Canadian National Railway Co (CNI) 2016 Q4 法說會逐字稿

All participants, thank you for joining to CN's fourth-quarter and full year 2016 financial results conference call, which will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize, and are subject to risks described in CN's fourth quarter and full year 2016 financial results press release, and analysts presentation document that can be found on CN's website. As such, actual retails -- pardon, actual results could differ materially. Reconciliations for any GAAP, non-GAAP, pardon, measures are also posted on CN's website at www.cn.ca.

(Operator Instructions)

Once again, please continue to stand by. Your call will begin shortly. Welcome to the CN fourth-quarter and full-year 2016 financial results conference call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.

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

With me today is Luc Jobin, our President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; JJ Ruest, our Executive Vice President and Chief Marketing Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. After our prepared remarks, we will conclude with a question and answer session. In consideration of your time, we are trying to keep this call to one hour, and I will ask that you please limit yourselves to one question. I will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Luc Jobin.

Thanks very much, Paul, and let me in turn welcome all of you to CN's quarterly call. Today we'll review our results for the fourth-quarter and the full-year 2016. The CN team is pleased to report another very strong quarter, one that caps a solid year of performance, both financial and operating, including significant improvements in terms of safety, service, and productivity. These results continue to show how CN is adapting to changing market conditions, seizing opportunities everyday, whilst positioning for the future.

We achieved strong results in the fourth quarter, with an adjusted diluted EPS of CAD1.23, and that's up 4% versus last year's fourth quarter. We also saw positive momentum on volume with RTMs up 4%. That's an encouraging sign, that the worst of the market correction in several commodity sectors is behind us, and brighter prospects lay ahead. JJ will give you more color on this in a minute.

In terms of operating performance, we delivered very good metrics despite a more difficult winter in December of last year. Looking at full-year results, we're very proud of our performance, especially given how challenging the year has been from a market standpoint. And so for 2016, we achieved a full-year adjusted diluted EPS growth of 3% to stand at CAD4.59.

We also delivered a record-breaking operating ratio of 55.9%. That is a full 230 basis points better than last year. It's very tough to achieve this level of results, and the entire CN team deserves credit, since we have accomplished this with a clear view to meet high service levels and supply chain collaboration, but not undermine our ability to grow as the market improves. Mike will give us a good look at how innovation, productivity, and teamwork has been instrumental in reaching this milestone.

In 2016, CN generated free cash flow of CAD2.5 billion, up 6% versus last year. And last but not least, we announced today a 10% increase in our dividend. Later on the call, Ghislain will expand on other key financial metrics for Q4 and the full-year, as well as provide you with our earnings guidance for 2017, along with some key assumptions. Let me now turn it over to the team for their more detailed commentary, starting with Mike Cory. Mike?

Well, thank you, Luc. The CN team of professionals deserve accolades for achieving very good results for the fourth quarter, in spite of the impact on December's winter comeback story. I will go into further detail on the subject of winter a little later.

On a full-year basis, the overall results were outstanding, and they reinforce our supply chain approach. This is an approach that produces premium service at the lowest possible cost, by understanding the customer demand, and executing our operations to efficiently deliver it.

On a full-year basis, all of our key operating metrics beat previous records with the exception of train speed. Train speed was slightly down since our record performance of 2010, however, volume is up 24%, and trains are carrying 16% more payload since that time period. For Q4 workload, and I am measuring this in GTMs, we are up 8.4% from Q3, and up 4% from Q4 of 2015.

In Q4, we set an all-time record for train productivity, at 9,449 [tonnes] per train, which is 5% higher than last year's Q4. We also set a Q4 record for locomotive utilization, which was up 7% year over year. All this was accomplished against a very tough comparable, with the significant headwind of winter in December that we did not experience last year.

In fact, going back over the last five years, the month of December of 2016 was the second coldest, with more days colder than minus 23 Celsius than any other period but one year. As well, the snowfall we experienced was the second highest in the last five years, and our major operating yards in Winnipeg recorded the highest level of snowfall in the history of the city.

Considering the dramatic change in weather that December brought, our response was swift, and it ensured our game plan of operational and service excellence remained intact. In fact, I can objectively say, that in my 35 years in this industry, and you have to remember a good majority of that's been in operations in Western Canada, we have not performed this well in the type of winter conditions we were faced with in December, in all of my recollection.

We were able to deliver these results because our focus is on two tracks. And the first track is really about the day-to-day management of our business. We focus intensely on our metrics. Our attention to detail is second to none, and continuous improvement if you will, leads us to meet the demands of our customers efficiently.

The other track is our line to the future. We invest time and capital to continue to create more efficient solutions for our customers. In turn, we create reliability, efficiency, and business growth for the long-term. This track allows for innovation that produces results.

Our investments in assets like AC locomotives, network and yard improvements, technology to reduce the impact of weather and increase our service offering for our customers, have created an environment of innovation. And I'll tell you that environment is something our team takes full advantage of. Our alignment with JJ and his team on developing and delivering a series of superior product offering for grain, supported by our investments in both network and locomotive capacity has produced by far the best movement of grain. And not only over a winter period, but over any period in recent history.

This alignment transcends across all business segments, and allows for a clustering of innovation and ideas that continue to drive our results. Now I've said it before, but no one metric generates these results on its own. It's all about balance. And we believe our model of operational service excellence with a view to the future is what delivers results that are best-in-class.

One last point of thanks for our operating team leaders. They believe in, and they deliver our plan, they sacrifice for their teams, and they create the environment that allows this success to happen. So we have work to do, but good work is being done. Over to you, JJ.

Well, thank you, Mike. A great operating result by the operating team of CN. The fourth-quarter revenue of CN was up CAD51 million or 1.6% versus last year. The CN carload was up 3.4%, the revenue ton-mile was up 4.2%, both were above the industry average.

Q4 was broadly as follows. Revenue increase from volume was about 3.5%, however, our most positive business were Canadian and US grain, market share gain in refined petroleum products and automotive. US housing starts was driving our lumber and panel. Our intermodal from the East Coast port did well, and finally we had recovery in Canadian exports of pet coke and potash. On the negative side, less long haul of crude by rail, less US terminal coal, and less sulphur.

The applicable fuel surcharge lowered our revenue by about 1%, and the all-in same-store price on same-store sales was up 2.7%. When excluding regulated grain, same-store price was up 2.4%. The Canadian dollar had no impact on revenue this past quarter.

I will now go to some selected details and outlook of our very diversified portfolio. Starting with grain, our grain operation was very fluid. As my partner, Mike just described earlier, we did a great job, especially in December. Which meant that for US grain, when I look at the as reported Q4 AAR carload, we were up 8,000 cars and the revenue -- reported revenue was up 19% or CAD30 million. This was driven by soybean and corn exports.

On the Canadian grain, when you look at it on the as reported under Q4 AAR carloads, we were also up about 6,000 cars. These are longer haul, and the reported revenue was up 13% or CAD40 million. This was driven by strong export of canola, and by our peak season pricing program. We had solid carload performance during the month of December, where the prairie got very cold, and which is really the result of past capital investment on our network that we can now benefit. And [very], and as Mike described his strong team operation, winter preparation, but also in partnership with our grain customers.

Under AAR Q4 carloads, we moved 87,000 cars of Canadian grain which is notably 12,000 more than our counterpart. The future of our grain franchise and grain market share is to grow. We do have better yield per acreage, there is more acreage being planted, and we do have a number of commercial agreements already in place with customers that will locate on CN, about two-thirds of the next wave of prairie elevator construction in the next few years.

Staying with the bulk commodities, potash produced 20% incremental revenue, while sulfur from the oil and gas declined 30%. Q1 outlook for potash carloading is positive for Canpotex export via Vancouver, but is also positive via the East Coast, where we used our new 29,000 ton unit train to [descend] on potash terminal. Overall, coal revenue for CN in total was down 6%. Our US terminal coal revenue was down. To note, effective January 1, we lost a shorthaul Midwest utility contract that in 2016 was worth CAD13 million for CN, and produced about 42,000 carloads. These were short-haul carloads.

On the flip side, Canadian met coal was up 13% versus last year, but the volume trend have turned around. CN, the met coal mine have increased their production in response to better world pricing. Three of our idled Canadian coal mines were acquired by a company called Conuma. One mine did restart, and is now in full production, and Conuma is looking to restart the second mine this year. We also have two other idled mines in CN, which are also under restart consideration. Our met coal and pet coke exports should be growing in 2017.

Housing starts drove our lumber and panel revenue, which was up 4% versus last year. The lumber and panel shipments to the US increased 6%. The expiry of the software lumber agreement on October 12 had little impact on our carloaders, which remained consistent during the quarter and into this month, driven by US housing starts in the range of 1.2 million unit per year.

Moving to consumer purchase of motor vehicles, our automotive as reported under Q4 AAR carload was up 5,000 cars, and on a reported revenue basis, we were up 6%. Vehicle sales were favorable, and we also gained new business from a [shoe] contract renewal. This year, in 2017, we expect our automotive carload to grow, and CN is now touching close to 70% of all the finished vehicles sold in Canada.

Regarding energy, our carload for crude by rail was about 15,000 for the past quarter, and 52,000 carload for 2016. Crude has sequentially improved during the fourth quarter. We also had share gains in refined petroleum products such as propane and motor fuel, which produce solid revenue growth which should continue in the first quarter.

On frac sand, our revenue was up 7%. The resurgence in drilling activities has sequentially improved sand carloads during the fourth quarter. [Intermodal] revenue was up only 1%, domestic volume growth was modest, mostly coming from door-to-door service from our initial carload customers, as well as from the Canadian retailers. The hub to hub wholesale and cross-border business stayed weak.

With a growing number of shipping line partners now doing business with CN, we had a much bigger pool of international containers at our disposal this year to grow our domestic repo program. And international volume was flat. In [Rupert], after Hanjin filed for bankruptcy in September, we are well on our way to recover the volume from -- with other shipping lines, especially with the DP World terminal expansion coming soon in July, and then the reshaping of the World Shipping Line Alliance which will come into effect sometime in May.

In Vancouver, all of our major contracts are renewed. Starting this month, we picked up the [Yanling] business, and Mike's teams is putting new service in place for the container business offloaded at Vanterm and Centerm terminal solving the congestion issues. Also notable, at the end of April we received the final phase of the railyard construction at Deltaport which will create 40% more rail capacity than what's available there today.

On the East Coast, our Halifax position in the [hinterland] is growing. Revenue growth was about 17% in the fourth quarter. The Port of Montreal is also doing well, growing 15%. One thing that we're very, very proud of and we want to emphasize is, is how the teamwork with the supply chain partners has allowed all of us to be able to grow these businesses. Rail volume in from the Gulf Coast is still building very slowly. And one other thing to add is, we will be adding an [intermode] ramp in Minnesota sometime in the first quarter.

Finally, iron ore, our combined iron ore rail dock and vessel business increased 8% revenue in last quarter. The outlook for iron ore is positive. There is less steel being dumped in the United States. There is strength in automotive manufacturing, there is prospect for US infrastructure spending, and the CapEx expenditure from the oil and gas industry is getting healthier.

In closing, we have the construction volume outlook, given the momentum we saw since last September, which has been sustained in the first few weeks of this year. We are aiming to outperform the rail industry average, as it relates to volume growth. On the pricing side, the pricing environment remains influenced by excess capacity in automotive transportation, however, we are seeing some early signs of tightening and discipline. We continue to expect pricing to be above rail inflation in 2017. Thank you. I think, I will turn it over here to Ghislain, our Chief Financial Officer.

Thanks, JJ. Starting on page 11 of the presentation, I will summarize the key financial highlights of our solid fourth quarter performance. Then I will comment on our full-year 2016 performance, and finally I will provide our guidance for 2017.

As JJ previously pointed out, revenues for the quarter were up 2% versus last year, at slightly over CAD3.2 billion. Fuel lag on a year-over-year basis represented a revenue headwind of CAD24 million or CAD0.02 of EPS, driven by an unfavorable lag this year of CAD10 million, versus a favorable lag of CAD14 million experienced in Q4 of 2015. Operating income was just shy of CAD1.4 billion, up CAD40 million or 3% versus last year. Our operating ratio came in at 56.6%, a record for a fourth quarter, and representing an improvement of 60 basis points over last year.

Other income was CAD91 million, compared to CAD16 million in 2015. This increase is a result of the gain on the line sale in Montreal of CAD76 million, or CAD66 million after-tax. Net income stood at CAD1.018 billion or 8% higher than last year, with reported diluted earnings per share of CAD1.32 versus CAD1.18 in 2015, up by 12%. This includes this gain on the one-time line sale I just mentioned. Thus excluding this gain, adjusted diluted EPS for the quarter came in at CAD1.23, up CAD0.05 or 4% versus last year. The impact of foreign currency on net income [in] EPS was negligible in the quarter.

Turning to page 12, as Mike previously pointed out, we continue to make progress in the quarter in terms of productivity gains, including costs and management initiatives, while providing superior service. Our operating expenses were up 1% versus last year, at just over CAD1.8 billion, mostly driven by higher volumes versus last year. As the average exchange rate in the fourth-quarter 2016 was essentially the same as last year, both actual and constant currency variances are the same.

Labor and fringe benefit expenses were CAD565 million, 7% lower than last year. This was mostly the result of lower wages and pension expense, partly offset by higher incentive compensation. Wage costs decreased by 2%, as wage inflation was more than offset by a reduction of about 5% in average headcount for the quarter versus 2015. At the end of the year, we still had about 500 employees laid off, and we finished 2016 with 4% fewer employees, or roughly 800 less than last year.

Pension expense was CAD46 million favorable this quarter, ending the year with a higher than expected tailwind of CAD195 million, mostly driven by the adoption of the spot rate approach to estimate current service costs and interest costs. As interest rates moved up since the third quarter, and the discount rate finished at 3.81%, at December 31, pension expense will be roughly flat in 2017 versus 2016 on a year-over-year basis. Finally, these items were partly offset by higher incentive compensation of CAD15 million the end of quarter versus last year.

Purchased services and material expenses were CAD428 million, 2% lower than last year. This was mostly the result of higher credits driven by our capital program, and lower repair and maintenance costs, partly offset by higher outsourced services. Fuel expense came in at CAD312 million or 3% higher than last year, mainly attributable to stronger volumes, partly offset by fuel productivity which was up by 2.5% versus last year. Depreciation stood at CAD310 million, 7% higher than last year. This was mostly a function of net asset additions.

The equipment rents were down 7% versus last year, driven by lower lease expense due to the return of leased cars. Finally, casualty and other costs were CAD111 million, which was roughly CAD40 million higher than last year, mainly driven by our annual actuarial true-up for legal claims of CAD25 million, and a Worker's Compensation credit of around CAD15 million recorded in Q4 of 2015.

Let me now turn to our full-year results on page 13. We completed 2016 with revenue slightly above CAD12 billion, or 5% lower than 2015. However, our operating expenses at around CAD6.7 billion were 8% lower than last year, producing a 1% increase in operating income versus 2015. The operating ratio stood at an impressive 55.9%, which as Luc indicated is a full 230 basis point improvement versus our all-time record of 58.2% set last year. This demonstrates our continued ability to balance operational and service excellence, consistent with our supply chain focus in good and tougher times.

Net income was up roughly CAD100 million or 3%, at just over CAD3.6 billion. Excluding the impact of the one-time line sale in 2016, and income tax adjustments in both years, adjusted diluted EPS for 2016 came in at CAD4.59 up 3% versus 2015. Quite a performance in an environment where volumes in terms of RTMs were down 5% for the year.

Now moving to free cash flow on page 14, for the full-year 2016, we generated just above CAD2.5 billion of free cash flow, which is close to CAD150 million or 6% higher than in the prior year. This was mostly driven by improvements in net income, lower cash taxes, and higher proceeds on sale of property. Our capital expenditure finished roughly at our budgeted CAD2.75 billion, and our balance sheet remains strong, with debt and leverage ratios well within our guidelines.

Finally, let me turn to our 2017 financial outlook on page 15. We are cautiously optimistic with regards to CN's prospects for the year, and while we see volume growth in 2017, we are continuing to experience some volatility and weaker conditions in a number of commodity sectors. As we look into 2017, North American economic conditions are improving, with favorable consumer confidence which should support progress in many sectors. In addition, we are leveraging our superior service to continue to gain market share in key customer service sensitive markets.

While energy markets, namely crude and frac sand have demonstrated sequential growth since the trough experienced in the second quarter last year, we still expect this sector to remain relatively muted in 2017. So this environment should translate into volume growth in the range of 3% to 4% in terms of RTMs for the full-year versus 2016, while overall pricing above inflation. Therefore, we expect to deliver EPS growth in the mid single-digit range over the 2016 adjusted diluted EPS of CAD4.59.

We remain committed to reinvesting in the business for the long run, with a capital envelope of CAD2.5 billion for 2017. We will allocate CAD1.6 billion to our basic track infrastructure supporting our safety agenda, and an investment of around CAD400 million will be allocated to PTC as we continue to advance the implementation of our program.

Furthermore, we continue to pursue our shareholder return agenda. In 2016, we returned to shareholders roughly 90% of our net income through dividends and share repurchases, and our current share buyback program is approximately CAD2 billion for 2017. Finally, we are pleased to announce as Luc mentioned, that our Board of Directors has approved a 10% dividend increase for 2017, reflecting our solid performance in 2016, and our confidence in the future as we move towards a 35% dividend payout ratio.

In closing, we remain committed to our agenda of operational and service excellence, with our supply chain focus, and we continue to manage the business to deliver sustainable value for our customers and shareholders today and for the long-term. On this note, back to you, Luc.

All right. Well, thank you very much, Ghislain, JJ, and Mike. I think what we'll do now is, we will turn the -- we'll open the lines to take your calls. So Retta, we are now ready to take the calls.

Thank you, Mr. Jobin.

(Operator Instructions)

Wayne McDonald, CN.

That was a mistake. There are no questions. I was just listening to the call.

All right. Thank you.

Thank you very much. Brandon Oglenski, Barclays.

Hey, good afternoon, everyone, and thanks for taking my question. So Luc or JJ, can you just give us some feedback on? Obviously, the landscape or at least the future landscape for NAFTA has changed a little bit with the US elections. Have you gotten any feedback from your customers? I mean, has anything structurally changed yet, and are you guys rethinking your capital allocation process? I mean, when you think about some of the assets that are involved in North America trade, especially some other railroad stocks, and valuations have come down a lot now, does that make you think strategically a little bit differently about the outlook?

Yes, thanks, Brandon for your question. Well, just talking a little bit about NAFTA, I mean, again from the Canadian perspective, we're cautiously optimistic. Again, we've been long trading partners with the United States, and there's a lot going on. And there's certainly a relationship which is very different between Canada and the US, versus Mexico and the US. So the balance of trade is much more, much closer.

And we also, when you look at the manufacturing jobs that have moved, they've moved out of Canada, and out of the US, and in many cases over to Mexico. So if you look at what might be more effective, certainly in the automotive sector, both parts and new cars would be potentially at the crosshair of that, but that's a very small percentage of what we actually export to the US southbound. So we are -- we don't expect any significant change, at least not in the foreseeable future.

And I think most of our customers, and JJ can supplement, our thinking, the same sort of optimistic, yet cautious approach, and we'll have to work things out. But generally, what we've been hearing from the US folks is encouraging, and we'll have to work through it. There is a free-trade agreement which predates NAFTA. And so, there's a long-standing relationship of bilateral negotiations, and working out issues.

As it relates to how this may affect other railways, at this point, it hasn't necessarily changed our views. I think it's still too early to call the game, and so we're going to have to see how things evolve and where the dust settles in the end. JJ, anything you want to add for him?

Yes, as I said in my opening comments, we are [constructive] about the volume outlook. We are aiming to outperform the rail industry average, and after three weeks, we are leading with 5.5% carload growth.

The -- and also, we look at the US. I mean, we've got about 17% or so of our business which is domestic US, Brandon. So that's, I think there are plenty of opportunities for us to grow potentially more manufacturing, and more jobs get created in the US. So we're looking forward to that. Thank you.

No problem.

Walter Spracklin, RBC.

Thank you very much, good afternoon, everyone.

How are you doing, Walter?

So I guess, the most common question I get is on your OR improvement, and how you can get much lower, and it seems to be a question that recurs every year. And you do deliver on that. So I guess, I will ask it again, Mike, you've got, and you demonstrated some significant trends, and improvements that seem to look like they're going to carry forward into next year. Luc, you talked a bit about technology investment. Is there any sense, is OR improvement in the cards for next year? And can you give us some insights into what you're assumption is for OR that drives your current EPS guidance?

Geez, that's a tough one, Walter. We can never answer it, it seems. (laughter) So I'm going to give you this. I'm going to give you four points that are basic to what I would say, fundamental success in railroading.

The first thing that we focus on, is understand what we're trying to accomplish. From that, we set plans that have targets that require improvement, whether we put one less asset into the plan, one less person, whatever it is, we set very tough targets. And then, we measure them religiously. And when we see something, we take action immediately.

Now that's all done with strong leadership, the sacrifice I talked about, that's what gets us strong OR. We'll never stop doing that. The other thing is the investment, the eye to the future, technology, everything is in the works. We just expect to continue to improve on, not just on OR, but every aspect of the business that we go after.

Yes, thanks, Mike. And Walter, it's always a balancing act. I mean, what when we try to do is be as productive as we can, and as Mike pointed out, to drive down the cost where we're not necessarily adding a whole lot of value. The flip side is we are set on gaining traction in the marketplace. So we're not shy about -- if we see opportunities and we want to invest a little bit, and getting that business onboard, we can do so. Our low OR allows us some flexibility, and our confidence that we can continue, with continuous improvement, that we can bring on new business, and drive it to a level of productivity, that's our strength.

And so, all that to say we're not going to guide on OR, and we're always trying to solve for what's the best bottom line and sustainable growth that we can bring on the network. And it will bounce around a little bit, given sometimes you'll have weather that comes into play, and at times, you'll have a few other things that can cause it to bounce around. But I think we just deliver, and you can rest assured that the team here is set on growing the business, and doing so as efficiently as possible, but not at the expense of our service offering. And that's the key, that's the magic to the equation here.

Thank you very much.

We'll look forward to the question next year. Thank you.

Thank you.

All right.

Ravi Shankar, Morgan Stanley.

Also along that question, at the risk of maybe asking the same question again, a different way. If I work out that bridge, your top line guidance to your EPS guidance, it does look like -- you said 3% to 4% of volume growth, and pricing over inflation. That by itself should get you to something close to mid single-digit EPS growth, not to mention as you just said, it continues the OR improvement and the buyback on top of that. I just want to make sure that there isn't something you're missing in terms of a headwind to earnings next year, kind of at the middle of the line, or at the OR line itself?

Well, I mean, you're not missing much. I mean, the reality is, again, I mean, we set out and we look at -- I mean, we have as much visibility as anybody else. So we take a few, and I think that what we set is a fairly constructive view, in terms of a number of commodity sectors seemed to have stabilized, and are showing encouraging signs of progress. So the guidance that we've provided, the mid single-digit is a reflection of what I would describe as that volume growth, the pricing that we've talked about, and continuing to deliver solid operating metrics including OR. So that's the equation, and if you solve for that, you get mid single-digit.

Great. And if I could ask one more, just on the share gains, I mean, you certainly had a very good recent track record with picking up share. Where are we with that shift? I mean, do think that's kind of normalized between you and your chief peer, or do you think there are more opportunities out there? Thank you.

There is more opportunity, either as geographic expansion or serving customers who are today would like to get a better service. So no, there is a -- I would not discount a potential to, I'm not going to get into which market, but there is some business out there, that we think we could have, that we would like to have, and maybe the customer would like to do business with us.

Thank you, Ravi, appreciate it.

Fadi Chamoun, BMO Capital Markets.

Yes, good evening. Just a clarification, I'm not sure if you said that, does the guidance include a buyback for 2017? And secondly, just for JJ, when you look at the, what's going on with the new alliances, ocean shipping alliances, do you feel on balance that this is something that creates opportunitIes for you to fill that incremental capacity on the West Coast? Or does it represent more of a risk at this stage? Any visibility on that would be good.

All right, Fadi. This is Ghislain, for your first question, yes, the guidance includes a CAD2 billion program for share buyback in 2017. And then, JJ, if you want to?

Yes, Fadi, on the ocean shipping, all the ocean shipping alliance will come into effect May 1. This is where all the musical chairs, when the music stop, and everyone has a different chair. It does provide some chaos to marketplace, if you wish from that point of view. At the same time, in the case of Rupert, because the expansion is coming in June and July, I'm sorry, and (inaudible) it does provide an opportunity. We are selling what is the original [Rupert], right now very hard. In the case of Vancouver, with Deltaport having this rail on [deck] capacity up 40% by the end of April, it also offered opportunity for us and our partners to go out and sell to, for a bigger ship. Bigger ship, having bigger discharge. And if the ship coming in as a first port of call, whether it is Rupert or Vancouver, it really gives us a great service to go and sell it to markets, where our [hinterland] market, where our market share today is suboptimal. So last year, we were restricted. The capacity, I think this year, we have an open field, as of sometime in the spring, and we are going to be running hard to exploit all we can out of that.

Thanks very much, Fadi.

Thanks, Fadi.

Jason Seidl, Cowen and Company.

Thank you, operator, and gentlemen, thank you for taking the time. I wanted to go back on the pricing side. I think earlier on, you mentioned that things were starting to tighten up. I was wondering if you can give us a little more color, as to where you are starting to see that, and sort of are you starting to reprice contracts at a little bit better rate than you thought you would?

So, [in the Q] I think, that the line was not that great. Your question was around pricing, and pricing outlook getting slightly better, is that right, Jason?

That is correct, yes.

Yes, so definitely the last two years have been a little more challenging than the years prior to that, partly because of capacity of [all mode] available. We see, I think, on the trucking side, there has been less equipment being purchased, and people have cut back on the capital expenditures. On the rail side, the capacity is going to be tightening. This is where you are going to get into commodity by commodity.

Now railroad may have a lot of locomotive, but they may no longer have the specific type of gondola, or specific type of a rail equipment that a customer is looking for. So this is why you start to get into these sub segment of -- I do have crews, network capacity, and I have locomotives, but I don't have any more centerbeam, or I don't have any more bilevel. Or on the trucking side, I think people can only do so long at quoting a low price. And then year after, [cutting] a low price, and then eventually start to get the result of what -- living up with the result of these low price.

So I think the discipline often comes back, as a result of phases with some pain. And then each market players I think would like to have eventually, a slightly better price. And each market player is also in some cases, or least in some equipment, getting to the point of getting to invest new capital money, and now they look at it differently. It's no longer an incremental sales, it's a sale that has to pay for their new rail car, the new equipment that they have to bring in. I think.

[Things return] (multiple speakers).

Okay. And how much of your book of business is already priced for 2017?

Same as in the past. We sign a multi-year contract, and so we're probably turning the book of business like maybe every three years or so.

Okay.

Thanks very much.

Appreciate the time.

Tom Wadewitz, UBS.

Yes, good afternoon. I wanted to see if you could offer -- within the volume growth guidance, I think you said, 3% to 4%. Is there a mix effect that would be meaningful, and then positive or negative that might kind of translate to revenue growth in a certain way? And then, I don't know if -- just to kind of little more color on the intermodal volume outlook, it sounds like there's potential, but it was kind of -- it's been weak recently. So any thoughts on those two, would appreciate it. Thank you.

Well, on intermodal, we haven't hit our stride yet. I think at intermodal, we were negative for a while, now we're flat, and we hoping for better days, and come the spring and summertime, for the reason I mentioned earlier. And yes, I think the mix has changed quite a bit last year. Shorthaul business being lost, long-haul being gained, long-haul crude disappearing, long-haul frac sand coming back in. I think, we're going to get some of that this year as well. As you know, intermodal if it comes in, that's fairly long-haul too, but it's lower weight, and we talk about the expansion of Deltaport.

So right now on the mix side, I'm not too sure exactly where we it will go for this year. There's a lot of -- we're not into a steady (inaudible) environment, we're into a bit of a recovery phase, from our volume side. But I think, there's reason to be optimistic about volume for this year. I think for the rail industry in general, but definitely at CN.

Okay. Thank you.

Thanks, Tom.

Steve Hansen, Raymond James.

Yes, hey, guys. Thanks for the time. If I look at the volume growth side of things, the strength that appears to be carrying over into Q1 appears quite robust. And if I'm looking at the pretty low hurdle into Q2, given last year's turmoil, it's striking that your backend guidance assumptions are probably a little bit conservative, or it strikes me that they are conservative. Any thoughts around sort of the cadence throughout the year, in terms of how the growth will progress in that 3% to 4%?

The first quarter of last year, we had a tougher winter, so [we necessarily] moved all the volume we want to move, But by the time we got to the second quarter, we were running very smoothly, but the demand for our product was not that great. You remember that the volume seen in Q2 wasn't that great, and then things start to pick up in the summertime. And our fourth-quarter volume last year, they have been fairly good. So that's kind of the cycle of what you'll see. But all-in, the guidance is one that we talked about, is the one we are sticking to right now so.

Yes, and Steve, I mean, it's Luc. Just keep in mind, I mean, if you've got better visibility in the second half than we do, we would be more than happy to share notes with you. So at this point, I think this is it a fair? It's fair annual guidance. And as you indicated, we do expect to have stronger comps through the first half. And then as the year unfolds, then if we see that the trends are evolving in a way that is either better or worse, then we'll readjust things.

We're cautious people. I think last year, everybody had different guidance. We finished at 3% EPS growth, which in the end, was one of the best in the industry.

I appreciate the color. Thanks, guys.

Thank you.

Scott Group, [Wolfe] Research.

Thanks, afternoon, guys. So I wanted to go back to just the OR question. If I just take the pieces of your guidance with volume and price and buyback and earnings, it does imply about 1 point or so maybe even 1 point or 2 of OR degradation this year. So is that what you are telling us, or maybe is there something conservative in the guidance? Or maybe something is changing, right? If you look in the fourth quarter, RTMs are up 4%, and earnings are up 4%, so maybe something is changing where you're just not getting the operating leverage anymore? So however, you kind of want to answer that, but the guidance does seem to apply OR degradation this year, and curious on your thoughts?

Yes, I mean, Scott, it is Luc. Just to give you a little bit more color, I mean, one of the issues you still have to keep in mind is that we did have a fairly mild winter. And when we look at the last year, so that's not a God-given right. And even though people talk about global warming, we're certainly facing a more what I call, a more normal winter, in fact a little bit more than that if you look to how December came up. In any event, so I think there's a little bit of noise there, in terms of where and how the year will unfold from a pure cost standpoint.

And I think, again, we take a cautious view of sort of the second half in terms of volume. So the numbers are there, and it's in the zone. So it's still too early to say whether our OR will deteriorate or not. There isn't anything that's going on that is particular. It will be up -- again, I mean, it will be a question of mix, it will be a question of when and how the volume is layered on.

Certainly, you can expect that we'll continue to manage the costs very tightly, and continue as I mentioned earlier to seize opportunities where we can. And we are prepared to invest a little bit more, and take on business that may be at a slightly higher OR, if that's the right thing for the franchise for the long-term. So I think the precision you're looking for, is not what we do focus on.

I mean, what we are doing is -- we get out there, we've got a good operating plan, we've got a good commercial plan. And every time there is an opportunity, we look at it and we move on it. So it could be just as much in terms of lowering costs, increasing productivity or putting on more business. So you're in the zone, but we'll have to see how it shakes out.

Okay. That's helpful. And if I could just ask JJ just one clarifying point. So I think you said price was up 2.7%, and fuel was down 1%, but total carload yields were down 2%? So that implies like at 3 to 4 point headwind from mix, and carloads and RTMs were pretty similar, so what am I missing on the mix headwind this quarter?

So on the same-store price, it was 2.7%, and if I remove the [regulated] grain, it was 2.4%. The difference between the two, is as I said, because we do have peak pricing on our grain business that we [saw] October 1. And what you're referring to is the impact of the mix. No, we lost some long-haul business versus the year before in crude by rail.

There's also been shifts in our frac sand which is also long-haul. The [antimal] business was flat, so there's a lot of mix noise in our mix result, which impacts these revenue ton-mile and these revenue per carload. But when we really manage the business, we don't manage a business on those metrics. We manage it on same-store price. We manage on a revenue to cost ratio, contribution per carload, revenue, ROI on equipment. And then also, you had the impact of exchange and fuel on these revenue ton-mile and revenue per carload. So you're looking at data, that I think, in the end is not really that useful to understand our yield. The element that we use, are the one I mentioned, the one I listed.

Okay. Thank you.

Okay, thank you.

Turan Quettawala, Scotiabank.

Hi, there. This is Milan Posarac on the line for Turan. I'm just wondering, CapEx has been coming down here the last couple years, and you're guiding regarding for a small decline in 2017 as well. So the volume is recovering a bit here in 2017. Should we expect CapEx then to resume its upward trajectory in 2018, or do you think you'll have a little bit of a longer holiday? Thanks.

So this is Ghislain, Milan. So absolutely CapEx, as I guided was CAD2.5 [billion] versus CAD2.75 [billion] last year. We did say that we had locomotives in 2016 that we were not expecting in 2017. So that helped, and reduced the envelope, offset a little bit by an uptick on the PTC investments. Going forward, I think we have been very consistent on our investment in capital program. I think we're always going around 20% of revenues, or close to 50% of operating income back to the business. So in my view, if I were you, I would not assume anything otherwise. I think, in that range, is the range that we're looking for.

Yes, Milan it's Luc. I mean, we obviously are looking, whenever we can see opportunities to invest, and to further advance our competitive advantage, we're not shy about doing that. So our eyes on the long-term. And we, as we move forward, we have indicated that there may be some opportunities, more on the technology side. So we're looking really hard, and we're not shy about investing. We do have a good track record of delivering returns on capital invested. So that's kind of our posture on that.

Okay, great. Thank you.

Thank you.

Ken Hoexter, Merrill.

Great, good afternoon. Nice job on the quarter, in a tough weather spike, it sounds like that clearly impacted a bunch of your peers. For that reason, I guess, was there any reason for the casualty spike? It was the highest level since the fourth quarter level since 2004.

Just I guess, technical question following on Scott's cost side. But just a longer-term picture, the thoughts on large wins, your big revenue wins with the GM business, Yang Ming. Should we look at this, as the pricing side, as you got asked before? Is there capacity need? What's driving those wins? I'm just wondering -- I guess, there is a large expectation, some of that would move back to your peer, but when you keep winning like this, it -- just wondering, is that just service or is it pricing?

So, Ken, I think there is two sides to your question, to make sure. So the first one is on casualty and other, and then the second one is market share. So I'll tackle the first one, and I will let JJ tackle the market share. So the first when I explained what happened in the fourth quarter, that explained that variance of CAD40 million. It's really an annual true-up that you do with our US legal claims, and about CAD25 million, and there was another CAD[15] million or so that was a credit in last year.

When you look at casualty and others, sometimes they're lumpy items that come in a quarter. If you want to look at a run rate, I think we have said in the past, that CAD90 million give or take in a quarter is a good number. And that's what I would use going forward. But sometimes, depending on what happens in certain quarters, you might have a lumpy piece hitting like the one that we had on the fourth quarter. JJ, you want to talk about the market share piece?

Yes, so when you look and see a account like General Motors, Kia, or [Mazda] or Yang Ming, they're in a world where service is very key for their own success. I think Mike Cory, in his opening comments said it right, our aim is to [present] a premium service at the lowest operating ratio, and that's supply chain. So our mindset is to try put ourself in the shoes of this company, especially those who are faced -- who are in a world where service does matter, automotive and delivering to warehouse, and assembly plant and retailers, and try to create a supply chain that starts before CN, and finish after CN, so we become relevant to them.

And that's how we -- customers don't change from one supplier to another without good reason. Everybody has got things, things are running well, why do you make a change? So it starts probably with some level of dissatisfaction, and then looking at something that's more appealing. And then having a little taste of it because we do business with all of these people.

We're doing business with all of these customers, we're just going to be doing more of it. And our job is to help them win in their market, and that's the reason why they like to do a little more with CN, where we are part of the extension of their success. So and, of course people want to pay a fair market price, and having the lowest operating ratio in the industry allows us to compete when we want to.

Very helpful. I appreciate the insight from both. Thank you.

Thank you, Ken.

David Newman, Cormark Securities.

Hello. Two questions, please. One is just on headcount. Can you give us your thoughts on that? And the second is on tax rate, can you give us your thoughts on tax rate for 2017, both effective and cash tax?

Hi, David, it's Mike here. We modulate our labor based on demand, demographics, productivity. We have people still laid off in some crafts, however, we have a very strong planning process, and alignment with a variety of functions, finance, marketing, sales, operations where we meet regularly, and we have a good view of the future. And then, we modulate our labor like I said.

On David, on the effective tax rate I think we had guided 2016 at 26.5%. I would continue to use that same number, [CAD417 million]. And on the cash taxes, we're still around the mid-teen level, so that's what I would use.

Okay that's helpful. Thank you.

Thanks, David.

Thank you, David.

Brian Konigsberg, Vertical Research Partners.

Yes, hi, good afternoon. Actually just starting out with a point of clarification, on the revenue ton-miles on the release and the presentation, it talks about 4%. But if I look at your AAR data, it talks about -- that actually indicates RTMs up 6.3%. Could you tell us what the difference is between those two?

The -- so in our press release, I think we're using the calendar month, the calendar quarter, which starts -- December starts, October 1 to December 31. And the AAR does not use the same period. So this is why my comment I did refer, when I was talking AAR data, I was specifically saying that. And I think, because a lot of the people I see use the AAR data to compare, but this is we get into -- it's not a quarter with 90 days, like we have on the AAR. I think Paul could probably explain that in more specific detail after the call.

Okay, yes, thanks for that. And can you talk a little bit on met coal? I think you indicated that you had a customer that was expanding some production, they're possibly some others that could open up business again in 2017. Maybe a little more color on that, and how significant that could be, to the extent these production ramps do happen?

In the last quarter of last year, the price of met coal, coking coal, started to go up, as a result of the Chinese production cutting back. We had a customer who had -- Walter Energy was in bankruptcy situation, he had three mines shut down. All of his assets were bought at a reasonable price by company called Canuma. They did reopen one of the mine in November. They intend reopen another mine sometime in the, probably sometime in the first half, may reopen a third one. It will all depend on how the price of coking coal move around the world.

If you want a very good color on what the Canuma game plan is, they actually, their CEO gave an interview on [BNN], where he explained all of his game plan, and how that comes together. But all that to say, that coking coal for CN should not be a negative headwind, it should be something positive. And that in itself is what I was talking about earlier.

All right. Thank you, Brian.

Yes, thank you.

David Vernon, Bernstein.

Hey, guys. Thanks for taking the question. I guess, Luc, maybe from a bigger picture sort of strategy perspective, as you guys are operating on all cylinders in a decent volume environment. Is there a point where you guys can start looking at other ways to enhance cash flow, whether the monetization of assets, maybe looking at coal production with CP, maybe looking at investing into adjacencies? Is this -- how critical is this for the Board? And could you give us an sense for, what you think would be sort of fair game, for what you could do to supplement the operating-- excellent operating results with corporate action?

Yes, I mean, thanks for your question. It's something that we're always looking at. The first opportunity we look at is, are opportunities for growth in terms of advancing our book of business and investing in the franchise. So if there are opportunities or for some co-investment, or helping one of our customers grow, and investing along with them, we look at these things.

In terms of coal production, again these things are on the radar, but there very few that actually right now that we can look to that might be interesting. So I don't think there's a lot of potential there. We always look at other opportunities, whether it's adjacencies or bolt-on smaller rails to acquire. So those again, tend to be a little bit lumpy, and we are cautious on adjacencies, because again you need to keep in mind, we know what we do very well. And unless we think we can have a competitive advantage, or improve our overall product by venturing into these things, we are not presumptuous enough to say that we can do all things well.

In many cases what we have done as well is to ally, is to have alliances and to work supply chain, and so we don't necessarily need to own the asset. The way we work with our partners and with [reciprocal] scorecards, and the way we work to prove improve the performance is clearly, has paid off for us. So we look at every opportunity to grow, to continue to grow the franchise. These things they're not linear in terms of when and how they come to us. But rest assured, that we are looking, and we are intent on growing this franchise. But on the flip side, we're good custodians of the shareholder's money, and we do look for good returns before we look at acquisitions, especially when they are outside of our field of expertise. But thank you for the question.

Maybe just as a quick follow-up, is there anything material that we should expect on asset monetization for next year, or kind of run rate, you'll see how it goes?

No, I think from that standpoint, Ghislain refer to a little less transaction that we were able to achieve by the end of the year. We don't expect anything of magnitude being out there. Having said that, we're always looking at things, and turning stones. So maybe Ghislain, I mean, what typically you look at what, about a CAD20 million [total store] run rate for miscellaneous parcels and stuff?

Yes, I would say about CAD20 million. And to your point, Luc, we always try to find out things, and sometimes things unfold in different ways during the year. Obviously, if we find some unused asset that we can monetize, we certainly will run after it, but at this point in time, I would say that we don't have anything specific on the docket. And I would assume about CAD20 million of small sales spread over the year basically.

Very good. Thank you.

Cherilyn Radbourne, TD Securities.

Thanks very much. Good afternoon. So a very strong operating quarter, given that winter that you described. A bit of slippage in terms of the train and car velocity, I assume a lot of that is winter. But if I looked at the metrics, I was also curious whether there were some trade-offs being made, in order to achieve the improvements in train productivity and locomotive utilization you reported? Maybe you can just kind of talk a little bit about where you continue to unearth efficiency gains?

Sure, Cherilyn, it is Mike here. Winter has obviously had its impact, and will continue until it is over. I said it before, it's really we balance all those metrics to produce first of all, the service the customers demand. And to JJ's point, make sure that we're just not looking at our internal workings, but we're looking at the entire slice, and we continue to grow that profitable business.

So you'll see changes throughout the year. We try to make the best decisions again to grow the business at the most controlled price, and give JJ and the team the opportunity to make sure that we are leading the supply chain. I, really, you'll see those numbers fluctuate a little bit. They're certainly not out of the range that that they normally are. There's no priority over either of them, it's just about demand for the customer.

Great. That's all for me. Thank you.

Thank you.

Thank you, Cherilyn.

Chris Wetherbee, Citi.

Very good, thanks, and thank your for slipping me in here at the end. A question on frac sand, so I think JJ, you mentioned seeing some pick up there. Just want to get a sense of how we think about 2017? Some of our internal views here would suggest a significant step up in production. Just want to get a sense of how you participate, and maybe what that means to the mix of the overall business?

So the drilling activity is up definitively, I think it is well-reported in the most part of the continent. In the case of CN, we participate the same way as in the past, that we have a destination franchise in Alberta and BC, where the drilling activity is also up, for example, in the month of January. So that frac sand coming from Wisconsin long-haul, and we are competing with some local brown sand.

And then, we also participate in other some shale play, where we bring the unit train or the carload of frac sand to Chicago. And we interchange with either Houston Railroad or Western railroad going south. So it is a good story. It has been sequentially up in the fall, sequentially up in fourth quarter, we had a good start here for the year. On the Canadian side, the people drill, they love it when it's cold, because they can get in [Muskeg] with their very heavy equipment on frozen ground. And things, don't be surprised, if things on the frac sand for CN start to slow down sometime in the spring. They call this, during the breakup, after the breakup, after the -- when it gets very mushy or muddy, and then, there is a pause of a couple of weeks, then they restarts again. No, it's a positive story, the price of crude and all of the technology of today, there's a decent outlook for anything which is fracking, either for gas or oil.

All right.

Thank you, very helpful.

Thank you, Chris. So perhaps in closing to kind of recap, first, I need to say I'm very proud of what the team has accomplished this year. We certainly demonstrated and [staged] our ability to deliver great results in a very challenging environment. You heard JJ describe how our volume outlook has now turned positive. Mike illustrated for you how the operating team continues to drive our agenda of operational and service excellence, and leveraging innovation. Ghislain shared with you how our financial performance came together in 2016, it's clean and it's straightforward. And you've received our annual earnings guidance trend for 2017, which is calling for mid single-digit EPS growth.

So looking ahead, we set out for 2017 with a constructive view. And while the environment remains somewhat mixed, we do expect to see moderate volume growth, and we'll see how it unfolds. One thing for sure, with relentless focus on safety, productivity and service, our industry-leading team is intent on delivering solid execution, with continued focus on leveraging our superior customer service and our supply chain approach to help us gain traction in the marketplace.

We continue to reinvest in our business with a long-term perspective, and we're well-positioned to deliver continued shareholder value. So on that note, we look forward to reviewing our first-quarter results with you sometime in April. And in the meantime, thank you very much for joining the call, and be safe. Thank you. We're ready to close the call, Retta?

Thank you.

Thank you.

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