Canadian National Railway Company - Q1 2014

Transcript

Operator (participant)

Welcome to the CN first quarter 2014 financial results conference call. I would now like to turn the meeting over to Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Ms. Drysdale.

Janet Drysdale (VP of Investor Relations)

Thank you, Eric. Good afternoon, everyone, and thank you for joining us. I would like to remind you of the comments that have already been made regarding forward-looking statements. With me today is Claude Mongeau, our President and Chief Executive Officer. Luc Jobin, our Executive Vice President and Chief Financial Officer. Jim Vena, our Executive Vice President and Chief Operating Officer. And JJ Ruest, our Executive Vice President and Chief Marketing Officer. In order to be fair to all participants, I would ask you to please limit yourselves to one question. It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Claude Mongeau (President and CEO)

Thank you, Janet, and thank you for all of you on the call to join us. We're in sunny Vancouver today for our annual general meeting, and we're pleased to have you on the call here to give you an update on our first quarter results. There's no question we just went through a very difficult quarter from the standpoint of the weather that we have to face, that we have to face. It is the harshest winter that at least I have been involved with, and I've been with CN for 20 years. And I think Jim will tell you later that it's probably one of the harshest he's had, too, and he's been here with CN for longer than me. So very, very difficult winter conditions that impacted not just the railroads, but all transportation sectors.

And it clearly impacted our ability to meet all of the customer demand that we had in front of us. So you know, at the end of the day, winter is winter. We're learning from it. And what I'm most proud of is the resiliency and the ability of our team of railroaders to face up to that adversity and perform on a relative basis exceptionally well, despite the elements. So solid performance financially. Luc will give you a, you know, some of the details in a minute, but you know, good top-line growth. You know, could have been better without the winter. Solid expense performance, obviously impacted by the additional expenses, but we were able to manage the productivity and keep solid earnings growth in the circumstances.

You know, it puts us in a good position, even though it was a tough quarter, to face up to the balance of the year and remain on track. In fact, as I look at April, the recovery is well underway. Our safety, our operating, our service metrics, all of those are quickly returning to pre-winter levels, and that bodes well for the balance of the year. We're very focused on continuing to basically deliver on our supply chain collaboration agenda. I'll be taking questions later on, I'm sure, but you know, we did have a setback.

I think it's highly unfortunate that the Canadian government decided in the heat of the moment to react to the 100-year crop for grain that we have, and introduce legislation, which I think will do little to help move grain and sets us back in terms of a sound transportation policy in Canada. But, you know, Parliament is sovereign, and, I'll be happy to answer any questions you have on that matter after the team gives you an update. With that, I'll turn it over to the team. Jim?

Jim Vena (EVP and COO)

Okay. Thank you very much, Claude, and, listen, I'm gonna be quick. Just got two slides today, but, wanted to start off with a representation. You've all heard, the story of the coldest winter, and, it affected us and, and just the traveling public everywhere in North America, whether it was down in Chicago or Eastern Canada or, through the prairies, where we traditionally have a taste of winter every year. So this slide, it was just a quick representation to say the amount of corridors that we have and what was affected and how we operated through that. Now, operating these tough conditions, no ifs, ands, or buts, added some one-time cost to our day-to-day operation. We had to, make sure we had, more snow removal.

We had a number of contractors come in, and, and Luc will give you a reference of where and what it impacted us to the bottom line in our cost structure. If you take a look at the bottom of the page, we talked about the, you know, metrics that are very important to us, train speed and terminal dwell, and they both were off substantially, especially during January and February. We saw a recovery in March when the weather started to break and wasn't as intense in all the corridors we had, but we had a reduction in train speed, terminal dwell. And one number that we did do not have on there, but we saw the similar drop in the close to 5% range, and it's our car velocity.

Car velocity, of course, is a measure that gives us a good feel of how the network's working. Now, we delivered in the first quarter, GTM growth and RTMs growth, and Luc will take you through the exact numbers, and our train load was actually up. A lot of that happened because of the results of what happened in March and what we were able to deliver. But there is no way that we would have been able to deliver it with having one of the key four foundations that builds the railroad. So locomotives, I think we did a good job of planning, and we have a long-term plan of how we bring locomotives in, and the purchase of the AC locomotives last year and the additional purchases this year, we're in the right position moving forward.

That helped us. But it was truly the employees that work for us, the managers, the frontline people. We had people from IT, people from accounting, people from operations out there operating trains, and that is the only way that we were able to operate and be able to deliver a growth in GTMs on a very severe winter. And as Claude said, I've been around here a little longer than 20 years. A tough one, but it is what it is. It's an outdoor sport, and there's no use complaining about it. Let's move, move ahead.

So if you take a look at the second slide under the recovery underway, the investments that we've done both on capital in the last few years, and we continue to analyze this as a long-term view, not just short-term, I think we are seeing the benefits, and we will continue to invest, whether it's loop, the investment in the EJ&E, and our capability to go around Chicago, the investments at Kirk Yard to give us more hump capacity there. In fact, we saw that operation through Chicago operate not quite as good, as fluid as when you'd have no winter weather.

But really, it was not as much of an impact to us as it could have been if we did not have the structural foundation that we built up in Chicago, interchanging with other carriers, and also the capability it gives us to move the traffic, the interchanges further down the railroad, whether it's in Memphis or Salem or other locations that are much more fluid. So excellent there. We know we're gonna continue to work to give more resiliency and be recoverability, and, you know, we'll talk about that. The CAD 100 million that we spent last year in addition to our regular plan that we put in, about this time last year, we did see the benefit of that through the winter. Our recoverability was quicker. It was still, it was cold. It was colder for a longer period of time, snow.

But when we got to being able to move, we were able to move quicker in a faster fashion. So bottom line is, there's no change in what we're trying to do. We need to stay excellent at moving the railroad, moving the boxcars as fast as possible, but on the other hand, make sure we're balanced, and provide good service to our customers. I think we impacted a number of them in the first quarter, and we're gonna work hard to, as the year goes on, to regain everybody's confidence and move all the business that JJ is bringing on. So, JJ, over to you.

JJ Ruest (EVP and CMO)

Thank you, Jim, and, good afternoon to all of you who are joining us this afternoon, including our very valuable customers and their shareholders. The next few minutes, I'd like to review the last quarter, and after that, give you a market outlook. The month of January and the month of February were very challenging, as Jim described. Most days in the Canadian Prairies were below 25 degrees centigrade or minus 13 degrees Fahrenheit. Therefore, car loads was down about 1%, and revenue was up only 1.5%, FX adjusted during that period. March got progressively better. We had less days below minus 25 degrees centigrade. Car load grew 5%, and revenue was up 7% FX adjusted. Overall, for the quarter, revenue growth was 9% as reported, broken down as follow: volume and mix was up 2%.

Same store and same, same store price on same store sales after fuel and, exchange was up 3%, and that's including, it's an all-in number, including regulated grain and export coal. The fuel impact on revenue was flat, and 5% came from the exchange. So therefore, when you look at our revenue for the first quarter, broadly speaking, do not infer a relation between our volume and our customers' demand. The story in the first quarter was about the exceptional winter condition and the resulting impact on network velocity and network capacity. So now looking at the quarter in more detail, and I will do that, as usual, on the FX adjusted basis. I will start with Petroleum and Chemical, which was up 16%. The volume growth came from crude, from LPG, and most of our base chemical and plastics.

We also had a strong market environment in energy, as well as in energy-based manufacturing. In that segment, both condensate and sulfur markets though, were soft. Metals and Minerals revenue was up 1%, excluding iron ore. Frac Sand revenue was up an impressive 23%. Our Wisconsin franchise continued to flourish with the addition of new production capacity and further scale-up of existing facilities. Other revenue from our metals segment was down 7%, mostly driven by lower shipment of pipe, steel, and aluminum. Iron ore revenue was down 19%. We had a very difficult winter condition in the Upper Midwest, which negatively affected our supply chain operation in that area. Forest Products revenue declined 6%. Lumber demand was very strong and was supported by continued improvement in U.S. housing starts.

However, winter affected network capacity in Western Canada and did put a downward pressure on our overall ability to move lumber, pulp, and paper car loads. The Port of Vancouver had a one-month truck strike, which also impeded lumber and wood pulp export via that port. Coal revenue was up 2%. We experienced lower export of pet coke and thermal coal, and these were offset by very strong demand for U.S. domestic utilities. Grain revenue increased 9%. We had revenue growth, which was driven by big crop in both Canada and United States. The demand for Canadian export is huge, and our supply chain shifted to full gear with the arrival of spring a few weeks ago.

Recall that pricing in Canadian regulated grain was reduced by the government by 1.8% for the 2013/2014 crop year, and it is a year-over-year negative on our same-store price. Fertilizer revenue fell 20% due to network challenge and also to a short-haul sourcing of phosphate by one of our customers who changed his sourcing in the year-over-year. Automotive revenue and car load dropped 10%. Finished vehicle revenue was negatively impacted by North American industry-wide TTX car supply shortage. Intermodal revenue grew 9%. The international business was up 15%, the domestic rose 2%. We had solid growth in the industrial sector, consumer products, and as well, from a geographic perspective, we had strong transborder shipment to and from Western Canada with the United States.

Our cold supply chain service is gaining market traction in the marketplace and produces double-digit growth. The early Chinese New Year congestion and the Port of Vancouver truck strike, which lasted a month, has put a toll on our port operation, especially in Vancouver. Now, looking forward, first, I wanna reaffirm, like I did at last conference call, that our year-over-year line of performance will be driven by current strong demand for most of our product, by our network capacity to meet that demand, and by the still weak Canadian Dollar. Looking at Intermodal, the business is looking strong. It's helped by strong U.S. economy, U.S. consumer confidence, also advised by still a very fairly positive customer sentiment toward a CN product, despite a strong, tough winter and as well as some recent market share in the marketplace.

Most promising is the business out of the Port of Vancouver, the Port of Montreal, and as well as the domestic retail. On Petroleum and Chemical, we will also produce growth. Shale gas is having a positive implication on manufacturing, mostly petrochemical. Crude by rail will continue its progression, although I am increasingly more interested in the needed price yield improvement of that segment versus strictly only volume growth. Metals and Minerals will be driven by oil and gas production consumable and by the North American automotive manufacturing. We further expect some further gain in Frac Sands during the course of this year and maybe next year. Forest Product will be driven by good, by good U.S. housing start and by existing high inventory of pulp, lumber, and paper at the, near the production sites.

The last Q1 housing starts, especially in the U.S., will not be made up, but most, most of our customers believe that the run rate will be back. For grain, we have a lot of Canadian grain to export. We will have a lot of it to export all of calendar 2014, as well as in 2015, two big carryover. For fertilizer, demand for potash export looks solid for the next few months, including maybe during part of the summer. Exchange rate will likely be a positive tailwind since the average exchange rate was CAD 1.02 for $1 during Q2 of last year. In closing, the strong market demand remain intact. Housing, energy, automotive, grain, fertilizer, domestic, thermal coal, iron ore, and anthracite are all looking solid.

Export coal, though, look weak, same as pet coke and sulfur also look weaker. We have a disciplined inflation-plus approach to pricing, and as the overall North American rail network capacity is getting snug, our rail capacity will increase value over time. Thank you. Luc, we'll go to financial.

Luc Jobin (EVP and CFO)

All right. Thanks, JJ. Starting on page 14, let me walk you through the key financial highlights of our first quarter performance. These are strong results considering the adversity we faced, but let me give you more specifics. As JJ highlighted, revenues were up CAD 227 million, or 9%, to nearly CAD 2.7 billion. Operating income was CAD 820 million, up CAD 40 million, or 5%, versus last year. Our operating ratio was 69.6%, an increase of 120 basis points versus last year, pressured by difficult winter conditions throughout the first quarter and extending over most of our network. As Jim pointed out, our team worked very hard, but we couldn't get to all of our customer demand, and also it resulted in higher operating costs.

Other income was CAD 94 million versus CAD 42 million last year. In the quarter, we sold a portion of a subdivision in the greater Montreal area to the local transit agency, resulting in a pre-tax gain of CAD 80 million. This compares to a similar transaction done last year, but last year was in the greater Toronto area for a gain of CAD 40 million. Net income for the first quarter was CAD 623 million, up 12%. Foreign currency translation contributed to a favorable impact on net income of CAD 26 million, or $0.03 of EPS in the quarter. So the reported diluted EPS reached $0.75, up 15% versus last year.

Now, when excluding significant property disposals, which occurred in each of the first quarter for this year and last year, the adjusted diluted EPS stands at $0.66, up 8% versus 2013. Turning to page 15, let me address the operating expenses. Those stood at CAD 1.873 billion, up 11% versus last year, or 6% on a constant currency basis. At this point, I'll refer to the changes in constant currency. First, labor and fringe benefit costs were CAD 587 million, essentially flat versus last year. This was the result of three main elements: First, an increase in overall wage costs, including overtime, of CAD 37 million, or about 2.5 percentage points, which partly was offset by higher capital work being performed in the quarter versus last year for about CAD 8 million.

The second element is a lower pension expense for CAD 24 million of the labor variance. The third element is a lower stock-based compensation expense in the quarter versus last year, which also represented CAD 8 million of the variance. Purchased services and material were CAD 388 million, an increase of 15%, or CAD 48 million versus last year. We had higher volume, about 5% more, revenue ton miles, along with significant increase in winter-related costs. As such, repair and maintenance expenses were up some CAD 20 million, accounting for 7 percentage points of the increase. As well, we had higher utility and material costs for five percentage points of the variance. Crew accommodation and increased intermodal trucking expenses made up the majority of the remaining increase for two percentage points.

On the fuel side, the fuel expense stood at CAD 468 million, up CAD 24 million or 6% versus last year. Higher volume represented an increase of five percentage points in the quarter, while an increase in price drove the remaining one percentage point. Depreciation was CAD 256 million, CAD 13 million higher than last year, or 6%, due to a combination of asset additions and the impact of depreciation studies. Casualty and other costs were CAD 97 million, CAD 11 million or 14% higher than last year. We had higher property taxes and general costs, which were offset by lower workers' compensation expenses. We also incurred higher accident-related costs for approximately CAD 10 million, which explains, for the most part, the variance.

Turning to free cash flow on page 16, we generated CAD 477 million of free cash in the first quarter, an increase of CAD 343 million versus last year. Cash from operations benefited from higher earnings, lower income tax payments, and better working capital. On the investing side, we had higher proceeds from property disposals, partly offset by higher capital expenditures. So our balance sheet remains strong, with debt and leverage ratios well within our guidelines. Finally, on page 17, our 2014 financial outlook. We're coming back strong from the extreme weather condition experienced in the first quarter, and which have arguably slowed down many parts of the North American economy as well. Our network is quickly catching up with demand, and we're optimistic with our prospects for the balance of the year.

Given this perspective, we're reaffirming our annual guidance, and thus we are aiming for double-digit EPS growth in 2014 over the 2013 adjusted diluted EPS of $3.06. Our guidance also continues to call for free cash flow in the range of CAD 1.6 billion-CAD 1.7 billion. We're increasing, however, our capital investment program from CAD 2.1 billion to approximately CAD 2.250 billion. This additional CAD 150 million will go towards higher investments in network capacity in our key corridors and additional motive power. So the CN team remains as committed as always to delivering superior results for its customers and shareholders, no matter how challenging the circumstances, as we continue to unfold our strategic agenda in 2014 and beyond.

On this note, I'll turn it back over to you, Claude.

Claude Mongeau (President and CEO)

Yes, indeed, Luc, our strategic agenda is delivering. I'm very pleased with those first quarter results, which are solid in the circumstances. As I said earlier, we are, you know, focused on the balance of the year. The, Luc just, reaffirmed our guidance, and we're committing to—committed to deliver on that, on that guidance. And the key is to regain our network fluidity, which is exactly what we're doing. I think in the month of April, as it stands, it looks like we might actually have a month with 1.3 billion GTMs per day on average, which would be by far the highest we've ever done on a consistent basis for a full month. So that's a good sign that the, the volume is out there, the fluidity, the speed of the network is recovering.

And behind that is our focus on first mile, last mile, on end-to-end visibility, basically re-regaining our footing in terms of customer service levels. Nothing is more important to our long-term future because we're committed to continue to grow faster than the economy and do so at low incremental cost, so that we can please our shareholders for many, many years to come. In order to do that, as Luc just indicated, we're gonna be investing, effectively CAD 150 million more. I think this is all part of our multiyear plan, and, we're just taking advantage of this smart monetization.

I thank you, Luc, again this year for finding a way to create value by selling assets that we don't need for our freight business, and to do so at a profit, generating cash flow that we can reinvest in our business. So I will turn it over to you for question and answer, but rest assured that we feel good about the balance of the year. We feel we have momentum to deliver solid results again in 2014. Operator?

Operator (participant)

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. Our first question is from Scott Group from Wolfe Research. Please go ahead.

Scott Group (Analyst)

Hey, thanks. Afternoon, guys.

Claude Mongeau (President and CEO)

Thank you.

JJ Ruest (EVP and CMO)

Good afternoon, Scott.

Scott Group (Analyst)

So JJ, I heard you mention, I think, a couple times that the volume in 1Q wasn't reflective of the demand environment. You know, wanna get your perspective, first on kinda what you think the demand environment is from a growth perspective. How much do volumes wanna grow? And then just kinda secondly with that, how much growth do you think the network can handle? So it's like, I think it's the second year in a row you've had to raise CapEx in the middle of the year. Are we getting to the point where you can't handle some of this growth, or is it kinda just the weather was unusual? I just wanna understand that a little bit better.

JJ Ruest (EVP and CMO)

Thank you, Scott. I'll do that, pick up the first one, and Jim will pick up the following capacity. Most of our segment had very good demand in the first quarter, and it was looking good for the second quarter, and in most cases beyond, especially anything has to do with energy, housing, automotive, you know, frac sand, and a number of these different things. Where we have softness is export coal, export sulfur, and export pet coke. And where we have some capacity, which is not necessarily related to CN, but capacity, which is more of a North American capacity, is, you know, how fast my center beams are coming back on my road to move the lumber that I have.

Same thing with the boxcar to ship out the paper out the panel offline, and same thing for the automotive finished vehicle, so I can serve my assembly plant. But demand looks fairly good. I mean, in some sector like, like grain, it's just huge. They're gonna keep us busy in the spring and the fall, and spring and the summer. So, Jim, if you wanna make some comment on network capacity.

Jim Vena (EVP and COO)

Right. Well, network capacity, we don't look at it as a short-term view. We need to take a look at it as a, as a long-term view, Scott. So if we take a look at it, we've always got a book that looks at what do we need to do this year or next year, depending on where the business is. We wanna make sure we're at the right level of capital against our revenues, so we still stay within that 18%-20% range, and Luc can jump in if he wants to add anything to it. But when we looked at everything that's happening, we thought, and with the change in the regulations for locomotives, we thought we needed to take and put some money into delivering some locomotives this year and providing ourselves some options for next year.

So that's part of the increase, and we wanted to make sure we stayed ahead of the curve there and weren't waiting to the last minute. The other, we've identified some areas that we had, that we knew we had to increase the capacity. So we feel with where we are in the business growth that we see moving forward and what we've just seen in April, we wanna get some of that done this year instead of waiting till next year and the following year. So that's what it's all about.

Claude Mongeau (President and CEO)

If I could just add, Scott, maybe we are moving 1.3 billion in April, so we, we don't need this capital to be able to overperform our outlook for the year. But we do take it on a multiyear basis. We really like the way the AC locomotives performed for us this winter. It was a very, very tough winter, but they performed well for us in the circumstances, and we have a chance here to buy, you know, more of them before we move to Tier 4. So that's for the locomotives. And for the rest, it's really, you know, we know where the pinch points are. We have the ability to reinvest in the business, and we're addressing those pinch points in a very, very methodical, disciplined way to support our growth long term.

Scott Group (Analyst)

Okay. Thanks for the color, guys. Appreciate it.

JJ Ruest (EVP and CMO)

Thank you. [crosstalk]

Operator (participant)

Thank you. Our next question is from Benoit Poirier, from Desjardins Capital Markets. Please go ahead.

Benoit Poirier (Analyst)

Hi. Jim, could you comment on the CAD 100 million of capital that was invested in the Edmonton-Winnipeg corridor after last year's challenging winter? Maybe perhaps more broadly, talk about some of the things that you did to prepare operationally going into this year's winter. Thanks.

Jim Vena (EVP and COO)

Okay, Benoit. Listen, let's go with the CAD 100 million first. What we identified was that last winter we had how fast you could recharge the system, how fast you could get the trains and the yards movement. We spent the money, very strategic, put some new sidings in on the Prairie North Line that allowed us an option to be able to move trains quicker. It's not our primary route. It's not quite as quick as our main line, so you don't want to use it, but it was important to do that. We spent money in Winnipeg, at Symington Yard, just because of the growth that we've seen in traffic and the flow.

You know, we've gone there probably 30%-40% growth in that yard and traffic moving through there in the last few years, so we knew we had to do that. And what we found this winter is, it really made a difference. We recovered quicker, even with a worse winter, Winnipeg West and the Prairies, than we did the previous winter. Now, what did we do to get prepared? Listen, we run in the northern part. I think there isn't anybody on the Class 1s that operates further north than us. We know winter is gonna happen. The question is how bad and how long and the intensity of it. So what we do is and we're very methodical about this, is you need people.

So we're lucky enough, and we've taken it head on to train a number of people to supplement our unionized workforce. That's not our key, but just in case we get into a position where we need it. This winter, we had people from across the company working out in the field. We had account managers, they were getting calls from customers, and they were out when the train wasn't moving, of course. They were out taking calls and dealing with things. We did that. We watched the yards very carefully. We managed it on a day-to-day basis, the senior group in operations, and watched everything we were doing. It just grows on what we do every day on the rest of the year, but you have to be very productive in the yards.

Yard productivity, again, in April, is better than it ever has been, so we can see that the recovery's there. Our train speed is coming back up where it needs to be, and we did that quickly with what we've invested in going through the winter. So it's a continuous process to see where we can look for opportunities to make the place better, Benoit.

Benoit Poirier (Analyst)

Okay, thanks for the time.

Claude Mongeau (President and CEO)

Thank you, Benoit.

Operator (participant)

Thank you. Our next question is from Chris Wetherbee, from Citi. Please go ahead.

Chris Wetherbee (Analyst)

Thanks. Good afternoon. Maybe just a pace, a question on the sort of pace of recovery into the second quarter, maybe focused on volume that was left on the table in the first quarter due to weather, what you can sort of make up.

... and maybe how you think about market share opportunity in light of what we've seen as a pretty tough winter so far, you know, any sort of new opportunities that have come up as a result of that. But I guess I just sort of roughly want to get an idea of how much sort of volume, you know, sort of upside do you have over the next quarter or two? How quickly can you kind of make up what you lost?

JJ Ruest (EVP and CMO)

Maybe I can start, Chris, it's JJ. In terms of market share opportunity, I don't think there is a resulting market share for us, as put up from the winter. The winter has been challenging for all of us, and, as far as CN, we have a good book of business. We're happy to have the customers that we have, and our focus is to serve those existing accounts. Regarding the business that we weren't able to serve during the winter, we're gonna work hard. In some cases, we're gonna be work hard a few weeks, some cases it'll be months. In case of Canadian grain, it'll be up into next year.

We don't necessarily have a number specifically, but we do have, as Jim said, we're doing extremely well the last few weeks with our GTM, and the book of business is there. We have demand, and it looks good for the next little while here.

Luc Jobin (EVP and CFO)

Chris, it's, it's Luc. I mean, just to amplify a little bit on what JJ's mentioned. You know, I mean, order of magnitude, we don't wanna focus on a specific number, but order of magnitude, we probably left behind about CAD 100 million or so of revenues that we just couldn't get to. So you know, we're, the quickness in terms of recovery that Jim pointed out is all about, you know, going after that volume. We know it's out there, and we're getting on top of it very quickly. So we have every reason to believe that, you know, there's a little bit that probably was lost, but by and large, we'll be able to recover most of it.

JJ Ruest (EVP and CMO)

Yeah, to give you maybe, one example, specific example, U.S. domestic thermal coal. The utilities that we serve, and one of them is a new customer for CN, have ended the winter with very low inventory, much lower than what they would like to be comfortable at this point. So we're gonna spend the spring, summer, and fall to rebuild it back to the level that they'd like to enter next winter.

Chris Wetherbee (Analyst)

Thank you [crosstalk].

Operator (participant)

Thank you. Our next question is from Walter Spracklin from RBC. Please go ahead.

Walter Spracklin (Analyst)

Thanks very much. Good afternoon, everyone. I wanna turn to a little bit more of a difficult topic on regulation, and, Claude, you've been addressing this very well in your both in terms of your comments today, but also in your public presentations. One of the questions I have, and I posed it last on the CP call there earlier this morning as well, is less of a focus on, you know, the interswitching expansion of the 160 km and all that. All of that sunsets, of course, in a year or so. It's gonna take a backseat to the Canada Transportation Act review. My question is, you know, should... Is it your sense that cooler heads might prevail now?

You mentioned how it was a heat of the moment decision by, by the politicians, that they came out with, with this regulation and this proposal. You know, this is gonna be arguably a year, maybe two-year process in which they're looking at the CTA. What might come about as a, in, in terms of changes to the CTA if interchange, you know, takes a backseat? What might we be, be faced with? Could it be a watering down or more compromise, or are you worried that something else might come out of left field on us, uh, like the interchange did and catch us by surprise?

Claude Mongeau (President and CEO)

Yeah, I think we will have... I mean, we're moving grain at the moment in line with what the grain elevator companies are able to unload. The, you know, I said that would happen a few weeks ago, and it's happening as we speak. So we will be able, over the summer, to show that railroads are not the only issue in the supply chain, that we can only be as good as the collective capacity of grain elevators to load and unload, and railroads to move in between. So I think that will help as we move more. We're gonna have a record year in terms of overall grain throughput, and people will have to step back and look at what they've done during the winter when emotion ran high.

I believe the Canadian government effectively gave super priority to the grain business. Now, this is summer. We're gonna have a chance here to operate hard for everybody, but what they've done is give super priority to the grain business. I think other commodity, as shippers, are gonna have to step back and ask themselves: Was that a good thing? And I'm hopeful that some will be wise enough to engage in the debate so that it's not just the railroad talking, that customers from all sectors are saying, "These guys are trying to make trade-offs. These guys are managing priorities. They have their incentives, normal commercial incentives.

They're broadly aligned with what we're trying to do in the commercial system, is what we trust more than a super priority for grain." So I think that hopefully will get people to think through and be wise about how they interact with government over the next, you know, few months but, and years as we, as the dust settles. That's at the level of sectors. But, you know, within the regulation that came about, the government also introduced, you know, a new regime for service level, arbitration, for instance, you know, penalties, things of that nature. Well, it's the same basic issue.

If you allow certain customers that are more regulatory-dampened to use the regulatory leverage and jump the queue, get in the line, and get a better deal, and try to make the railroad become a taxi as opposed to a bus service, I think customers are gonna see that, you know, the ones that are commercial, that they're allowing others to jump the queue and get a better deal by going to Ottawa, if that's what happens. That also should get people who are wise and understand the logic of a commercial system to engage in the debate. So we're gonna use this decision, which I believe was not a good decision.

I think it was taken in the heat of the moment for the wrong reasons, and we're gonna have a chance to explain to stakeholders, our other shippers and the regulator, that there is a much better approach. That approach is to encourage supply chain collaboration, to, you know, have the sound policy that builds on commercial incentives, and that we will be able to make that case, and make it to a point that they not only sunset these provisions in a couple of years, but also don't use the CTA review as a big football game around how much do we regulate the railroads. That's my hope, and that's the case we're gonna put forward. I think it's important enough for Canada that the cooler heads and wiser head will prevail in due course.

Walter Spracklin (Analyst)

Yeah, that makes a lot of sense. Okay, thanks very much, Claude. That's my question.

Operator (participant)

Thank you. Our next question is from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski (Analyst)

Well, good afternoon, everyone, and Claude, thanks for those comments there. You know, Luc, I did wanna follow up on the compensation line, and, you know, looking at revenue growth of 9% and compensation growth of only 3, how do we think about that relationship going forward? I know you've talked about a lot of moving pieces in the comp line.

Luc Jobin (EVP and CFO)

Yeah, I mean, you know, again, I think in the first quarter, we had the first time that the pension started to be a bit of a tailwind for us as opposed to a headwind. So, that is part of the explanation for the change. There was also a fair amount of favorable stock-based compensation swing. But it, you know, if you look at the longer term across the year, you know, we're still looking for labor to be in the sort of 20% of revenue category. So, you know, order of magnitude, that's still the number that we have in mind.

We are going to be growing our average headcount, probably to the tune of, you know, 1%-2%, and we're continuing to see wage inflation around 3%. So, you know, those, those, those elements will be, you know, will be there throughout the year. And, we've guided for the pension expense to be favorable to the tune of CAD 70 million-CAD 80 million, this year, you know, versus last year. So, so that's, you know, broad terms, that I think is what we're looking at for, for the labor category.

Brandon Oglenski (Analyst)

Thank you.

Claude Mongeau (President and CEO)

Thank you, Brandon.

JJ Ruest (EVP and CMO)

Thank you, Brandon.

Operator (participant)

Thank you. Our next question is from Bill Greene, from Morgan Stanley. Please go ahead.

Bill Greene (Analyst)

Hi, good afternoon. I wanted to ask, JJ, about currency. Are we yet seeing any reaction north of the U.S. border from your shippers? Have they been able to ramp up production? Is this gonna be a meaningful driver in the second half? Any color you can give us, and if the answer to that's no, maybe sort of what's a normal timeframe for when they would start to react?

JJ Ruest (EVP and CMO)

I think if you look at, thank you. If you look at the, you know, those who really live off the U.S. currency in terms of export, whether lumber, for example, pulp, most of that, even when it's sold to Asia or sold to United States, would be in U.S. currency. It does give them a bump, right? They are more competitive in world market if you ship, if you go overseas, and they make a little more profit, if you ship to the U.S. So I think you already see that impact, especially in, in markets where you don't necessarily have a lot of contracts out there, like lumber and panels. Pulp is, tends to kind of quarter by quarter. Currency is also a factor in other markets, like in the case of export coal, for met coal, for example.

The Australian Dollar is weaker, so you know, the dollar, the price, the price of the product is in U.S. funds. Canadian Dollar is weaker, but, you know, other currencies around the world are also weaker relative to U.S. Dollar. But I think when you take all that in, right now we're what, $0.90-$0.91, and it's okay. It's, typically for Canadian manufacturing sector, $0.91 is easier than $1. And, you know, we'll, we have no impact either way, and, you know, we'll ride, the both segments. But I think the demand you see right now, you already see the impact of some of the Canadian manufacturing sector, having some positive benefit. When you sell to world market, now you have to look at other world currencies, and it gets a little more complicated.

Bill Greene (Analyst)

Sure. Okay. Thank you.

JJ Ruest (EVP and CMO)

Thank you.

Operator (participant)

Thank you. Our next question is from Cherilyn Radbourne, from TD Securities. Please go ahead.

Cherilyn Radbourne (Analyst)

Thanks very much. Good afternoon. You guys had a bit of a tough winter last year as well, nothing to the extent of what you saw this year. But my sense was last year that you weren't as pleased with the way that you handled the winter. I wonder if you could just compare and contrast this winter versus last winter a bit for us, and just your ability to regain momentum this year versus last year.

Claude Mongeau (President and CEO)

Yeah, well, my secret weapon is that I was able to give the keys to Jim this winter. You know, so he did much better than I did in the middle of February. The...

Seriously, the big difference is last year, like this year, on a relative basis, we're doing much better than the other railroads, despite being the most exposed in terms of the weather. Last year, we had an issue, which was winter, but also the lack of recovery capability, especially towards the end in the March period. And that was because we were bumping against the line capacity in that Edmonton to Winnipeg corridor. And so it was a bit more unique to CN, and it's something that we should have been smart enough to get ahead of the curve, and so that's why we did what

...last year and introduced a CAD 100 million program. And we are, you know, always have and will continue to be ahead of the curve, looking at our pinch points. We learn every time we face adversity and make investments ahead of the curve so that we don't bump up against against resiliency issue. It's tough enough to face up to adversity. The, you know, you, you wanna avoid facing up to recovery lag time when weather gives you a break. So I think those would be the, the two main, the, the two differences between last year and this year, Cherilyn.

Cherilyn Radbourne (Analyst)

Great, thanks for that color. That's all for me.

Operator (participant)

Thank you. Our next question is from Allison Landry from Credit Suisse. Please go ahead.

Allison Landry (Analyst)

Hi, good afternoon. Thanks for taking my question. You mentioned earlier that shale was actually contributing to some growth in the industrial sector. I was wondering if you could discuss some of the potential projects that you have in the pipeline in Canada, specifically, whether it's frac sand, inbound materials, or even LNG exports. I think a few weeks ago, there was an announcement that a large-scale frac sand transload facility would open in Alberta, exclusively served by CN. So just hoping to get some commentary surrounding this topic.

JJ Ruest (EVP and CMO)

Thank you, Allison. It's JJ, so maybe I'll, I'll take that one. I mean, cheap gas or cheaper gas really means a whole lot for the North American economy, including CN. So what does the cheap gas means? It means, you know, people who make petrochemical can make more of them and, and be profitable. Same thing for fertilizer, you know, which some producer are on the CN line. Same, same thing for people who make plastics, like plastics plants that we serve in Alberta and Louisiana. When you look at LNG, there is a number of projects for an LNG export terminal, like on the West Coast, whether it's Kitimat or Rupert. Because those projects, even though they're not approved yet, people are already drilling heavily in Northern BC to get gas.

Because when the project goes forward, you really need to be able to charge this project with a lot of gas day one. So people are drilling today. They drill, they frack, they cap. They drill, they frack, they cap. So we're already moving pipe and frac sand to northern BC to build up a base of readily available natural gas from well. And when the project is announced, 3, 4... And let's say it takes 3, 4 years to build it, then there's gonna be a huge amount of drilling, huge amount of frac sand. When we say huge amount of frac sand, we mean unit train quantities. And that's where the market is heading to in Western Canada, just like I think it is in Texas.

People wanna ship 50-car block and eventually leading to a 100-car block and, and with loop track, you know, already high efficiency, high scale operations. So all these things mean a lot of good things for railroad and a lot of good things for CN, whether it's manufacturing or just, or the resource itself.

Allison Landry (Analyst)

Okay, great. Thank you very much.

Claude Mongeau (President and CEO)

Thank you, Allison.

Operator (participant)

Thank you. Our next question is from Steve Hansen, from Raymond James. Please go ahead.

Steven Hansen (Analyst)

Oh, yes, good afternoon. My question relates to your emerging crude barrel franchise. I was just hoping you could provide some added color on your suggestion that in addition to volume growth, I think you said you're also starting to see some pricing growth or acceleration. And if you could provide some color specifically on what's driving those gains, what basins or origin, destination are driving those quarters, in what specific quarters, that'd be helpful.

JJ Ruest (EVP and CMO)

Okay, Steve. Well, it's JJ again. What I was saying is that, it's good to be focused on the profitable volume growth, but there comes a time when some market are growing at such a pace, and, everybody gets so focused and excited on them, that the, the profitable mark eventually gets sacrificed. I just wanna be sure everybody understand, even though we provided guidance as to how much we wanna grow that, that business, we will not grow it at the expense of price. So if we're short of our volume target, it will be because we wanna be sure that we focus on, first on the profitable before we get on the big volume. And after having said...

I've seen in the last 6 months here is, you know, that market may have got too excited to the point where some of these deals weren't necessarily the deal we'd like to have, say, 2 or 3 years from now. We took a pass in some cases and wanna focus our capacity where it makes the most sense. Typically, for us, it's, you know, the business starts somewhere in Alberta or in the West, the Prairies, and it goes east to a CN sort of refinery, or it goes south to either a refinery and/or, you know, barges to get to another refinery. The flows are from the west to the east and the west to the south. If that helps.

Claude Mongeau (President and CEO)

Thank you, Steve.

Operator (participant)

Thank you. Our next question is from Jason Seidl, from Cowen and Co. Please go ahead.

Jason Seidl (Analyst)

Afternoon, guys. You talked a little bit about your same-store sales being up 3%. Now, I believe you stated that it included regulated grain and the export coal. If you remove those two items, where would we be at?

JJ Ruest (EVP and CMO)

Even though we threw this calculation, we don't provide that level of detail. But my philosophy in same-store price is same-store price really means the good, the bad, the ugly, and what's in between, and it's either the whole thing or none of it. My message to my troop is we always have area of weakness and areas of strength, and the game plan is to make the average where it needs to be.

Jason Seidl (Analyst)

But I'm assuming the number would be higher then.

Claude Mongeau (President and CEO)

That would be correct, just because of grain.

Jason Seidl (Analyst)

Yeah, there we go.

JJ Ruest (EVP and CMO)

Very, very consistent, and I like his way of thinking. It's like, playing a hockey game, and, you know, the player is asking: "Could we just forget 10 minutes of the game?" No, the hockey game is three periods. It's, it's, the whole thing, not just, 80% of it.

Luc Jobin (EVP and CFO)

Sometimes five.

Jason Seidl (Analyst)

Yeah, guys, unfortunately, my hockey team only played about two periods this year. That's why they're on the back nine right now.

JJ Ruest (EVP and CMO)

You just watch the half and go to all the distance.

Luc Jobin (EVP and CFO)

Thank you.

JJ Ruest (EVP and CMO)

Thank you.

Jason Seidl (Analyst)

Thanks, guys.

Operator (participant)

Thank you. Our next question is from Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter (Analyst)

Great. Good, good afternoon. Claude, when you go through the whole regulatory discussions, is there discussions in terms of what you can do more of in terms of capacity? It sounded like you had mentioned before, you're already meeting what the grain elevators can put out. So what are the... Are the regulators telling you they expect you to be able to even do more than that? I just wanna understand how the discussions have flowed, as you've progressed here, as the weather broke.

Claude Mongeau (President and CEO)

Yeah. I, I think the, I mean, the best way to put it to you, Ken, is the following: I think there's been a lot of advocacy throughout the winter. I can understand the grain grower side, you know, being concerned about the grain not moving as fast as they, as they would have hoped. But you also have grain elevators companies that are private sector companies, that are few, and that control a big part of the supply chain, that did a lot of blame shifting and basically a lot of self-serving regulatory advocacy. And all I'm saying to the government is, you know, let's follow the facts. Of course, in the winter, there was a shortfall. We couldn't meet all the demands and all the capacity of the supply chain.

But as soon as the winter broke, we started to ramp up, and at the moment, we are on top of Prince Rupert. They cannot move more. We are on top of Vancouver. This weekend, there were 500 hopper cars staged while they were taking a break for Easter weekend, and those cars were sitting, not being unloaded. We are full, except for one elevator in Thunder Bay, and there's only a few vessels coming through the ice that is still blocking the channels going to Thunder Bay. So we are moving just above 5,000 cars, and we are absolutely in sync with the grain elevator companies. So that's what the supply chain is able to do, period. Not just the railroads, but the railroads and the grain elevator companies.

So we're gonna go back to the government, and we're gonna say, "It's one of two things. You either align the supply chain on a commercial basis, the alignment of incentives, and you use the commercial tried and true approach to make sure that people deliver for Canadian farmers, or we regulate. And if we regulate, we should regulate it all. Grain elevators, railroads. We should do the coordination. We should tell what people are supposed to do and do it on a regulatory basis." It's really a choice of path, and, you know, at the moment, the government spoke in the middle of the winter with railroads being blamed. Now, the facts are coming out. They're gonna have another chance to look at this file and decide.

I'm hopeful, I'm hopeful that cooler heads will prevail, and that supply chain collaboration and the sound policy framework that we've worked so hard in Canada to build. We have the best railway system in the world, period. We have the lowest rates, the best service. Before we mess with success, we should think it through. And so it's either supply chain collaboration or it's a regulatory approach. And if it's regulatory, we're gonna be arguing that we should regulate the grain elevators and the railroads, because that's the only way to bargain for the farmers if that's their goal.

Ken Hoexter (Analyst)

Appreciate the insight. Thanks, Claude.

Operator (participant)

Thank you. Our next question is from Thomas Kim from Goldman Sachs. Please go ahead.

Thomas Kim (Analyst)

Thanks. Can you quantify the dollar impact of weather on a few of your cost items, purchased services, fuel, and equipment rents?

Luc Jobin (EVP and CFO)

Yeah, I would say, I'd say, Thomas, that broadly speaking, in terms of expenditures, we're probably looking at something in the order of magnitude of about CAD 50 million of higher expenditures attributable to the, you know, to the harsh winter, so give or take. Okay. Would you be able to break that down into those three different buckets or whatever buckets that you have? That's about as good as it gets.

Thomas Kim (Analyst)

All right. Okay, thank you.

Operator (participant)

Thank you. Our next question is from David Tyerman from Canaccord Genuity. Please go ahead.

David Tyerman (Analyst)

Yes, good afternoon. My question's on your guidance. You've raised your capital budget CAD 150 million, but not changed your free cash flow guidance. I'm wondering, what is filling in the gap?

Luc Jobin (EVP and CFO)

Well, we were able to, it's Luc. We were able to dispose of the, you know, part of a subdivision in the Greater Montreal area, so we realized the proceeds of just shy of CAD 100 million. So, you know, we've been running pretty good cash, managing the working capital, and, in addition to which, we have this realization. So all in all, you know, we were able to address the increase in the capital expenditures, while at the same time, you know, not changing, not changing our free cash flow guidance.

David Tyerman (Analyst)

Okay, perfect.

Claude Mongeau (President and CEO)

We had a very solid start to the year on free cash flow, so.

Luc Jobin (EVP and CFO)

Very, very good. Yeah, a strong, strong position.

Claude Mongeau (President and CEO)

Thank you.

David Tyerman (Analyst)

Okay, perfect. Perfect. Thanks.

Operator (participant)

Thank you. Our next question is from David Vernon from Bernstein. Please go ahead.

David Vernon (Analyst)

Hey, good afternoon, guys. I guess with the CAD 50 million weather impact, if you were to adjust that out, the stronger start to the year here, would that make you more constructive about being able to hit the double-digit EPS growth, kind of as you look out through the rest of the year? Is there something else that's gonna be maybe keeping you from getting a little bit more constructive?

Claude Mongeau (President and CEO)

No, we're always very constructive. But at the same time, disciplined, and you have our guidance. We are committed to deliver on it.

David Vernon (Analyst)

Okay. Maybe then, just, as a quick commercial follow-up,

... In terms of the expansion of the length of haul that we saw in the manufacturing business, is that something that had a weather impact to it? Or is that something you'd expect to be sustained through the next couple of quarters, given the underlying sort of mixed trends in that segment?

JJ Ruest (EVP and CMO)

Well, I think the first quarter was kind of unusual. So before the winter, we had the average length of haul increasing in some of the sector already. I think we spoke of that in the past quarter. But also during the winter, our mix of business was not quite what it was usually. For example, in lumber, a lot of our customers truck, so they truck to a, you know, closest point, which was the Port of Vancouver from Northern BC, and they kept the rail cars to go to Vancouver to go to Chicago again, for example. So the mix of business for, you know, the last quarter has been more about, you know, network and customers' choice to use the best possible, you know, equipment in the way that serves them the most, not necessarily their natural flow.

David Vernon (Analyst)

You wouldn't expect that 15% uptick in length of haul to sustain?

JJ Ruest (EVP and CMO)

What I'm saying, I guess the first quarter was not a good quarter in terms of... It was not reflective of demand. It was not reflective of usual pattern, kind of an oddball. Not sure we can draw a lot of long-lasting conclusions from that.

David Vernon (Analyst)

All right, great. Thanks a lot, guys.

Claude Mongeau (President and CEO)

Thank you.

JJ Ruest (EVP and CMO)

Thank you.

Operator (participant)

Thank you. Our next question is from Keith Schoonmaker from Morningstar. Please go ahead.

Keith Schoonmaker (Analyst)

Thanks. We've heard other rails cite Chicago again, as a major source of delay this quarter. Jim, I'm interested in hearing greater detail on how you're using the J. For example, does most of the traffic moving to and from your southern line skirt the city on the J, or do handoffs from other rails have to move on the belt lines?

Jim Vena (EVP and COO)

If we take a look at the way what the J has done with the EJ&E, being able to have that line around the city, we still have to deliver some traffic into the belt and over the IHB. We moved everything we can off those two lines and onto our own railroad. We moved the interchanges, and we worked hard the last couple of years to move the interchanges with all the other Class 1s that we could, away from the belt and the IHB and over to our own locations. And we're using the yards that we have in the city. So what we've been able to do is we control our own destiny. Chicago did slow down for us because we're impacted.

You know, it wasn't as fluid as it normally would be, but so we were impacted with everything else that was going on. But we did not have a lot of trains sitting, waiting. We did not have, like we would have before, the EJ&E trains sitting at the north end of the city for a few days trying to get through. So the investment was right. And we just finished; we've got one more piece of expansion left to do on the line and connection.

We'll finish that off early next year, and we'll have the railroad built the way we want, and we're finishing off Kirk Yard to make us even more capacity intensive to be able to handle more traffic through Chicago this year, and we'll have that finished by the end of summer.

Claude Mongeau (President and CEO)

Yeah, it's huge. The Kirk Yard as a hump facility right there in Chicago, that's huge for us. And the ability to bypass Chicago for the vast majority of our traffic, I got to tell you, I was glad we owned the EJ&E this winter.

Keith Schoonmaker (Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from Steven Paget, from FirstEnergy. Please go ahead.

Steven Paget (Analyst)

Good afternoon, and thank you. Just looking at historical CapEx and this year's forecast CapEx as a percent of revenue, run rate seems to be around 20%, if I have that correct. Is that a fair run rate to use for the future?

Luc Jobin (EVP and CFO)

Yeah, I mean, this is Luc. I'd say, Steven, that, you know, we're running—we've run historically somewhere between 18%-20%. So right now, we're going to be running slightly to the higher end of it, and that's a reflection, again, of our growth agenda. I mean, we are seeing a lot, our growth is a lot faster than what the economy brings. And, you know, we've got pretty good visibility on it, so we see the opportunities to improve our performance, improve our network, and accommodate all of that growth.

So, you know, we're gonna be running at the higher end of the range, probably for the next couple of years, again, and I'm assuming that, you know, we're gonna be getting to all of this growth that's out there in front of us.

Steven Paget (Analyst)

If I may ask as a follow-up, what physical assets is the increased CapEx buying?

Luc Jobin (EVP and CFO)

Well, as I mentioned earlier, I mean, you know, there's a, there's some of the additional requirement that is going to secure, an increased number of locomotives. So last year, we acquired over 80 locomotives. This year, we're gonna be acquiring about 60 locomotives. So the motive power is a big component of that, but at the same time, we are putting infrastructure investments, such as the CAD 100 million last year on the Winnipeg-Edmonton. We are putting money into some of our key yards to increase our capacity and ability to store and move cars. You know, with this, you know, when you're moving 1.3 billion GTMs per day, that's a lot of traffic on the network and in the yard.

So, you know, we wanna be in a position where it's not only to help us with resiliency in the winter, but you know, basically, that we can maintain the performance, you know, the metrics that we have, as well as the service, as we accommodate the growth. So those are the two main areas that are gonna see the capital investment.

Steven Paget (Analyst)

Thank you, Luc.

Claude Mongeau (President and CEO)

Thank you, Steven.

Operator (participant)

Thank you. Our last question will be from David Newman, from Cormark Securities. Please go ahead.

David Newman (Analyst)

Good afternoon.

Claude Mongeau (President and CEO)

Hey, good afternoon, David. You just squeaked in on the 5:30-

David Newman (Analyst)

I did, right under the wire. Right under the wire.

Claude Mongeau (President and CEO)

All right.

David Newman (Analyst)

As I look at some of the truckers are talking, they're just going gangbusters this past winter, and some of them might have been weather-related, whatever. But the trucker spot rates and contractor rates in both TL and LTL were all going up. And as I look at your sort of domestic mixed merchandise and intermodal, overall, you're talking about CPI plus type increases. I mean, could we see CPI plus plus here at some point? Your forward book of business, I think JJ talked about you're busting the seams, demand very strong, and the only thing to give here is gonna be pricing. You talked about it in crude by rail, but as... Are you seeing it across the other segments as well, or what can we anticipate just on the pricing overall?

JJ Ruest (EVP and CMO)

Yeah. I think the word I used was snug, not necessarily a busting at all. And, Jim always remind me to try to get a little more money for our services, which we work very hard to provide. Spot rate for truck this last winter were very high, and those truckers, trucking firm, who were able to keep capacity aside to be sold on spot, made very well on that. And then what they sold on a regular rate, they were there, like us, to probably spend a little more money on fuel and, and conductors, drivers, I'm sorry, to make it happen. I think we wanna be middle of the road. We wanna do -- we've been very steady at inflation plus pricing, and we're sticking to that.

We recognize that more and more, the North American network capacities may be a little snug, so that what we have is very valuable. What we have valuable is rail capacity. You know, rail capacity is very difficult to recreate. You don't buy other railroad. If you buy them, they don't, you know, the capacity is they already have business on it. And the building track, we know that, you know, from our own program, it takes time, takes permit. It's not easy, and it's capital intensive. So what we have is very valuable. The economy in North America is getting progressively better. Recession was in 2009. How quickly we forget. And I think these assets have a little more value than the past.

One thing does not—doesn't show in the same-store price is, when we work on some lane that may not be as attractive today as they were four years ago, and those lanes sometimes change from one rail carrier to another. It doesn't show up in store price, but it does show up in your overall bottom line. And that's also, I think, part of what's ahead here, is to be more selective and mindful, not of customers, but which line of a customers fits best with us, with or without extended interswitching.

David Newman (Analyst)

Does it help at all? Will this help at all in terms of any market share gains on the TL guys? I know it's one area that you're, you've kind of focused on, but is it... Does this help accelerate that market share gain?

JJ Ruest (EVP and CMO)

I think, as I said earlier, domestic intermodal looks promising for us. I think probably promising for all railroads, including domestic intermodal, interline using, for example, the wholesale partners. And I think that that's an area that makes sense because of length of haul, because of trucking costs, because of driver shortage. I think that was there six months ago, and it's obviously gonna be there even more so 24 months from now. Long-haul truck, you know, is expensive and demanding in terms of manpower.

Claude Mongeau (President and CEO)

It's right in our sweet spot, David. It's all about selling one CM. It's about, you know, putting a product out there that has a lot of value and getting paid for it. But, you know, you got to earn it one load at a time, and that's our journey.

David Newman (Analyst)

Excellent. Thanks for taking my call, guys. The last call of the day.

Claude Mongeau (President and CEO)

Okay, well, thank you. Thank you all. You know, listen, we're very, very pleased with the fact that, despite the adversity, we've been able to deliver a solid first quarter. As you can hear, we're committed to deliver a solid 2014, and I would just invite you all to be safe and look forward to have you on our second quarter call.

Janet Drysdale (VP of Investor Relations)

Thank you. [crosstalk]

Operator (participant)

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