Canadian National Railway Company (CNI) Q1 2013 Earnings Report, Transcript and Summary

Janet Drysdale - Vice President of Investor Relations Claude Mongeau - Chief Executive Officer, President, Director, Chairman of Donations & Sponsorships Committee and Member of Strategic Planning Committee Vincenzo Vena - Chief Operating Officer and Executive Vice President Jean-Jacques Ruest - Chief Marketing Officer and Executive Vice President Luc Jobin - Chief Financial Officer and Executive Vice-President

Scott H. Group - Wolfe Trahan & Co. Turan Quettawala - Scotiabank Global Banking and Markets, Research Division William J. Greene - Morgan Stanley, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Cherilyn Radbourne - TD Securities Equity Research Jacob Bout - CIBC World Markets Inc., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Jason H. Seidl - Cowen Securities LLC, Research Division Steven P. Hansen - Raymond James Ltd., Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Benoit Poirier - Desjardins Securities Inc., Research Division Brandon R. Oglenski - Barclays Capital, Research Division Christopher J. Ceraso - Crédit Suisse AG, Research Division Christian Wetherbee - Citigroup Inc, Research Division

Welcome to the CN First Quarter 2013 Financial Results Conference Call. I will now like to turn the meeting over to Ms. Janet Drysdale, Vice President, Investor Relations. Ladies and gentlemen, Ms. Drysdale.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining us. I'd like to remind you the comments that were already made regarding the 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 J.J. Ruest, our Executive Vice President and Chief Marketing Officer. [Operator Instructions] It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.

Thank you, Janet, and thank you to all on the call to join us. We are here in Edmonton. I have to say, it's a sunny day. There's still snow on the ground, but I can feel the spring, and it's a good thing because we have had our set of challenges this past winter. It clearly impacted our results in many ways. You'll hear Jim talk about some of the challenges that we faced and what we're doing about them. It impacted also our revenues and expense. You'll hear a little bit about that. But more importantly, it hit our service level in a way that is not what we are trying to do at CN. We have an agenda of supply chain-enabling. We are determined to help our customers win in their marketplace, and the winter is a hard reality in railroading. It is extremely difficult to face up to the challenge. We've had our fair share of issues, and we found also that we need to build up our resiliency. But at the end of it all, service was not where it needed to be, and we're going to be working hard to recover. We are, as we speak, regaining fluidity. There's a lot of demand in front of us. And we're trying to move the traffic and deal with the backlog so that we can have a strong finish to the year. So on Q1, the revenues were up 5%. J.J. will give you the detail, but I will say to you that I'm pleased. Despite the challenges, this is a record level of volume. I think in our history, we only had one more quarter with performance of that level. So to be able to handle peak volume in a difficult winter period is a very positive statement on our ability to drive value for our customers and shareholders despite the challenges. The operating ratio was impacted. It's up a little bit more than 2 percentage points versus last year, once again, impacted a little bit by issues that we have to face with. But still, solid margins, solid free cash flow and reasonably solid EPS. That $1.22 were up 3% on a year-over-year basis. That's not where we had planned to be for the beginning of the year, but it's still in a range that we can make up between now and year-end and finish strong. So our first order of priority is to restore the high service levels that our customers expect of us, and from there, everything will work. We can create value for our customers and continue to create very solid shareholder value. With this, I'll turn it over to Jim to give you a little bit of detail.

Okay. Thank you, Claude. Good afternoon. As you can see from the operating highlights, the first quarter was an operating challenge. Even with improvements in GTMs per train mile and yard productivity, our key metrics, were impacted. Until the changes in mid-February, I was, as Claude has reminded me a few times, planting roses all through Chicago. The metrics on the Southern region were strong, outpacing the previous year as a result of our strategic investments around Chicago and hard work by the entire team. I do not want to dwell on our first quarter other than to discuss what we can do different. The network has improved in April to the point where car velocity is lapping last year. In fact, we had 5 days of GTMs over $1.2 billion, with train speed, locomotive utilization and terminal dwell where they should be at this time of year, all this with our revenue loads and trailing GTMs up. I'm proud of the work the operating team performed during the tough first quarter. I'd like you to turn over to slide -- on Page 7, where I'll present our plans moving forward. We have seen a significant increase in traffic on the 797 miles between Edmonton and Winnipeg. We dealt with an extended winter, which was similar to a 15-round heavyweight fight. We got hit with a storm, then got hit by a native blockade. And when we were starting to recover, we got hit by another blow. Winter is tough. It's an outsourced port, and we have taken many steps to try and deal with the prolonged winter. We have invested in DP, power operation, snow clearing machinery, centralized recover operations and increased placement of switch heaters and deployed air repeater cars. Even with these investments, winter can be mitigated but is tough to knock out. A few years ago, when I was heading up the Western region, I still remember shutting down the railway completely around Edmonton and Winnipeg for 2 days because of cold. Even with the shutdown, we were able to recover because it was a single event. In order for us to deliver on our goals of operating and service excellence and to provide more resiliency as a system, we will be investing an additional $100 million on the line and yard capacity so we can deal with many obstacles and recover quicker. The plan is to increase capacity in the line between Winnipeg and Saskatoon and upgrade our line between Saskatoon and Edmonton in our Prairie North Line so we can shift trains away from the main corridor when required. As I've already stated, winter can't be knocked out, but we can mitigate its impact on a vital corridor. So J.J., what if I pass it over to your turn?

Okay. Well, thank you, Jim. And good afternoon to everybody on this beautiful afternoon in Edmonton. As Jim mentioned overall, a very challenging first quarter from a service standpoint. Having said that though, our customers' goodwill, our customers' demand remains intact. I will start with a quick review of our first quarter results, and after that, I will give you an outlook of what's ahead. Our total revenue was up 5% in the first quarter or an equivalent of $120 million. The breakdown is as follows: volume and mix accounted for roughly half of that increase; price was the other portion of the revenue growth; the impact of foreign exchange and of fuel was negligible in this quarter; same-store price on same-store sales was just over 3.5%. Now going over to more specific segment -- market segment, and I will do this, as usual, on an FX-adjusted basis. Petroleum and chemical, the revenue was up 16% on only a 3% carload growth. Crude by rail revenue was up 300%, and we now have roughly $75 million of our book of business in the first quarter, which was directly crude. As you know by now, crude is a very long haul business for CN, and we at CN are directly serving single-line the U.S. Gulf and all of the Eastern Canada refineries. Looking at Metals and Minerals, it was up 3% in revenue. We had a 20% increase in revenue ton-mile for frac sand, a direct impact of new frac sand plants located on our Barron Subdivision in Wisconsin. In metal, we also had a strong movement for pipe related to pipeline projects. However, we had an offset by a softer steel-related market. Forest product revenue was up 2% in revenue. Overall, the lumber and panel demand was stronger in the…

Yes. Thanks, J.J. So I'm going to turn to Page 14 of the presentation. Let me walk you through the key financial highlights of our first quarter's performance. As J.J. mentioned, revenues were up $120 million or 5%, just over $2.4 billion in the quarter. Needless to say, we were going up against a tough comparison, given the outstanding revenue growth of 13%, which was achieved in the first quarter of 2012. On the positive front, our volume was up 3% in terms of RTM, and as Claude mentioned, this performance weighed in as our second-highest volume quarter ever. Line-haul pricing was up on a same-store basis in the 3% to 4% range and our yield was actually up 2% on a rail freight revenue per revenue ton-mile basis. Our operating income was $780 million, down 2% versus last year, as higher [indiscernible] expenses in the quarter overshadow [indiscernible] . Here again, keep in mind that the operating income was up 23% in the first quarter of last year. The operating ratio was 68.4% in this quarter, which represents an increase of 220 basis points versus last year. Last year, you may recall, benefited from a very mild winter, and so a better winter benchmark would probably be looking at the first quarter 2011, where our operating ratio was actually 69%. Other income stood at $42 million in the quarter compared with $293 million in the first quarter of 2012. This year, we completed the sale of a small portion of one of our greater Toronto subdivisions for a gain of $40 million, whereas last year, we had a similar transaction but at a larger scale, with a gain of $281 million. Our reported effective tax rate -- or, actually, our adjusted effective tax rate was, in the quarter, 25.1%.…

Okay. Well, thank you, Luc and Jim. And just to wrap up, it's clear that we've had a tough start to the year, but this is a strong team. And what doesn't knock you down makes you stronger. And we are, as we speak, basically focusing on preparing for next winter. As Jim said, winter doesn't go away, and it's difficult for railroads, given our technology, to deal with that adversity without impact on service. But the outlier impact this year is something we don't want to repeat in the future. And so we are preparing ourselves to have stronger service into next year as we speak. We're also determined to take advantage of the strong demand that's in front of us. We do have a good outlook in intermodal, in energy markets, in bulk markets. If the economy stays with us, which I have no indication is not the case, we should be able to come in with the full year in line with our guidance and have the back end of the year very strong. With this, we will go over to your question -- question from the audience. Patrick?

[Operator Instructions] The first question is from Scott Group from Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So wondering if you could help frame kind of the impact of the weather in the quarter maybe from an expense standpoint. And then is there a sense on how much revenue maybe you missed out on in the quarter because of weather and kind of how we should think about the pent-up demand in 2Q related to that?

You know what, Scott, winter is winter, and I don't think it really serves a purpose to try to parcel out how difficult this winter was and how easy last year was. As Luc told you, last year was extremely mild, this year was much tougher than usual. Whether it's $50 million or $60 million, the important point is we are focused, as we speak, to recover it. We will -- we can't deal with the expense that we faced. We can only get productivity and efficiency to help offset it. The revenues, much of it is still available for us. We did lose some business. It's tough to measure. The important point is we're focused on finishing the year strong and are staying in line with our guidance for the full year. Scott H. Group - Wolfe Trahan & Co.: Yes, that's helpful. And is there a sense on -- we've seen sometimes in the past in Canada when you've got a rough winter and then heavy snow, sometimes you get things like a spring melt that can be hurtful. Are you confident that the network is kind of coming back and we're not seeing other operating issues or maybe some of the grain elevators are going to the other rail kind of just from a market share perspective?

It's Jim. And let me just talk about the snow. We do have some heavy snowfall, snowpack in areas. Most of it is away from our main line and our main corridor through the Prairies, but still, we're monitoring it. And if everything goes the way we would expect that we should -- nice cool spring is helping us. And unless we get an effect with a lot of rain, I don't see anything. And we're monitoring it on a daily basis. But it's a guess like anything else. If everything went bad for us, I guess it'd be bad for everyone. But at the end of the day, we've got a lot of factors that are positive. Cool spring, it's not on our main corridor. And I'm being told by the experts that even the ground is not saturated with water, so we have a better chance for it to dissipate in and not run off against our track.

And Scott, it's J.J. On the grain question, we're moving grain just as well as anybody else right now. We do have good fluidity in our network, and we're going to our backlog nicely.

The next question is from Turan Quettawala from Scotiabank.

Yes. I guess, my question, maybe I'll just talk a little about the coal volumes. Again, J.J., maybe you can give us a sense of how much inventory is piled up here in the mines maybe and if there's any ships or something waiting around for you to ship the coal to the terminals. And also added to that, I guess, I think CSX was talking about weakness in thermal coal side to Europe. I know you mentioned that as a strong point. So your customers, I guess, are faring better. Is that the way to look at it?

Starting with the thermal coal. The thermal coal comment was in relation to our business in the U.S. where all of our export is thermal coal from the Central Gulf. And we had year-over-year growth in that coal business in the Central Gulf. And I think we'll be looking at the same thing in the second quarter. Maybe it's just the way that CN network is laid out, but we'll still do that. On the Canadian coal, the West Coast coal, the Canadian mine, I would say, broadly, without going into specific name, they do have inventory at the mine, and therefore, we do have available the pent-up demand for them to get to the port and sell it to Asia, whether it's, in some cases, thermal coal or something, in some cases, met coal. But right now, I think we're moving coal slightly above the rate -- the production rate. I mean, week by week, month by month, we're going to go through what they have on hand.

The next question is from William Greene from Morgan Stanley.

J.J., can I ask for your views on some of the comments you made on crude by rail are just the strength and the amount of sort of runway you still see for growth? And, of course, all of us look at things like differentials and, say, "Well, maybe the opportunity is diminishing a bit." Can you just talk about how you think about the durability of this demand? Could it go away as fast as it arrives? How do you think about that?

Thank you, Bill. We actually -- we had a discussion just before the call. In looking at a differential, just the differential itself as the bellwether or signal is maybe too simplistic. There's a number of things at play. There's a number crude producers that don't necessarily get access to this price either because they are geographically challenged or their product is not quite the product that is a product easy to process and refine. Also, from a point of view of the refiners, the refiners today are still extremely bullish on leasing cars, buying cars, doing backstop capital investments for those who are willing to build a terminal for the product to move. And they're still very much of the view that getting product by rail allows them to get a price that they can't get from a pipe. So we're still very positive on -- well, not still. We are very positive on crude by rail. A number of people around us are also very positive; the refiners investing into fleet, you see pipeline companies getting interested in doing multimodal with the railroad and themself investing in some terminal to load. A number of people in the U.S. Gulf and our CN line are investing into receiving facilities. More and more players are looking at going the way of unit trains. So this is just still picking up momentum from one quarter to another. And the capital investment by all these different players is very encouraging.

So you have the confidence, yes. And when I look at this crude by rail or any of these mix effects, I think your same-store sales pricing came down. So is that sort of a mix comment where that came down? Or are we seeing something in the pricing that's causing it to be weaker on a sequential basis?

Well, overall, the same-store pricing was above 3.5%, and around 3.6%, basically. And the way we publish those same-store pricing is all in, including coal, including everything, including all commodities. The run rate from late last year is slightly lower. I would say it's a combination of mix. Some markets are tougher than others. We're quite happy at the range the way it is right now. It's still very much above inflation rate, especially when you take into account that we really, really deal with fuel inflation, with the fuel surcharge. I'm not a big user of RCFU or anything that deals with -- that brings a fuel into my same-store pricing. So, I think 3.6%, 3.5% and dealing with a fuel surcharge, already addressed fuel, is a good model.

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

Starting, I guess, my comment -- my question is on your forestry business, in particular, but in general, your customer reaction. Obviously, you've had a lot of volume on your network. That's a good thing, obviously. But with the winter problems, it probably affected your service level. I'm just curious as to where exactly you're seeing bottlenecks; which customers are complaining, I guess, the most and, certainly, we've read in the media here that forestry products customers are complaining quite a bit. I'm just curious, Claude or J.J., how you'd -- is that something weather-related only? Or is it a little bit more than that?

Yes. There's no question, as I said earlier, that our service was not where we want it to be. But frankly, I'm not sure I would take what associations are saying as necessarily a good barometer of our true service level. We did miss on a number of orders because of the cycle times and the difficulty to bring our speed back into a position to load effectively. This has impacted not just forest products but basically all of our merchandise customers for the -- especially from the middle -- early February to late March. Unfortunately, the picture that I had on my first slide, Walter, that train, which is dug in about 12 feet of snow, was on March 22. So we did have a lot of adversity. It did impact service, but we did move more business across all of our segments. And are committed to restore the service level that our customers expect and to finish the year strong, dealing with their backlogs and meeting all of their demand for months to come.

And the bottleneck outside of Forestry, is there any other ones that concern you at all?

We did have issues also in bulk, some of it because of CN, some of it because of the difficulties in the supply chain with our terminal partners. So coal, for instance, to Western Canada did not move as strong as we would have liked, but we are, as we speak, recovering ground there. Bulk potash would be a similar story. We did have a couple of weeks there, in particular, late February, early March where we were getting behind. But as we speak, we have a very strong export program. We're moving forceps [ph] for Canpotex, are doing our level best to get them to have, hopefully, a record export quarter. We're getting caught up on our domestic potash. So it's not by commodity. The issue that we face is what Jim explained. We had extreme adversity to deal with and an issue of resiliency in our corridor between Edmonton and Winnipeg. We are dealing with the issue of resiliency by adding infrastructure, and we're going to be dealing with adversity by being even more prepared into next year for our locomotives to be running and all of our initiatives to be kicking so that we reduce the risk of an outlier impact. But it is what it is, and I'm not sure I would take the press as a good barometer of our true service level.

The next question is from Ken Hoexter from Bank of America Merrill Lynch.

Claude, maybe just a review here a bit on the staging and prepping or maybe it's even for Jim. But in the past, you've always talked about how you've prepped for things that have gone on, whether it'd been storms or other factors that you have to deal with in dealing with outside weather. Did something change here? Or was this, as you mentioned, just a factor of so many different events one after the other? Just I guess we're starting to see that rebound now. And in that same kind of thought process, maybe talk about the speed with which you snapped back.

Ken, bottom line is it was just the length and breadth. If there was 1 or 2 events that we normally see, then we bounce back real quick. But I've been working on this railroad and a number of different jobs across, and every so often, it happens that you can have the best laid plans. And it doesn't matter what you have in place. When it starts to hit you and you start recovering and it hits you again, I don't care what it is. You can't put enough capital into the system to be able to get you at the point where we can alleviate everything, so. And also, it won't make sense for us to do that. But at the end of the day, what we've done is we've got a plan moving forward in an area where we've seen substantial growth over the last 2 years -- 2 to 3 years, in fact, close to 17%, 18% in the number of cars that are running through there that we need to do something to give us that flexibility. Now we recovered real quick. Second part of the question was, how fast can we recover? Once we got a week without anything happening, we recovered. But it took a while, and we've dropped our total cars down by 6,000. So that's excellent. Our car velocity, which is the number that I've used because it's an all-in, you don't fool around with train speed or dwell, those are sort of subsets, we're better than we were last year at the time. So with business up -- I'll let somebody else tell you how much. But business up substantially so far in April, and so I'm very happy with the system. We just need to fix, and that's why we're going to spend that $100 million to make sure we fix and give ourselves some resiliency if we have a winter that's normal, even be able to bounce back quicker.

I appreciate that. In fact, if I could get my follow-up on -- I think you mentioned or maybe J.J. mentioned something about larger ships and prepping at the ports. So obviously, as you prepare for the Panama Canal expansion, what does that do for trains in terms of whether you're handling more on a per train basis, increasing the train lengths? Does that mean more investment for sightings? Or is this kind of a temporary fix before some of the vessels start to move through the canal? Can you kind of just maybe round up some thoughts on that?

Okay, if I can. The canal, I think, will only open in 2015. So what's happening is the bigger ships are to come and service this year and they're currently being cascaded around the use of the canal is not yet to be opened. So there will be, for example, bigger ship in Rupert from Costco. They will increase the size of their ship on one of their locations, the CN. You'll see the same thing in Rupert. In the Halifax, the G6 coming in Halifax sometime in late June. And in Vancouver also, some of the ships have been upscaled. So what that means is you have bigger discharge, potentially bigger discharge. I think, Jim, we're already on this train as long as we can be, so if you have bigger discharge, eventually, you're on more trains because the train length already today is probably maximized to the best horsepower ratio. And what that means really is you have bigger ship. You have to have places for them to go and get market. But it can only put so many containers in Montreal and Toronto. So one of our success here is why some of the lines attracted by CN is that if you're going to bring in bigger ship, you better have a bigger discharge because you don't want to add a number of port of calls. Therefore, you need to have access to bigger hinterland, hence our effort to make Detroit a real place to go for CN on both east or west, and that's why we're opening Joliet in Indianapolis. We are trying to attract these bigger ships to us by giving them a bigger catchment area. Now come 2015, when the canal opens, we'll see what happens. All kind of speculation is what will be the fee, the toll in that canal? And what are the tolls going to be to make the canal extremely attractive? Don't know. You know what, that might help our coal business coming out of Convent going to Asia because now you'll be able to put some bigger coal vessel, grain vessel from the U.S. Gulf going back to the canal, and that's not to be dismissed also as one of the impacts of the expansion.

Thank you, Ken, I don't know about that follow-up question, but it was a good one.

The next question is from Cherilyn Radbourne from TD Securities.

In terms of the volume that you moved this quarter, they were a new first quarter record, and as you alluded to in your comments, not far from an all-time record for the property. So I'd just be curious if your assessment of how much of the issues you encountered in the quarter were a function of winter weather versus setting new volume records, and perhaps, bumping up against capacity constraints in a few key areas.

Good question. I'll let Jim add to this. But for sure, you have to stay ahead of the curve when you're growing, but we're not growing beyond what we were expecting. And then -- and it really is an issue of -- effectively, it's a little bit like a downward spiral. When cold weather forces you to have more trains, when you have more trains and you're hitting problems, you get to a point where you need more locomotives. And you get -- if you don't have enough resiliency capability in the network and the impact that you face is larger than usual, you can get into a situation where you just don't have enough time to recover in between weather disruptions. And that's what happened to us during 2013. We have punches. We would start to recover but didn't have time to recover enough, get punched again, get punched again, and it stayed like this until this big blizzard all the way to the first official day of spring. So it's much more the difficulty that we face and the resiliency on that corridor than growth. But of course, growth is what you have to move, and it plays at the margin, but it's not the reason why we face issues in 2013.

Claude, the only thing I could add is this. I think overall, we have a real thorough plan of where our pinch points are depending on where the growth is specifically. So in this corridor, it just makes sense for us to add some capacity just because of the traffic pull that we see moving forward in there plus to give us some resiliency. And we spent money on the B.C. North for the coal in the Intermodal, running through there. And we spent the money over the lakes to get to Toronto, and of course, we spent the money on EJ&E and tie-in in Chicago to help with capacity and resiliency. So there isn't, Cherilyn, of any specific area, but this one area, we needed to deal with, with what we just encountered and the growth that we see.

The next question is from Jason Seidl from Cowen Securities. [Technical Difficulty] The next question is from Jacob Bout from CIBC.

Just a question on your expectations of growth in Intermodal volumes over the next couple of years, maybe talk a little bit about -- you can put it in the buckets of -- with the new products, supply side collaboration or how much of this would actually be from taking market share?

The supply side is something where we're trying to create a product which is unique and not only just to serve Canadian cities but also U.S. market, import and export, by the way. We've often talked about import but also export. Then you have the new destination, which we said earlier is there to attract bigger ship, not to dismiss the domestic market where we're actually bringing in new products. Therefore, we're really working hard to give what we call industrial customers the reason to use a container as opposed to only a boxcar or a gondola. We've got some new products coming up this summer to move steel inside of a 53-foot container box. So in some cases, we'll take it from Canadian trucks. Some cases, we'll take it from the cross-border truck. Some cases, we'll take it from one of our U.S. railroad competitors. Some cases, it might be flowing from us from our Canadian competitors. I think it will come from all of these different areas and organic, and we are aiming at a lot of different things at the same time.

And what are you targeting for overall growth?

Definitely better than CN average. So if you think the CN average, you would think Intermodal because it's a product which is more nimble and it does the job for more and for less. Intermodal should be able to outperform the CN average and the CN average, I think, we have guidance that covers that well.

The next question is from Tom Wadewitz from JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: I wanted to ask you a little bit more on the Intermodal. If you could talk about the specific terminals that you're adding and review -- I think you mentioned the timing. I didn't catch all of that. And I don't know if you talked about the capacity in terms of lifts and percent of total capacity. But if you could perhaps run through that from a capacity perspective and also maybe give us a sense of do you harvest that in the year or does it take 3 or 4 years to fill that. So a couple on Intermodal.

Okay. So one of the terminals, the one that's maybe most talked about is Joliet, Illinois. It's in our rail line. It's an old merchandise yard that we're converting partially to an Intermodal ramp. The terminal will be opened in June. In June, we'll start the import service, the export service. And we'll also start the grain stuffing [ph] facility on-site for those who want a higher payload for container. And we have a number of pre-selling. Before the -- we made the announcement, we had some deal with some shipping line about how many containers it will bring into this site. How long will it take for us to load up the terminal? Time will tell, right? So the terminal is not even open yet, so I think I will let it open and see whether these pre-commitments actually come in all in as said or even bigger. The other one is Indianapolis. Same thing. This one will open in June for both import, export, and grain [indiscernible] facility on-site. Same thing there. We have done some pre-selling before the opening of the terminal. And in both cases, they're starting off a size that, without getting too specific, is very reasonable. It's not a very risky capital investment for us. And then from there, we can add in based on customers' reaction and the profitability of these sites.

And Tom, we try to keep our network of Intermodal terminal kind of in balance. Some have more capacity than others, obviously. The obvious example would be Calgary. We just opened it officially last week. This is a brand-new facility. It has loads of growth in terms of the available capacity. Terminals like Toronto and Detroit. Detroit has been a fabulous growth story. So we obviously have to be nimble and watch capacity and stay ahead of the curve. Same thing in Toronto. It's our hub terminal. We have to make sure we stay nimble and ahead of the curve. So we try to always stay in line and have the ability to serve our customers as the growth materialize. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: That having been said, is there any way to frame it? It just seems like it's quite a bit more capacity addition then would be normal. I mean, is it like 5% add to your total lifts, or is there any way you can kind of frame the capacity?

Well, I guess we have capacity more than just for 2013, whether it's Calgary, as Claude mentioned, or Detroit, Montréal, there's 2 terminals opening up. And we still have room in the case of the other terminal. We added capacity more than just for 2013. So we do have some runway ahead of us to be able to exploit that.

The next question is from Jason Seidl from Cowen Securities.

I want to touch back on crude-to-rail a little bit. You said there was going to be new terminal opening up on your lines. Can you talk a little bit about the size? And also if you will, should we expect, sequentially, that petroleum revenue per carload to tick up as that becomes a greater percentage of the whole?

The terminal, it will be terminal opening both in the Central Gulf, U.S. Gulf, in our line, as well as in Western Canada. These terminals, some are brand new, meaning they don't have any shipment today. There's a tendency to -- for investors to look at ways to either put a rail loop or unit train or take an existing one that is doing carload service and see if they can extend a footprint to unit train operations. So these are 2 tendencies. One is more sites closer to the oil well. The other 2 is a site that eventually are unit train capable or will be transformed into unit train capable. And obviously, when you get the destination, you need to be able to receive that. So those who are buying, more and more are looking at expanding their footprint on the receiving side either as a refinery itself or their terminal which is close by where they barge in or clock in. So there's a significant infrastructure more and more, onloading or offloading, to make this a larger scale, more unit train operation over time, something where the cars really turn fast, load fast, move fast, get there and come back, next load.

I would say, Jason, it's quite exciting, and it goes to the durability question that was asked earlier. We went from initially a smaller terminal, a smaller player being built to origin the crude traffic. As of late, what we are -- the discussions and the dialogue and the agreements that we are reaching are with larger-scale refiners that are looking at building capabilities to unload at their refinery but also are getting involved in partnership for themselves in creating the loading at a facility at the origin point. And they're investing in very large -- in a number of cars and investing in loading and unloading facilities. And I would think that they're investing in all of this infrastructure to move crude by rail for many years to come.

And investing in coil and insulated tank cars, meaning that there's a lot of people out there who would use the long-term viable share of rails to move heavy crude than one which is -- where you can buy the crude before it gets diluted, therefore, you need coil and insulated car to be able to move it.

And then we also have our take 2 issue earlier. Someone from our office in Montréal apparently was on Edmonton time when we issued our results.

Next question is from Steve Hansen from Raymond James.

With respect to the Canadian crude by rail phenomenon, particularly as it relates to heavy oil, you've obviously been very successful at signing up many of Western Canada's small to midsize heavy oil developers over the past year or so, and that speaks to your originating capability in Alberta, I suppose. What I'm curious to know though is whether or not you've had any possible indication from Canada's larger, bellwether heavy oil producers and whether or not they might be willing to embrace crude-by-rail here as discussions around Keystone continue to extend out.

Yes. I'll let J.J. answer. But as I just said a minute ago, that's the phase that we're entering. We have a number of larger-scale refineries or integrated producers with which we are having dialogue as we speak. But J.J., within the confines of our agreement, what else can you say?

Some of these, hopefully major terminals that are going to be built in Alberta, although unit trains are actually being backed by the bigger producer. the producer have enough volume and tonnage to backload into a viable investment. And these same producers, some of them are integrated also, going out in buying and leasing fleet. So you're going to get to see some of the bigger players now backing some of these capital investments with some of their product, either a seller or a buyer.

And the part that's interesting is it's not just rail, it's rail and barges to get to a destination refinery and use the ship unloading capacity. It's pipeline then rail. I mean, we are seeing a range of new avenues being created and new players getting involved, and all of which point in terms of the prospects for the future to something that clearly shows that rail and pipeline are complementary and that we are helping moving energy to market in an efficient way and I believe for many years to come.

Think of rail -- crude-by-rail is really becoming an Intermodal solution. Many of these terminals are going to be set by pipeline and then rail. So it's a combination of more than one mode from origin to destination.

The next question is from Matt Troy from Susquehanna.

Jim, I just wanted to ask you a question. You've obviously been at it for 3.5 decades now, and you picked one heck of a quarter to assume the helm. But if I were to look beyond the current weather-related issues, you know this railroad well, if you look out on a 3, 5, 7-year basis, what are the opportunities for you to bring and add value, given your skill set and experience in the railroad? You're obviously coming along line of very good COOs. So I'm just curious, as you look at the network and its needs and its opportunities, maybe if you could just give us top 3 list or focus list that you see as what you'll be doing to leave your mark over, let's call it, the next half decade?

Well, great question. First of all, what the heck, I could have showed up in July and we would have been having a different discussion on how the second quarter was so nice. And thank you very much. But yes, at the end of today, you've got to get back to the basics. And what you have to start, and I've been out to some of the terminals, they look at ways that we can move the boxcars, move all the cars with less cost and looking at the locomotives to make sure we got full utilization. So we developed the skills over a number of years. And I guess you're right, it is 35 years, it is a long time. But at the end of today, I think there is value in looking at it. It's a simple model. Really, it's not that complicated to. We went to Prince George, myself and Mike Cory and walked in there and figured out a way with a yard that has 13 assignments and taken 2 out of there and be able to handle the same number of cars, and I want to do that and spend as much time on the ground as possible with the few of the other things I have to do. So I'm looking forward to it as -- I've been doing this for a long time. And if any of you followed where I've been, it's -- we got to improve it and drive the most you can to have -- fill a balance. You can't just drive the operating metrics to a point where we limit our services to the customers that we commit because in the long run, we hurt ourselves. So I'm looking forward to developing a good, clean operation that allows us to handle the business that's there in a smart manner.

Okay. If I could add. I've been watching Jim over the last couple of weeks in fairly tough conditions. And I like his no-nonsense approach, and he's rallying the team. And he's already having a huge impact not just on fixing today but on laying for the future. And there's quite a good bug also with the rest of the team. We've added quite a bit of other promotions as part of this transition to the leadership team and operation. And there's a lot of people that are a bit tired about the winter but excited about the future and geared up to deliver a strong back end to the year.

The next question is from Benoit Poirier from Desjardins Capital Markets.

My question is on the crude-by-rail. Looking at the percentage derived from light, I think it's about 60%. But as the trend moves toward heavy oil, I just want to know, what is the, kind, of your expectation in terms of percentage of heavy oil in the next few years and how your network compares to CP when it gets to the heavy oil business?

Well, we think we are very well positioned for the heavy oil market because that comes from Canada and the north of Alberta in particular. There are places like the Peace River area, Grande Prairie, where we clearly are the one railroad to support the development of that particular crude place. Similarly, with the ANY and our strong presence in Edmonton, all the way down in Saskatchewan to the Manitoba border. We have a beautiful origination franchise. But I think if anything differentiates us, it's our -- the combination of that origination franchise with our destination reach. We go all the way to Saint John, New Brunswick. We serve every refinery in the East starting from Québec City, Montréal, in and around Toronto, Chicago, down all the way to the Gulf, stopping in Memphis. So we are able to go places. And if people are looking to get the best out of the fleet they're buying and to also be able to manage their supply chain of crude to feed in the crude in the right sequence for their refineries, we think we have a very great offering. And I think as the market evolves, we will be a strong player in that segment.

The next question is from Brandon Oglenski from Barclays Capital.

J.J., I just wanted to come back to your comments about some potential panel mill openings on your network and what that could mean for the lumber business looking forward and how you balance that against a pretty challenging paper market. And just along with that, we're also hearing from the media this morning about constraints for railcars and capacity for the lumber shippers, so can you just walk through what this opportunity presents for CN?

Okay. Well, panel prices are up. They were up last year. That's why some of these mills which had been mothballed in the last housing start recession now have the guts and the money to reopen. And there will be panel mill reopened. there's been a number of them announced. Some others are not announced. Most panels typically ship in boxcar. However, we do see some customers who are looking at using a centerbeam because even though it's not the usual way of doing it, looking at a bigger payload of shipping on a centerbeam, that means a little more capital on their side on the way they wrap the bundle. So the panel resurgence is positive. It will require some equipment. Some cases, boxcars. Some cases, centerbeam. The discussion today about -- the newspaper about lumber, yes, we had a tough winter, no question, especially out West where a lot of the lumber mill are located. The demand is also strong, stronger than what I think even the lumber producers were forecasting themselves last fall. It's a great thing. Price of lumber is up. Stock price of lumber company is up. And we deployed a -- as Jim said, deploying more fleet when you do network. The philosophy there is not even moving more lumber. So now that we have network velocity, we'll work on that. And already, our lumber revenue are pretty good in April, and we'll just keep it one week at a time.

And we've been flirting around this April number. And our April-to-date numbers are up 10%, and lumber is up something like 30% on a year-over-year basis. So we're dealing with the business in front of us, and as we are regaining fluidity, we will be serving our customers to help them reach their market. That's what helps them win in their marketplace and that's what helps us create value for our shareholders.

The next question is from Chris Ceraso from Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Just a question about the addition of capacity to your network, which you mentioned will you better prepare for dealing with tough winters in the future. Do you think that on a through-the-cycle basis, that will end up pumping up or pushing up slightly your normal operating ratio if you're carrying a little bit extra capacity for those outlier circumstances?

No. I'll let Luc add to this. But clearly, we're doing this for service improvement and for efficiency improvement, both. So that should help us drive more productivity going forward and more resiliency. I mean, you just have to look at our first quarter results. You don't want to be caught without enough network to recover because once you get into that downward spiral, I mean, the cost impact are fairly significant. So this is not about adding costs. This is about adding capacity, adding resiliency and adding throughput so that we can create more value for our shareholders and help our customers win in the market place. Luc, anything else on that front?

No. I think again, you lose a little bit of business when you don't have the capacity. And the resiliency is another issue because then your customers start to wonder what actually can you do. So as far as we're concerned, we're seeing the growth. We're seeing the opportunity, and we're investing. And I have no question in my mind that this is a worthwhile investment. And in fact, we'll maintain if not improve, the operating ratio. So I mean, I think it's a good thing. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Is it a function of that you performed a little bit better during the stress period so that even if you're carrying a little bit extra cost during the nonstressed periods, on average you end up a little better?

Well, we also gain velocity. And then during the non-winter periods, so we'll gain efficiency as a result. So I think it pays throughout the year.

A good example of that is just when -- when you have a busy corridor, it's not just busy in the winter. It's also busy in the summer when you have to have work gangs do their scheduled maintenance. So having a little bit more resiliency, the detour route through the 3 North lines, for instance, that's going to help us deploy our engineering gangs more effectively and have less impact during the summer months when we are trying to maintain the railroad. So it's -- this is an all-weather investment. We're basically just advancing investments we would have had to do 1 year or 2 from now to make sure that we mitigate the risks of adding another unusual winter next season.

That's right. It will be useful for the coming fall peak.

The next question is from Chris Wetherbee from Citi.

Maybe a question on crude by rail. Just thinking about the kind of targets for this year. I think you've talked about doubling, I guess, the carloads moved; run rate's around 16,000, carloads as we stand right now. I guess how should we think about maybe potential growth opportunities that might come incrementally over the rest of this year? And then maybe on the back of that, how do we think about the mix of unit trains versus non-unit trains right now? And maybe how does that mix shift as we go through the rest of the year as you guys have gained some scale on that business?

Well, most of our business is still carload business as opposed to unit train business, I would think. By the time we get to the fourth quarter, probably most of our business will still be merchandise business and not yet all -- not yet more than half of it unit train business. It might still be picking up at that point. Some of the -- the guidance that we have talked about, we still feel comfortable with these numbers. We'll probably do a little better than that. And I would like encourage people to look at revenue ton mile. When you look at CN for crude, the revenue ton mile is what gives you the best indicator of our how well we'll be doing as opposed to carloads or barrels.

Okay. I think we have one last question, maybe? No. Okay. So thank you for being on this call. We're sorry if the results were issued a couple of hours early and I kept you on your feet. Certainly got Janet and her team noticing. I think it's an issue of time zone error. And we will be working hard here in the next few months to develop the rhythm that we need to show you that not only are we improving service but we have resiliency and we are able to create solid returns for our shareholders. So look forward to the call at the end of Q2.

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