Canadian National Railway Co (CNI) 2015 Q1 法說會逐字稿

Welcome to the CN first-quarter 2015 financial results conference call. I will now turn the meeting over to Janet Drysdale, Vice President, Investor Relations.

Thank you, John. Good afternoon, everyone. Thank you for joining us. We are very pleased to be taking the call today from Memphis, Tennessee, where we will be holding our annual general meeting tomorrow morning. In the meantime, we're in joining the fine weather, the southern hospitality, and of course, the Memphis barbecue.

Just before we get started, I would like to remind everybody of the comments that have already been 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 it is indeed a sunny day here in Memphis. Thank you all for joining us on this call.

We have a solid start to the year; very good first-quarter results and we would like to take you through them. But let me just give the highlights.

Clearly, revenues have been growing. Some of it is because of last year, but most of it is because of our strong momentum in many markets. Revenues are up 15% on nearly double-digit volume growth. JJ will give you the detail of that.

Clearly, we are able to grow faster in the economy, as per our plans, and bring it down to the bottom line. We're balancing operational and service excellence. Jim's team has been able to run a very fluid network throughout the winter.

It was an easier, milder winter in Western Canada, with less extreme cold, but make no mistake, we had our fair share of issues, particularly in Eastern Canada, with a lot of snow and difficult winter conditions on the east end of our network. You put it all up together, are able to drive that low incremental cost. We are very pleased with our operating ratio at 65.7% and the rest flows: strong earnings growth up 30% and strong free cash flow.

Now Luc will give you some of the details. We're obviously getting help from exchange and from the fuel surcharge lag, but you take it all out and look at the underlying performance, very much a good start to the year and overall results that we are very pleased with.

So without further do, because we want you to have as many questions as possible, I will turn it over to Jim to discuss our operating performance.

Claude, thank you very much and I will be brief this year or this quarter. So maybe just to frame a little bit more with the weather in the first quarter; we had a strong first quarter. Workload on the GTM basis, which gives me a good reflection of what the workload is like, was up 9.8% and as you will hear later on, the RTMs were up about -- were 7.1% higher.

No if, ands, or buts, when compared to first quarter last year weather was much more temperate than last year in Western Canada through Wisconsin and Minnesota, but was much more impactful in Eastern Canada. And in fact, in Atlantic Canada significant winter as I've seen or we have seen in many years. Given that we expected a betterment in our operating metrics, but the fluidity of the network, as evidenced by double-digit improvement in car velocity, significant betterment in terminal put-through, train velocity, locomotive utilization provided great feedback on our agenda of operating excellence.

Our capital investments on pinch points with an unending view to use all our assets, whether it's people, the plant, or the locomotives, in a manner which has not changed the fabric of who we are and delivered on service excellence as a strong combination. And I think the first quarter was a good reflection.

Turn over to the next page, please. Our agenda does not change. Our culture is built on foundation of moving equipped as fast as possible in a safe manner. Nothing compromises being able to move fast and in a safe manner, but we did have two significant derailments in the first quarter and we have been aggressive in analyzing what occurred to see if we need to change anything we are doing. We have not completed the entire review, but will not stop until we understand if there is anything else we need to do.

Our overall safety metrics for all incidents and injuries, if you put them all in the mix, is better year-over-year, but we know safety is at the cornerstone of everything we do and we will not rest until we understand better what we need to do and change, if anything.

The keys to operating and service excellence is understanding the entire supply chain. Better understanding customer needs by using technology, which we have implemented, to give us more visibility. And having key measures that we both -- the customer, ourselves, and the different parties that we interact with -- so that we can measure and understand how we're doing, if we are doing better, improving, or whether we need to work on some things. We are very happy with the progress we've made and still some progress to make, but at this point very comfortable with where we are.

That is all supported by what we do for capacity. We have been double tracking on the Steelton Hill. We have been adding capacity east of Edmonton. We have not only added capacity on our main line corridor, we have added capacity in our yards to make sure we are more efficient.

We announced and we continue to invest in our secondary mainlines. And of course, continue to invest in training because of the number of new recruits we have, re-certifications, or re-familiarizations.

But before I pass it on to JJ, just let me finish with this. Good quarter, but it's where I expected us to be, so we will continue to work hard on our agenda to improve and provide our marketing and salespeople the best product to sell. JJ, over to you.

Thank you, Jim, and thank you for all of you who are joining us on the call today. It is JJ speaking and I will go over the next few minutes, bring you through the highlights of our first-quarter revenue performance, and then provide you with our commercial outlook.

Revenue for the quarter totaled CAD3.1 billion, an increase of CAD405 million and, as stated by Claude earlier, 15% over last year. The broad breakdown is as follows: volume produced about 8% revenue growth. CN lead the industry in volume, with carload increase of 9% and revenue ton mile increase of 7%.

Same-store price [reduced] 3.9% after adjusting for exchange and fuel surcharge, in line with our fourth-quarter pricing results. Exchange added another 7.5%. The Canadian dollar is at $0.81; was weaker versus the $0.91 that it was last year. And fuel surcharge, which revenue were heading down, reducing revenue around 3%, a trend that will definitely worsen next quarter.

The applicable WTI tariff was based on $61 crude this quarter, which was $91 last year, and the applicable on-highway diesel tariff was based on $3.35 versus a $3.84 -- $3.87 of last year. Recall that there is a two-month lag in applicable WTI and on-highway diesel tariffs. All-in-all, a solid first-quarter driven by volume growth, consistent pricing, and solid operating execution by Jim's team in the field.

Now I will review each segment. This time I will speak to the revenue variance on the as-reported basis in Canadian dollars and inclusive of the fuel.

Starting with grain and fertilizer, the grain revenue went up 19% on solid operating execution. Our Canadian grain revenue was strong, with commercial grain increasing 33% and regulated grain rising 26%. Our spotting program in Western Canada increased to 4,500 poppers per week on average versus the 3,700 of last year.

The US grain revenue was up 6% despite carload falling 8% as we ran out of export grain early. Fertilizer revenue was also strong, up 38%, led by solid global product demand and solid operating execution in the field.

Coal: our Canadian coal revenue was almost cut by half, shrinking to a handful of mines, which continue to operate in Canada at reduced rates. Our US coal revenue continued to increase with stronger export carload and stronger domestic utilities carloads during the first quarter.

Petroleum and Chemicals growth in crude by rail revenue was up 10%. We moved 30,000 carload of crude, down sequentially from the fourth quarter of 33,000 carload and up from last year's Q1 of 28,500 carloads. Our mix of heavy to light crude remained at 60% in favor of heavy.

Natural gas liquid produced well, now that the (inaudible) Pipeline is reversed and no longer available for Canadian NGL transport. Low feedstock price contributed to strong production rate at our plastic plants and finally movement of TIH carload was down 25%.

Now Forest Products. Lumber and panel produced 33% revenue increase, driven by 12% US volume growth, on US housing start obviously, and highway-to-rail conversion of Asian export over the Port of Vancouver. Pulp was up 10% on account of higher Asian export and we are having good success with our high-velocity pool -- low-velocity pool system, which prioritize ordertaking. The velocity of our premium boxcars and center beam fleet has increased and we are achieving a higher customer order fulfillment and a more positive customer sentiment.

Metals & Minerals. Frac sand revenue rose almost 70% over last year. We moved over 23,000 carloads in a quarter, 50% more than the 15,000 carloads that we moved last year, but sequentially down from the 29,000 carloads of the fourth quarter. The iron ore supply chain, including vessel and dock revenue, was up 25% due to solid execution by the iron ore supply team of CN.

We had upside in non-energy-related semi-finished steel, aluminum, and non-ferrous, but this was now partly offset by much weaker energy-related steel demand and much lower North American steel production rate of 73% in the first quarter, down 7% from last year. Production is hurt by the US strong dollar, resulting in a surge of steel imports in the US.

Automotive revenue increased 23% on strong demand across the board and on new business volume. We have pent-up demand as one of our major customers experienced an extended quality hold delay and our European imports were delayed by many East Coast ice storms.

Intermodal. Overseas revenue was strong and came from the volume of the very fluid West Coast Port of Rupert and Vancouver and in the East over the Port of Montreal. Domestic revenue was down 3%, in part because of the derailment in northern Ontario, which specifically affected our domestic service. The inland terminal of Chicago, Memphis, Detroit, and Joliet saw the biggest overall intermodal growth for CN.

So now turning to the outlook. Broadly speaking, for the coming months exchange in fuel surcharge will create very strong opposing wind. We are likely to have a sizable gain from exchange rates, which is likely to be offset by a sizable reduction in fuel surcharge revenue.

On crude, we see potential from the start up this mid-quarter of new crude rail terminal in both Alberta and Illinois, but we also see increased volatility in crude volume. On frac sand to foresee a volume pause for the seasonal spring break-up and a wait-and-see after that. Because of that, overall our crude and frac sand for the full year we are now aiming for 40,000 carloads of combined carloads of crude and sand.

We have a weak production from the Canadian mine -- Canadian coal mine and in Canadian grain export a smaller carryover than last year. Not quite enough grain to keep our export at the level of the spring and summer of last year.

On a positive note, we count on US housing start-related volume; that is lumber, panel, and container import. We count on automotive sales; that is carload of finished vehicles and import containers of auto parts. We hope for positive potash market during the spring. We count on the strength of our intermodal franchise and on the strength of the US consumer confidence supporting consumption-driven business.

We also count on our extended merchandise railcar fleet to capitalize on the manufacturing sector, despite some decline of the Purchasing Managers Index in both Canada and United States. Longer-term the container ports we serve are in very good shape and our intermodal international franchise will be enhanced by the [Maher] Rupert terminal 500,000 TEU expansion, by the Port of Montreal 600,000 TEU expansion, and by the future new rail-on-dock service in Mobile, Alabama.

In conclusion, we have a very diversified portfolio, which carries us through the rotation of diverse commodity markets and through the regional economic cycle. We are aiming for 3% carload growth. We reiterate our 3% to 4% same-store price and we continue to focus on yield. Luc?

All right. Thanks very much, JJ. Starting on page 12 of the presentation let me walk you through the key financial highlights of our first-quarter performance for 2015.

As JJ mentioned, revenues were up over CAD400 million, or 15%, to reach CAD3.1 billion in the quarter. In the quarter, fuel lag represented CAD57 million tailwind in revenues. Operating income was CAD1.063 billion, up over CAD240 million, or 30%, versus last year.

Our operating ratio was 65.7%, a record level for a first quarter. This represents a 390 basis point improvement over last year as we enjoyed strong business volumes and, in contrast to 2014, we experienced a more normal winter season on average across our network.

Other income was CAD4 million. This compares to CAD94 million in 2014, which included a pretax gain of CAD80 million on the sale of a subdivision to a transit agency. Net income stood at CAD704 million, up 13%, and the diluted EPS reached CAD0.86, up 15% versus last year.

Meanwhile, the adjusted diluted EPS, also at CAD0.86, was up 30% after excluding last year's major asset sale. Foreign currency exchange was CAD56 million favorable to net income in the quarter.

Turning to page 13, we once again were able to deliver superior growth at low incremental cost. Operating expenses were up 9% at just over CAD2 billion. Expressed on a constant currency basis, this is up 2% or CAD46 million. At this point I will refer to the changes in constant currency.

Labor and fringe benefit costs were CAD668 million, a 9% increase over last year. This was the result of two elements. First, an increase in overall wage costs of 6%, made up of 3% wage inflation and 6% increase in average headcount, partly offset by higher capital work. Second, second element was the higher pension expense for CAD15 million, or 3 percentage points of the total labor variance.

Purchase services and material expenses were CAD457 million, up 12%. Higher volume drove increased costs, including materials, for 8 percentage points, as well as repairs and maintenance expenditures for 3 percentage points. The fuel expense stood at CAD361 million, or 31% lower than last year. Price was CAD161 million favorable versus last year, and fuel productivity went up by 2.5%, but this was partly offset by higher volume, or CAD41 million of unfavorable variance.

Depreciation stood at CAD296 million, CAD29 million higher than last year, or 11%. This was a function of asset addition, as well as the impact of depreciation study and other adjustments.

Equipment rent at CAD94 million were CAD9 million higher than last year, or 12%. This is due to increased net car hire expense and equipment leasing costs.

Casualty and other costs were CAD159 million, CAD54 million above the prior year's. Two elements drove this increase. First, accident-related costs were CAD40 million higher than last year. Second, workers compensation costs were approximately CAD10 million more, as we had the benefit of a one-time credit received in 2014, which obviously didn't come around in 2015.

Moving on to cash, we generated free cash flow of CAD521 million in our first quarter. That is approximately CAD27 million higher than in 2014. This was mostly driven by higher cash flow from operations at CAD992 million, partly offset by higher capital expenditures at CAD468 million.

Finally, on page 15, our 2015 financial outlook. We continue to be confident in terms of CN's prospects, notwithstanding the fact that we are experiencing conditions that are weaker than expected in energy-related markets as well as coal exports. As we look to the immediate future, while North American economic conditions are somewhat mixed, consumer confidence is solid and expectations for increased spending should support continued growth in housing, automotive, and intermodal sectors.

These and other key assumptions underpinning our outlook should translate into approximately 3% carload growth, with pricing in line with our inflation-plus policy. Therefore, we are affirming our 2015 financial outlook, calling for double-digit EPS growth over the 2014 adjusted diluted EPS of CAD3.76. We are also raising our capital investment program for the year from CAD2.6 billion to approximately CAD2.7 billion, allocating an additional CAD100 million to safety-related infrastructure investments.

Furthermore, we continue to pursue our shareholder return agenda with a substantial stock buyback program underway; a 25% increase in dividends for 2015, while gradually moving towards a 35% dividend payout ratio.

So a great quarter and on this note I will turn it back over to you, Claude.

Okay. Thank you, Luc and team. Clearly our agenda is delivering the right results and we are very pleased with the start to the year.

We're focusing on more than just the quarter. We're focusing on building the future. Our approach and focus on helping our customer win in the marketplace is resonating. It's helping us outpace the economy and outpacing the rest of the industry in terms of growth.

We are able to accommodate that business at low incremental costs, because we have a very fluid network and our operating metrics are continuing to improve. This is driving productivity, but it's also driving service efficiency to help have the right value proposition for our customers.

And we are investing for the future. This CAD2.7 billion capital envelope is testament to our long-term confidence in our ability to continue to play our role in helping our customers win in the marketplace. We are doing it overall with a lot of investment in safety, a lot of investment in growth, a lot of investment in productivity and everything that drives our agenda, but we are also starting off with a number of very large-scale projects that are indications of our willingness to stay ahead of the curve.

Our investment in Milton -- our announcement of a new Milton project, for instance, in Toronto is a very good example. We are an important intermodal carrier in and out of Canada and we need the growth in terminal capacity to allow us to link up to the investments that are being made by our partners on the West Coast. JJ referred to one in Rupert, but we expect others to follow in Vancouver, Montreal, and elsewhere.

We are increasing our overall capital envelope to double down on our agenda of moving goods safely and doing that with a high level of service. And if you do that consistently with a marathon-like approach, in the end you drive value for shareholders, which is what we are geared up to do every quarter, every year for many years to come.

So with that I will -- we will move over to the question period, John.

(Operator Instructions) Fadi Chamoun, BMO.

Good afternoon. So I just wanted to circle back on the CapEx. You are revising your volume expectation a little bit down, but your CapEx going higher. My sense is that there's a bit of change in terms of the risk tolerance toward safety and derailment maybe.

I'm just wondering whether you would consider this sort of a systematic change in how you look at your infrastructure and what you are willing to tolerate in terms of safety risk. Or does is this sort of a one-time identification of issues that you want to fix?

No, Fadi, I think you have to look at this as a consistent strategy. We are always staying ahead of the curve. We have been investing in our core mainline network in terms of capacity over the last couple of years.

You may have seen last week we announced multiyear programs to invest in our feeder network. It is a long-term program to make sure that the growth that we see coming off of our Western Canada feeder network that we have the infrastructure to do it safely and that we have the infrastructure to grow with our customers in that part of our network.

So it's for safety. It's for growth. It's for capacity. It's for all of those things that we are investing, and we are doing so with a lot of confidence in our future prospects. It's not about anything that we have found lately that is causing us to increase our CapEx.

Okay, great. One other thing sort of on the energy carload change; is that decline from 75 to 40, can you split that between crude and sand? Is it more sand driven than crude?

We've given you guidance that is combined and there's a reason for that, Fadi. It's kind of difficult in this uncertain environment. I think 40,000 overall, that's about as good as it gets in terms of growth, outlook, and guidance that we are -- we feel in a position to give you.

Thank you.

Ken Hoexter, Bank of America.

Claude, thank you very much for that insight, but can you -- maybe if I could just follow up on that. I want to understand the moving down on carloads but increasing CapEx. I just want to understand; are you over investing or are you saying these are longer-term projects that you need to get out in front of because the volumes are --? I just want to understand, given the downtick on volumes, maybe I'm not clear on your answer on that prior question.

As I said in my closing comments and in my answer to the question, we run a marathon. We run a business over many years and we line up our initiatives, our assets, our resources over a longer-term cycle. I think you're reading too much in terms of our decision to move forward with our feeder network investment in Western Canada and this quarter's revision to our energy outlook.

If anything, we are making those investments because we think there's a bright future for frac sand and for energy movements of our products in the long-term future. So it's geared up to a view that the business will be there and we are starting those programs this year, adding CAD100 million to our overall capital expenditure as part of a program that will spend, over the next three years, close to CAD500 million in Western Canada.

Great, I still have the follow-up. Just you mentioned the increasing investment on Western Canada and I saw that Rupert -- is the chain of ownership at Rupert is that enhancing the opportunities there? Is that looking for expansion compared what you're seeing? Just can you maybe talk a little bit about the growth on the intermodal side there.

So the prior owner, the current owner, Maher, announced they are going ahead with construction of the expansion of the terminal, 500,000 TEU. 90% will be rail; I would say 5%, 10% will be truck; and then subsequently the new owners coming in to buy Maher, the DP Oil, Dubai Port. Great company, large scale over the world, a lot of customers contact that could help to market -- premarket the capacity of the terminal that they are just about to buy.

So I think from a CN point of view it's fantastic new expansion of our line. Great, strong partner who has a scale, a world scale basis and we are already marketing that aggressively.

Thank you, Ken, (multiple speakers). And I will remind you that this opportunity to remind everybody of our rules of engagement, one question per participant.

Walter Spracklin, RBC Capital Markets.

Thanks very much. This is Erin in for Walter. I just wanted to clarify your FX sensitivities given the movement that we have seen in the exchange rate and the updates to your assumptions. I think your previous disclosures have said that a CAD0.01 change is about CAD0.02 in EPS. Hoping you can provide an update there.

Yes, as we look at the current environment -- it's Luc, I would say a CAD0.01 change translates now roughly into about CAD30 million on net income, which then again translates into about CAD0.04 on EPS.

Great, thanks. That's my one question.

Bill Greene, Morgan Stanley.

Good afternoon. Claude, CN for so many years had this tremendous cost advantage over its peers and you can see that in the long-term growth rates that you've achieved.

A lot of the competitors are focusing a lot more now obviously on costs. Does that change the competitive landscape for you? Do you worry that that puts at risk any of these targets to grow faster than the economy and to continue to sort of drive the top line in ways that maybe some of your peers haven't been able to?

You know, if you look at our first-quarter results we like how our performance stakes up versus the rest of the industry. We think we are investing to stay ahead of the curve, because that's the way to have the right assets in place to provide the solid service that differentiates our capability in the marketplace.

We are innovating in terms of end-to-end supply chain thinking. Our customer-centric agenda, our Sell One CN, all of those initiatives are resonating, and so we feel good about the market response and we believe that it's competitive world out there.

As others get better, we have to continue to improve and get better, but we are resonating. We have good growth and we feel good about the prospects for the future.

So it's not just cost but also service is your point?

I'm not sure we have that many customers look at operating ratio before they make a decision to award us some business. They are looking for value. So cost advantage give us the ability to compete for the business, but a customer will award its business based on service and service differentiation.

That is when you look at what we've done the last two years especially; people came to us because of service we offered, not because we had the best operating ratio. If you put yourself in the shoes of a customer, that is how we see it.

Excellent, thanks for the time. Appreciate it.

Cherilyn Radbourne, TD Securities.

Thanks very much, good afternoon. Just wanted to ask one about the energy business. Curious if you could speak to how much of your crude-by-rail business is with large integrated companies and whether there was any change to the mix of origins and destinations in the quarter.

Well, there's definitely a shift from what was moving in carload service, merchandise service to unit train service. And at the same time that means that shift also we are dealing now with typically with bigger players, either the refiners themselves, the people who ultimately buy the product, or the producer of the crude back at the origin.

So the shift is toward larger companies, larger blocks of business, and less of the midstream companies or in between. I don't know if that answers your question.

Just given the shift in differentials during the quarter, was there much of a shift in terms of the mix of origins and destinations?

No, not so much, because the market was already moving toward very big buyer and big seller and big block. But the fluctuation in the spread does definitely impact the business from month-to-month, because when people make the transaction for what crude they are going to buy to pay their refinery for the following month -- like right now they are looking at May -- all these spreads start to matter more than -- they are in the range that matters.

Okay, that's helpful. That's my one, thank you.

Chris Wetherbee, Citi.

Thanks. Just a question; in the next couple quarters, as you see volume growth naturally decelerate because of the tougher comps, how should we be thinking about headcount as it plays out through the rest of the year?

Chris, it's Luc. In the first quarter we were up about 6% in terms of average headcount. For the whole year, we are probably looking closer to about 3%. You'll recall we accelerated through the second half of last year, so we will be showing slightly higher numbers through the first half of this year, but our target overall would be probably around the same level of growth as we are seeing in the carload, about 3%.

Okay, thanks. That was my one, thanks.

Jason Seidl, Cowen and Company.

Thank you, gentlemen, for taking the time. Wanted to talk little bit more about sort of the Prince Rupert expansion. Obviously, we have probably seen a little bit of freight, one from the West Coast ports, but it seems like this expansion is more than temporary and that you guys think there's a lot of business to generate through Prince Rupert into other areas. I was wondering if you could talk to how much business you think you probably took from the West Coast ports and also talk about the growth going forward.

I term of the West Coast port, Rupert is only so big and what was happening in the US West Coast was quite large. Probably the biggest benefiter of the US West Coast diversion was the East Coast port: New York, Norfolk, Savannah, and the likes. And up to a point, the Canadian ports: Vancouver and Rupert. Rupert had a little more capacity available.

But at the same time we have been marketing this for quite a while. People came to Rupert, and when I say people I mean the importers. We didn't get a new shipping line coming to Rupert in the first quarter. What we had is more importers who really wanted to spread their eggs into more ports, East Coast ports and Canadian ports.

And we feel fairly confident that obviously the business will stick with us. And when you look at our commitments we are investing into major capital investment in Toronto, which partly will be fed from the West Coast. And Dubai Port is also was very confident and believes that Rupert is a great port to serve the US Midwest and a great port to serve Eastern Canada. So us and them are very much aligned in the future of Rupert as a solid growth area.

Okay, thank you. That's my one.

Benoit Poirier, Desjardins Capital Markets.

Thank you very much. So just in terms of volume, we understand that you will be facing a tough compare in Q2 with the grain obviously going into the negative territory. What should we expect in terms of RTM? Because so far your trending downward 2%. Any expectation for the Q2?

Broadly speaking, we might in the second quarter see an RTM which will be a little bit weaker than the carload. So we will see in another quarter how things add up, but you might see that the RTM is somewhat weaker than the carload growth for the second quarter.

Okay, thanks. That's my one.

Brandon Oglenski, Barclays.

Good afternoon, everyone, and thanks for taking my one question. JJ -- just want to play by the rules here.

There's big concern not only for the railroads, but I think across industrial investors right now that we are just late in the cycle. Obviously commodity prices are trying to signal something potentially. FX has moved a lot for Canada.

What is the confidence in your visibility with your big customers -- maybe outside of energy, maybe more talking about the merchandise segment, the automotive segment, intermodal -- that leads you to the idea that, hey, we are actually going to see positive volume growth, even on the back of what turned out to be a really strong 2014?

Definitely, if you take it sector by sector, this is where you see the positive growth. The Canadian forest industry, that exchange rate of $0.80, $0.82 is doing very well especially for the export to the US. If you look at the automotive industry, they want us to move more product. And also, because they make more product, they want to bring even more containers from Korea, Japan, and China.

So when you break it down by sector, this is where you see where the growth is coming in, which is really aligned to what you would see in the economy. And at the same time, when you talk about grain, it's a one-timer. We had a fantastic crop two years ago, good and bad politically and commercially. The next crop will come in and after that we will pick it up there again.

You look at China, China is doing not too bad, but in terms of making more steel, the world is awash with steel. So when you take them one at a time, the visibility is fairly good.

The place where the visibility is maybe a little more challenged is energy; what's going to happen to the price of crude. If anybody on the line can help us out here that would be useful. Same thing with the price of gas and how much activities will take place in terms of drilling. That is complicated question to answer.

And that's a good question, Jason. Brandon, I'm sorry, basically the confidence of the consumer is where we see bright spots. Now, we may be wrong; things can change, but there has to be a lot of discretionary income flowing to the consumers with lower energy prices. So we are hopeful that that will help durable goods like automotive, housing starts. Construction materials, in general, is a market that is still below where we were five years ago in the recession.

So we have markets that are sleepers where growth, secular growth is still very solid. We have markets where our ability to be differentiated in terms of our product offering is helping. Intermodal would be the best example of that.

And then we have global offshore markets that are facing headwinds and uncertainty in the energy play. Overall, the diversification of our business mix and the strength of our agenda allows us to grow and continue to expect to grow faster than the economy and to drive shareholder returns that way.

Appreciate it.

Allison Landry, Credit Suisse.

Good afternoon. Thanks for taking my question. So I was wondering if there is a way for you to bookend your expectation for double-digit earnings growth within the context of muted carload growth, and at least for the second quarter, somewhat softer RTMs as well. Should we be thinking of something in the low double-digit range versus the consensus of roughly mid-teens?

You know, that's a very good question, but our guidance will stand for what it is. We are confident that we will be delivering double-digit earnings growth and we are not uncomfortable with the consensus that is out there today as we speak.

Okay, thank you.

Scott Group, Wolfe Research.

Thanks. Afternoon, everyone. Wanted to ask about pricing. Came in at the upper end of the expectations for the year and I wanted to get your sense on how sustainable that is and if that's a potential source of upside to keep that pricing at that upper end of that 4% range.

Then just more specifically on pricing. As you lowered the energy volume expectations, have you seen any changes at all in the pricing that you are getting for crude or sand?

Starting with broadly, we've guided price to be same-store basis 3% to 4% for the year. And remember August 1; because we are Canadian railroad, August 1 the Canadian grain cap will be reset and it will be reset at minus 1%. So that will -- we will see that flowing through the second half of the year.

Regarding frac sand and crude, not necessarily a change in pricing direction of those markets. A lot of the, I guess, newer things happen during the first quarter as to where these markets are adding heading volume wise. We like to be paid for what we do. It's not because the commodity in the car is of high price or low price and the selling should impact or it does impact our freight rate. We provide transportation services and commodity price goes up and down and freight rate in other markets.

JJ, I'm just not sure I understood kind of what you were trying to say about the oil and sand pricing that you are seeing out there and how that is changing, or maybe mix is changing it.

What I'm saying is that there is no relation between the freight rate and what's happening in the volume or the space of frac sand and crude. It's that if crude is weaker that freight rate for the crude will be weaker.

Turan Quettawala, Scotiabank.

Good afternoon. Luc, had a question on the headwind from the fuel surcharge. On the last call you talked about, I believe it was a CAD100 million headwind for the full year on fuel surcharge and I think that was based on $50 crude. I know crude is obviously incredibly volatile here, but can you just provide an update to that headwind for 2015 now that showed us pretty much hitting $60? Or maybe is there some easy sensitivity that we can think about there?

Turan, it's a good question and, again, it's one with there's so much volatility that it's a tough one to call. Suffice it to say, we have seen a little bit of upward movement in the WTI so it's hovering around $55 right now. The question for us and what we're going to have to see is where does the exit point at the end of the year? Towards the last part of the year, the last quarter or so, what is it going to do?

We haven't changed so far our assumption, which is on average for the year about $50, but with an exit that probably will be closer to $60. So it's difficult to modulate with great precision, but I would probably, for now anyway, stick to the roughly $100 million or so kind of range. And we will have to walk it home, so it's going to be a bit bumpy and we will see how it goes. Hopefully, if I can get better clarity, I will update in the next quarter.

Thanks I guess, but in Q2, just to be specific, is it going to be about this -- should still be a tailwind though?

Well, it depends. You tell me where the WTI is going, Turan, and I will respond. If it takes a big step up, of course then we're going to have a bit of a fuel lag and we will see where that all shakes out.

Got it, thank you very much.

Matt Troy, Nomura.

Thanks. Just in light of the agreement you reached with the Teamsters Canada Rail Conference I guess a few days ago, was wondering if you could just put kind of the outcome of that into context and just give us an update across the labor force, where you stand in terms of negotiating with the various agreements you've got expiring over the next few years. Thanks.

Matt, it's Jim. Thanks for the question. So that is the last major one that we have in Canada, so it basically gives us a framework that nothing is going -- no new agreements are going to have to be negotiated before the middle of 2016. And then the timeframe will be into 2017 before we get it, so nice, stable area where we're at right now.

It was very much a pattern agreement. We had some changes in productivity that will help us and the wages -- wage increases patterned with the rest of the agreements that we put in place.

In the US, we have a number of agreements, but of course, anybody who follows the railroads real closely it's a different regulatory and different process negotiating in the US than it is in Canada. And we continue to negotiate. We don't see any stumbling block, or anything that we are concerned with, with any of the agreements that would affect us operating the railroad in an efficient manner.

Thanks for the time.

Tom Wadewitz, UBS.

Good afternoon. I wanted to ask you about the intermodal yields. It looked like it was down about 3% year-over-year. You had strength in intermodal yields in fourth quarter, so it's a bit of a change.

Wondering is that some price competition, maybe contracts rolled over. Is there something that -- something else, a really big fuel impact or --? What's behind that and would you expect that to be the pattern if you look the next couple quarters? Thanks.

Maybe just to clarify, our same-store price on intermodal is positive, but when you look at -- I think you're looking at the cent per RTM or the revenue per unit. (multiple speakers)

Yes, revenue per car.

Yes, mix is a big factor. Exchange rate is another big factor. Fuel surcharge, which obviously is down, is another big factor. And in intermodal is where we have a higher proportion of our WTI fuel surcharge formula, which as I said earlier, we're converting over time. So when you add all these things it's a lot of noise.

But what we do is we measure things on a same-store price basis and those are -- we are getting price increase on the base price.

So I wouldn't worry -- other than those moving parts, Tom, that are difficult to predict, the effects of the fuel surcharge, the value of our service, and our pricing approach in intermodal is very much to get value for those services. There's nothing to be concerned about, and we will continue to do that for as long as we offer good service.

What is the mix that you referred to, JJ? I just don't have intuition on what that is.

Mix as in length of haul; mix as in how much we have priced in Canadian funds, how much we have priced in US funds. Mix as is we have some of that price, fuel surcharge, WTI, some of this price in highway diesel that we are converting the highway diesel. So all these things do impact our revenue per unit and are significant in the big scheme of things.

Okay, thank you.

David Vernon, Bernstein.

Thanks for taking the question. Just a question on overall sort of business mix.

The last few quarters it looks like gross ton miles are growing at a much faster rate than revenue ton miles. I'm just wondering if that is something that we should expect going forward from an efficiency perspective or if there is some one-time things happening in terms of the way the growth is developing that is driving that.

I think it's really a question of mix, of the commodities that we move, because really the fundamentals are you get the business in a car load, you get the distance in terms of your OD payer, and you get the weight in terms of the type of product that you are moving. The two measures are typically very much in sync, but from a quarter to a quarter there might be some mix differences that would play into making a little bit of a gap.

I mean it just strikes me that the last -- two of the last three quarters are the lowest it has been in, I don't know, 10 years. So I was just wondering if there's something else that might be there or if this is just normal mix.

No, I think it's just normal mix. Really it's just normal mix.

Steve Hansen, Raymond James.

Good afternoon. I think you noted in your commentary that the reversal of the Cochin line has had a beneficial lift on your nat gas liquid volumes that you're moving here, given the stranded nature that we are likely to see over the next couple of years. I was wondering if you tried to quantify that opportunity as it evolves here, and I understand there's also multiple export terminals now have been proposed for the West Coast. Trying to get a sense of what that could mean for the next year or two.

I'm not sure we down to forecasting carload by commodity group here, but definitely the value of the propane and the butane and natural gas -- natural gas is very low. We achieved -- leaving the propane in it is kind of -- it's a sin, because propane should be selling better than natural gas value.

So already a number of producers in Western Canada, mainly around Edmonton, are building fractionators to extract the propane and some of the liquids from the gas so they can sell it for the value that it should have. Some of it within North America, some of it for our export project as you mentioned.

When you talk about the energy renaissance, we talked about crude and the frac sand earlier, but one can also talk about the liquid which are trapped in the Canadian gas which no longer can move to the US market by their own distinct pipeline. So it does give us an opportunity, especially 12 months from now when these plants start to start up, as you know. Those capital investments give us a visibility that somebody out there does believe that propane should have its own value and that should not be sold at the price of natural gas.

Thank you.

Brian Ossenbeck, JPMorgan.

You mentioned automotive is fairly strong over the remainder of this year. I was just curious how you view the potential for more production moving to Mexico and possibly shutting down, relocating from Eastern Canada. How big of a shift do you think that could be and what timeline do you think you have to start preparing for that dynamic?

I think we've already -- this is not a new phenomenon. There's a lot of it already taken place. There's a number of plants actually running or in construction in Mexico, so we -- the base that we have, I would say, in Michigan, Ontario, and up to a point we participate in the products going to the [Ohio] plant, is an exciting part to CNN. As much as the finished vehicle, but also there's a big business in moving parts into these assembly plants.

There was an article in Wall Street Journal a while ago that was explaining how much of a foreign content now there is into a car manufactured in North America. Meaning more and more of the parts are not necessarily coming from Mexico, they are coming from overseas. They are coming in containers.

So the automotive story is as much a finished vehicle story than it is as an intermodal story. And we are very much on this market opportunity in a big way.

Our customers are investing in global vehicle platforms and over time you have to expect that we will be able to move Michigan/Southern Ontario vehicles for export as well as for North America. So as JJ said, there's been a lot of conversion, but the plants that are there are competitive. The Canadian dollar is helping and, as long as they produce good vehicles, we will move them to market.

Yes, both of them should grow: finished vehicles and parts. And as I mentioned earlier, we are also now paying attention and focus on what's happening in Mobile, Alabama, and we think that's another nice gateway for CN to exploit. Namely for parts coming from South America.

Thank you.

Tom Kim, Goldman Sachs.

Thanks, I have a question on cost. Just given the improvement that you are seeing in service levels as well as your increasing network velocity, should we expect to see this reduce your overall cost curves, particularly in purchase service expenses and equipment rents?

A lot depends on volume. I'll let Jim give you a sense of this initiative, but we focus on every lever of costs. Fuel efficiency during the quarter was up 3%. Our yard productivity is up significantly on a year-over-year basis.

If we have more volume, we will have more expense, but we focus on efficiency and productivity in every piece of the activity that we drive. Jim?

Claude, the only thing I can add is this is something we look at on a daily basis. We are always concerned about where the business level is; how efficient that we run the railroad. And efficient in just how fast you move it and what it costs you.

I am very comfortable with the mechanisms we have in place to react. I'm very comfortable that if the business comes in and it keeps on growing that we will put it up to the bottom line; be able to handle it efficiently like we have up to this point with less cost per unit.

And if it slows down and the growth isn't quite at the level that we expected, we have taken into account what we would do and we will react quick and make sure that we drive as many -- much of the cost out as we can as quickly as possible and make sure we get it to the right place. So that's what we look at it when we come to cost.

Thank you.

Steven Paget, FirstEnergy Capital.

Good afternoon. Thank you. It's a sunny day here in Calgary, too.

Supply chain management, maybe if I can rephrase it, could be about how CN works with customers, non-rail and transportation and logistics networks. Is supply chain management more about winning new customer contracts or about operating the existing network and the existing business more efficiently?

Listen, supply chain approach is a mindset. We are a great railroad. We are leading the industry in service and other key efficiency metrics, but we think of our role as connecting the dots from end to end.

I will give you a good example. When we're dealing with containers that comes from a ship, lands on a dock in Western Canada, and wants to go inland, whether it's Toronto or the US Midwest, the end-to-end journey of that container often touches other participants in the marketplace. It's our global container terminal in Vancouver. It's Maher, soon DP World, in Prince Rupert.

It's about all the way to destination including the inland terminals, the trucking arm, the trucking leg of the journey to destination. We think about it end-to-end and we try to optimize that supply chain so that the customer gets the best possible efficiency and service reliability from one end to the other.

It's a mindset. It's an approach of daily engagement, but it's also an approach of marketing. The more you know about your customer -- and JJ was talking about automotive parts, for instance.

The visibility to the inbound container flow, the ability to load those containers that are empty when they get to Detroit and fill them with exports so that the return journey is a match-back movement and you lower the cost of the shipping line. Round-trip economics, end-to-end visibility, daily engagements, the ability inside CN to think like supply chain enablers as opposed to just great railroaders. It's that entire package that is giving us the results that we have.

They show up in top-line growth. They show up in joint efficiency initiatives and they show up in our ability to over time drive value for our shareholders.

Sounds easy. (laughter)

Thank you, that was my question.

Keith Schoonmaker, Morningstar.

Thanks, a quick question for Jim perhaps. Terminal dwell and velocity improved despite the strong RTM growth. And I recognize there may not be a standard metric for this, but could you quantify how these metrics are translating into changes in your on-time and departure performance? As well, could you indicate if this is still improving or would you say it is in pretty good shape at this point?

You know what, there comes a point where you -- the metrics get to a level where you start saying to yourself, wow, what else is left? And I am very comfortable with where the first quarter ended up and that's why I didn't make a big deal out of it. We worked hard at it. It's at the right level.

Every metric below you could -- if I brought up the sheet that I keep track of and look every day, it wasn't the metric that I would say moved sideways or down. They were all positive. Second quarter continues to be strong, metric wise, so at the end of the day we are going to do everything we can to optimize it and make sure that we've got to it at the right place. But again the second quarter this year is headed in the right direction and hopefully it keeps on there.

More important for me is that this is not about how much money and how much capacity you can put in to run the railroad quicker. It's being smart about what we put in for capacity. It's investing properly into the Company and then making sure that we give a competitive advantage.

We are still fairly quick, I think, compared to everybody else and that's where we want to be is at the top of the heap or right close to the top and stay at the top if we can. So that's what drives me and that's what drives the whole operating team.

Jim, are you willing to share the on-time performance?

Yes, it's very high. I don't have the numbers sitting right in front of me, but it's pretty nice.

Okay, thank you.

He's hedging his bets here on the potential for future productivity. Thank you, Keith, for that question.

We have no further questions. Like to turn the meeting back over to Mr. Mongeau. Please go ahead, sir.

Thank you. It has been a very good call and, as we said, we are pleased with our first-quarter results. It is an uncertain environment in terms of certain parts of our market. We have to face up to it and we are trying to give you our best sense of what it means in terms of overall growth.

But we have a lot of initiatives. We are building for the future. We like how our agenda is delivering and we look forward to meet you at the end of Q2 to talk about another bang-up quarter. Thank you.

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