Canadian National Railway Company (CNI) Q4 2012 Earnings Report, Transcript and Summary

Janet Drysdale - 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

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division Cherilyn Radbourne - TD Securities Equity Research Christian Wetherbee - Citigroup Inc, Research Division Scott H. Group - Wolfe Trahan & Co. Cameron Doerksen - National Bank Financial, Inc., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Brandon R. Oglenski - Barclays Capital, Research Division Turan Quettawala - Scotiabank Global Banking and Markets, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division David Tyerman - Canaccord Genuity, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Keith Schoonmaker - Morningstar Inc., Research Division Steven I. Paget - FirstEnergy Capital Corp., Research Division

Welcome to the CN Fourth Quarter and Full Year 2012 Financial Results Conference Call. I would like to turn the meeting over to Mrs. Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Mrs. Drysdale.

Thank you, John. Good afternoon, everyone, and thank you for joining us. I'd like to remind you the comments already made regarding forward-looking statements. With me today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, our Executive Vice President and Chief Financial Officer; Keith Creel, our Executive Vice President and Chief Operating Officer; and J.J. Ruest, our Executive Vice President and Chief Marketing Officer. The rules have not changed. [Operator Instructions] I will be available after the call for any follow-up. It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Thank you, Janet, and thank you to all of you to join us on the call in the middle of the day. I know it's a busy day for you, so we'll try to keep things moving and be as informative as we can on our fourth quarter results, which have been excellent. I think the CN team of railroaders has turned in an impressive quarter, capping a solid 2012 year. In fact, when you look at it, 2012 for us is really a record year, record in terms of volume, record in terms of earnings, record in terms of safety. We have been able to finish the year strong and are very, very pleased with these results. Revenue was up 8%. I'm talking about constant currency. J.J. will give you some of the details, but the good news is we have strong growth in certain sectors, but growth in all of our business units, so pretty balanced growth across the board is what drove this 8% revenue increase for the fourth quarter. Our operating ratio was 63.6%, which is an improvement over our last year, and it's testament to our ability to accommodate that revenue growth at low incremental cost. And I'm particularly pleased with that because frankly, this year, December was not an easy month. Winter came in early in Canada, and Keith and his team were able to maintain our strong performance metric, both on the operational efficiency side, but also on the service side, importantly. And Keith will give you more detail in a minute. In terms of bottom line, our diluted EPS was $1.41. That's up 8% on an adjusted basis versus the fourth quarter last year, solid performance. And the full year cash flow topped $1 billion, just over $1.6 billion for the full year, and that's despite very significant pension contribution next year. We took advantage of some of the cash that we generated from the monetization that Luc and his team were able to conclude in the early part of 2012. So Luc will give you more details on these results in a minute. Let me just say a few words on 2012. I said earlier that, in many ways, it's a record in the company's history, and I'm pleased that we achieved this record performance based on our strategic agenda. We have been able to outpace the economy, with record volumes during the year. We really outperformed what the economy would have given us across the board, really. And crude, obviously, is a big area where we outpaced the market. It's a new market for us. Intermodal, we grew much faster than our peers and much faster than what the economy would give us on the strength of market share gains. Same story, more market share against truck, but the same story of gaining more inroad than the marketplace with merchandise products. So all of these things adding up is why we significantly outpaced the economy and were able to drive record volumes in 2012. And we were able to bring that to the bottom line and delivered record earnings as well. Balancing operational and service excellence and our new supply chain agenda are what is driving those results. They are driving it at the top line, but they are also driving it to the bottom line because frankly, we are now getting to a point where our supply chain partnership is helping us improve not only service but also seek new ways to gain efficiency, and that bodes well for the future because if you keep that paradigm going, our partners and us are working together to improve slot utilization, to streamline cycle times in important bulk sectors and to generally focus on better service outcome, looking at it end to end. And it's helping us, as a result, grow both the revenue and bring it to the bottom line. So clearly, we have a good agenda. We're pleased with how we finished the year in terms of driving shareholder value to our -- in terms of our important constituency here. If you look at it, we are trading at an all-time high. Our premium is in line with the fact that our story is coming together and people have confidence in the future, and I'll say a few words at the end to wrap up after Luc gives you the guidance because I think we have solid potential and prospects going forward, and we will not disappoint our shareholders and continue to drive shareholder value for many years to come. With that, I'll turn it over to you, Keith.

Okay, thanks, Claude. It was indeed a great fourth quarter to close out a great year, as you pointed out. In fact, these are the type of results that have continued to provide compelling proof points that our agenda of operational and service excellence continues to gain momentum. So let's spend a couple of moments providing some color on our performance. As you can see, we delivered productivity gains across the board on a year-over-year basis. Each one of our key productivity measures improved, which I'm especially proud of, considering 2012 business levels marked the highest volumes in the company's history. Again, a powerful proof point that our operating team continues to execute in a meaningful, disciplined way, handling this growth with low incremental costs. Turning specifically to Q4, as I said, on a volume basis, fourth quarter was strong. In fact, it's the second strongest quarter ever in the company's history. When faced with the heavy volumes, we produced significant gains in yard productivity, which is up 11% versus 2011. We realized gains across all 3 regions, but our shining star was Chicago, where our productivity actually improved 16% versus fourth quarter of 2011, which not surprisingly, again, our investments in Kirk Yard and the EJ&E property continue to pay dividends. We opened our renewed Kirk Yard during the fourth quarter, allowing us to shift the major switching from Markham to Kirk, which is another step in our plans to consolidate switching activities in this critical Chicago hub. As you can see, we had incremental gains in train load productivity as we continue to take advantage of our Distributed Power fleet to safely run larger, more efficient trains laid on the foundation of our network. There was a little bit of slippage in some of our velocity-based metrics in the fourth quarter that you'll see, but I'd refer to those as minor bumps in the road. We had some very meaningful operating challenges in the Western region, where we lost our mainline to Vancouver for 5, almost 6 days in late November following a major rockslide. So making no excuses, but also, we realize that winter does exist in Canada. It hit us a little bit early, especially compared to 2011. So against the backdrop of very favorable winter comparables in '11, we did have some slippage. But regardless, we've got a solid winter operating plan in place, and we've already realized and produced improvements in those metrics, so no concern on a go-forward basis. Shifting to our service focus, we continue to raise the bar on productivity while at the same, driving meaningful service improvements for our customers and for our supply chain partners. Our focus on delivering a reliable end-to-end service is working. We strongly and firmly believe that by having shared metrics with our partners and meaningful fact-based dialogue and an understanding of the entire supply chain will continue to improve the service that we provide to our customers while driving continued incremental productivity gains for CN and also for our customers and supply chain partners. In the Merchandise segment, a few key points to share. First, we continue to leverage our car management excellence process to drive improvements to our car order fulfillment. 2012, we met 95 -- 94% of the unconstrained demand for the CN fleet. This success was enabled by ensuring constant communication with our customers, by having a good handle on their requirements and working with them continually to minimize any shortages while we optimize our car movements. Second point, we continue to focus on the critical first-mile/last-mile of our service, which is what directly touches our customers day to day. Our customers know the window when they'll be switched. We measure our performance against that expectation. In 2012, as you can see, we achieved 91% switch window compliance. Thirdly, one of the first supply chain focus areas we tackled almost 3 years ago was grain, where we've developed and implemented a scheduled grain plan. As opposed to continuing success by hitting the right week with the requested car supply 3 years ago, we're consistently providing cars on the scheduled day 82% of the time. This supply chain reliability has enabled the partnership that starts with the loading elevators in the prairies to the unloading elevators at the ports that have actually produced record grain movement levels for us during the fourth quarter. In fact, we set an all-time record for grain deliveries to the West Coast, loading and sustaining an unthinkable 5,000-car per week spot program for an 8-week span, which in contrast to CN's history, we had a record of 2 total weeks in our history where we loaded and shipped 5,000 cars and they were not simultaneous. So in closing, I want to reemphasize the obvious. Our strategy to drive operational excellence while driving service excellence is absolutely working, both for CN, for our customers and our supply chain partners. We've got momentum on our side. The operating team and plan is firing on all cylinders. So with that, I'll turn it over to J.J. to highlight how our colleagues in the marketing department are converting this momentum into future growth opportunities.

Thank you, Keith, and good afternoon to all of you who are joining us today, and special welcome to Janet to this quarterly roundtable. In the next few minutes, I will review the last quarter, and then I will give you our commercial outlook going forward. The revenue was up 7% from last year, and the breakdown is as following: same-store pricing on same-store sales came in just short of 4%; volume was up 5%; our length of haul was up 7%; carloads was up 3%; and the revenue ton-miles was up 8%. The revenue increase from fuel surcharge added another 1.5%. Then the weak U.S. dollar conversion took out $44 million or 2%, and other items were slightly negative by less than 1%. If you want to join us on Page 10, I will -- you can read the results by business unit, and this time around, I will only add colors on the more relevant variances. And as usual, all my comments will be FX-adjusted basis. I will start with crude. Crude was up $50 million of incremental revenue during the quarter and incremental 9,000 carloads, but more relevant than just carload, we had very strong revenue ton-miles coming from crude. CN is the long-haul carrier among the Class 1 railroad when it comes to crude. Iron ore had a major drop of 15,000 carloads, but the revenue impact of iron ore was less than $5 million in terms of reduction. Iron ore, in case of CN, is a very short-haul business, in fact, about 60 miles. Next is steel pipe and the booming North American energy sector. We had our large diameter pipe, which are used for the construction of pipeline, and our OCTG pipe, which are used for drilling, produced an incremental $12 million in the quarter. That's a 50% growth for that sector. Domestic lumber and panel, which are driven by U.S. housing starts, saw a revenue increase of 6%. Next, the CN good and steady story on coal. Our coal and pet coal business unit grew again last quarter, and the revenue was up 17% or $25 million. U.S. grain and the Midwest drought. Our U.S. grain segment actually grew a solid $28 million in revenue, mostly because of very strong export as the Mississippi River was a little weak. Fertilizer was up 27% or $18 million. We handled more volume of fertilizer and we especially handled more products in the quarter. And finally, the bright spot for many years to come, Intermodal. Overseas revenue was up $24 million or 8%. Domestic was up $14 million or 8% as well. Highlight, the Port of Vancouver did very well for us last quarter. We had very good increase in the import from the CN shipping line. The domestic business was also strong, and in that case, the momentum was basically good across the board of all of these subsegments. For the full year 2012, the Intermodal business reached $2 billion in revenue, with an annual compounded growth of 12% since 2010. Concluding on Q4, we produced $200 million of exchange-adjusted growth, almost 4% of same-store price increase and 8.2% of RTM growth. Now turning to the commercial outlook, and I will start with Intermodal. I'm on Page 11. And you will see on Intermodal, this year, the story is about new product, new terminal and new customers. Starting with organic growth, new products, we are introducing new products such as returnable sled insert, a new service which is aimed to move long steel products in domestic containers to compete with long-haul flatbed truck. We're also going to be introducing this year cross-border reefer services for the reefer market, starting with domestic reefers for Canada-U.S. movement, but also within international reefers, which we aim to bring from the West Coast ports that CN serves. To expand our Intermodal geographic reach further, we are adding new terminal. You saw the press release. We are opening in Indianapolis. We are opening, in conjunction with a partner, a new terminal. This terminal will open in June, and it will offer CN direct service from both Rupert and Vancouver to serve the Indianapolis market. In Joliet, Illinois, a new terminal will also be open by the summer, also with direct service from both Vancouver and Rupert, and this is a very large logistics spot market. It has huge potential for CN. In Calgary, we just opened on January 10 our new terminal, and we now have the capacity to expand our business in Southern Alberta for the years to come. Finally, we are also welcoming new customers in our portfolio. You'll remember that EPL joined CN last October at the Port of Vancouver. MOL is now joining CN this month at the Port of Vancouver, and a large-name U.S. retailer is opening stores this spring, and they will be joining us some time this spring. So all in all, we believe our Intermodal franchise has the scope for another year of up to 10% revenue growth. Looking at Bulk on Page 12, our fertilizer volume will benefit from the restocking of inventory in North America, as well as from our Canpotex contract. On the coal side, the Rupert export terminal just came back, in fact, last weekend, last week, from an expansion shutdown. The new nameplate capacity of the terminal is now 18 million tons from the 13.5 million that it was. So therefore, that's a significant revenue portion piece for CN going forward. The low water level in Mississippi River will continue to benefit our U.S. grain rail program to Central Gulf, at least in the short term. And on the Canadian side, you've heard Keith talk about our fantastic program of last fall, so his service will really keep us ahead on the export program in 2013 as well. Manufacturing, I'm on Page 13, starting with crude. What really drives the crude by rail is the spread in the crude selling price, the spread between Western Canada Select and the Brent Index, and we definitely have the scope to more than double our revenue of last year, whether you look at that in barrel revenue or carload, this could be a significant business for CN in 2013 and beyond. Housing starts will lift our domestic lumber, panel and Intermodal revenue, and in fact, some idle panel mill in our network should reopen later in the year, probably in the second half. The booming energy sector will drive many of our commodities, mainly the large diameter pipe, the drilling pipe, the Alberta aggregate, the Wisconsin frac sand franchise, movement of condensate, all these businesses are very good prospects for 2013. On the negative side, paper, iron ore and steel products do have a weaker outlook. In conclusion, to wrap this up, we have a solid momentum in pricing, which we will be maintaining this year. And you should see CN as a disciplined growth story, a story that is leveraging our OR of 63%, leveraging our leading supply chain service and reputation in the marketplace and leveraging our bountiful and diverse energy franchise. So on that, I will answer your questions at the end, and I will turn down to Luc.

All right. Thanks very much, J.J. Starting on Page 15 of the presentation, let me walk you through our key financial highlights for the quarterly performance. Revenues were up $157 million or 7% at $2.5 billion. J.J., Keith and their teams combined efforts to help us achieve a solid volume increase in most commodity sectors, and once again, in the fourth quarter, we performed better in several categories than prevailing base market conditions. Operating income was $922 million, up 10% versus last year. This was driven by strong revenue growth, and at low incremental costs. Our operating ratio was 63.6% in the quarter, which represents an improvement of 110 basis points versus last year. Other income was actually a $5 million expense in the quarter, compared with $21 million of income in the fourth quarter of 2011. As we pointed out in previous earnings calls, this category is always difficult to forecast due to both timing and activity levels. The caption also combines income and expense items, so it's really land and property disposals, income from passenger rail projects, offset by expenses relating to real estate, foreign exchange, investment and other costs. So in 2013, I would point out that I anticipate the activity level in this category to be significantly lower, as we expect both fewer land sales and passenger rail projects. On a full year basis in 2013, I would expect other income to be more in the $20 million range, in fact, closer to our 2012 run rate for the second half. Turning to our net income for the fourth quarter of 2012, it stood at $610 million, up 3%, and the reported diluted EPS was $1.41, up 7%. Removing the impact of the income tax adjustment in 2011, the adjusted diluted EPS of $1.41 in 2012 represents an 8% increase over last year's fourth quarter. On a constant-currency basis, this is an increase of a full 11%. As Keith pointed out, we came through with another solid quarter in terms of operational productivity and customer service, yet this performance did not come at the expense of overall cost management. The operating team continues to make progress in improving some of our key productivity and service metrics. Turning to Page 16. Let's talk about operating expenses. Operating expenses were $1.612 billion, up 7% versus last year on a constant-currency basis. At this point, I'll refer to the changes in constant currency. Labor and fringe benefit costs were $463 million, a decrease of $43 million or 8% lower than last year. This was a result of 4 elements. The first element is an increase in overall wage cost for approximately 5%. This was the product of wage inflation, up about 3%, overtime was up 1%, and we also had an increase in headcount by less than 1% in the quarter versus last year. Now GTMs were up 6%, so clearly, we enjoyed some 5%-plus labor productivity gain in the quarter. The second element is higher capital work during the quarter, which actually offset the increase in wage costs. The third element is a lower increase in stock-based compensation expense in this quarter versus last year, accounting for 5 percentage points of the favorable variance, and this was obviously given a lower increase in our stock price through this quarter versus the same period last year. Finally, the last element relates to lower fringe benefit costs for about 3 percentage points, and this was due in part to recognizing a benefit from terminating our former CEO's retirement benefit plan. Turning to purchased services and material expense, it stood at $340 million, up 17%. This was mostly a factor of higher volume and business activity levels. About half of the increase is due to more repairs and maintenance for cars and locomotives, as well as higher expenses for contracted services and volume-related activities. The balance of the increase is really for other project work, including information technology, business development, safety and engineering. The fuel expense stood at $400 million, an increase of 8% versus last year. This higher volume represented 6 percentage points of the increase, while higher prices accounted for the balance. Casualty and other costs was $108 million, $53 million higher than last year, as we incurred higher legal claims, lower environmental credits versus last year, higher costs relating to workers' compensation as a result mostly of carrying out an actuarial evaluation in the quarter and generally, higher other costs. Our full year results for the C&O category were $338 million of costs. Now we anticipated 2012 costs to be higher than last year. And for 2013, I would expect a similar range of expenditure, that is, averaging approximately $85 million per quarter. Speaking of our full year results, they're summarized on Page 17. We wrapped up 2012 with over $9.9 billion in revenue, an increase of 10%. Our operating earnings grew 12% to reach $3.6 billion, almost $3.7 billion. The operating ratio stood at 62.9%, so below 63%, a 60 basis point improvement over last year. Net income was up 9% at $2.680 billion. This translated into a 13% increase in reported diluted EPS of $6.12. Excluding the impact of major asset sales in both years and some income tax adjustment in 2011, the adjusted diluted EPS for 2012 stood at $5.61, a 16% increase over 2011's $4.84. Turning to free cash flow on Page 18, this was another strong year. We generated $1 billion in free cash flow. This compares to $1.175 billion last year. This year's performance benefited from higher net income and lower income tax payments. This was offset by higher working capital for about $425 million, mostly resulting from voluntary pension contributions that were done to the tune of $700 million in 2012, partly offset by higher accounts payable. Also, capital expenditures in 2012 stood at $1.825 billion, including capital leases. Meanwhile, our balance sheet remains strong, with debt ratios and leverage within our guidelines. We continue to progress our stock buyback program of $1.4 billion announced last October, consistent with our strong shareholder return agenda. In that spirit, the Board of Directors has approved, and we announced today, a 15% increase in our quarterly cash dividend. Since the IPO in 1995, CN's dividend has increased every year, growing at a compound annual growth rate of 15% over those 17 years. Finally, on Page 19, allow me to address our 2013 financial outlook. We continue to see a gradual although modest improvement in the North American economy, combined with opportunities in domestic energy-related commodities, as well as other export resource markets. We assume North American industrial production will increase by approximately 2% in 2013. On a brighter note, we do expect U.S. housing starts to continue their strong progression and be in the range of 950,000 units or so. As for U.S. motor vehicle sales, we expect about 5% growth to approximately 15 million units in 2013. These and other key assumptions underpinning our outlook should translate into a 3% to 4% growth in carloads in 2013. As we've seen in 2012, we expect this carload performance to convert into stronger RTM growth from continued gains in length of haul. On the pricing front, we maintain our inflation-plus pricing policy. Having said this, our annual guidance has us aiming for high-single-digit EPS growth in 2013 over the 2012 adjusted diluted EPS of $5.61. Our objective is to achieve this despite accounting headwinds of approximately $150 million that we see in 2013. These headwinds relate to increased pension expense and depreciation studies. On the pension front, we finished the year with a further increase -- sorry, a further reduction of 70 basis points in the discount rate used to establish the pension obligation. This change in related assumption augments the accumulated actuarial losses which must be amortized to the P&L annually. The result will be an increase of approximately $120 million in our pension expense for 2013. The balance of the headwind is our best estimate of about $30 million in additional expense resulting from depreciation studies carried out every -- periodically every couple of years to adjust the useful lives of certain assets in our balance sheet. Our guidance also calls for free cash flow in the range of $800 million to $900 million. In 2013, income tax payments will revert back to a more normalized level of approximately $850 million, given lower voluntary pension contribution. This means, nevertheless, a threefold increase over 2012. So the 2013 cash tax rate will be much closer to our effective tax rate, which, in turn, is expected to be in the range of 28% to 29%. Our free cash flow guidance assumes a capital investment program of about $1.9 billion and a 15% increase in dividends announced today. So the CN team remains committed to delivering superior results and creating value for shareholders as we continue to unfold our strategic agenda and leverage a solid pipeline of growth and productivity initiatives in 2013 and well beyond. On this note, I'll turn it back over to you, Claude.

Okay. Thank you, Luc and team. As you can see or have just heard, we did deliver outstanding performance, not just in the fourth quarter but for the whole of 2012. We've had record volumes, at least a 10% revenue growth. We've had record efficiency with our industry-leading operating ratio below 63%. We've also had record safety performance. CN and the rail industry are a very safe mode of transportation, and it's a key component of our service offering. So when 23,000 railroaders deliver impressive performance like this, they want a -- basically, it shows that the game plan that we are following is gaining momentum, and it is this momentum that we believe will carry us through into 2013. As Luc said, the economy is sluggish, but it's constructive. We are determined to outpace base economic conditions by leveraging our franchise diversely, our pipeline of strategic initiatives and our continuously improving service levels to drive our top line growth above economic conditions. And if we bring that to the bottom line despite the $150 million of expense headwind that Luc talked about, we are in a position to deliver EPS growth in the high single digits and solid free cash flow for 2013. And it's on that basis and with the confidence that I have, my team has and the board has that we've increased our dividends 15% again this year, and are keen and committed to continue to drive solid shareholder value for many years to come. With that, John, we will go to questions.

[Operator Instructions] First question is from Jason Seidl of Dahlman Rose. Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: I wanted to circle on some of the growing Intermodal business that you have, as well as the expansion at Prince Rupert. Can you talk to us how that business can come on throughout 2013 and the impacts on RTM that you expect?

Yes, the -- thank you, Jason. The Intermodal business at Rupert is really part of an overall game plan. Rupert, the terminal itself, is expanding. There's a fourth train coming up sometime this spring, which will be installed. As Keith mentioned, we've also installed -- expanded our long siding on the Rupert-Edmonton corridor, and we are anchoring that with new capacity in Joliet and Indiana, all this which will come out this summer. So this is a whole effort to connect all these links to, by and large, the U.S. Midwest, import or export, as well as take our place -- a fair place in Eastern Canada, Montreal and Toronto. And obviously, this is long-haul business, and it has a big impact on RTM. And from an RTM point of view, it's increasing the mix up. I don't know if that helps. Is that what you were looking for? Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division: That helps a lot, I appreciate that. Guys, can you talk about as you expand this, are there any upfront costs in running additional trains, or are you guys just going to increase your train lengths out of Rupert?

I think we are -- as we speak, we are running -- for the last several weeks now -- Keith, correct me if I'm wrong -- we've been able to run 2 trains a day out of Prince Rupert every day for basically, I mean, the last 2 to 3 weeks because there's very, very strong demand. So these trains are running at train length capacity, subject to weather and our siding capacity. So we're already running long trains, and we hope to run more of them in the future in line with business growth.

Our next question is from Cherilyn Radbourne of TD Securities.

I just wanted to ask a question on Ridley Terminals, actually. It would seem that, in a more subdued outlook for domestic coal, an export outlook like that, that's got expansion potential, has become all the more strategically valuable. Could you just give us some kind of color on what length of time you think it may take to fill up the additional capacity that's just been completed up there?

Okay. Well, the terminals today now has a capacity, if you estimate [ph], roughly 18 million tons. Some of that will be Northern B.C. coal, so it's related to the production increase in those mine and its success in the marketplace. By and large, it's met coal, good-quality met coal. Then you have some PRB coal, which is moving today through Rupert. And I think there is a long-term future for PRB coal to Asia via the terminal that will exist. And then there's also, as you know, a major project in Alberta, the first coal project which is thermal coal, which is 3 years from now, and that's a major mine. That could be up to 10, 12 million tons. So in fact, I think the people who run the Ridley Terminals have plans to -- going from 18 million to 24 million tons because of the outlook they have on coal. Some of those commitment actually are reserved by people like First Coal who have actually reserved capacity in the future is to be sure that they have access to water [ph]. So there is a business case there for a strong coal business.

And what's the ultimate scale of that footprint from a tonnage perspective?

From 18 million, it's 24 million. From 24 million, there is also plans and space and land and water lots to get up to 40.

The short term is to get to 18 million; the midterm is to 24 million. And I think, as J.J. said, and he did not mention quint [ph] difference since a mine that [indiscernible] owned, which is in the pipeline to reopen hopefully sometime in early 2014. So there's clear visibility to fill that 18 million to eventually 24 million-ton capacity, but the layout and all of the components, including the railroad, rail, utility corridor that we are building as we speak, because I think they're about to break ground, is lined up to eventually expand all the way to 40 million tons if there is demand for it.

The next question is from Chris Wetherbee of Citi.

Maybe a question just on the competitive dynamic within Intermodal. You picked up the MOL business. And I think, J.J., you mentioned another retailer moving over. I just want to get a sense of kind of if there's been any material changes in the competitive dynamic between you and your counterpart in Canada or if this is more of a kind of service improvement in some of the terminals you've been opening up. I just want to kind of get a sense of maybe how that relates to the pricing side of Intermodal going forward.

Thank you, Chris. I would say, by and large, it's been organic growth. When you talk about a new retailer, obviously, it's business that doesn't exist today, it's new to any carrier. When you talk about new terminals that we're opening in the U.S., that's where really we're not competing in that marketplace, with our smaller carrier from the West because now, when you're talking Indianapolis and Joliet, they get to different geographic areas. So it's coming from truck, and for -- to come from truck, that's why we introduce these new products, or it's coming from U.S. market, or it's coming from -- in some cases, there's some business going back and forth between the 2 of us and these are the 2 contracts that moved around.

The next question is from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So one for you, Luc, on the headcount side. So a good year of headcount growth relative to volume and, for sure, relative to RTM growth. With the guidance for 2013 of 3% to 4% volume growth, even better on the RTM side, how are you thinking about the need for people this year and volume -- headcount growth relative to volumes in '13?

Thanks, Scott. Well, first of all, we finished 2012 with roughly just a little bit under 2% growth in terms of headcount, and we finished the fourth quarter with less than 1%. So we've done a lot of adjustments. I think we're enjoying good productivity. Next year, we're probably looking at just around 1% is what I guess what we have in mind at this point. Of course, we'll have to keep monitoring the volume and how it unfolds. But once again, I think Keith and the team are looking to achieve some productivity growth, so we're going to try to contain it within 1%. Scott H. Group - Wolfe Trahan & Co.: What's driving such a big differential that you feel like you can continue?

Well, what's driving it effectively is our ability to leverage our investments in our sidings, in our DP trains, longer trains, heavier trains, fewer train starts. Fluidity in our corridors. Chicago is helping out tremendously. In and of itself for Chicago, with the conversion into Kirk Yard, we realized synergies there from a headcount standpoint on the operating side just from the jobs that we save from running the multi-large facilities to the one, which is a very efficient and becoming more efficient hub facility. The key -- one -- something like that here and there across the board, you sprinkle them out and it all adds up, and you're able to absorb several percentages of productivity versus what your revenue or your RTM growth is. Scott H. Group - Wolfe Trahan & Co.: And Keith, do you think that's how you can keep...

I think you're pushing it a little bit there with 2. I want to keep Janet here. I want to have a smooth transition, and we had Bob before with the whip. And we'd like to keep it streamlined. You can come at the end.

The next question is from Cameron Doerksen of National Bank Financial.

I just wanted to get a little more clarity around this crude-by-rail business. I think in the past, you've talked about 30,000 carloads sort of run rate in 2012, going to 60,000 in 2013. Is that still your expectation? And I guess related to that, if I look at the incremental numbers you gave for Q4, it looks like maybe the revenue per carload is sort of north of 5,000. Is that accurate?

The revenue per car in the Q4 was positive, thinking -- I think one thing I said which I think you -- well, is a fact is that we do have the longest haul on average, so our revenue per car is higher than maybe other railroads when it comes to crude. I mean, we go all the way to Mobile, we'll go all the way to Louisiana, we can go all the way to both coasts. So we do have long haul. And often, we start from Alberta as opposed to the Bakken. I mean, it has huge potential. The interest in the crude industry for rail is huge, either because pipeline capacity is not quite done for them or they want to go to market, which provides a net back that physically, the pipeline industry can't quite get them. So it's a question at this point of how fast we can move these different projects and executions. We have enough -- we're public about some of the projects with, like Southern Pacific and others, and the potential is real. We're sticking the same forecast that we've offered. And time will tell how some of these things actually come together, week by week, month by month.

There's clearly the huge opportunity. I mean, Canada is an energy powerhouse, if you look at it. I mean, we have gas, we have oil, and if we play our cards right and develop the proper transportation solutions, pipeline and rail, to open up the export market and to open up the supply chains that provide good net backs, there's a huge potential for transportation and infrastructure companies to help this booming oil and energy market for many, many years to come.

The next question is from Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Yes. So I wanted to get some of your thoughts, J.J., on Intermodal side, you mentioned a couple customer wins. And it's a finite number of steamship customers. Do you have more -- are there more contracts or customers with contracts that are expiring in 2013 that you would see opportunity for share gain, or do you think these 2, the MOL and APL, are kind of it for the moment, and you have stability? And then, I guess to what extent that you can have concern about, you take too many away from the other guy, then you run the risk of a little more negative pricing dynamic?

Your question, Tom, is quite specific. I won't go down that level of detail. But every year -- I think every year, all railroads -- most railroads have major renewals, including Intermodal, and that's just the way it is, that's how the marketplace works out. And we do compete with -- in the Canadian marketplace, with one specific railroad. And when we -- and when our business gets us cross-border, we compete with other railroads, other gateways, other ports. And when you look at the domestic business, which is also a very significant part of our business, we're now into the different landscape, we're in the eastern U.S., we compete mostly with truck. And in the supply chain in the West, it's mostly with our competitor from Calgary. So when you look at our Intermodal franchise and how it may be growing this year and the years to come, it will be like in the last 2 years, it will be from a range of different things, not just the CNCP-type things, where it's new location, new product, new supply chain, new destination. In the case of CN, because we do go to 3 coasts, we want to exploit that. So that gets us into markets where we overlap with other folks.

I would say, Tom, just to echo what J.J. said, we sell service, and we have a tremendous service advantage, and we sell product innovation, and we have a huge pipeline of new product innovations. And we sell a beautiful franchise, that's 3 coasts, and offer the -- I mean, I think an unparalleled ability to provide support and help our customers win in their end market. And that's what we do, and we try to bring it to the bottom line.

And we do.

The next question is from Walter Spracklin, RBC Capital Markets.

I just want to come back to the volume growth guidance, the carload growth guidance that you provided. Just wondering, I was looking in the last -- just roughly the last 6 months or so, noting that carload volumes versus RTM, there's a differential of about 500 basis points here, and just curious whether you see that contracting in 2013 as we lap those or as we lap the longer-haul business that you established in the back half of the year. Or is that a good metric to use in terms of forecasting our RTMs? And then I guess as a follow-up to that, just related though, is that you went out of your way to kind of note that you had made some market share gains due to some service disruptions. I just want to understand whether you're factoring that in to that 3% to 4% and saying that we're likely to see that seep back, or we're going to keep it regardless and we just wanted to highlight it in the last press release?

Walter, I will just say you're trying to tip the Janet meter with one question.

You're not helping me, Walter.

Let me say the following. I think the pattern between carload and RTM growth, you should expect it to be generally the same. Now there's a lot of moving parts. Is it exactly the same from year-over-year? We'll see where the markets are and how they all come about, but the fact that we expect to grow our RTM faster than our carload, I think, is a good depth to bank on because the things that are growing are the long-haul markets: intermodal, export potash, export coal, long-haul business in crude, et cetera, et cetera. So that's the best we can give you at this point in time. And it's our goal to position ourselves where the markets are looking for our services. It so happens at the moment, the markets that are hot are longer haul, but we're pursuing every opportunity where there's a profit to be made, whether it's a shorter-haul traffic or a longer-haul traffic.

If I might add, we do have, on the flip side, some segments which are very, very short haul, which are going to be declining in 2013. Iron ore year-over-year will have less carloads, but that's not a whole lot of revenue. We have a legacy contract on the EJ&E and plastics plant that's also going to be going away. That's very short haul, that was from Chicago to Chicago. We also have the gasoline oil [ph] contract that's also going to be going away. They're converting to pipeline. That was also very short haul, Quebec City to Montreal. So carload is kind of a tough measure, really, to have a sense of the CN volume.

The next question is from Matt Troy of Susquehanna.

Obviously, you have a competitor who's geared up to improve their operations. In a competitive business dominated by 2 players, there's obviously risk of brain drain or talent diversion or poaching. Claude and Keith, I would just be interested in your perspective, have you seen any increased turnover, have you seen inquiry, and how do you secure talent, or what's your game plan should that kind of poaching inquiry pick up as their plans get underway in the next 2 to 3 years?

As I said before, we have a great agenda. We're gaining momentum, and there's nothing like having fun together, winning in the marketplace to keep a team together. When your stock price is high and the bonuses are paying, when your stock price is high, and long-term incentive compensation is paying, and when you're having fun driving an agenda that resonates with your customers and your employees, you have a winning recipe, and we have a winning recipe, it's been working for 3 years. And I think we have a winning team, and I think we're having fun together. And I don't see us losing people. If we do, we have a huge bench strength, and we will carry forward and continue to win in the marketplace.

Keith, do you have anything to add to that?

I think Claude summarized it pretty well.

The next question is from Brandon Oglenski of Barclays.

Maybe not to directly follow on that question, Luc, but something that we've had some trouble with is modeling the comp and ben line here. You've had a lot of volatility in the past 2 years. I mean, you've gone from $400 million in the quarter up to $510 million. But looking forward, in the second half of 2012, you were running $470 million to $460 million. Is that the type of run rate that we should be expecting with additional wage inflation but some efficiencies that Keith was speaking to earlier?

Well, I think, again, you can see what we're looking at in terms of headcount, so I mean, we are anticipating wage inflation probably around 3%. We're looking at probably headcount being up about 1% through the year. We did indicate that we've got $120 million of headwind on the pension side. And when you're trying to factor all of this together, you should be mindful of some of the potential credits that we have discussed in the fourth quarter. So I mean, that, I think at this point, is the additional guidance I would give you.

And stock-based compensation, we hope, will continue to be a headwind that we have to deal with because it's volatile from quarter-to-quarter. But when you have strong shareholder returns and your stock price goes up, and given that our -- a lot of our LTI at CN is actually restricted stock units, we mark to market, so we carry the load with the benefit and pleasure of our shareholders.

Understood. But it sounds like maybe a similar outcome as the last couple years, where you're getting inflation here, but less than your overall revenue growth. Is that fair?

It's what we're trying to do. Subject to pension.

Yes, and I'd be very careful because, again, I wouldn't personally use the run rate of the last couple of quarters. Those would tend to be low, I mean, I think given what I've told you. And typically, we run about 21% or thereabouts in terms of labor costs to revenue. So you got to be careful not to take necessarily the run rate because there are a number of things that are changing. And hopefully, as Claude said, the stock-based compensation will continue to be a little bit of a headwind. So...

The next question is from Turan Quettawala of Scotiabank.

I just also had a quick question on the changes that are going on at CP right now. I know, Keith, you've spoken in the past about how this might benefit CN with coal production and so on and so forth. I'm wondering if you can give us a sense of whether you're seeing any tangible benefits flow through at this point in time or maybe some color on timing on that, or when you expect to see that come through?

I'll give you one very compelling example, and that's what we were able to do with grain movements. I think you see that both CP and CN -- through increased fluidity, that both railways enjoyed that fluidity, enjoyed that better operating environment, that more disciplined operating environment. And I think that you'll see that it allowed us both to do some meaningful things for our customers, and export grain at levels we otherwise never thought possible. So that's a very powerful proof point.

Anything else on that front or else maybe you'll see some over the next year or so?

Well, I would expect that -- I don't know if we'll see something to that quantum, but similar improvements and results anywhere we touch each other and interact and interchange cars. And case in point, again, back to the holidays, CP has a much more disciplined approach to running their traffic as opposed to shutting down the railway, which they used to do, which allows us both to realize car productivity savings and car velocity savings by not bunching up and congesting traffic lines.

As I said before, to have 2 strong teams competing hard for the business. To have 2 strong teams to emulate each other. And to have 2 railroads that are amongst the best in the world, is not a bad thing for shareholders, and it's certainly not a bad thing for Canada.

Our next question is from Ken Hoexter, Bank of America.

Claude, can you just talk about the exposure to housing? Are you surprised, given the strength you're seeing on the rebound here, that you're not seeing more of a bounce in forest products? And I guess leading that into your overall carload growth target of that 3% to 4%, what would get you to, I guess, be more excited on or maybe even a -- or what opportunities do you see for a faster growth?

I think we have some pretty strong expectations for growth. Hence, if the economy is stronger, obviously, we will raise with that tide. But at this point in time, I think Luc gave you our assumption, 950,000 housing starts or thereabouts. I mean, we carry the vast majority of export lumber from Canada into the U.S., so it's a pretty direct link to our ability to grow if housing starts do increase to that level. In the last few years, we've been able to offset the tough conditions in the housing starts in the U.S. by growing with our customers' lumber exports to Asia. So that market may take a little bit of a sideways. And the U.S. goes up at the same time or if both markets were to go up at the same time, then perhaps there is upside. But we will ride the markets the way they come at us. And I think lumber, into 2013, is an area that is very constructive, very positive for us.

Our next question is from David Tyerman of Canaccord Genuity.

My question is on the Rail Service Review in Canada. I'm wondering if that has impacted your outlook materially yet, and whether you have enough clarity right now to understand what the full impact could be and whether that could be material at some point in the future.

Yes. As I've said before, the -- we really genuinely, sincerely believe that supply chain collaborations and a commercial framework is the best way for CN and the rail industry to help its customer win in end markets. We've made that case. We are concerned about the impact of regulation in terms of unintended consequences. But having said this, there is no better recipe than improving service, and delivering day in, day out to make sure that people stay on the mutual trust and commercial framework. And so we will be engaging the government as they come forward with the new law, and we will be making sure that it's balanced, and that, hopefully, it doesn't get used, if it does pass the legislation, by working hard every day at satisfying our customers.

So it sounds like it's not clear enough right now to state in terms of impact?

Yes, we will make this a moot issue by providing good service every day.

The next question is from David Vernon of Bernstein. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: J.J., just a quick follow-up on the crude-by-rail volumes. You mentioned that the growth in demand, that was really based on a spread between coastal and inland prices. And I guess I was just trying to figure out or get your opinion on at least, at what point -- if that spread were to start coming in, at what point would that spread need to get to before you start getting worried about volume growth in that segment?

I think when you look -- talk to the different crude producers, when you talk in the range of $10 -- $8, $10, $12, they say the spreads have to be tighter. And rail is more expensive. It's a question of depending where you go and how that works out. But rail is not the cheapest mode to move crude, but it's a very good mode to get to more profitable markets. So $8 to $10, but we're a long way from that, and again, that's a general number, because if your crude is high in sulfur and some of these other things which are tougher to refine, your spread is even higher than just that, so it depends on the quality of the product. We talk about crude, but not all crude is crude is crude, as some is better than others, and it does have either a penalty or a premium in the marketplace.

And when you're talking bitumen, then it's -- then rail is much more competitive with pipeline, even on a cost basis. So...

Yes, Claude is right. When you move back in crude, that's -- you move it as it is. When you move bitumen, we don't move -- we don't need the diluents. The diluent was not already with the product, meaning it's not -- not coming out of the pipeline, then we don't have to move the diluent. It's an extra saving. The people who produce crude, if they're really just crude producers, they're not [indiscernible] refineries, and they produce this heavy crude, rail is a really, really compelling story for them.

Our next question is from Keith Schoonmaker of Morningstar.

This question is probably for Keith Creel. Operations, obviously, are running particularly strong, continuing to run best in class. Are there particular initiatives or CapEx projects about which you're most optimistic for improvements this year, or is it more incremental little-by-little gains?

I would say it's more rifle shot strategic, just a continuum of the story. We've got some more investments to make in Chicago that will allow us to take some incremental steps, pretty excited about the investments we've made east of Edmonton, and the Edmonton, the Winnipeg corridor, which we'll start realizing benefits from. We put some additional signals in. We've got some plans to put some additional double-track capacity in that lane, which will prove well for us as well. And then we'll continue our B.C. corridor, on the strength of the 7 sidings we've put in this past year, which increased our capacity by about 50%, with Year 3 or 4 of a 5-year plan to add some additional siding capacity up there. So nothing earth shattering but more of the same, which will allow us to continue to pace with increased productivity in a year-over-year basis.

It's rifle shot, but he has a big magazine.

Our next question is from Steven Paget, FirstEnergy Capital.

You talked about loading pipe onto containers in some way that would replace flatbed trucking. Could you please give more details on that?

Yes. We basically, we're talking 53-foot domestic container, and it's basically an insert that looks like a flatbed truck. It's a platform. You load the steel, for example, tubular tube, for example, that will go into Mexico, to plants who makes parts for automotive, they need to be protected from the rain and snow and dust and whatnot. So they would be moving on a flatbed under a tarp. You load that on that insert, sort of a cradle, if you wish, and then you slide it into the container. And that's how the container product becomes a direct competitor to flatbed truck. And we actually have a video on that, and Janet could probably link you to our website where we have some of this video. You can actually see the loading of the equipment.

Quite exciting, our focus on supply chain services, we innovate with new products. This is just one that J.J. has talked about, but we are looking to move finished vehicle in containers, for instance, in certain markets, we're looking to load plastic tank, flexitanks, so that we can move liquid in containers. We've always moved bags and other such commodities. But selling -- using the Intermodal product to sell to different markets and selling One CN are key, key thrusts in our ability to continue to outpace base markets and gain market share against trucks.

And have more than one source of growth and not always rely on just the one market or the one rivalry to be able to grow. So a lot of focus on organic growth, where we can come up with products that don't quite exist today. Just -- I made an error earlier, Cherilyn, when I answered your question on coal. The coal mine in Canada I was referring to the -- that might actually open for thermal coal is Coalspur. I think I had said First Coal. I really meant Coalspur.

That concludes our Q&A. Mr. Mongeau, please go ahead.

All right. Well, thank you. This was a good call. It's awfully cold here in Montreal, and it's pretty cold across Canada. I know that because it stopped the railroad when it's cold. But we have the momentum on our side, we're focused on coming through the winter with a solid service record. And if the market demand continues to materialize the way we've seen for the last couple of weeks, we should have a very solid first quarter to report when we next get you guys on the call in -- at the end of the first quarter. So have a safe day, and look forward to talk to you soon.

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