Canadian National Railway Co (CNI) 2013 Q4 法說會逐字稿

Welcome to the CN fourth-quarter and full-year 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, Michael. 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 yourselves 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 all for those who are on the call today. We are here in Montreal; the temperature in the East is good and things are warming up slightly out West, so we feel good about that because weather has been a bit of a challenge lately. We will be discussing that through the call.

But December was tough; we had difficult weather. But Q4 overall came up with very good results. The team will share the details, but solid revenue growth during the quarter, the ability to bring that business at low incremental cost again and that allowed us to deliver CAD0.76 for the fourth quarter which is an increase of 7% from last year.

When we met with you in December we had hoped that maybe we could finish at the higher end of that tight range that we had given you. December brought us basically in line with the middle of that range, so we feel reasonably pleased with that performance. It allows us to turn in a full-year EPS on an adjusted basis of CAD3.06, which is effectively 9% year-over-year growth, in line with our guidance for high-single-digit or close to double-digit EPS performance.

Again we are building on our supply chain agenda, it is working. We have been able for the full-year to outpace the economy and grow faster in base market conditions. I think we finished the year with record volumes and record revenues. The volumes were up faster than our peers in the industry and that is consistent with our game plan.

We were also able to maintain our industry-leading operating ratio. Despite significant headwinds on pension and depreciation issues we turned in an operating ratio for the full year of 63.4% again for the full-year, which is only half a point of an increase over the prior year.

Maybe the number that I am most pleased with given the challenges we faced lately with the focus on railroad safety performance is our safety performance for the full-year in 2013. We actually delivered 9% year-over-year improvement in our accident ratio.

We had 33 main track accidents last year in the full year, that is about as good as we have ever done. In fact, it matches effectively the record performance we had achieved in 2012. And it is not just 2013; this is effectively a decade-long trend of improvement in our safety performance.

Obviously every accident is one too many and we have had a few accidents to deal with during the fourth quarter, but that does not detract us from the focus on a continuous investment in detection technology, tightening of our processes and investments to have a quality plant infrastructure to continue to prevent accidents from happening in the first place and to respond effectively in the rare cases when we do have issues to deal with.

So solid performance overall and a good finish to the year in the fourth quarter. We do have issues to deal with with weather. December was quite challenging and it is continuing into January. And I am sure Jim will give you some insights into that as he gives you right now an overview of our key operating metrics and what we are doing on the railroad. Jim?

Thank you very much, Claude. Overall very impressed with our fourth-quarter operating performance as we kept improving our metrics across the board. The story of the fourth quarter can be divided into two parts.

October and November, when we finished those two months our velocity was up by 6%, our trainload was 3% better and the volume higher than ever before. So very strong October/November.

December I will have to admit was difficult. But we ended -- even with all of that, when you put all the numbers in, we ended up with a 1% betterment in train productivity; 8% better in yard productivity, which continues a very strong year in our processing cars going through our terminals; and a 2% betterment in car velocity, which most of you have heard me say is the single biggest metric that I like to look at that tells me how fast we are moving the cars.

So even with a very difficult December, I think we finished the year and delivered. We had put ourselves in a little bit of a hole during the first quarter last year and we were able to deliver most of the metrics, the betterment, through the year and we had a strong third quarter and continued with a strong fourth quarter that was tempered some because of the weather.

Now I have been railroading for a number of years and I know some people have asked me how many years and some people have said that I was a rookie and other people have said I have been around forever. But I will have to admit this year December and January, they have been tough.

But I am very proud of the team and everybody that works at CN from the unionized employees out in the ground that are dealing with very cold weather in a number of locations, not just the traditional Canadian prairies. We have had cold and we have had snow as far south as our territory runs into the United States.

Now we continue to deal with the weather, January has been difficult, and we continue to have to set priorities. We have added a number of assets, whether it was the new locomotives that we brought online on purpose during the end of the third quarter, the 18 locomotives, whether it was the BP locomotives that we put in place, whether it was processes in the yard.

But even with all of that we are setting priorities and we know that we are not able to move all the business that JJ was lining up for us to move in the first quarter. Even given all that though, to this day our movement -- number of GPMs we are moving per day is higher than it ever has been and hopefully we will continue to do that as we move forward.

On safety, and Claude already mentioned how important it is to us, and it was nice to see our safety record continue to improve and we delivered best ever numbers in some categories.

But more importantly, we will continue to invest on technology. We announced CAD10 million additional investment in this last quarter and we will continue to invest smartly for technology gains and especially on processes to continue to drive our safety record better in how we are handling all of our products.

Now volume continues to grow and JJ and the whole marketing team are doing a great job of continuing. And we will continue to invest strategically for productivity and capacity.

We completed the previously announced CAD100 million additional investment between Winnipeg and Edmonton for example and we will be investing more this year on this corridor. And specifically looking at some other quarters where we have it in the plan that we need to take a look -- with the increase in volume that we expect this year and moving forward, we need to make sure that we have the capacity and the resiliency to operate.

Listen, no if's, and's or but's, we have our work cut out for us. And just like last year, we will need to work hard to recover the expenses. I am very confident that we have got the team and we will deliver this year the same as we did last year. JJ?

Thank you, Jim, and thank you to all of our running trade and our engineering forces out there working very hard the last eight weeks. Good afternoon to all of you joining us today on the call. In the next few minutes I would like to review the last quarter of course and then I will give you a commercial outlook for the going forward.

The month of December, as Jim was mentioning, has been extremely cold conditions and it did impact the overall supply chain in Canada in many of our sectors. Having said that, we did post solid revenue growth of 8% which is 5% adjusted revenue growth on an exchange basis.

Now looking at it from a freight revenue point of view, we delivered 6% growth on the FX adjusted basis, 4% came from the volume and mix, 2% came from price, fuel surcharge impact was negligible in the quarter.

On the pricing side, to be more specific, same-store price came close to 3%, slightly down from the third quarter. As a reminder, same-store price is calculated after deduction of fuel surcharge revenue and is applied on about 75% of our freight revenue which is a same-store book of business.

Regarding the mix in the quarter, we had an increased length of haul of 18% in [Petro] and chemicals. We also had an increase of length of haul of 8% in metals and minerals, but we had a 9% decrease in the average length of haul for coal. The carloads for the quarter were up 3%, the revenue tons for the quarter were up 5% and in both cases it mostly came from the October/November operation.

Now looking at last quarter in more detail, we will do that on the FX adjusted basis as we do usually. Metals and minerals revenue grew 7%, mostly from energy consumables, namely increased frac sand production on our Wisconsin network. The ferrous and nonferrous metals were weaker.

Forest product revenue grew 6%, mostly related to US housing starts, while Canadian housing starts and forest product exports were flat to weaker in the quarter. Petroleum and chemical revenue was up 17%. All commodities made positive contributions to these results except for sulfur.

There was a number of new crude bio rail loading facility coming online during the quarter and of note, the 2013 crude carloads were almost 75,000 for the full year and the fourth-quarter run rate was almost 25,000 carloads.

Automotive revenue overall was flat, but we did see growth in our presence in the cities where we have [auto port] facilities and our Canadian bound revenue was up a strong 14%. But that was offset by a nonrecurring fourth-quarter 2012 military movement.

Intermodal revenue was up 10% from a diverse source of growth, namely in retail, in the industrial sector and our coal supply chain in the Port of Vancouver. Our recent terminal investment, which are aimed at making the CN Intermodal map bigger and more dense, also produced growth namely in Joliet, Detroit and Saskatoon.

The coal revenue was down 12% on an FX adjusted basis for the quarter on account of weaker export for pet coke and terminal coal, while the met coal export was actually a bright spot for CN. Canadian and US grain export demand was very strong and revenue growth was limited to 3% due to the very cold Canadian December and resulting network challenge. Fertilizer revenue was down 7% and, as was the case in grain, December operation was a limiting factor.

Now looking ahead at the outlook on page 10, on a year-over-year basis, line haul revenue performance would be driven by strong demand, network fluidity as well as a weaker Canadian dollar.

On the more promising side Intermodal business is looking strong. It is helped by a better US consumer confidence, by positive customer sentiment toward the CN product and by our recent gains in the marketplace. Most promising are the Port of Vancouver, the Port of Montreal and the domestic retail product.

Petro and chemical demand is also -- will also produce strong growth. Shale gas is having positive implications on chemical and plastic manufacturing and crude by rail will continue its progression. Metals and minerals will be driven by oil and gas production consumable as for example frac sand. Acceleration of capital spending by industrial corporations should also foster a more positive backdrop for the metals segment.

Forest products will be driven by US housing starts which is led by lumber and panel. Exchange rate will be a positive tailwind since the average exchange rate was CAD0.99 for $0.01 during the first quarter of last year. Now with the uncertain side, the tepid coal market which we are working diligently to offset with our domestic terminal coal initiative and with Canadian West Coast export.

Also of issue is the strong demand that we experienced for grain and fertilizer in the first quarter and the potential challenge and the operational challenge that it represented in the middle of the winter. Having said that, we should have a lot of grain to move all of calendar 2014.

So in closing, as we discussed at our recent Investor Day in December, we have an integrated sales model and a culture of service innovation to (inaudible) the marketplace. We have a disciplined inflation plus pricing approach in the marketplace. And we have a clear vision and commercial strategy to continue our drive for growth. Thank you and on that I will pass it on to Luc.

Thanks, JJ. So starting on page 12 of the presentation let me kind of off you through the key financial highlights of our fourth-quarter and the 2013 full-year performance. First, let's take a look at our solid fourth-quarter results.

Revenues, as JJ indicated, were up CAD211 million or 8% to CAD2.745 billion. Operating income was CAD967 million, up CAD45 million or 5% versus last year. Our operating ratio was 64.8% in the fourth quarter, that is 120 basis points higher than last year, as both Claude and Jim indicated, pressured by difficult winter conditions in December.

Other income was a CAD2 million expense versus a CAD5 million expense last year as we continue to see lower property and land sales to offset ongoing real estate and other costs. On a full-year basis in 2014 I would expect other income to turn slightly positive and be in the CAD10 million range. But as usual this will likely be lumpy through the year.

Net income for the fourth quarter is CAD635 million, up 4%, and the diluted EPS reached CAD0.76, up 7% versus last year. FX was favorable for CAD19 million on net income or CAD0.02 on the EPS in the quarter. Our effective tax rate was 27.3% in the quarter, higher than last year at 26.6%.

Turning to page 13 our operating expenses were CAD1.778 million, up 10% versus last year or 7% on a constant currency basis. At this point I will refer to the changes in constant currency. First, labor and fringe benefit costs were CAD594 million, an increase of CAD120 million over last year. This was the result of principally three elements.

First, we had an increase in overall wage cost of 7%. This was partly the product of wage inflation at 3% and a 1% increase in our average headcount versus last year. The balance of the wage cost increase relates to higher over time for about CAD9 million and less capital work being performed in the fourth quarter this year versus last year. This was partly the result of volume increases, but for the most part due to the harsh weather we had in the month of December.

The second element is a higher stock-based compensation expense in this quarter versus last year which represents 9 percentage points of the variance, as we did have a higher increase in the stock price through this quarter versus the same period in the previous year.

Keep in mind that our stock-based compensation in 2014 specifically in the first quarter will not have the benefit recognized in the first quarter of last year resulting from the settlement of the employment matters relating to former executives for CAD20 million.

The last element of the labor variance is higher pension expense for CAD49 million and that as such is the pension expense increase by about CAD30 million in the fourth quarter this year versus last. The balance of the pension variance relates to 2012 when we recognized a gain resulting from the forfeiture of pension benefits for a former senior executive.

We did however finish 2013 with some good news in terms of key assumptions for our 2014 pension cost. The discount rate increased to 4.73% and the return on our plan assets reached 11.2% in 2013. As such we now expect our pension expense for 2014 to be in the CAD10 million to CAD20 million range, a constructive improvement over the CAD90 million incurred in 2013. By the way, this represents about CAD15 million better than we had originally expected.

Turning to purchased services and material expenses, those were CAD364 million, up 4%. This was due to higher volume resulting in increased Intermodal trucking expenses for 2 percentage points. Also higher volume along with winter-related costs including utilities, materials, namely wheels and others, repairs and maintenance expenses accounted for about 6 percentage points of the variance.

This was partially offset by lower project-related and contracted services for about 4 percentage points. So the extreme cold weather brought us higher labor and higher purchased services and material cost in December, which at this point I would probably estimate to be approximately CAD15 million.

Unfortunately this little twist of mother nature is also extending itself well into January and consequently we are having a similar monthly cost pressure to contend with starting in 2014.

The fuel expense stood at CAD422 million, essentially flat to last year. Higher volume represented an increase of 5 percentage points in the quarter. Improved productivity constituted an offset of 1 percentage point and price was also favorable by 2 percentage points. The balance of the variance is attributable to the favorable impact resulting from fuel inventory adjustments for 2.5 percentage points.

One item I would like perhaps to just remind everyone is that revenue ton miles is the best indicator of workload across a number of our expense categories and especially for fuel. If any of you are still anchoring your estimates on carloads or other factors you may be actually understating expenses as a result.

Depreciation is CAD254 million, CAD13 million higher than last year or 5% and this was mostly due to asset additions and the impact of Canadian and US depreciation studies for track and [road] properties.

In 2014 we will be carrying out a depreciation study for rolling stock, so between asset additions, the full-year impact of studies done in 2013 and the potential impact of 2014's depreciation study I would expect our full-year depreciation expense to be about CAD75 million higher than in 2013.

Equipment rents were CAD71 million, CAD4 million higher than last year or 6%. This is mostly attributable to increased freight car and Intermodal equipment leasing costs.

Casualty and other costs were CAD73 million, CAD38 million favorable to last year as we incurred lower legal and other claims related costs, lower FILA and occupational disease cost as a result of an actual review in addition to lower general cost versus 2012. I would expect this category of expenditures to be in the CAD80 million per quarter range on average in 2014.

Now let's turn to our full-year results which are summarized on page 14. So we wrapped up 2013 with nearly CAD10.6 billion in revenue, a 7% increase. This sets a Company record in terms of both volumes and revenues.

Our operating earnings grew 5% to reach CAD3.873 million and our operating ratio stood at 63.4%, only 50 basis points higher than in 2012 which for us was a record year. And this is quite an achievement when you consider that we faced in 2013 a strong pension headwind of 1 full percentage point of OR along with other accounting and related matters.

Net income was down CAD68 million or 3% at CAD2.6 billion mainly as a result of lower gains on disposal of rail assets for CAD242 million which was partly offset by an increase in operating earnings of CAD188 million in 2013.

So this translated into a 1% increase in reported diluted EPS of CAD3.09. Excluding the impact of major asset sales and income tax adjustments in both years the adjusted diluted EPS for 2013 stood at CAD3.06, a 9% increase over 2012's CAD2.81 in line with our guidance calling for high-single-digit growth.

Moving to free cash flow on page 15. For the full year 2013 free cash flow generated stood at CAD1.6 billion -- just a little bit above CAD1.6 billion, CAD1.623 billion, CAD38 million lower than in 2012. We generated over CAD3.5 billion of cash from operating activities. Notable elements here were income tax payments of CAD890 million, working capital changes including pension contribution of CAD239 million.

On the pension front for the combination of higher discount rates and return on plan assets that I mentioned earlier should translate into a going concern surplus of CAD1.7 billion and a solvency deficit of CAD1.7 billion.

We estimate the required solvency contribution in 2014 will be CAD335 million which will actually not require cash outlay from the Company as the funds will be drawn down from the CAD470 million balance in our advance voluntary contributions already made in prior years. So we estimate our cash contribution in 2014 mainly for current service costs will be approximately CAD130 million.

In 2013 CAD1.852 billion of cash was actually used in investing activity. Our capital expenditures in 2013 were CAD1.973 million in terms of cash CapEx and when you actually take into account CAD44 million of assets acquired through capital leases we get a total of CAD2.017 billion, in line with our guidance.

We had proceeds from non-core asset sales of CAD52 million, another investing contribution of CAD69 million to complete the picture in investing activities. Deducting the change in restricted cash of CAD73 million leaves you with CAD1.623 billion which is our free cash flow generated as per our new definition of free cash.

For those of you trying to reconcile our old definition to our definition of free cash simply deduct the dividends of CAD724 million and the change in FX on cash of about CAD19 million and you get the CAD918 million of free cash generated in the year, slightly ahead of our guidance in 2013. Meanwhile our balance sheet remains strong with debt and leverage ratios within our guidelines.

Finally on page 16 let's take a look at our 2014 financial outlook. We continue to see a very good progression in the North American economy combined with opportunities in grain, lumber, Intermodal and domestic energy-related commodities. We expect otherwise a modest progression in other resource export markets.

We assume as well North American industrial production will increase by approximately 3% in 2014. Housing starts will continue their strong progression and we estimate they will be in the range of 1.1 million units in 2014. These and other key assumptions underpinning our outlook should translate into mid-single-digit carload growth in 2014.

On the pricing front, as JJ mentioned, we maintain our inflation plus pricing policy. So having said this, we are reaffirming our annual guidance as communicated to all of you last December. So we are aiming for double-digit EPS growth in 2014 over the 2013 adjusted diluted EPS of CAD3.06.

Our guidance also calls for free cash flow in the range of CAD1.6 billion to CAD1.7 billion. Our free cash flow guidance assumes that we will invest in capital programs to the tune of about CAD2.1 billion. Consistent with our strong shareholder return agenda our Board has approved today a 16% increase in our dividends.

In addition, we continue with our agenda of rewarding shareholders through our stock buyback program. In 2013 we bought back 27.6 million shares at an average price of CAD50.65 for CAD1.4 billion total. In 2014 we continue with the program approved by our Board last October to buy up to 30 million shares and we have set aside about CAD1.4 billion towards achieving this objective.

So in conclusion, the CN team remains committed to delivering superior results and creating value for shareholders as we continue going forward with our strategic agenda in 2014. On that note I will turn it back over to you, Claude.

Thank you, Luc. As you can tell, the team is lining up a number of impressive achievements and milestones. There's a lot to be proud of in terms of our 2013 results. To deliver basically record revenues and record operating income and to continue our remarkable journey is the goal and basically 2013 came in in line with that objective.

Our Board is very confident and so is management, and indeed the dividend increase of 16% reflects that confidence. I will note to you that it is a remarkable track record -- for 18 years we have been increasing the dividend and the dividend has increased 16% on a compound annual growth rate for that extended period.

Our focus now is turning to 2014 and we do have a challenge with weather. We discussed this. Jim gave you the core element that we are dealing with with the extreme cold weather. It is rather unusual to have snow in New Orleans and to have Winnipeg; I think Winnipeg was the coldest month of December since 1879.

So we are dealing with very difficult weather conditions which had impact on our railroad operations and so we are dealing with it from an operations standpoint and we are focused on maintaining productivity. But we have line of sight on the impact this has on our customers.

We are managing priority the best we can so that we can avoid creating undue hardship and we will be breaking loose as soon as the weather gives us a break to rethink and get the network back in a mode where we can meet demand and deal with the rollover that we have from December into January.

And even though the first quarter will be challenging, we have two months to go and we feel confident we will be able to deliver good performance in the first quarter and stay on track for our full-year guidance, as Luc just explained to you.

Our agenda of safety is first and foremost. We are taking it to the next level. Our three-pronged approach to prevent accidents, to shape the agenda and help regulators in the industry come forward with solutions for those DOT-111 tank cars, to strengthen our capability together with industry and other carriers in terms of mutual aid, and a capacity to respond when there is an unfortunate accident.

And to engage with communities to have an approach where we are transparent with information, share best practice and reassure the general public is our approach to meet the challenge and take our safety agenda to the next level.

So we are pleased to take it over to you with questions and we do so with a commitment to deliver a very solid 2014 again this year. Operator, we will go to questions.

(Operator Instructions). Walter Spracklin, RBC Capital Markets.

Thanks very much. Good afternoon everyone. I guess my first question here is on the Canadian dollar and perhaps you can update us on the revenue and expense impact if it has changed it all with a $0.01 move on that exchange rate.

But really I guess where I would like to focus my question is on flow of goods and if in your past experience as a Canadian dollar appreciated certainly the export picture for Canada into the US was not as strong as it was when we had a cheaper Canadian dollar.

Just curious if that is something you anticipate on the flipside now. Is there anything that would exist that wouldn't suggest that this would reverse and are you seeing any indication from your customers that perhaps the flow of goods is starting to pick up as the Canadian dollar depreciates relative to the US?

Thanks for the question, Walter. It is Luc. I will take the first part and then I will ask JJ to comment a little bit more on in terms of the flow of goods. Just from a financial standpoint every penny translates into somewhere between CAD0.01 to CAD0.02 of EPS so that is really the impact netting out the revenues and expenses.

Do you have the revenue and expense specifically or --?

No, we don't provide that.

Okay.

Walter, on the revenue side obviously Canadian manufacturing companies, especially those who have a heavy amount of their production on the Canadian side, do benefit from -- they export to the US to benefit from a weaker Canadian dollar. That is if they are in production today and they are not running flat out as it is.

So I think on kind of a midterm basis it is positive if you have a plant you can run it harder, you can seek more sales in the US and have those profitable sales. In the long-term you only want to be dependent on the weaker dollar so much. Eventually want to be able to invest capital and rely on something else then just exchange. It is positive but --.

In the indication so far of any ramp up in that flow of goods at all or is it still too early to tell?

I think it is too early to tell, right. (Inaudible) more like a few weeks and I think that the forest products sector for example, whether it is housing or related construction material, pulp paper, the like historically have benefited from a weaker Canadian dollar.

Thank you.

Bill Greene, Morgan Stanley

Good afternoon. Claude or JJ, can I ask you to talk a little bit about sort of if you feel like the underlying trends in the economy are actually improving? I know there are a lot of weather pieces here so it is hard to piece it together.

You have a more positive outlook this year, so to some extent embedded in that may be a view that things are getting better. But it also felt like fourth quarter had a bit of an inflection and demand in some segments of transport. So I would like any color if you can provide it on what you are thinking on 2014, how it may evolve.

I think that we have seen good demand in Q4. We are certainly seen good demand as we speak. Our challenge is to meet that demand in very cold weather when effectively our velocity being reduced. It is taking away our capability to meet all the demand.

But the broad markets in the US are constructive; the Canadian markets in general are also I think constructive. Obviously some commodity sectors like grain we have a huge crop and things are looking good for the balance of the year and probably well into 2015.

The only area where it is a little bit more touch and go, and I will ask JJ to give color and comment, is the global impact of concerns for commodity markets with Asia seeming to slow down a little bit at the moment. JJ, any other color on that?

Since December 2, December 8 I think, Jim, from that point on you can't really look at carloads from railroad, at least from the CN point of view, as an indication of demand because now you get the noise of what is happening in terms of the challenge of the network. Same thing on the January results, because right now we are not in a position to meet the demand.

But where the demand -- this is where it gets tricky; what is in our book of business which is demand and how much is just the pent up from the past week. But US housing starts, US consumer confidence which will be reflected in a [handful of] containers that are for automotive looks good. Energy, chemical, plastics have slowed.

Grain looks great. Late during the third and fourth quarter last year we weren't too sure if fertilizer looked great. Fertilizer right now looks great for the first half, both export and domestically.

What is maybe a little weaker is what we used to write in some of years past, which is the trade with Asia and namely shipping goods to Asia, Canadian natural resource. That is obviously weaker so really our focus right now is more about the internal demand -- what is happening here in North America, what are we consuming, and also at what cost can we consume.

In the case of Canada with the weaker Canadian dollar; in the case of the United States with an industry who can now benefit from real affordable energy where it's energy as in gas, energy as in electricity or energy as in oil. So I think when we are past this sort of Arctic vortex we should start to see eventually again the relation between carload and the economy.

That is great. Thank you for the time.

Turan Quettawala, Scotiabank.

Good afternoon. I guess I just had a quick question on crude by rail. Obviously there has been a lot of increase, regulatory scrutiny here on that. And it seems like it's probably pretty likely that there's going to be some tank car regulation at least coming in.

I guess my question is just do you think that any of these changes, at least from what you know right now, can disrupt the volume trajectory at all on that front?

I don't think so personally. Mind you at the end of the day what we know now is that the DOT-111 is a car that is more prone to failure and it can have -- it is a low probability of having an accident, but the high severity of the consequences is calling into question the design of those cars, which have been known for years to be more prone to failure.

But now obviously the focus and the industry has spoken, I personally have seen it on the records thinking that the DOT-111 cars have to be dealt with over time but phased out and we need to move to a new tank car design.

As far as our own franchise, we move a lot of our business in coil insulated cars or we move a lot of our business in cars of the new standard, the [CTC-1232] and those cars are materially safer. The conditional probability of a CTC-1232 versus a DOT-111 is 50% less risk of failing.

And if you look at a coil insulated car, it's not exactly a thermal jacket, but it acts like one and the risk of a conditional release, it's probably something like 70% to 75% less than a DOT-111. So we are dealing with safer cars.

A lot of what we move is also crude oil from Western Canada that is heavy oil that has a higher flash point, and the light oil over time will migrate towards safer car and the railroads will improve their safety records and the regulator will make sure that we all are held to a higher standard.

And I think if we succeed at that we should be able to continue to serve those markets and help energy move to market efficiently. That is our agenda and I don't think -- we have issues to deal with and a lot of people to reassure. But I think the hard facts are supportive of the continued ability to do our job delivering energy to market.

Great. Thank you for that color, Claude.

Tom Wadewitz, JPMorgan.

Good afternoon. Let's see -- I suppose when it is this cold out you probably would ask for as much capacity as you could find in certain respects. But what is your view, Jim or Claude; on capacity in the network given that you have had pretty tough weather conditions for two months now?

Do you feel like you need to kind of ramp it up and spend more money or the network is more fragile in certain areas than you would expect? And kind of how you match that up with the significant added volume you have coming on and maybe risk to handling that in a way that the customer likes?

Great question. I think to start off with we always have a long-term view of where the volume is going to be and what our planning period could be, so we don't want to react. If we have to react like we did last winter when we added CAD100 million we will do that and we have the capability to do that or move it from somewhere else.

Now as far as what we have learned with the winter is I think everything that we have done and we did last year has helped us, but we need to make sure that we've got the right capacity everywhere and we'll take a look at it as we go through this winter.

What I know for sure is the money that we spent last year between Winnipeg and Edmonton has helped us. We have seen a significant improvement of moving the trains through from Saskatoon West and we have got money allocated this year to invest some more between Winnipeg and west towards Saskatoon so we are going to do that.

We know we have an issue coming between Edmonton and Chicago and we are going to continue to build on that to make sure, especially with the way the traffic flow is, JJ keeps on going and selling more business in that quarter which is good, but we need to make sure that we are ready for it.

So I don't think anything specific that we missed, but I will tell you if we do miss it we will be quick to react and we will make sure we put the money in that we need quickly so that we can remedy any situation.

Tom, maybe I could just add because to you but also to our customers, that the hard reality here, it is not an issue of capacity; it is an issue of an extended period of extremely cold weather and the impact it has had on train technology.

The reality is we have more locomotives, we have more network capacity. But if you have a few days, which is normally the case, a few days or a few periods of a few days with minus 30 degrees you cannot run the train, you cannot get the air to qualify and you lose capacity, your velocity could come down 15%, you have to shorten trains. So you need more active and you obviously build up a backlog.

If that happens for a short period and then you have a few days to recover it is more bumpy in winter like every winter. What we are seeing this year is just extended period with no reprieve. I said earlier, December -- you have to go back to 1879 to have a month of December in Winnipeg that was colder. In Saskatoon there were 18 days where the temperature was less than minus 30 degrees.

We have had a new record temperature South towards Chicago and what that does is over an extended part of your network or extended periods of time you have this velocity and train length impact reducing your ability to move cars in the whole pipeline.

This is not a network capacity, if we had more locomotives or more siding we would not be able to push meaningfully more traffic than we are able to at the moment. It is the way we are set up with the technology of air to basically feed the braking system of the train. Thank you.

Okay, great. Thanks, Claude. Thanks, Jim.

Scott Group, Wolfe Research.

Thanks. Good afternoon, everyone. So there's been a lot of talk about weather. I am wondering if there is any way to put a number on trying to quantify what the impact was, one, in the fourth quarter. And then was there any kind of early view as to what it could look like in the first quarter?

And I guess the crux of the question is you have pension helping more than you thought, the dollar helping more than you thought and demand getting better. Do you think that weather in the first quarter fully eats away at those positive things or does it create some potential upside to the full-year outlook that you guys have?

I will let Jim comment but I think you framed it right, Scott. We have a bit of a challenge and we have upside area and that is why we are reaffirming guidance for the full year.

Scott, just to answer your question, as I mentioned in my comments, when we looked at the fourth quarter, specifically December -- again, these numbers are not always exactly precise, but in the range of about CAD15 million more expenditures were clearly incurred as a result of the very, very extreme cold. I would expect that we are going to see something similar for January. So that is on the cost side.

Obviously as well, you are not getting all of the volume through on the top-line that you would like, so that is something that we will have to assess. It's still a bit early because through the next two months the team will be working very hard to try to recover some of that and so we will see.

On the pension front, yes, we are getting a little bit of a better position than we expected. I did mention that we do have some headwinds as an example, the settlement we had in terms of some of the labor cost last year.

So net-net on labor cost you are not going to see a big upside in the first quarter. You are likely to see a little bit of that through the second, third and fourth. We do still have some depreciation headwind that we have to contend with, but by and large I think the way we ended the year, leaving aside for a second the winter impact sets us up reasonably well for fulfilling our guidance and that is why we reaffirmed it.

We will see how we end up faring through the first quarter. But I think we all feel pretty positive about the year. All the signals are looking good, a little bit of extreme cold which we are dealing with and I think that is where we are at this point.

Thank you, guys.

David Newman, Cormark Securities.

Good afternoon, gentlemen. Just to reconfirm, Luc, you said it's CAD1-5 million, CAD15 million?

Correct.

Okay, very good. My question is more on the pricing side. Obviously weather is a bit of a hindrance right now, but as you look out, I mean obviously the demand environment is getting a bit better, the trucks are facing a lot more regulations, etc., so it is getting even tougher for those guys.

I mean, can you see a day when we get back to sort of better than CPI kind of price increases at some point here as this evolves? And obviously you guys are doing great on the service front. Can you see that kind of picking up beyond those levels at some point?

I think for this year 2014 calendar year, inflation plus pricing at 3% is our goal. (Inaudible) everything you said, not all commodities obviously will carry the same weight. There are some segments where we can get more. There are some segments where we will get less.

One of the segments that has been the most challenging for us this year is regulated grain, which is basically what the Canadian government decides and that will be a headwind for us first, second and third quarter.

But maybe on the flipside on the other extreme we are taking a bigger increase (inaudible) on the price for dangerous goods like TIH and LPG for good reason. And I think what's important also is to put the perspective of the price increase we get versus the inflation.

In the end we are looking for a net, right? We are looking for a price increase which is better than inflation and one of the things that maybe this year looked better is inflation in North America is not that strong and that may be one of the positive sides of how this year might unfold on inflation plus/minus inflation type scenario.

And do you have any longer-term contracts that you could shorten up? I know CP is talking about doing that. Anything on that front at all?

We don't have that many long-term contracts. We are mindful I think as all railroaders to how far out we want to extend ourselves in terms of commitments. It is tough to read the future for many reasons. Sometimes keeping your options open is the best thing.

Any contract we sign though we leave all the way through the end. I think that is just good business. If I would be on the other side of the contract I would want my customer to do the same.

But we are mindful when we sign these contracts, which are multiyear, we are mindful of some of these industries that sometimes give you pretty close to nothing. So we tend to shy away from some of the indexed that sometimes get you in a bit of a challenge.

Okay, and if I squeeze one more in -- domestic intermodal overall, are you seeing any wins there, JJ, that you can illuminate on?

Say that again.

On the domestic intermodal side are you seeing in the recent wins that you could sort of highlight that you are seeing on the retail side?

No, not specifically. This year our bigger wins are more on the overseas market. The domestic side it is more kind of one at a time, not so much one customer at a time but one piece of business at a time. And as you know, our domestic franchise is both Canada/US.

We do a significant enough amount of business on the US side of our domestic business that you need to keep that into account in the marketplace more than just Western Canada to Ontario.

Excellent. Thanks, guys. Let's hope for some global warming here.

It will come. It is a question of time.

Jason Seidl, Cowen and Company.

Real quick going back to (inaudible). Claude, when you look at the DOT-111s and the current fleet and some of the proposals out there, how long do you think the industry needs to sort of get it up to snuff, if you will? And do you foresee maybe any issues where there is a shortage of cars that might impact volumes over your network?

I think the industry, just like the railroads, has an incentive to reassure the public. And I think all of the strong players in that space are very crazy conscious. So I am of the view that many of our customers today are looking at ways that they can evolve as quickly as possible away from the DOT-111.

Now that is the responsible industry player, that is the railroads who are doing that, I think the regulators can help by framing that and making it a standard, so you can hear noise of associations that they don't agree, but that doesn't mean the world doesn't agree that this is something that needs to be done.

Having said this, we have moved for years using the DOT-111 cars and we do so extremely safely. The railroad industry moves 99.998% of dangerous goods to destinations without incident. And so, we have to make sure that we keep things in context and give normal time frames for the phasing out to occur.

Is that five years? Is that seven years? That will be flushed out over time. But I don't -- I think the world is recognizing that this needs to happen for highly flammable products.

Okay, great. And I guess my next question is for Luc. In terms of the CapEx for 2014 and even going forward, can you pull out the PTC impact for me?

Yes, on PTC, obviously we are ramping up. Our view is we've probably got about CAD300 million or so to fulfill the full program from this point on. And we are probably going to invest about CAD50 million or so during the course of 2014.

Okay, fantastic. Gentlemen, I appreciate the time.

Benoit Poirier, Desjardins Securities.

Tough start given the tough weather minus 1.2%. But on the other side the RTM is still up 4% during the quarter. And if we look at the spread there was also positive spread back in 2012 of almost 4%. So how should we be looking in terms of RTM and carload spread going into 2014?

At the moment I think the first few weeks of 2014 have a bit of noise in them, but there is no question, and you pointed out, we are growing as we speak. In fact in railroad terms we have good growth even through this very tough period.

We are a backbone to the economy and we have an agenda to help our customers win in the market. When we tell you we are facing challenges, we measure that against the commitments and the demand we see from our customers.

So we are proud of being in a growth mode despite difficult weather. But we are mindful that we are not meeting the demand of our customers and impacting them in terms of their ability to reach markets in a time adding cost or a lot of sweat and anxiety because of our difficult service performance.

So the two elements are not in contradiction and we are doing our best to come out of it. We have February and March where we will be running strong if the weather permits and recover the backlog, restore our normal service-level and grow from there to meet our overall guidance for the full-year. I think that is the best way to give you a straight answer on this question.

Okay. Thanks for the time.

Thomas Kim, Goldman Sachs.

Luc, can I just ask you a quick question with regard to your guidance for the effective tax rate as well as the effective interest rate for the year?

The effective tax rate is going to be around 28% to 29%. I would probably err on the side of the higher number there. In terms of interest rates, we don't particularly provide guidance on that.

But it doesn't really change at the (multiple speakers). You can decide what the interest rate is, but much of our book of debt is fixed.

Okay. Great. Thanks a lot, guys.

Thank you. That was a good wrap-up question. We will leave it there and thank everybody who joined us on the call. We are committed to deliver a solid 2014 year. We have good momentum. Our agenda is on track and we will be looking forward to report on the first-quarter results in a couple of months with hopefully some good news on how we were able to recover from tough weather. Thank you very much.

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to hang up their lines at this time and thank you for joining today's call.