain is subject to that revenue cap, which is adjusted down this year based on the formula for inflation. So our grain business is less than 10%. Our regulated grain businesses in the range of 7%, 8% of our overall -- 6% of our overall book of business.

So indeed to the extent that is down a little bit that will impact the overall price, but we said earlier that we are comfortable that our agenda rising above inflation. And certainly Q4 we already have the new pricing in place and we will see fairly soon how it plays in the mix, but we are very comfortable with that 3% to 3.5% range for pricing on a go-forward basis.

Last year -- what the grain cap was providing last year, Canadian grain at about 6% of our book of business was helpful to bring the average up, where this year at minus 1.8% obviously it will be a bit of a drag. And that is what it is.

Okay, thank you. But just to clarify in terms of your total book of grain business which portion is subject to -- what percentage is subject to the 1.8% and which is non-regulated?

Only the Canadian grain as of --

I can walk you through the numbers, Steve, after the call. We can get into the detail.

But it is definitely less than 6%, so in that range of 4% to 6% in the book of business.

Okay, thank you.

Matt Troy, Susquehanna.

Thanks. I just wanted to ask a question about intermodal margins. I know you don't speak directly to what they are, but your results certainly fly in the face of conventional wisdom, i.e., that intermodal growth comes at the expense of margins and long term this might be a problem.

Given our record margins this quarter, just curious if you could just put into directional perspective intermodal margins directionally improved versus three years ago and might in three to five years' time that be something that could look more like the corporate average or even surpass your corporate average margins? Because again it seems to fly in the face of results -- of conventional wisdom that this is a sub margin kind of heavy business.

Matt, I think we try to lead the way in this regard and we have said consistently that our intermodal business is actually quite close to our average profitability margin. It is a little bit less than the overall book of business in terms of margins, but not significantly. And so as we grow the business in intermodal we like the margin.

Of course, your ability to accommodate incremental business you always have a little bit of leverage in terms of putting in more on the train, lengthening train, etc. But at the end of the day, the overall book of intermodal is very close to our average corporate profitability and we like it that way.

We have very specific profit margin targets to maintain that. As an example, revenue per train; not only going east, but going back out. We call that balance.

Also, how many revenue containers we have per train. Different things that really in the end are way beyond just -- the price of each transaction is that when we run these trains are they balanced. Whether they are on long, whether they are on a lot of double stack, all these things add up to whether you run a fairly profitable or very profitable intermodal business.

Actually, an area where supply chain is not just service and it is not just growth. It is also efficiency. Our terminal partners are actually helping us increase our slot utilization.

The last couple of weeks I was looking at things. Very good demand in Vancouver; our slot utilization is close to 94% coming out of Vancouver terminals. It is close to 99% in Prince Rupert, so they are really helping us get efficiency through higher slot utilization.

Of course, the more you have your trains full the less time the containers spend in the terminal, and that is also helping dwell which is good for service. And the more growth, the more ability to leverage. So it is a little bit like the high-grade sausage; like them fresh and keep them coming.

Balance is a key.

All right. Thank you.

Keith Schoonmaker, Morningstar.

You called out in your completion of the CAD100 million investment in track in Edmonton-Winnipeg and I think Jim mentioned new locomotives coming out still this year. But as we think a little bit longer term, and I'm sure we will hear more in the upcoming meeting, but can you give an idea of your thinking on the level of CapEx? Will it remain around 18% or 19% of revenue? And what types of projects do you expect to be most impactful even over the next, say, three to five years?

I would say at this point that we are still very much key -- focusing on the 18% to 20% range. What we do, and Jim and I and the team have been reviewing what we see out there as being opportunities, whether to accelerate the growth of the business so investing on more of the marketing side, or looking at infrastructure in terms of what can help us achieve more velocity, more sustainability in terms of performance.

Claude mentioned as well safety is a big preoccupation of ours, so we are also looking at where and how can we improve that aspect of our infrastructure. So I don't expect major surprises. I think we will review, certainly, the whole situation coming out of next winter.

We feel pretty good about the infrastructure that we have put down in the Winnipeg to Edmonton corridor, and we are constantly monitoring where and how the volume is coming on to the network. So probably not a whole lot of difference. A lot of interest in our part in securing locomotive power ahead of the changes on the EPA side, so that -- we will see more of that.

Of course, as the business continues to grow we need to make sure that JJ has the proper supply of cars so that is also top of mind for us. Everything else is -- we keep looking at it. I don't expect big discontinuities, but we are mindful of where and how the business is performing.

Very well. Thank you, Luc.

You are welcome.

This was our last question. I would now like to turn the meeting back over to Mr. Mongeau.

Thank you, Marcus, and thank you all who listened to this call. We are very pleased with our third-quarter results. We have momentum into Q4.

Our agenda is working. We are trying to stay focused on safety and solid service to be able to create value for our customers and our shareholders, and it is working. We are looking forward, as I said earlier, next time that we will be together, hopefully basically face to face in Toronto at our analyst day meeting on December 10 and 11. So we are looking forward to meet you there and give you a sense of our longer-term agenda, our guidance for 2014, and take your questions at that point.

With this have a safe day. Thank you.

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