Canadian National Railway Company - Q4 2018
January 29, 2019
Transcript
Operator (participant)
CN fourth quarter 2018 financial results conference call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN fourth quarter 2018 financial results, press release, and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca. Please stand by, your call will begin shortly. Welcome to CN fourth quarter 2018 financial results conference call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher.
Paul Butcher (VP of Investor Relations)
Thank you, Patrick. Good afternoon, everyone, and thank you for joining us today for CN's fourth quarter and year-end 2018 earnings call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is JJ Ruest, our President and Chief Executive Officer, Mike Cory, our Executive Vice President and Chief Operating Officer, and Ghislain, our Executive Vice President and Chief Financial Officer. Also joining us on the call today for the Q&A session is Doug MacDonald, our Senior Vice President, Carload, as well as Keith Reardon, our Senior Vice President, Consumer Products. In order to be fair to all participants, I would ask you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions.
It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, JJ Ruest.
JJ Ruest (President and CEO)
Thank you, Paul, and good afternoon, everyone. Welcome to our winter earnings call. Before I start, I would like to take just a short moment to congratulate Jim Vena on his return to the rail industry. Best of luck, Jim. We wish you all the best. We have a solid result and outlook to report. In the fourth quarter, we produced adjusted EPS growth of 24%, revenue growth of $500 million, our best quality pricing of the last seven years, very solid volume growth of 12% in revenue ton-miles, higher fuel surcharge, and especially in December, much improved operating metrics resulting from our CapEx and resource plan. That is, improved car velocity, improved train velocity, less total number of cars online, and our lean, high horsepower fleet is running at much higher uptime.
Also, last, last quarter, the overall adjusted operating margin was 38.8%, and the adjusted operating ratio was 61.2%. To be noted about December, we downsized our non-union labor force and took a one-time $27 million restructuring charge. Now, turning to page five, the year of 2018 in review. After a dismal first quarter in 2018, in the last nine months, we bounced back to increase revenue by $1.3 billion, producing adjusted operating margin of 40.4% during those same nine months. Proof again of the CN scale in growing the rail business profitably. Now, a quick review of the fourth quarter book of business, starting with Intermodal. Intermodal revenue was up 9% from better pricing and good volume growth from the Port of Prince Rupert and the Port of Vancouver.
Overall, coal revenue grew by 21%, mainly from West Coast export to Asia and Gulf Coast export to Europe. Canadian grain revenue grew at 17%, with Q4 Canadian shipping up 14%. This crop here, which is from its beginning since last August, CN Canadian grain export tonnage is 1.5 million metric ton ahead of last year's pace. This is an all-time company record for crop year to date. Our CN railroaders are getting the job done for the Canadian grain farmer. Potash, semi-finished steel, refined product, each grew revenue at solid double digit. Paper, wood pulp, and chemical grew low double digit. Lumber, after a plea last year from shippers to get more supply of lumber car, the lumber business is down, and we currently have 1,200 lumber cars parked.
On crude, we move on average 230,000 barrels a day in the quarter, versus about 130,000 barrels a day in the third quarter. Our CN railroaders are also getting the job done for the Alberta oil industry, and we are willing to do more as needed. In Vancouver, from November 1 to mid-January, we move a solid 10% more volume than last year. CN, and a good number of world-class supply chain terminal operators that are committed to the efficiency of running 24 hours a day, 7 days a week, have kept the big Port of Vancouver going at a time of strong demand and harsh conditions. Automotive was up about 5%, and we are entering a phase of overall market softness.
...Looking to 2019, we have a good start to the year, with about 10% increase in our production to date of revenue ton-mile volume. We have diverse and solid opportunity ahead of us, and we are aiming for high single-digit volume growth for this year as measured in RTM. So please refer to our detailed top-line outlook in page, in page six. I'm gonna pass it on to Mike for his operational review. Mike?
Mike Cory (EVP and COO)
Thank you, JJ. Yeah, kudos to Jim. JJ, I wanna say congrats on being named Railroader of the Year. I think you're either the third or fourth one I've worked with, and hopefully be around to have about five or six more.
JJ Ruest (President and CEO)
Thank you.
Mike Cory (EVP and COO)
Look, first, as always, I just wanna thank the great team of railroaders at CN for their day-to-day commitment in delivering what I would say is a very strong quarter on many fronts. When you consider the rough start we had the last year, they delivered on everything they said they would in a very demanding environment. Here's a little overview of the impact of our 2018 capacity and resource projects. Our network train speed was up 4% versus Q3. Our locomotive utilization was up 2% versus Q3, and our through dwell was improved by about 4% versus Q3. And this was all accomplished as GTMs grew to a record Q4 level in 2018. In fact, GTMs were up 6% versus Q3, which was a quarter that already was at a record level.
The growth, of course, is not linear. Our growth is more concentrated in our Western and Southern regions. On a year-over-year basis, our GTMs were up 11% over Q4 2017. Our network speed improved by 4%, car velocity improved by 10%, and our through dwell improved by 15%. With this exceptional team of railroaders, we are able to achieve these results, and for this, I am extremely thankful. So during the quarter, our service levels met all the demand for Canadian grain. We moved all available frac sand, we moved record amounts of crude, and we fulfilled all customer demand while meeting forest product orders. In Q4, we completed the capacity projects we outlined to you earlier and added the remainder of the 60 new locomotives that we purchased. We also added just over 300 qualified operating employees.
Most of these employees, again, were deployed to our busiest region in Western Canada. Our run rate for operating employee demand is now normalized. On the safety front, we saw a sequential improvement in both FRA accident and injury ratios. We continue to place an extremely high focus on developing systems and technologies to ensure safe train operations. Turning to the next slide, our engineering team continued to work right through Q4 in preparation for another solid program this year. This work consists of some new capacity additions in our southern regions and the design and permitting for projects commencing in the spring of this year. As I've stated many times, growth is not spread equally across our network, so our capacity projects are aligned to where our network requires capacity.
On the technology front, we are installing equipment inspection portals in key areas of our network to improve our mechanical capabilities. These inspection portals will improve our ability to develop deep databases on component life, improve our maintenance intervals, reduce dwell time in major terminals, and allow our car mechanics to focus on fixing defects. We have also developed and will deploy autonomous track inspection cars that can run at track speed. Like the inspection portals, this will allow us to direct our track maintenance employees more clearly to areas requiring repair, all the while providing key data points to better deploy capital and understand the life cycle of the components. Both these technologies will fully support a safer railway, better reliability, and reduced cost over time. Lastly, in 2019, we will acquire 140 new AC locomotives.
These locomotives will replace older locomotives as well as those still under lease. All of these actions will continue to properly position us as we go forward into the next evolution of scheduled railroading. We're working to create effective capacity through systems and technology. 2019 is gonna be a big year for operations at CN, and let me tell you, we're ready for it. We have a solid pipeline of growth opportunities, and we're ready to accommodate it at low incremental cost. With that, I'll pass it over to Ghislain.
Ghislain Houle (EVP and CFO)
Thanks, Mike. Yeah, JJ, congratulations on Railroader of the Year. Very proud to be working with you. I'm very pleased with our solid performance in the fourth quarter and capping off a turnaround year. Starting on page 11 of the presentation, I will summarize the key financial highlights of this performance. As JJ previously pointed out, revenues for the quarter were up 16% versus last year, at slightly over $3.8 billion. Fuel lag on a year-over-year basis represented a tailwind of $27 million or $0.3 of EPS, mostly driven by an unfavorable lag last year. Operating income came in at $1.452 billion, up $227 million or 19% versus last year. Our operating margin came in at 38.1% or 80 basis points higher than last year.
During the quarter, we recorded a provision of $27 million from the management workforce reduction initiative. Excluding this provision, our operating income was $1.479 billion, with an adjusted operating margin of 38.8% or 150 basis points higher than last year, translating into an adjusted operating ratio of 61.2%.
Net income stood at $1.143 billion, or $1.468 billion lower than last year, with reported diluted earnings per share of $1.56 versus $3.48 in 2017, down by 55%.... Excluding the impact of non-core asset sales and provision for workforce reduction in the quarter, and the impact of deferred income tax expense from the U.S. tax reform, including the enactment of higher provincial tax rate in Canada in 2017, our adjusted diluted EPS for the quarter was up a solid 24% versus last year. The impact of foreign currency was favorable by $24 million on net income, or $0.3 of EPS in the quarter.
Turning to expenses on page 12, our operating expenses were up 14% versus last year at $2.356 billion, impacted by strong volumes, higher fuel prices, and higher labor costs, while operating metrics improved versus last year's levels. Expressed on a constant currency basis, this represented a 12% increase. At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were $791 million, 17% higher than last year. This was mostly the result of higher wages, driven by increased headcount, an increased pension expense, and severance costs related to the management workforce reduction initiative, partly offset by higher capital credits. Purchase services and material expenses were $527 million, 10% higher than last year.
This was mostly the result of higher outsourced services and repair and maintenance expenses, mainly from higher volumes, partly offset by favorable capital credits. Fuel expense came in at $466 million, or 18% higher than last year. Higher volumes accounted for $38 million of the increase, while higher fuel prices were $31 million unfavorable variance versus 2017. As network fluidity improved, fuel productivity was favorable by 1.6% in the quarter versus last year. Depreciation stood at $346 million, 8% higher than last year. This was mostly a function of net asset additions. Equipment rents were up 4% versus last year, mostly driven by additional car leases. Finally, casualty and other costs were $111 million, which was 9% lower than last year, mostly due to lower legal claims.
Now, let me turn to our full year results on page 13. We completed 2018 with revenue slightly above $14.3 billion, almost $1.3 billion, or 10% higher than 2017, with all of the revenue growth generated in the last three quarters of the year. Our operating expenses at around $8.8 billion, were 13% higher than last year, producing a 5% increase in operating income versus 2017. The operating margin stood at 38.4%, 180 basis points lower than last year. Adjusting for the provision for workforce reduction, our adjusted operating margin came in at 38.5% or 170 basis points lower than last year. Net income was down 21% at slightly above $4.3 billion.
Excluding the impact of one-time line sales and workforce reduction provision in 2018, and income tax adjustments, primarily the US tax reform in 2017, adjusted net income was up 7%, and adjusted diluted EPS came in at $5.50, up 10% versus 2017. This is quite a performance in light of a challenging first quarter of 2018. In fact, as JJ mentioned earlier about CN's performance, in the last three quarters of the year, our adjusted EPS from Q2 to Q4 was up 17% versus the same period last year, so quite a turnaround. Now, moving to cash on page 14, we generated free cash flow of roughly $2.5 billion for the full year 2018.
This is $264 million lower than in 2017, and mostly the result of higher capital expenditures, partly offset by higher net cash from operating activities. Our capital investments finished slightly higher than our budgeted $3.5 billion, and our balance sheet remains strong, with debt leverage ratios well within our guidelines. Finally, let me turn to our 2019 financial outlook on page 15. The demand environment remains solid in a number of different sectors, and we continue to see a broadly positive economic backdrop in North America, particularly as it relates to consumer confidence. In addition, we expect CN-specific opportunities to enable us to grow above base economic conditions. This environment should translate into high single-digit volume growth in terms of RTMs for the full year versus 2018 in a favorable pricing environment.
On the capital front, as Mike highlighted, we are committed to reinvesting in our business to support safety, service, and growth. Given the strong volume growth we experienced in the latter part of 2018, and to continue to support future growth opportunities at low incremental cost and deliver superior service, we are setting our capital envelope at around $3.9 billion. Infrastructure capacity investments should be in the same range as 2018. With this, we expect to deliver EPS growth in the low double-digit range versus 2018, adjusted diluted EPS of $5.50. We are assuming the Canadian and US dollar exchange rate to be approximately $0.75, and fuel prices to be in the range of $50-$55 per barrel for WTI.
Finally, our effective tax rate should be around 26%-27% for the year, versus 25% in 2018, adjusting for capital gains treatment on asset sale. Furthermore, we continue to pursue our shareholder return agenda. In 2018, we returned to shareholders slightly above 80% of our adjusted net income through dividends and share repurchases, and our current three-month buyback program of up to 5.5 million shares will be completed by the end of January. Finally, we are pleased to announce, as JJ mentioned, that our board of directors has approved an 18% dividend increase for 2019, reflecting our solid performance in 2018 and our confidence in the future as we aim to reach a 35% dividend payout ratio.
In addition, our board of directors approved a share buyback program of up to 22 million shares for an amount of up to $1.7 billion to be returned through a normal course issuer bid from February 1, 2019, to January 31, 2020. In closing, we remain committed to our agenda of operational and service excellence with our supply chain focus as we continue to manage the business to deliver sustainable value for our customers and shareholders today and for the long term. On this note, back to you, JJ.
JJ Ruest (President and CEO)
Well, thank you, guys. As you can see, we are well-positioned to deliver a solid result going forward. The service metrics are back to scheduled railroading level. We have organic volume growth, but also we have an organic acquisition. We have a capacity CapEx plan for long-term growth and service resiliency. Some of that CapEx in the next two years is for the Vancouver gateway infrastructure, namely two projects totaling CAD $300 million that CN will be jointly funding with Ottawa and the Port of Vancouver. We are deploying smart technology to drive CN into the next evolution of rail transportation and supply chain productivities. More to come on that at our Investor Day in early June. Our approach to shareholder distribution in dividend and buyback is balanced and steady.
Our approach to our operating margin and return on invested capital, which stood at 15.7% in 2018, is also balanced and has a long-term focus. Patrick, we're gonna turn it over to the question, and as a reminder, we have Doug MacDonald on the cargo side and Keith Reardon on the consumer products side, joining us for the commercial question. Patrick?
Operator (participant)
Thank you. 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. The first question is from Turan Quettawala from Scotiabank. Please go ahead.
Turan Quettawala (Director of Equity Research)
Yes, good afternoon, and thank you for taking my question. I guess maybe I'll start off on the guidance front here. Just kind of looking at some fairly easy lap years, obviously, here in first half, and you talked about that in your comments. And the sort of high single-digit RTM growth, it seems like you're being a little bit conservative on the EPS line. I understand that there's a bit of uncertainty here in the economy, but are there any specific areas maybe that you're concerned about when you think about your guidance? Thank you.
JJ Ruest (President and CEO)
So if I can maybe start, Taran, thanks for the question, is we had a very solid start, I think, in the first 15 days of the month, because the network, the weather was forgiving to the railroaders. And as of about a good week or so, we've had this polar vortex, where it's been minus 40 degrees centigrade in Northern Ontario, Northern Quebec. So we don't take anything for granted for the wintertime, and the first quarter is always a challenge, or potentially challenged quarter, not necessarily on the business side, on the operating condition side. We're in much better shape, but we always like to see the winter before we step out too far, and we have good guidance in our view, take into account, you know, how the economy looks.
I don't know if you, I didn't want to add anything, Ghislain Houle.
Ghislain Houle (EVP and CFO)
No, I would, I would, totally agree, JJ. I think that, this is our best foot forward on guidance as we speak. And as we usually do every quarter, we review, we review our numbers, we review the outlook, we do a top-down, bottom-up, and, and as we, go through the year, you know, we'll do the same thing. And, but at this point, this is the best view, that we have forward.
JJ Ruest (President and CEO)
Yep, high single digits.
Turan Quettawala (Director of Equity Research)
Thank you very much.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Chris Wetherbee, from Citigroup. Please go ahead.
Chris Wetherbee (Senior Analyst)
Yeah, thanks. Good afternoon. Wanted to ask about CapEx. So, I think a step up on a year-over-year basis to a relatively high number as a % of revenue. Maybe you could help us a little bit in terms of, you know, highlighting some of the specific opportunities and maybe how you think that could generate growth beyond 2019. And then also maybe just sort of following up on the last question, are there some sort of operating penalties, if you will, associated with the CapEx as you undertake all the projects over the course of potentially the summertime that may dilute a little bit of the, you know, expected operating leverage of the business?
JJ Ruest (President and CEO)
So the CapEx, if I may start there, Chris, thanks for the question. The CapEx is for growth and for resiliency. So growth will be reflected in the top line, and resiliency will be reflected also in our costs. Next year, well, this year, we want to be sure we create a product that gives us the runway for 2020, 2021, 2022 in terms of attracting good long-term business with CN, but also that allow us to have operating metrics that help us to slowly grind the profit margin. So it's really aiming to these two things, is a safer railroad, capacity for growth, especially in Western Canada, where there's still a lot of business opportunity and as well as, you know, working on our costs.
Chris Wetherbee (Senior Analyst)
In terms of any of the cost penalties for this year, do you think there, that impact operating leverage at all or not really?
JJ Ruest (President and CEO)
... Mike, you want to talk about the impact of having a major capital program during the summertime on the operating metrics?
Mike Cory (EVP and COO)
Chris, no. What, you know, generally, in the summertime, we see some of the commodity mix change, where we're able to get into the track in these places in Western Canada. So no, I don't think it having. I don't see it as having a big penalty. And you got to remember, last year, we were on the back tees when we started. We had, starting right from scratch, getting materials, building the plan very quickly. We added, if you remember, in Q, after Q1, we added some more capital to it. This year, you know, from what we learned last year, we're gonna do some different spacing and how we go about doing the basic capital versus the, the new special capital.
We're also looking to do some grading and have it in position so that we can start to use the 12 months of the year to build track. For instance, in Western Canada, you can build track in the middle of winter as long as you've got a good grade. We're gonna mix some of that in for years going forward, but next year, I don't see as much of a penalty as we may have taken this year.
Chris Wetherbee (Senior Analyst)
Okay. Thank you very much.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Cherlyn Radbourne from TD Securities. Please go ahead.
Cherilyn Radbourne (Managing Director and Equity Research Analyst)
Thanks very much. Good afternoon.
JJ Ruest (President and CEO)
Good afternoon.
Cherilyn Radbourne (Managing Director and Equity Research Analyst)
I wanted to ask for a bit more color on the natural resource export growth through Prince Rupert. So can you speak to the current run rate on some of that traffic, how you expect it to ramp up as the year progresses? And whether you think that ramp up, is it all sensitive to the economic backdrop?
JJ Ruest (President and CEO)
Doug can answer that. Doug MacDonald.
Doug MacDonald (Senior VP)
Thanks, Cherlyn. So, from a natural resource standpoint, through the West Coast, we expect to see some significant growth, obviously, in our coal franchise. So we've had two mines start up that will obviously overlap into this year. So that's the CST mine as well as the other mine from Conuma Coal. And then we actually have our brand new mine coming up very early in Q2, but also even at the end of Q1, and that'll be the Vista Coal project. So that'll be significant. At the same time, we expect we're doing very well in grain as an export route up there as well. So we're probably gonna be close to hitting a record there this crop year.
Cherilyn Radbourne (Managing Director and Equity Research Analyst)
Thank you. That's my one.
JJ Ruest (President and CEO)
Thank you.
Doug MacDonald (Senior VP)
Thank you.
Operator (participant)
Thank you. The next question is from David Vernon from Bernstein. Please go ahead.
David Vernon (VP and Senior Analyst)
Hey, guys. Thanks for taking the time. I wanted to kind of ask the CapEx question a different way. It looks like kind of high single-digit RTMs, pricing in the low singles. You're still looking at a CapEx budget for 2019 around 25%. As you guys do, like, sort of your long-term planning around the three, five, seven years, is that kind of the right number, do you think? Or are we doing quite a bit of expansion that you're gonna be flexing into over the next five to seven years?
Ghislain Houle (EVP and CFO)
Yeah. Thanks, David. This is Ghislain. Listen, we've said that 2018 would be a big capital year, and, and it was. It was around 25% of revenue. And we said to the market that you should expect the same range in 2019. So, you know, that's where we are. And if you look at the variance category to try to help you, I mean, usually on basic maintenance, we're very consistent, and we're always in the range of about $1.6 billion. We're very consistent on that. We've, you know, we've said that the infrastructure capacity investment this year would be in the same range as last year. I would tell you that the bump up this year versus versus 2018 is really the locomotives. Remember last year, we received 60 locomotives.
This year, we're gonna receive 140, which is very good news. Like, and 120 of those will be in the first half of the year, and actually, 70 of them will be in the first quarter. So they're, they're, they're upfront. And again, we still have about 130 locomotives that are under lease. And as velocity, as we're gonna come out of winter and as velocity is going to improve, we're gonna look at every opportunities to return the lease units and use the brand-new units that's coming online. Good news on, CapEx from the PTC standpoint, it's starting to go down, and you can assume about $300 million of PTC in 2019.
And frankly, going out of 2019, we've said, and we are committed to continue to do that, is that you should now expect after 2019, our capital envelope to go back to historical levels in the 20% of revenue range. So we're following our game plan. We're doing exactly what we said we were gonna do, and, and but we need the capital and the infrastructure to continue to deliver that superior growth that that we're shooting for.
JJ Ruest (President and CEO)
Maybe if I may...
David Vernon (VP and Senior Analyst)
Go ahead.
JJ Ruest (President and CEO)
If I may add, David, when you compare us to our peer in United States, the big railroads, big Class I's in the U.S., our high horsepower fleet is quite lean, right? We have a total fleet of ranging in a range of 1,550 units. So we're not, we're not a railroad who's working with 400 or 500 or 600 unit fleet that we can bring in. We're running with a fleet, which is already sweating these assets. Therefore, we need to have more power-
David Vernon (VP and Senior Analyst)
Yeah.
JJ Ruest (President and CEO)
more reliable power.
David Vernon (VP and Senior Analyst)
Yeah.
JJ Ruest (President and CEO)
As we get more power and more reliable power, we actually return the less reliable and the older power. So we're running with a lean fleet, which means that since we're a growing company and we grew revenue by $500 million in the fourth quarter, we need to add more high horsepower to the network so that we can continue to grow profit properly.
David Vernon (VP and Senior Analyst)
That's very helpful. I appreciate that. Then maybe just as a follow-up, you know, the slide presentation mentioned organic and inorganic growth opportunities. Now, CN takes a pretty different approach to the market in terms of owning sort of assets around other modes besides just a railroad as compared to peers. Is there some sort of appetite for you guys to maybe diversify a little bit more, or is this gonna be more about a focus on smaller, sort of, tuck in any kind of things? Or I'm just wondering if there's something in this message around inorganic that should signal an approach to the market that's a little different than maybe you've had in the past, maybe a little bit broader from a service perspective?
JJ Ruest (President and CEO)
... Yeah, I would suggest, David, that the approach is different than in the past and maybe different than the other Class 1. Our objective, our appetite, is to find ways to make more use of the existing network. So we have mainline from east to west and north to south, which is not fully utilized, with the exception of the Edmonton to Winnipeg line. All other aspects of our railroad has capacity to grow on the existing mainline. So what can we do as a tuck-in acquisition or joint ventures that would bring more business to our mainline? That's really the focus. So it's in that light that we do these due diligence, and we look at different business.
TransX is one of them, the first one that we've announced, because we have an agreement with the seller, but we don't have an agreement yet with the government to actually take control of the company. But what TransX is, is a company who's in the intermodal business, and we believe they can help us to bring more business to the CN Railroad using our network. It's in that case, specifically, Halifax to Vancouver, to divert traffic from the road to the railroad. So historically, we may have been looking at buying short line. We bought a number of short line in the past. Now, there's not as many of these opportunities out there that we could execute, so we're looking at other ways to actually bring more business on the railroad.
But the principle is still the same, but it's not necessarily something that is a Class II or Class III railroad. It is something that brings in more business to the existing network, which by and large, with the exception of the section that Mike talked about, has capacity and is still underutilized.
David Vernon (VP and Senior Analyst)
All right. Thank you, guys.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Fadi Chamoun from BMO. Please go ahead.
Fadi Chamoun (Managing Director and Senior Equity Research Analyst)
Thank you. Good evening.
JJ Ruest (President and CEO)
Good evening.
Fadi Chamoun (Managing Director and Senior Equity Research Analyst)
So, a bit of a follow-up on this last question is, how do you think about this in terms of ROIC? Like, when you're taking kind of railroad capital and going into these adjacent assets, like port assets or, like you mentioned, TransX, does the profile, the ROIC profile of the business change, or do you see that as potentially being accretive to the overall railroad ROIC profile?
JJ Ruest (President and CEO)
So I will start and then just link. But I'm happy that you ask the question from an ROIC point of view and not from an operating, operating ratio point of view. Because when we look for growth, we're looking for return on investment, and we're taking return on investment for the business that we buy. And also, what does it do to actually improve and maintain the return on investment on the large asset that we have already, the mainline, right? So it is, return on investment is one thing that we actually now are going to publish once a year. It's something that, we're aiming in the range of 15%-16%.
It is in the light of making better use of the rail asset, but at the same time, getting an overall return on investment for the shareholders and the total enterprise that's attractive. So as we're evolving from scheduled railroading, you know, doing the transformation to bring the operating ratio down, now that we are. Some of our assets are leaner, we still want to grow organically, and Doug mentioned some of that earlier. In fact, he forgot to say, talk about the propane terminal in Prince Rupert, which will open this spring, but also other means to bring growth business. The rail industry in general, and hopefully, that will change, hasn't grown as much as it should or as it could.
We want to create this model where we can grow without necessarily having to rely only on the bulk and the cargo business. If you want to add something, just like-
Ghislain Houle (EVP and CFO)
Yeah, maybe, JJ, just to add to your point, when we look at these, TransX is a good example, and Fadi, you and I know that, their OR is not the same as the railroad. But to use - but to JJ's point, we look at the ROIC, and I can assure you that the return of that investment is a very good one. And, and we've said that, outside, when we look at internal projects at CN, our internal threshold is 12%, and we have all the projects go through the grinder to make sure that, again, you know, we deliver return on, on the money that we invest.
So return on invested capital is very important at CN, and as JJ mentioned, whatever we do, that is a measure that we look at, and it has to produce. And I can assure you that what we do, it does, and you know, that's why we continue to shoot for 15%-16%, and that's very good.
JJ Ruest (President and CEO)
Yeah.
Fadi Chamoun (Managing Director and Senior Equity Research Analyst)
Maybe one quick follow-up on this to Keith. Like, Prince Rupert had a lot of success in terms of kind of tapping into that import of containers, I guess, from Asia to the U.S. Midwest. When you look at Halifax, like, how big is that addressable market, I guess, that you could potentially be tapping into to divert volume, kind of the same way you did on the West Coast?
Keith Reardon (Senior VP of Consumer Product Supply Chain)
That market is evolving all the time, and it's only going to increase. As the manufacturing capabilities that are in China today are moving out, as the higher costs are occurring, they're moving into Malaysia, Indonesia, Vietnam. We were there in November, and the number of plants that are being built is significant. So as that trade moves farther south, that gets right into the wheelhouse of the Halifax Suez Canal connection, and we feel very, very comfortable that we'd be able to play in that market. That's one of the reasons why we're looking at Halifax so extensively. So the play that we wanna make, and we feel we will be successful.
We are going to market it as the Prince Rupert of the East, and we feel it has the exact same attributes, and we will be successful.
Fadi Chamoun (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. The next question is from Benoit Poirier, from Desjardins. Please go ahead.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Good afternoon, everyone. My question is related to, could you mention maybe some color about what do you see for crude by rail in light of recent volatility and differential, and also in light of the current curtailment? Do you expect kind of a uptick in Q2 and maybe provide some visibility throughout the 2019? Thank you.
Doug MacDonald (Senior VP)
Sure, Benoit. It's Doug calling. So we're expecting to see... Obviously, we had a great run rate in Q4. We're expecting to see that dip a little in Q1 with some of the curtailments that are, have been on from the Alberta government. But we're still gonna have a great year-over-year comparison. And then we're expecting that to ramp back up in Q2, as most of the curtailment issues, we believe, will come off, and we should do much better.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Okay, perfect. And a quick follow-up, just for Halifax, any color on the timing and maybe the magnitude of the investment that is required in Halifax?
Doug MacDonald (Senior VP)
So we're in due diligence, so we can't really talk too much about the detail. But the timing is, we're still a number of weeks, number of months before this whole thing comes together. But our vision of the Rupert of the East could be played more than one way. And we know we have more than one iron in the fire, and but Halifax is definitely one of them.
Benoit Poirier (Managing Director and Senior Equity Research Analyst)
Thank you very much for the time.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.
Ravi Shanker (Managing Director and Senior Equity Analyst)
Hi. Just a follow-up on the crude. Just wondering, what is the assumption that you've built in for your 2019 guidance? Is it much higher than the 130,000 carloads from last, the last peak?
Doug MacDonald (Senior VP)
Yeah, it's Doug MacDonald. Yes, we are expecting to see significant growth still over 2018.
Ravi Shanker (Managing Director and Senior Equity Analyst)
Okay. No specific carload guidance?
Doug MacDonald (Senior VP)
We're not giving specific carload guidance at this time.
JJ Ruest (President and CEO)
Yeah, not by... We don't go down by commodity. Our guidance was in revenue ton-miles.
Doug MacDonald (Senior VP)
Yeah. Yeah.
Ravi Shanker (Managing Director and Senior Equity Analyst)
Got it. And we're approaching the time of the year for another CN Analyst Day. So wondering, can you give us an update on that event? And also, how does the CN today compare to the CN of two years ago, maybe in terms of top-line growth opportunity and margin expansion, especially after you guys made heavy investments into your network already?
JJ Ruest (President and CEO)
Okay. So, we're working on a program, but it will be early June. There will be half a day where we will have, we will showcase specifically technology, where people will have the chance to see and touch. And then on the day two, we will get to the business and, you know, what's our plan from, from capacity, from service, from a potential investment. By then, we may have other things that have been done, where we will do the business on the second day. But the first day, there'll be a lot of messages of how we - how do we become a scheduled railroad or scheduled railroad industry that start to really use technology to create a better service, better safety, and lower our costs?
Lowering our costs, not just we close yards and we park locomotives, but lowering our costs because we too leverage technology like many other industries have done.
Ravi Shanker (Managing Director and Senior Equity Analyst)
Oh, great. That's helpful. I'm gonna try to squeeze in one more. Are there any financial impact from the congestion in Vancouver in early January, and are service levels fully fluid now?
JJ Ruest (President and CEO)
No financial impact, and the service has been back. We would argue the service been good all along.
Doug MacDonald (Senior VP)
Yes.
JJ Ruest (President and CEO)
Thank you.
Ravi Shanker (Managing Director and Senior Equity Analyst)
Wonderful. Thank you.
JJ Ruest (President and CEO)
Thank you.
Operator (participant)
Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.
Allison Landry (Research Analyst)
Thanks. I wanted to ask about the long-term OR trajectory. I understand the goal is to maximize EBIT dollars and returns, but considering that some of your US peers are rolling out PSR and have talked about a mid-50s operating ratio, how do we think about where the CN network can operate within the construct of an improved North American rail system?
Ghislain Houle (EVP and CFO)
Hi, Allison. This is Ghislain Houle. I think, I will go back to the guidance that we provided in the 2017 Analyst Day. I think that you participated. We said at that time that we, that our OR was going to be in the mid-50s. Now, as you know, with the pension reclass, that hits Canadian railroads, that adds about 200 or 220 basis points to it, so it's in the high 2050s, and I think that's what we're looking. I mean, we've said many, many times that we're not enamored by the OR, that the OR is the result of what we do. We want to grow the business, and frankly, we'd rather be a $20 billion at 58% than a $14 billion or $13 billion at 55% or 56%.
So we have a great cost foundation, and we're using this to grow the business. Now, in 2018, because of our lack of capacity, as you know, the OR went up a little bit, and we've said that, you know, as we get the right infrastructure in place, which we are getting, we did a big year in 2018. We'll do another big year in 2019, that our costs will go back and reduce naturally, and we'll go back to the high fifties.
... OR, and then the use of technology that JJ mentioned, and we have five key projects that you have in your appendix, actually, on the presentation. They are out of the lab. We're actually deploying these projects out there as we speak, and we see some significant, you know, savings coming from it, and we're pretty excited. So that's the OR.
JJ Ruest (President and CEO)
And if I might add, so that since we are, part of our plan is to do some tuck-in, you know, connection to the network, but not rail acquisition, but acquisition that will feed the network. We're thinking as of, you know, the next time we report our results, to separate the rail business, the rail revenue from the non-rail, so we can give you visibility on the rail OR, and as opposed to, you know, the overall blended, which we will provide all the results. But we're still very focused on the profit margin of the rail, but also the ROIC, and you know, be mindful that at some point, to give visibility to just our rail operation, we will start to segregate our results.
Allison Landry (Research Analyst)
Okay. Maybe if I could just follow up. Outside of the pension change, is there anything structural that we need to consider between CN and your U.S. peers, if they can, for example, get to a 55?
Ghislain Houle (EVP and CFO)
No, I think, the pension change is there. I don't see anything else. I've mentioned, you know, to help you guys that our effective tax rate was gonna slightly go up, in 2019 versus 2018, and that's the result of the regulations that were just issued in December, related to the U.S. tax reform. But other than that, we're on even keel with the U.S. railroads.
Allison Landry (Research Analyst)
Okay. Thank you.
Ghislain Houle (EVP and CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Seldon Clarke, from Deutsche Bank. Please go ahead.
Seldon Clarke (Analyst)
Hey, thanks for the question. Just getting back to your guidance for a second. Given all the moving pieces that impacted the operating ratio in 2018, how should we think about operating leverage in 2019? Should we see some acceleration in incremental margins from the 50% level that you guys did in the fourth quarter?
Ghislain Houle (EVP and CFO)
I think we're pretty proud of the 50% incremental margins in the fourth quarter. And as I said, as we get out of the winter, as we get our new locomotives, our workforce has stabilized. I think, you know, there's opportunities for sure. And, you know, like we said, we've got still 130 leased locomotives out there, and I'd rather depreciate a brand-new locomotive over 35 years than pay $700 a day for a leased locomotive. But more so, it's all about the reliability as well. Now, you get a brand-new, reliable, locomotive versus an older one that breaks once in a while. So, you know, I'm not gonna give you a specific number, but, you know, stay tuned.
I think that as we get the right infrastructure and these growth opportunities that Doug and Keith are talking about, I mean, they're real, and they're real, they're coming at us. And with the infrastructure coming, we're pretty confident that the incremental margins will continue to improve.
Seldon Clarke (Analyst)
Okay. So is it fair to say that they should, in 2019, be incremental margins should be higher than what they have been in the past, just given some of the one-time costs you guys had in 2018? Or are there similar one-time costs, just given that these investments are a longer-term story, that would offset some of those, like, benefits to operating leverage?
Ghislain Houle (EVP and CFO)
Listen, the, in 2018, as we've said, the key was that we had a lot of growth, and we did not have the right, we did not have enough capacity. So as we get the capacity, and you can see in Q4, the proof is in the pudding. Our OR is actually down, or better by 150 basis points, which we told the market this was gonna happen. If you remember, you know, our OR and our operating metrics were, they were, they were improving sequentially from quarter to quarter, but they were still, down from a year-over-year basis. And we said that in Q4, with capacity coming online, that you should see the operating metrics getting better, and you should see the OR, improving, and it happened.
And frankly, these capacity projects came in, you know, sometime in October, mid-October, so we didn't benefit from a whole lot of that capacity coming to us. So the capacity, we're gonna do some more this year. To Mike's point, we're gonna try to be a little bit more creative from the way we plan our work. We're learning with the team, and under Mike's guidance, had a good postmortem because we're learning, we're humble. And without giving you a specific number, you know, we're comfortable that we're gonna continue to improve.
JJ Ruest (President and CEO)
We're gonna get better.
Ghislain Houle (EVP and CFO)
We're gonna get better.
Seldon Clarke (Analyst)
All right. I appreciate the call.
JJ Ruest (President and CEO)
Thank you.
Ghislain Houle (EVP and CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Justin Long, from Stephens. Please go ahead.
Justin Long (Equity Research Analyst)
Thanks, and good afternoon. Sorry if I missed it, but was wondering if you could share what the same-store pricing number was in the quarter and what you saw in terms of renewal trends. Then also wanted to ask about headcount. Clearly, we saw a big ramp in 2018. Just curious if you have some initial thoughts on 2019 headcount and maybe you could share what's getting baked into the guidance.
JJ Ruest (President and CEO)
I'll do the same-store price, and Justin will talk about the headcount.
Ghislain Houle (EVP and CFO)
Yeah.
JJ Ruest (President and CEO)
On the same-store, we did not provide a specific number, but like we did in the past. What I said in my comment is that this was our best quarter of the last seven years. So obviously, it must be above prior quarter of this year. So I can give you a sense. But in terms of... We've noticed that railroads more and more provide either vague or no specific on same-store price.
... So we've decided it was time for us to do the same thing, since some of that is used against us sometime in the marketplace or how we negotiate contracts. So we didn't provide same-store price specificity, but I think the fact that what we made as a reference point should give you a good sense.
Ghislain Houle (EVP and CFO)
On headcount, Justin, I'm happy to report that we've stabilized. We've caught up on our conductor hiring. I mean, if you look at our headcount at the end of the third quarter versus the end of the fourth quarter, we're actually down by over 400 people, and this relates to the management reduction that we've talked about. So, you know, in 2019, you could assume that we will hire for attrition only. And under JJ's guidance, we will continue to look at management's productivity, and make sure that, you know, we are as lean and mean as we can be. Okay, that's very helpful. Thanks for the time. Thank you.
Operator (participant)
Thank you. The next question is from Walter Spracklin, from RBC Capital Markets. Please go ahead.
Walter Spracklin (Analyst)
Thanks very much. Good evening, everyone. So I guess maybe this question is for Keith. We saw with the service disruptions in prior quarters, a little bit of a dislocation in the customer base, a little bit of dissatisfaction. And I know CP touted a little bit on some gains that they made, and some wins in their area. I was wondering if you could talk a little bit about your conversations with some of your customers, with both respect to rail competition, but also on the trucking side, whether we're seeing trucking coming back in now a little bit more with more capacity, if that's at all playing out. Just a little bit about on the competitive environment and the tone of the discussions you have with your customers.
Keith Reardon (Senior VP of Consumer Product Supply Chain)
Sure. Well, when people talk about the softness in the trucking and that the rates may go down, that's not all across the board. That is in certain markets. So we're not, we're not feeling that as of yet. With regard to competitiveness, we compete every day. We win business every day. We may lose a little bit, but if you look at our track record on the intermodal side over the last five years, I think our batting average is extremely good. There has been some discussion about, you know, some of our accounts that are open for contracts moving forward. You should not be mistaken that we will compete very hard. We have every intention of signing those customers up.
We have more than speed from A to B, and we have more than price. And it's what we've been working on the last five years that have allowed us to grow with our customers. We had to take a little break last year on the domestic side, but we focused on price and yield. Moving forward, we are open for business, and we will compete hard to grow the domestic business.
Walter Spracklin (Analyst)
All right. That's good color, and Paula, keep it to one. Thanks.
Ghislain Houle (EVP and CFO)
Thank you.
Operator (participant)
Thank you. The next question is from Ken Hoexter from Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Great. Good afternoon. Mike, you talked last year a lot about the 27 projects you were focused on in the construction and catching up to fill out that capacity. What kind of pinch points do you see now on that slide you presented on page nine? You kind of ran through, I guess, a couple of major projects. Is there anything that, you know, where you look now ahead, you really need to focus on in terms of adding that capacity that will make a capacity difference as you go forward?
Mike Cory (EVP and COO)
Yeah. Okay, Ken, I think, you know, again, we align any capacity to where the, where the growth is gonna take place. Again, we'll be talking mostly between our Western and Southern regions, and if you look at the map, we're really talking, Edmonton to Chicago. And I'm very, very happy with the way we've performed over December. I think it was either JJ or Joseline who spoke about the tough winter conditions we had in the last week. But with the resources that we've put in place, whether it's the air compressor cars, the people, the locomotives, and the track, especially on that Winnipeg-Edmonton corridor, we've withstood it really well. Our numbers are doing well this first quarter.
So again, the approach we're taking next year is still to look at that Edmonton to Winnipeg corridor, and we've got specific locations, but now really probably honing in in the Chicago area, making sure that as we get the goods to the Midwest, that we've got the same resiliency as we see that growing, that corridor growing in the future. So it's the same, same one more year, pretty much the same thing, Ken. I don't see a lot in yards. We did some really good work in some of our major yards this year. It's that highway that I keep talking about that creates speed, that drives the productivity, that all the things about cost and that reliable service we're trying to deliver.
Ken Hoexter (Managing Director and Senior Equity Analyst)
So this is not solely focused on whether it's crude by rail coming out of Alberta or intermodal around Chicago. It's just your main corridor, or there are commodities that are focused on the expansion?
Mike Cory (EVP and COO)
No, we... Look, we've got great growth opportunities in many corridors. We work-- I work very closely with, with Keith and, and Doug, and we make sure that we're, you know, we're aligning our resources right to those proper-- those opportunities that we're getting. So the main, the main corridor between Winnipeg or between Edmonton, excuse me, and Chicago, that is something we're gonna continue to, to pay focus to, but it's all commodities. Our diverse book of business needs that.
Ghislain Houle (EVP and CFO)
Yeah, it's the main line.
Mike Cory (EVP and COO)
Yeah.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Perfect. Thank you for the time.
Ghislain Houle (EVP and CFO)
Thanks again.
Operator (participant)
Thank you. The next question is from Tom Wadewitz, from UBS. Please go ahead.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah, good afternoon. I have a follow-on to, I mean, I guess it's somewhat similar to the prior question, but,
... how do you think about that, you know, that highway or the line capacity and relate that to the level of growth that you would expect to achieve? Like, are you, you know, given your spend this year, are you getting ahead of things? So if you see, you know, mid-single digits RTM growth next year, can you ease up on that line spend? Or is this something where, you know, each year you put up a good volume growth number, you got to spend at a fairly high level on the line. And then just one other kind of one that if I can throw out, you know, throw out there on the Halifax, you talked a bit about that.
How do you think about Halifax versus Montreal in terms of, kind of advantages, disadvantages of one versus the other as a, East Coast landing spot?
JJ Ruest (President and CEO)
Maybe I can start, and Tom and Keith can talk about the ports, Prince Rupert, the East and how one can do that. But we're - our guidance for high single digit RTM, but it's not spread out evenly on the network, right? So to get high single digit RTM, obviously, we will be fairly heavy on the corridor between Edmonton and Winnipeg and, or Edmonton to Chicago. Also, there'll be, you know, when you get to the coast, you have two highways now to get there. So when you look at our volume, it's very significant growth when if you just apply that to the Western network.
So this is where I think you need to take into account our CapEx, that is put into place where to do high single digits, we need to do much better than that in the West. I think that's the context. And also, when you look at the operating ratio of CN or the operating margin, it is also a corridor which matters a whole lot because we have a lot of our business going through there. So to run a fluid railroad at good cost, we need to invest the capital. And as just as a reminder, we did increase our revenue by $500 million in the fourth quarter. So the more we wear and tear the railroad, the more we have to fix it, and the more we have to add some capacity. You want to say something, Mike?
Mike Cory (EVP and COO)
Yeah. So I'm just what I look at when I'm looking at capacity, obviously, I'm looking at the growth, but I'm looking at speed. So train speed, car velocity, and terminals as well. Those are the things I'm trying to build the highway to hit, and that's gonna drive whether it's OR, the reliability we need, and/or in many cases, the safety.
JJ Ruest (President and CEO)
Yeah.
Mike Cory (EVP and COO)
So those are the three big things I look at as we're building this. We're not-
JJ Ruest (President and CEO)
But where the main line has no capacity restriction is between Halifax all the way to Chicago. And I think, going back to your question about the port business, maybe Keith can give you some color.
Keith Reardon (Senior VP of Consumer Product Supply Chain)
Yeah. So, the markets for Halifax and the markets for Montreal are really two different markets, and it's because of the physical nature of the ports. Halifax is a deep water port, ice-free. It's. We're planning on that to be big ship, big train ready. Montreal is more of a niche market for our customers. It's a higher cost per container if you have smaller vessels coming in versus being able to come in with large vessels in Halifax. So they're two separate markets. We look at them in two different ways, and I believe our customers do as well.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great. Thanks for the time.
JJ Ruest (President and CEO)
Thank you, Tom.
Keith Reardon (Senior VP of Consumer Product Supply Chain)
Thank you.
Operator (participant)
Thank you. The next question is from Brian Ossenbeck, from JPMorgan. Please go ahead.
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good afternoon. So two quick ones, one for Keith and Doug. On the—Keith, on the consumer product side, can you just elaborate on the rationale and benefits for joining the EMP program? And what do you—and also, what do you think some of the opportunities are later this year when Canada seemingly rolls out ELDs? And Doug, for you on the lumber cars that are parked now, are those able to be redirected, those volumes redirected to Asia for export, which has been, you know, a bit of a relief valve for some of that type of product in the past?
Keith Reardon (Senior VP of Consumer Product Supply Chain)
Yeah. So, to start is, with regard to, the EMP. It's been a long time since, CN has been part of a, container pool. A long time. And, we have been an agent in the EMP program, but you do not have the benefits as a, a full, supporter with, with putting containers into it. If, if you look at that market, it's from the West, the, the Canadian West down to the Southeast U.S., and from the, Northeast Canadian market down to the Southwest. It's opening up a market for us that we cannot play in today. We - it's, it's not very easy to put our boxes in. We work very well with the NS and the UP in the discussions on this program.
I see it as a game changer for us, as well as we are already growing in some of those markets, and we will continue to grow in some of those markets with our US IMC friends, folks like Schneider, J.B. Hunt, and others. So we see it as an accretive thing to our programs we're already working on, not a substitution for.
Doug MacDonald (Senior VP)
And, Brian, on the lumber side, we're starting to see orders pick up, so we're starting to pull those cars slowly out of storage now, and we should see them fully utilized before we're hoping at least into Q2. At the same time, Vancouver, the market has picked up there. We are using it as an export relief out with our customers for Asia, and we continue to see that happen no matter what, not just while there's a small downturn in the U.S., but really all the time. So they want to continue to use that on a regular basis, and we're gonna be there for them through the Vancouver and Prince Rupert and Prince George export markets.
JJ Ruest (President and CEO)
Okay, thank you, Brian. And now we're-
Brian Ossenbeck (Managing Director and Senior Equity Research Analyst)
Thanks for the details.
JJ Ruest (President and CEO)
We will wrap this up. So I want to thank all of you for joining us today. Many of you we will see on the road between now and the next earnings call in April, where CN will also be celebrating our 100 years anniversary. And as we said earlier, we'll have an Investor Day early June. So thank you for joining us today, and have a good evening. Thank you.