Canadian National Railway Company (CNI) Q3 2012 Earnings Report, Transcript and Summary

Robert E. Noorigian - Vice President of Investor Relations Claude Mongeau - Chief Executive Officer, President, Director, Chairman of Donations & Sponsorships Committee and Member of Strategic Planning Committee Keith E. Creel - Chief Operating Officer and Executive Vice President Jean-Jacques Ruest - Chief Marketing Officer and Executive Vice President Luc Jobin - Chief Financial Officer and Executive Vice-President

Christian Wetherbee - Citigroup Inc, Research Division Turan Quettawala - Scotiabank Global Banking and Markets, Research Division Cherilyn Radbourne - TD Securities Equity Research Scott H. Group - Wolfe Trahan & Co. William J. Greene - Morgan Stanley, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Benoit Poirier - Desjardins Securities Inc., Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Veronica Zhang - BofA Merrill Lynch, Research Division David F. Newman - Cormark Securities Inc., Research Division

Welcome to the CN Third Quarter 2012 Financial Results Conference Call. I would like to turn the meeting over to Mr. Robert Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Good afternoon. Thank you for joining us for CN's Third Quarter 2012 financial results. I'd like to remind you again about the comments that have already been made regarding forward-looking statements. With us today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, our Executive Vice President, Chief Financial Officer; Keith Creel, Executive Vice President and Chief Operating Officer; and J.J. Ruest, Executive Vice President, Chief Marketing Officer. In order to be fair to all participants, could you please limit your questions to one each. With that, it's now my pleasure to introduce Mr. Claude Mongeau, our President and Chief Executive Officer.

Thank you, Bob, and thank you for -- all of you to be on this call at the end of the day. Let me just go over quickly the highlights, and then I'll turn it to the team to give you the key details but fair to say we're very pleased with our third quarter performance. It's pretty solid overall. We've had a number of areas where we hit record in terms of our performance, revenues is one of them in terms of overall throughput and volume, this is one of our best third quarter ever. Our revenues were up 7%, if you take out the impact of exchange and a pretty broad based growth across all our business sectors. J.J. will give you the key elements in a minute. We were able to accommodate that business at low incremental cost. I'm very pleased with all of our operating metrics continuing to show improvement, at the same time as we're continuing to focus and making progress in our core service metrics. So Keith will give you the highlights, but it comes down to how we were able to accommodate that business at low incremental cost and we're very pleased with the 60.6 operating ratio for the third quarter. In terms of earnings, and here this is on an adjusted basis, we delivered $1.52 per share, that's up 10% on an adjusted basis, very solid performance overall. And our free cash flow followed year-to-date, we are slightly in excess of $1 billion of free cash flow. And it's the strength of that free cash flow generation and also the solidity of our balance sheet that gave our board the confidence to allow us to start a new share buyback program, which Luc will give you some more details around in a minute. So overall when you look at it, pretty much all aspects of our agenda are working and the operational and service excellence is helping us deliver very strong results. Keith?

Thanks, Claude. This is indeed a great quarter, both from an operational perspective, as well as the service perspective, as we've moved our service and operational excellence agenda forward. Growing our business in concert with our customers and our supply chain partners. To that point, a few moments I'm going to provide a bit more color and detail. What we mean when we say operational and service excellence, as well as how we're tracking with the progress in this area. But let's start on the operational side of the business model. First, looking at our performance and the key productivity metrics that we report on each reporter. Train load, or GTMs per train mile, continue to increase, as we take advantage of our ability to safely run longer, more environmentally and energy efficient trains. We're handling 2% more tonnage versus the same time last year and 4% over third quarter of 2010. To that point, let me share an exciting development quickly as we continue innovate on this front with a recent third quarter introduction of what we call a super culturing. Our 224 car long coal train in the BC North corridor, which are essentially double the size of the trains we're running just 3 years ago. This train's constant innovation has been made possible through our continued divestments in the long sidings of the BC North. The acquisition of Distributed Power engines and by bringing together the appropriate parties in the supply chain to drive EMD and efficiency. On this point, initial reviews from the port operator in Ridley and our customers have been very positive. More to come on this as we evolve this opportunity, but certainly a success story they make when it comes to supply chain, collaboration and concert with operational efficiency improvements. Efficiency gains…

Thank you, Keith, and a warm welcome to all of you who are joining us tonight. And I will start first -- I will give you, in the next few minutes, a review of our team, the top line performance in the third quarter and give you after that a sense of our business ahead. The third quarter was solid, solid in term of volume and solid in term of price. In summary, the revenue was up 8% as reported, net of exchange, it was up 7%. The making of that is the following. Volume and mix added together was 5%, volume was 5.5%, mix was negative 0.5%. Same-store price on same-store sales was up about 3.5%, midway in our 3% to 4% range. This is in line with our inflation plus pricing, and slightly lower than our near focus on the recent quarter. I'd like to add a note also that we do not do quality pricing on export coal at CN. The fuel lag -- the lag on fuel surcharge eroded our revenue by about 0.5%. Now let's go into more detail of the top line and as usual, I will do this on an ethics adjusted basis for the revenue. Starting with petroleum and chemicals, which revenue was up 14% in the quarter. The story here is quite simple. Crude and compensate added an incremental $45 million of revenue in the quarter. Refined petroleum was up $10 million. Sulfur, which is related to fertilizer, was down $6 million, and the remaining economically sensitive chemicals were tend to be steady and flat. Metals and Minerals revenue was up 5%. The commodities which were over performing was energy-related product, a steel product and shale drilling activities, that is, for example, steel that goes into the making of pipeline, or…

Okay. Thanks, J.J. Now let's turn to Page 14 of the presentation and I'll walk you through the key financial highlights of our quarterly performance. Revenues were up 8% at $2.5 billion. As well, volume was up in terms of RTMs, 7%. In the quarter, however, we did experience a deceleration in RTM growth versus last year. As July was up 11%, August was up 8%, while September came in only at 3% above last year. This was really the result of a couple of factors. The first one being that September -- in September, the growth in RTMs was very strong last year, where we had 9%. Secondly, we witnessed weaker growth in the North American and global economy, economic activity affecting some commodities sectors such as iron ore, nonferrous ores, steel, met coal as well. We also saw some lower demand for potash and below average U.S. grain crop. At this point, we expect this weaker economic context to continue through the fourth quarter. In the third quarter J.J., Keith and their teams combined efforts to help us achieve solid volume increases in all commodity sectors and once again, several categories performed better than base market conditions. Operating income was $985 million, up %5 versus last year driven by a strong revenue growth and low incremental cost. Operating ratio was 60.6% in the quarter, an increase of 1.3 percentage points versus last year. Last year's operating ratio was more favorable as a result of a substantially lower stock-based compensation expense in that quarter. Other income was $18 million in the third quarter this year, which is about $8 million higher than last year, when we exclude the $60 million profit on the sale of the IC RailMarine terminal in Convent, Louisiana, concluded last year. Other income relates mostly…

Okay. Well, thank you, guys. And just let me wrap it up. This team of CN railroaders is obviously very proud of its strong third quarter results. We hit a number of performance records, as you heard. But more importantly, we are seeing our agenda gaining momentum. We are growing faster than the economy or base markets. We are accommodating that business at low incremental costs, and we're generating solid earnings and free cash flow. And that's what it takes to continue to deliver solid shareholder value for 2012 for many years to come after that. Before I turn it over to Q&A, I have one important announcement to make and it's with some trepidation. After more than 15 years, Bob Noorigian has decided that he's made enough money and I'm guessing that Shirley wants him on the golf course and he's mentioning Florida. But he came to me a few months ago and told me that he would retire at year-end, and so I asked Bob to give me an indication of who he thought should succeed him and it was not a very long discussion. We decided we would go with Janet Drysdale, which many of you know. Janet was with Bob for almost 4 years a few years ago, and has been continuing to drive value with Luc as of recently in financial planning. So Bob, this is your last third quarter -- this is your last analyst call, and it's very fitting that we are hitting all sorts of record performance. I know you will be doing a road show with Janet over the next couple of months here. She starts only on December 1. So you keep holding the fort for a couple of weeks here. But we will miss you and I know I speak on behalf of many shareholders and analysts in wishing you most fulfilling retirement in a couple of months from now, not just yet.

It's always good when it's a couple of months. Thank you, Claude. And with that, we'll open it up for any questions we have from the audience. Thank you. It's a great management team, great company, and I think there's plenty of growth that we're going to see in the future. Thank you, Claude.

[Operator Instructions] Our first question is from Chris Wetherbee of Citi.

Maybe if I could just ask a quick question, kind of on the guidance and the outlook as you think about 2013. I know there's some caution about the strength of the economy. You mentioned a couple of headwinds that you see whether it be from on the expense side. But I just wanted to get a sense about the kind of the revenue opportunities that you see specifically at CN. Obviously, the crude is one that you've highlighted in the release, but just maybe get us a sense there, outside of the economy, kind of the things that are working in your favor, it seems there are a decent amount of opportunity set up for you. So how should we be thinking about that kind of roughly as we look at 2013 preliminarily?

J.J.?

The market will give us lag next year. Definitely, crude will give us lag. Grain is a good crop from the Canadian side, that will carry us until the next -- following next spring. Housing start is a good news, we've been dropping the positive U.S. housing starts for a while. The whole thing around energy, not just crude, but also fracs, sand and Intermodal, where the economies a little weak or the economy's a little strong, where Intermodal performance the last 2 years as we over perform the economy. So intermodal both domestic and overseas should be plus. And again you know steel nonferrous, although I can't tell exactly when this will turn around, these are very cyclical commodities, they will turn around, but they may take their time before they turn around. I was in Japan talking to some steelmaker a few weeks back and they're not necessarily very optimistic right now. They've kind of written off the fourth quarter and maybe the beginning of 2013. How does that all add up? I think we haven't yet decided what kind of guidance we are ready to provide for the next in terms of volume. Again, our objective is to over perform the economy. Canadian economy, U.S. economy and our participation in Asia.

And as J.J. said, I think we like the portfolio of growth opportunities we have. Some of them are structural like frac sand and metallurgical coal on the West Coast. Others are really driven by our strategy to improve service and make inroads in the most service sensitive segments in the market. And our flexibility, key supply chain focus is helping us also gain market share against trucks. So I guess, the best way to think about it, Chris, is we don't know where the economy will be and we'll update you in January. But we are looking to make our own launch and grow faster in the base markets.

We have a question from Turan Quettawala of Scotia Bank.

Just a quick question, I was wondering about your potash business over the next 2 to 3 quarters. I understand, obviously, that you will benefit from the Canpotex contract here. But just, it does seem to be weakening a little bit even domestically and I'm wondering, J.J., can you provide a little bit of color there on the domestic potash market?

Thank you. Of course, Turan, we -- on the export side, whether it 's a fourth quarter this year, or first quarter of next year, this is all plus for CN. Potash market in the world may not be as strong as a producer would wish for CN because our base was 0. We had 0 export last year, 0 potash export first quarter. We did benefit during the second of the strike the second quarter so that will be the comparable. On the domestic side, we did have gain, on the potash side in the third quarter and again here we could just be as good as our customers, our customers need us to be as good as we can be to help them for them. So we're still basically assume here that the fourth quarter potash domestically for the 2 big companies that we work with, that we will be up year-over-year and the next winter -- then we'll see next winter what happen. The price of grain is high. There is reason to fertilize because you know there's a good product out there, and time will tell. I think the potash industry is also hopeful. They got a lot of investment and a lot of capacity coming on stream.

And as a quick follow-up, is there any change to the Ridley, I guess, there was suppose to be some announce -- some decision I guess by the end of the year, on the terminal there?

Turan, you're referring to the Canpotex potash terminal?

Yes.

That's right. So as far as we know, it's definitely a major item on their board meeting in December. And at December, they will look at that very closely again and might make a decision, positive or negative, I don't know.

The next question is from Cherilyn Radbourne of TD Securities.

Keith presented some very impressive service improvements, and yet as we all know, we're facing some service legislation here in Canada that seems to be taking a little bit longer than expected to emerge, so I wonder if you could just tell us what you're hearing in terms of when it may appear and what you think the risk is if we get something that's noncommercial, if I can express it that way.

Thank you for that question, Cherilyn. And frankly, Keith was getting miffed there about the reputation for our service being tarnished here in some circles, so he felt pretty strongly about giving you the real stats so that we can have a good discussion. And I think it's important for our shareholders, it's also important to some of the customers and the stakeholders and media that might be listening on this call. Reality is the following, the rail service review was called basically 6 or 7 years ago. That's when people were asking for rail service review and I've said it in many circles, CN and its agenda to drive change and improve its performance in a way that at times was a bit too fast is a big reason why there was a rail service review in the first place. But we are talking about 6 or 7 years ago. And since then, we have clearly stepped up. There's no question at CN and I know it's the same at CP, we are focused on having more customer engagement, we're listening better, and we're trying to put ourselves in the shoes of our customers. We have an agenda that's customer-centric. We have made dramatic change to our first mile last mile focus in terms of measurement. We've always been very good hub to hub. But now we are focusing, as you heard Keith, on things like order fulfillment, and 96% order fulfillment after car rejection is nothing short of a world-class performance, and the same goes with some of the other metrics. This morning just these things, it's also supply chain collaboration, a new mindset we're bringing to the table. So my perspective, and I wrote to our customers to discuss these same issues, asking them to step back…

We have a question from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: J.J., I had a question for you about housing. So relative to last cycle, the Canadian dollar's a lot stronger. Do you think there's as much demand this time around for Canadian lumber?

Yes. Last time, the Canadian dollars was weaker. Today we are about at par. But the price of lumber is actually pretty good, that's one of the things where you see some diversion of lumber going to Asia to the United States and the net back is attractive. So higher-priced -- it's a question of higher price and freight. The freight is about at the same ballpark for us as inflation plus, the price of lumber starts to go up before the housing starts, I think, kick in. So now I think for a producer in B.C. and Alberta, U.S. housing start is attractive. Producer in Eastern Canada, there's Québec and New Brunswick, they may be -- this cycle may not be as strong for them, but CN business, when it comes to pile and lumber, very much rely on Western Canada. Scott H. Group - Wolfe Trahan & Co.: That's helpful. So when we think about your capacity, how much of your center beam or other capacity to handle a rebound in housing, do you still have relative to last cycle? And then, should we be thinking that you've been maintaining those cars and there's a lot of leverage to those volumes coming back, or do you have to spend some money in maintaining and upgrading those cars relative to 5 or 6 years ago when you were using them last?

We still got about 2,000 in storage, certainly. The ones that have been lead storage we have to take a look at and make sure they're in proper order, but don't expect there'll be any major significant expense there. We continue to invest in our physical plant through strategic investments, loan sightings, improving and expand on the capacity in Prince George, which is the major facility that would handle these cars, as well as in Winnipeg. So certainly, there is enough latent capacity that we've invested in for the past 4 or 5 years, that I would not see any issue for a housing start rebound.

I mean the leverage that we kept those cars for use in the rebound in the housing starts.

The next question is from William Greene of Morgan Stanley.

I wanted to ask a question a little bit off the beaten path here, but something that's come up a little bit is just the notion of density in Eastern Canada, and we've long sort of heard that that's kind of a challenge to margins. Is that true? Is that something that we could see a creative solution that could happen to address margins in Eastern Canada? Or is that sort of just off the table enough that we should have in mind?

Let me ask Keith to respond to that. But we have a pretty good returns across our entire network. And while it is lower density in the East, all the business that we handle is handled at good margins. Keith, do you want to comment on the challenge to keep our costs down in the East given the lower density?

Yes, effectively, it's summarized by doing more with the less. The Eastern region, if you look at all 3 of our regions, as well as they all do, in this downturn over the past couple of years, the East has continued to raise the bar. They've done it through our strategic initiative to run long, long trains over the NOD. We be made some very pinpointing investments to be able to meet long trains at strategic locations to allow us to absorb growth that we have had, although it's been marginal about cutting train starts, so to speak. So we control the labor costs, we've increased power velocity, train velocity, terminal expense across-the-board. Jeff and his team are doing a phenomenal job controlling across to maintaining, better yet -- actually improving our margin when it comes to the operating expense side of things in the given level of business we have.

And a little crude to the East wouldn't hurt, Bill. So we're focused on all levers to make sure our business returns everywhere.

One more point I can tell you this, these guys are getting so creative in gallons in the East. We were just meeting last week in Chicago talking about our pipelines of initiatives next year, we're taking some of that latent capacity and actually doing switching downstream to take additional cost out and increase asset turns, more specifically, their automotive fleet, which has given us direct savings, being able to turn more loads, frees up capacity for the industry, the automotive growth then reduces our car hire cost.

Our next question is from Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Let's see -- I think this is for Claude, when you look at maybe near-term, I don't know if you want to call it cyclical weakness in some of the commodities, export coal comes to mind. I think that you talked about significant growth opportunity, longer-term in B.C. and northern B.C., do you see customers and their investment plans responding to some of this near-term weakness? And do you think some of the growth you would expect is at risk, or is this just kind of a near-term blip and you would still feel quite good about the northern B.C. opportunity?

You know what, I feel quite good about the northern B.C. opportunity. I mean markets are impacting everybody. But the export coal that we have out of British Columbia and Alberta is high-quality metallurgical coal. It has nothing with the thermal export coal that you see elsewhere across North America. So I do think that at the margin, the mines in British Columbia are very competitive, even with Australia at the margin, and we have a good sailing distance, very efficient port capacity and our end to end supply chain is helping us, or is allowing us help our customer's maintain their position in the marketplace. So there might be a little bit of a soft patch here that might delay things a little bit, but I think the metallurgical coal franchise and the opportunity to grow it over the next several years remains intact. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay. So you think that -- you would say that this investment plan is still on track with what you would have seen before?

That's correct, yes.

Our next question is from of Benoit Poirier of Desjardins Securities.

Would it be possible to give an update on the level of activity at the Port of Halifax, especially in light of the strike issues at the U.S. ports and the low water levels in Montréal?

Yes, I could do that. You're right. The -- Benoit, this is J.J. The water level in the St. Lawrence Seaway end of the summer here were low. So the containership coming to Montréal the last 2 months or so if you wish were light loaded so there was less container per ship and some of those -- some of that business ended up being handled by Halifax, either as export back, as Canadian export out of Montréal [indiscernible] behavior so the issue is a little more on the return than the import side. So the Montréal has been sort of a steady flat, negative partly because of that, and Halifax have seen some benefit. But you know, the way we're selling Halifax and Keith talked earlier about the density of the network in the East, we're very focused on Halifax, very focused on Montréal. Especially Halifax have deep water, has 2 great terminals, both of them have -- especially one of them has a freight train that can often deal with large vessel. There's a big push right now from CN to port authorities and the terminal in Montréal and Halifax to channel our services in India and Vietnam and other countries, and overtime, this will pay off. And not just to serve Canadian cities, but also to serve U.S. Midwest cities. East coast versus east coast.

Our next question is from Chris Ceraso of Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So a question about productivity. Can you give us a rough idea, a ballpark, maybe in terms of percentage points on the operating ratio? How much productivity you strive to achieve each year and what your success rate has been? Has it been 100, 200 basis points productivity? I'm just thinking about that in light of the 150 basis points that you outlined as a headwind for fiscal '13 from pension and other employee related costs?

Certainly. I'll comment and maybe Keith can pick it up from there as well. If you look at this year, I think the team has done an outstanding job because we have effectively been able to offset a good chunk of the pension headwind that we were facing. So it's not something that is easy to achieve every year. Obviously next year will be more challenging because we keep looking for opportunities. But I would say that we strive to try to offset at least half if we can and more of these types of headwinds. So that's kind of a -- just to give you a sense of direction.

And as far as the challenge of doing it, I mean day in and day out, you reinvent yourselves. And as you fix one issue across-the-board, you're going to identify other opportunities for the pinch point to move. So like I said last week, we spent 2 days going through this and I walked away feeling even more energized and encouraged by the innovativeness and the ownership that this team is taking. We're feeling that pipeline of opportunities. So certainly, it's no easy task. It's hard work. You've got to roll your sleeves up and get at it and operate in a disciplined way and execute. But it's certainly doable. We'll continue to redo it, reinvent ourselves year after year.

Our next question is from Walter Spracklin of RBC Capital Markets.

So my question here is for Claude, I guess. Canadian Pacific has talked about what they're -- been aggressive in terms of what they're going to do, what changes they're going to make, we're going to hear a lot more about it in December. But clearly, you being the main competitor and not one to, I guess, sit back and be reactive on this, I'm sure you are looking at the potential impacts to CN from some of these changes. My question is, have you seen any changes so far in terms of any changes from your competitor? And when you think about what might happen in the next 12 months, 1 year, 2 year, 3 years out, do you see this as a positive for CN? You know, if they get a little bit more -- moving a little bit more in pricing or so on, or you see this as neutral or negative, and can you talk to me a bit about again, what changes you've seen to date and what you might see in the future as it impacts CN?

Yes, I think -- as I've said before, Walter, I think it's constructive for the rail industry in Canada. You've got a pretty competitive bunch here and we're not going to make it easy to catch us. So if CP gets better, we're going to have to get even better, better, faster. And that's exactly what we're doing. We're focusing on our agenda, it's working. We are, I believe, making huge strides in regaining our customer's heart in terms of what we do for them. If you forget the -- some of the advocacy in Ottawa, it's paying an additional growth and we are accommodating that business at low incremental cost. So our agenda of operational excellence and service excellence is carrying the debate, and we hope that CP gets better. We hope they are able to price that into the market in a disciplined way with the value of the services they create. And if we all do this, the industry will be better. Canada will be better for it and it's a good story.

Any changes to date so far that you've noticed?

We're working hard to get better and we're seeing evidence that it's working.

Our next question is from Matt Troy of Susquehanna Bank.

Just a quick question. In terms of competitive access, or potential access to your management, middle management ranks, it's a question that often comes up with investors that now that your former CEO has settled at your competitor and the work begins in earnest going forward. Is there risk -- I know one man is not the entire CN management team. But can you just work us through why you're not concerned or the layers of defense or strategy you've got about retaining the management team?

You know what, the best way you retain a team is to have a good agenda that's working and to have fun and to have the right chemistry as a team. And I think we have all of those conditions lined up. There is no question we're having a lot of fun driving our agenda and we're getting good feedback from our customers and from our shareholders. I think Hunter has a good strategy undergoing, I -- he and I go way back. I'm not certain at all he will want to come after CN employees. I think he's a man of his word and I would expect him to focus on driving change at CP without having to poach CN. And if he does poach CN, we have a lot of retention tools and a lot of bench strength.

Our next question is from Jason Seidl of Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: You guys mentioned, I think on the Intermodal side, that there is going to be a large retailer coming on. Could you talk to us a little bit about sort of the level that you might see from that, and is that going to impact the length to haul?

Without getting into -- I mean, that the retailer will start next year, the first quarter, and then we wish them the best of luck in their investment opening of their franchise, the Canadian side, and they will tend to be combination of long haul coming from both coasts, mostly the West Coast, as well as some product coming from United States. So I mean it is, because of the number of stores they're talking about opening, it should be a nice sizable account on the domestic side. And domestic accounts sell a combination of product produced here within the North America and product coming from offshore, typically Asia. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: If I can get a clarification question here. J.J., I think you mentioned that there is going to be a revenue tailwind in 4Q due to fuel of about 1 percentage points, but you said currency could hold you down between 1 and 2, did I hear that correctly?

That's right. Last year, the Canadian dollar is in the fourth quarter, if I recall well, was about $0.98. Is it about that, Luc?

Yes, and it's running on average. I mean, it's early in the quarter, but it's been running about 101, 102, so it could be $0.01 to $0.02 as J.J. pointed out, 1% or 2%.

Our next question is from Ken Hoexter of BoA.

This is actually Veronica Zhang standing in for Ken. So regarding your recently won Intermodal contract from a competitor, can you kind of talk about your underlying process? As in, was it service priced than not wanting to live through the management turnover and service renewal? Or was it just your work during the strike? And on that point, are there more cases you see following this path be it in Intermodal or other?

I would only focus on the one at hand. The one that came to us basically this month. It's very rare that you see a major shipping line switch from one railroad to another. So you don't see that too often. So we're extremely pleased that they decided to come and join us after a decade plus of not working with CN, but working with another railroad. And when you look at those companies, typically not all of them but most of them, they're really -- they have to go and sell their service in the marketplace. They need a service that fits their own service as they sell not only in Canada, but also in other continent. That name tend to be a service minded name, their -- they need service wintertime, summertime, labor disruption or not, and they really like the supply chain service that we have. That is that most shipping line need and what more shipping line are selling is a good consistent transit time from the time the container gets discharged at the dock, to the time they deliver to major cities. We all have very fast train service, fast train service doesn't mean fast container velocity. The container velocity is from shipped discharge to available at the port. This is where what Keith was talking about, the whole supply chain mindset, the level of service agreement that we have at port of Vancouver, the level of service agreement we have with ESI and Deltaport -- DP World in Vancouver. These are really elements that matters a whole lot to our shipping line. And I think in the end, that was a compelling offering to them because they think it will help them sell their product, their service in the Canadian marketplace. So that's -- by and large, that was sort of the reason why they may have made the choices that they did.

And also just a general follow-up for Keith. I mean you guys are at 60% operating ratio already. This is very broad, but are there any other costs you want to see at this level that you target to reduce, and in particular, where?

It's a pretty broad question. I'd say more specifically, there is always operating cost and opportunities. Again, I'd like to get out on the property and just do a couple of visits this summer, it doesn't take long. Go to any of the major terminals or go to operations and different set of eyes and ears, you get a couple of guys and gals together that understand operations and blitz a terminal and take a look for opportunities and you see opportunities that you want to reduce costs time in, time out. So certainly, we're not too concerned about being able to go out, find those opportunities.

And we need them because now Luc already signed them up to a deal with a close to half of our headwind into next year. So we'll need some magic to deal with the pension and other accounting headwinds.

The next question is from David Newman of Cormark Securities.

So my question is certainly, I think the buyback should help in 2013, and you guys have really stepped it up and certainly using your balance sheet, the other previous question on density, et cetera, and I think Claude, you had mentioned on an earlier -- I think in an earlier conference that you haven't engaged in M&A for a little while, and I think Ontario Northland is one that you mentioned. Is there something that you guys might step back into sort of the M&A front once again, and reacquire some short lines like -- I think there has been more interest in that side?

You know what, there's not many opportunities like that out there, the ONR is one that appears to be moving towards a potential sale by the Ontario government, but we are always looking for ways to extend our network. If we can find one, whether it's short lines, or regional lines like the ONR, but while we are ready to act on them as they become available as opportunities, they are not many out there and let's put it this way, it's not Plan A and it's certainly not part of what we have in our toolkit to continue to deliver good results between now and year end and into 2013. All right. Well thank you, David, you just got under the wire and if I'm listening to all of you wishing -- having good wishes for Bob and missing him a little bit, I get a feeling here that you are going to be looking for help to build your model and answer your questions. But fortunately, we have Janet with Paul Butcher that will be ready to stand by as of December 1 to help with the transition as Bob moves on to a very, very well-deserved retirement. I want to say, Bob, you've heard it about 20x on this call. On a personal note, you've been a trusted advisor of me for basically all my career at CN. And throughout, I always look forward to get your wise counsel and never worry too much about making sure that our message was well delivered to shareholders. So for all of that, I thank you. And I just only -- I can only hope that we’re going to have a fourth quarter that is another solid quarter with record performance, so that we keep the tradition going while you are on the golf course.

Thank you, Claude, I really appreciate it. Like I said, I think it's a great management team. It's a great company. It's been a good run. And because many of you already know Janet, we're going to be visiting a lot of our investors and some of the sell side in the next few weeks here. I appreciate it. And no pressure, Janet, it's just when I came to work here, the stock on an adjusted basis was $4.50, so I expect the same from you. Bonne chance, Janet. Thank you, Claude, and come see me in Maples some time gentlemen and ladies.

Thank you very much, and we're looking forward to a strong finish of the year and seeing you all, or talking to you all, at the year end in January. Thank you.

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