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Edited Transcript of CNR.TO earnings conference call or presentation 28-Jan-20 9:30pm GMT

Q4 2019 Canadian National Railway Co Earnings Call

MONTREAL Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Canadian National Railway Co earnings conference call or presentation Tuesday, January 28, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ghislain Houle

Canadian National Railway Company - Executive VP & CFO

* James Cairns

Canadian National Railway Company - Senior Vice-President of Rail Centric Supply Chain

* Jean-Jacques Ruest

Canadian National Railway Company - President, CEO & Director

* Keith Donald Reardon

Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth

* Paul Butcher

Canadian National Railway Company - Vice-President of IR

* Robert E. Reilly

Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer

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Conference Call Participants

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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Cherilyn Radbourne

TD Securities Equity Research - Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Fadi Chamoun

BMO Capital Markets Equity Research - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Konark Gupta

Scotiabank Global Banking and Markets, Research Division - Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Seldon T. Clarke

Deutsche Bank AG, Research Division - Associate Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Walter Noel Spracklin

RBC Capital Markets, Research Division - MD & Analyst

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Presentation

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Operator [1]

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CN Fourth Quarter and Full Year 2019 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 and full year 2019 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 standby, your call will begin shortly.

Welcome to CN Fourth Quarter and Full Year 2019 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.

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Paul Butcher, Canadian National Railway Company - Vice-President of IR [2]

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Well, thank you, Patrick. Good afternoon, everyone, and thank you for joining us for CN's Fourth Quarter and Year-end 2019 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; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; Keith Reardon, our Senior Vice President, Consumer Products, Supply Chain; and James Cairns, our Senior Vice President, Rail-centric, Supply Chain. (Operator Instructions)

It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. JJ Ruest.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [3]

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Well, thank you, Paul, and good afternoon, everyone, and welcome to our fourth quarter earning call. I'm very proud of the CN team, and our resilience in the face of challenge during the last quarter. Let me start briefly by ceding the last quarter. In October, solid railroading operating metrics combined with the rollout of a solid plan to reduce asset costs, labor costs, fuel costs, in line with what we had discussed during the third quarter earning call. In November, we had a very disruptive 8 days national strike, a 9 days work stoppage in total that was not only very disruptive on the Canadian economy and impacted the Canadian GDP for November, but also was very disruptive to our November operating costs, our asset utilization and our fuel efficiency's program.

In December, to support our customers, the team deployed all the resources required to move the economy and enable our customers to fully recover from the strike. So the fourth quarter, we produced adjusted EPS of $1.25, down 16%. The revenue ton mile volume was down 13%. The revenue at $3.6 billion was down 6%. And our adjusted operating ratio of 65.2% was up 400 basis point.

Let me now go into 2020. During last fall, we did what we said we would do to rightsize the business to current weaker demand. We removed almost 5,000 railcars from the network and return the lease locomotive. We sequentially ended the fourth quarter with approximately 1,300 less people. We have vacated the targeted 75,000 square feet of lease office, mostly in Downtown Montreal. We are taking a $31 million provision in our results, mostly related to permanent management cutback, and we are reengaging into our industry best fuel efficiency program. Also, based on feedback we received from investors, we have decided to provide annual guidance on free cash flow. We are also launching 3 customer service index, 1 for each of our 3 rail product line, customers index, which are very relevant the way customers define service. Rob will introduce them in a few minutes.

As per our guidance for 2020, James and Keith would produce GDP plus RPM growth and rail inflation plus pricing, with a base assumption of improving freight and trade environment in the back half of this year. 2020 will also be a year of further initiative to contain and reduce costs in operation, but also in function.

In the next few minutes, Rob will cover operations and technology. James and Keith will cover their market and Ghislain will cover the financial and the guidance.

I will now turn it over to Rob. Rob?

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [4]

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Thank you, JJ. First, thanks goes out to the women and men of CN who helped deliver this quarter's results. The team showed again the ability to quickly react to conditions whether it was the softening volumes entering Q4 or the quick recovery of our network following the 9 day work stoppage. The team remains focused on running a safe and efficient railroad, and despite the challenges of the fourth quarter brought on by the work stoppage, the team still delivered a strong year of results. Some of the highlights include: car velocity improved 5% in 2019; network train speed improved 3%; our dwell reduced 5%.

For 2019, we delivered an all-time record for fuel efficiency, and we will deliver even better results in 2020 as we continue to focus on fuel costs and CO2 emission reductions as the industry leader. And as a reminder, CN consumes approximately 15% less fuel per gross ton mile than the North American industry average. And over the past 25 years, we have reduced our locomotive emission intensity by 39%, thus avoiding over 45 million tons of CO2 emissions.

Our active inventory online was reduced by 5% as a result of greater car velocity and our aggressive program in the second half of the year to scrap, sell and return approximately 5,000 railcars. With the increased reliability in our locomotive fleet, along with improved velocity, we were able to rid ourselves of all 125 leased locomotives we had at this time last year and therefore, not carry that cost forward for the rest of 2020. In addition to this, we've been able to retire 39 older, less reliable locomotives from our fleet.

As we move into 2020, we have made organizational changes that further strengthen our team and further assist us in running a safe and efficient railroad, led by very capable leaders. In December, we transitioned from 3 operating regions to 2 with James Thompson, leading the Western region and Derek Taylor leading the Eastern region. We are also centralizing all of our Canadian crew calling and train dispatching under the leadership of Doug Ryhorchuk, our Senior VP of Network operations. This brings all of our day-to-day resource management under one leader as we run the railroad as one network safely and efficiently. Doug, Derek and James are all seasoned scheduled railroaders that continue to provide strong leadership to our transportation team and take us into a new decade of rail leadership. Jim Sokol, our VP of Mechanical continues to streamline our mechanical footprint across the network as the reliability of our locomotives increase. These structural changes allow us to get locomotives to the correct shops for maintenance, reduce materials inventory online and achieve this more effectively with fewer people.

From a safety standpoint, we continue to leverage technology to drive a safer railroad for our employees, our customers and the communities we operate in. In November, we completed conversion of all of our mandated subdivisions to PTC capability. This was a full 13 months prior to the deadline at the end of this year, and we continue to make solid progress on interoperability with other railroads. Considering where we started on this initiative, this was a tremendous accomplishment by the team.

Also, we now have 8 autonomous track inspection cars operating on our railroad. By the end of this year, these cars will cover 100% of our core mainline operation in the U.S. and in Canada. From New Orleans to Chicago to Vancouver and Prince Rupert and all the way back east to Halifax. These cars will provide coverage of nearly 90% of where our annual GTMs operate. And we're already seeing safety benefits as they operate in existing revenue train service. By operating in regular train service, the frequency of testing across the track has increased dramatically allowing us to find defects sooner and improve corridor capacity versus the manned geometry cars operating with a separate locomotive today.

In addition, we have 7 autonomous inspection portals built, and we are seeing more and more benefits as the algorithms are developed and mature. Over a recent 45-day period, our portals found over 3,000 actionable car defects. All of these defects were not found by the comparable manual inspection. High-resolution cameras linking to proprietary algorithms is a path forward in the long term. As we move further into 2020, we will develop more proprietary algorithms to increase the coverage of what can be found via automation and make our railroads safer and more cost effective.

As JJ mentioned in his comments, we are also introducing a customer service index for our 3 rail product lines, intermodal, bulk and merchandise traffic. This index takes service measurement beyond the limits of a simple trip plan, which has been in place for many years at CN and encompasses factors that are more important to our customers, such as order fulfillment of what they need to ship, the wasted dwell time sitting at port terminals with containers missing trains, left behinds at intermodal hubs and the consistency in our last-mile delivery to the ultimate user waiting for goods. This index will allow us an all-in metric to assist in providing the relevant service our customers need and allow them to grow their business with the CN supply chain.

As we look forward to the remainder of 2020, and as I've said previously, we remain committed to running a safe and efficient railroad that is poised to continue to grow with our customers.

With that, I'll turn it over to James Cairns.

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James Cairns, Canadian National Railway Company - Senior Vice-President of Rail Centric Supply Chain [5]

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Thank you, Rob. 2019 is now in the rearview mirror, and we're focused on delivering growth in 2020 while preparing to capitalize on specific growth opportunities starting in 2021. Keith and I will spend the next few minutes going over 2019 performance and the 2020 outlook for a few specific commodities as well as highlight some of the projects under development on our network that we expect to deliver solid volume growth in 2021 and beyond.

Let's start with crude. For the full year 2019, we grew crude carloads by 20%. We expect significant year-over-year growth in crude carloads for the balance of Q1, and crude will continue to be a growth driver in 2020 with about 1/3 of our volume being heavy undiluted crude, which is less dependent on price spreads than diluted bitumen. We will begin to lap the structural decline in BC lumber production in Q2 this year, and we expect a relatively steady run rate for the balance of 2020. We do have the ability to flex up if we see a market rebound this year.

In Q4 2019, we introduced new frac sand services designed to smooth out demand and protect rail share versus truck. We finished December strong with 44% year-over-year revenue growth. Increased January rig count in Western Canada is a positive indication that we may see a mild rebound in frac sand carloads in the coming months. As we move into the second wave of the energy renaissance in Western Canada, spurred on by new drilling to support LNG exports, frac sand will be the first rail commodity to ramp up, and we are well positioned with our unique unit train service that directly connects desirable Wisconsin sand with end markets in Alberta and BC.

Propane volume was up 17% in 2019. We will continue to see growth in CN's unique propane export services in 2020, with the commissioning of the second Canadian West Coast propane export facility to be built by Pembina at Watson Island, scheduled to start up Q4 this year and the full year impact of the first Canadian West Coast export facility built by AltaGas at Prince Rupert that started out Q2 of last year. Our efficient single line service seamlessly connects propane production with export facilities in Prince Rupert, creating a superior product for our customers and a long-term structural advantage that simply cannot be replicated.

This past season was another banner year for Canadian grain. We moved 8% and 2 million metric tons more in the 2018, 2019 crop year compared to the previous crop year. In 2019, 5 new CN served high throughput loop track facilities came online, significantly increasing CN's exclusive loading spots in the country. The current crop year started off slow with the delayed harvest resulting from wet weather. We expect to see full impact of customer and CN investments in the grain supply chain, which will position us to move even more grain more efficiently in 2020.

In addition to significant investments in new elevator capacity and waterfront export terminals physically built on CN line, the new G3 unit train facility on the North Shore in Vancouver will be fully operational in Q2 this year and will be the only loop track to loop track grain supply chain in Canada, allowing G3 and CN to move more grain using fewer resources.

We grew Canadian coal carloads by over 30,000 in 2019, and we will continue to see growth through 2020 as our client, Coalspur, significantly ramps up volume through the year. Ridley Terminals expanded capacity from 14 million to 16 million tons in 2019. And with new private sector ownership, we see potential for terminal capacity to double if the market demand is there. Prince Rupert is a gift that keeps giving. It's been a great new story for our intermodal business and also a growth driver for our carload business. Between propane, coal, plastic resin and wood pellets, we grew carloads to Rupert by 11% in 2019, and we expect another solid performance in 2020.

Looking ahead, 2020 will be a transition year for our carload franchise as we prepare for new met coal business with Teck to start-up in 2021. Teck will invest $800 million in their West Coast supply chain with new export capacity at the CN-served Neptune terminal and an increased capacity secured at the CN-served Ridley Terminal. In 2021, we'll see the full year impact of the Pembina Watson Island propane export facility as well as new facilities in place that will increase carloads of sulfur, diesel and plastic pellets.

Thank you. And now I'll turn it over to Keith.

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [6]

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Thank you, James, and good afternoon, everyone. The consumer markets saw multiple headwinds negatively impact volumes in the fourth quarter. The GM strike as well as CN's 8-day strike caused supply chain to either look for short-term transportation alternatives or stop shipping until the end of the work stoppages. In addition to the multimodal impact of the GM strike the closed GM Oshawa facility produced its last finished vehicles in December. For the international intermodal business, we saw 24 blank sailings to the West Coast. The blanks, coupled with the effects of the pull forward of the international intermodal volumes in Q4 of 2018 created year-over-year comp challenges. Despite the Q4 related short-term headwinds, we continue to drive forward with our strategic initiatives to leverage our unique network reach and our consistent high levels of customer focus.

Starting with automotive, we are seeing some short-term volume challenges for the industry. Our key strategies of increasing the number of automotive storefronts leveraging our great franchise of finished vehicle manufacturing facilities that are on or close to our network as well as providing a consistent, solid supply of railcar capacity will be key enablers to CN continuing to produce volumes at rates greater than the industry averages.

We will continue to make gains with our Vancouver auto port facility, which is producing solid expected results, and we look forward to the late fall opening of our new automotive facility in New Richmond, serving the Minneapolis and St. Paul markets.

Now to our other key consumer market intermodal and starting specifically with the international intermodal business. Our structural and network advantages, coupled with our focus on close collaboration and solution mindset with supply chain partners will continue to allow us to be less impacted than most by the headwinds facing the industry. In fact, at Prince Rupert, we grew our volume by over 11% in the fourth quarter. A great amount of work has and continues to be done with both of our partners on the West Coast, the DP World and GCT to strategically fill the capacity that they have created at their terminals in their latest tranches of expansions. We will see some volume swings in Vancouver during the first half of the year as the Yang Ming and the ONE contract transitions occur.

We expect that in late April, we will begin seeing upside in our business mix and West Coast volumes versus last year. Our new intermodal storefront in Regina, a partnership with Mobile grain is providing our export customers with additional opportunities for reach and gateway choice. This new storefront has been generating impactful additional Saskatchewan export volumes to markets around the world. With many of the ocean lines, we continue to develop a solid pipeline of import and export opportunities that will grow volumes in Saskatchewan over the coming quarters. The close collaboration that we have established with all of our terminal partners, whether they are East Coast, West Coast or Gulf Coast, will continue to pay dividends as we extend our reach to the hinterland with additional storefronts, additional export supply chains and round-trip economics that support our ocean line partners.

Finally, let's move over to domestic intermodal. Despite the volume challenges of the CN 8-day strike, which impacted our domestic business for close to a month, we have seen many of our strategic initiatives developing and gaining traction. The TransX and H&R integration plans are going very well. The EMP program, our retail door-to-door program, our cargo cool temperature predictive services and our close collaboration with our U.S. partners, such as J.B. Hunt and Schneider have all been growth engines for us in the fourth quarter. Those segments are set up to gain momentum as we lead into 2020. We're also continuing to gain momentum with our Canadian-based wholesale partners, as Rob and his team working with our intermodal Ops teams have improved service levels continuously over the last several quarters.

To wrap this up for the consumer products segment, the short-, mid- and long-term strategies and structural advantages that we have developed, acquired and partnered with others to employ are providing our customers with solutions that add significant value to their supply chains. We look forward to working with all of our customers and partners to drive growth in 2020.

Thank you, and I will now turn it over to Ghislain for the financial aspects of the quarter's results.

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [7]

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Thanks, Keith. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our fourth quarter performance. We continue to witness weaker volumes, driven by softness in the general economy, and we're also impacted by the conductor strike in the quarter. We continue to rightsize our resources to the weaker demand while still being conscious of our CN-specific opportunities, some cautious optimism for the second half of 2020 and most importantly, for our mid- and long-term structural opportunities.

Revenues for the quarter were down 6% versus last year at slightly lower than $3.6 billion. Operating income came in at $1.218 billion, down $234 million or 16% versus last year. While our reported Q4 operating ratio came in at 66%, we recorded a provision of $31 million related to workforce reductions in Q4 2019 and had a similar $27 million provision in the prior year. Excluding those provisions, operating income was $1.249 billion with an adjusted operating ratio of 65.2%.

Net income was $873 million and reported diluted earnings per share was $1.22. Excluding the impact of a noncore asset sale in 2018 and the provisions in both years related to workforce reductions, our adjusted diluted EPS was 16% lower than last year. There is no impact of foreign currency in the quarter.

Turning to expenses on Page 12. Our operating expenses were essentially flat versus last year at $2.366 billion. I will now cover some of the key highlights. Labor and fringe benefit expenses were 5% lower than last year. This was mostly the result of lower incentive compensation of close to $50 million and lower pension expense of $15 million, partly offset by lower capital surcharge credits of $40 million as our capital investment program was completed earlier than last year. Purchased services and material expenses were 11% higher than last year. This was mostly the result of higher trucking and transport expenses due to the inclusion of TransX. Fuel expense was 13% lower than last year, mostly driven by a 12% reduction in workload and a 3% decrease in fuel prices.

Let me now turn to our full year results on Page 13. I am very proud of our performance of delivering positive earnings in a negative volume environment. We completed 2019 with revenues close to $15 billion, almost $600 million or 4% higher than 2018. Our operating expense at $9.3 billion was 6% higher than last year producing a 2% increase in operating income versus 2018. Our reported operating ratio stood at 62.5%. Adjusting for provisions for workforce reductions in both years and a charge related to the replacement of our positive train control back office system, our adjusted operating ratio was 61.7% and or 20 basis points higher than last year. Net income was down 3%. Excluding onetime nonrecurring items in both years, our adjusted diluted EPS came in at $5.80, up 5% versus 2018.

Now moving to cash on Page 14. Free cash flow was almost $2 billion for the full year 2019. Our capacity investments are completed, and our capital envelope finished close to $3.9 billion, aligned with our budget. We have purchased 154 locomotives, advancing 14 locomotives on our order for 2019.

Finally, let me turn to our 2020 financial outlook on Page 15. The demand environment remains soft in most sectors. However, we continue to see some support from consumers and from CN-specific opportunities that James and Keith have talked about. This environment should translate into low single digit volume growth in terms of RTMs for the full year versus 2019 with pricing continuing to be ahead of rail inflation.

With this, we expect to deliver EPS growth in the mid-single-digit range versus 2019 adjusted diluted EPS of $5.80. After 2 years of elevated investment levels, our capital envelope for 2020 is estimated at approximately $3 billion. With that, we expect to deliver free cash flow in the range of $3 billion to $3.3 billion, which will drive a significant improvement in free cash flow conversion. A number of key assumptions underpin our 2020 outlook, including a Canadian to U.S. dollar average exchange rate of approximately $0.75. WTI in the range of USD 55 to USD 60 per barrel, and the full year effective tax rate of approximately 26%, a step-up from 25% in 2019.

We continue to pursue our shareholder return agenda. In 2019, we returned to shareholders almost 80% of our adjusted net income through dividends and share repurchases. And our current buyback program of up to 22 million shares will be completed by the end of January. We are pleased to announce that our Board of Directors approved a 7% dividend increase for 2020, demonstrating our confidence in the future. In addition, our Board of Directors approved a share buyback program of up to 16 million shares for an amount of up to $1.5 billion to be returned through a normal course issuer bid from February 1, 2020, to January 31, 2021.

In closing, 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.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [8]

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Well, thank you, Ghislain. And just before we open it up for the Q&A, I'd like to highlight 4 things, which are example of our focus on leveraging our unique infrastructure and building sustainable long-term business growth. First, I want to be sure everybody recognized that we continue to -- our relentless focus on PSR costs. For example, Rob is centralizing crew calling and network dispatching. He is also rightsizing our maintenance shop and a function also looking at -- deeper to see if we can outsource some activities, which are not core to the railroad.

Second, we invest to push technology to modernize PSR. Doug McDonald right now and his team is on track to create an inspection algorithm with our tech partners, and these intellectual properties and many others will eventually become part of the next secret sauce of PSR railroading in North America.

On growth, we are building new platform of long-term growth. Over the past 10 years, CN's revenue had nearly doubled to reach $15 billion last year, while our operating ratio improved from 65% in 2010 to 61.7% last year. It did not happen by waiting for the economy to bring us the freight. And therefore, we intend to continue to grow a platform of growth through the acquisition of M&A to our core platform, to our domestic intermodal platform or the things that we do when we successfully find out some rail short line that we can add into our network.

And finally, I think what's very important, especially as we look at 2020 and beyond, for the ESG investors out there, you will find the value in CN. We're very proud of our leaders and very comprehensive sustainable report, it's worth the read.

So maybe let's turn it back, Patrick, to the Q&A right now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Ken Hoexter from Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [2]

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Great. I guess, Rob, that was a great rundown on kind of some of the savings you're seeing already from the portals and track inspection. Maybe you could just delve into that a little bit more in terms of the potential from that. Is there another phase? Is there another level of savings or another advantage post the PTC investments you've made?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [3]

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Rob?

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [4]

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Yes, that that's a great question, Ken. So on both the portals and the autonomous track inspection cars, we're just on the cusp right now. So we're going to see benefits as these continue to grow. On the portals, this -- these results that I quoted there are the results of about 9 algorithms. In 2020, we're going to have about 10x that many algorithms produced and producing further results. And each one of those algorithms makes our railroad safer. Obviously, when we put in an algorithm, it's got to develop, it's got to mature, it's got to get a lot of experience in it. But as time continues, as they get more data in there, we find more defects. And humans do a lot of things better than computers. There's other things that computers and machines can find better than humans. This is one of those. And with the cameras we have, it certainly makes us safer.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [5]

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That's great rundown. And I guess for my follow-up, maybe, I don't know, JJ, I'll throw it at you and pass around. But just given the cold weather and the start that you had to the year, maybe is there -- can you talk about how you get to that low single digit volume outlook? How -- what kind of growth do you need to inflect and at what point to make that target?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [6]

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Yes. So I'll give you maybe just the short version. Definitely, we think the second half will be more conducive than the first half. The first half will be a challenge. You saw that for the industry, including CN, December run rate was not great. So obviously, the month of January is also going to be challenging. We had a cold snap, very cold snap in Western Canada of about 7 days, where those of you who follow our carload, really saw the big dip for these 7 days. And we're at -- right now, we're not quite current on the Canadian West Coast. We hope to be current by -- in the next few days. So yes, second half, and I think James gave you some color earlier when he talked about crude, when we talked about some of the coal projects. We'll have to do quite a bit of our self-help.

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Operator [7]

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The next question is from Brandon Oglenski from Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [8]

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And I guess, JJ, I wanted to ask a more strategic question here because we are getting a pretty interesting divergence from some of your competitors south of the border that think they can run CapEx closer to maybe or even sub 15% of revenue. And I think you guys, obviously, you spent a little bit more in the last 2 years, but you're guiding to, let's call it, the high teens, maybe close to 20% of revenue this year. I mean, how do you discuss this with investors? Obviously, you guys have been able to get more core growth, I think over the past than your peers. But is the higher level of spending, the way to run a railroad now?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [9]

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So the -- we invest for growth, and we invest for cost. So when you look at -- look at this over time, Brandon. Look at this over time, in the last 10 years, look at the revenue growth of all the railroad. And take the time to compare them. And then this is where you see that at some point, some of us have been able to grow. Therefore, we need to reinvest CapEx. Some of us haven't grown as much. So therefore, they don't need to invest as much CapEx. But growth does not come by itself, you have -- we have to go and chase it. As I said earlier, growth is not just given by the economy, it's driven also by things that we do, and when we're successful in attracting that growth, we need to actually put in the asset. So this year, it's about 20% in that range. And I think definitely, we're comfortable in that rate. PSR creates some growth for a short period of time, but eventually, if they're successful in growing their business, and eventually, they will need to invest. You want to add something?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [10]

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Yes, JJ. I would add, Brandon, the fact as well is that the way that we've explained our capital allocation strategy to investors have been very disciplined and very consistent. And long-term investors like that. So we've always said that our first use of cash is towards the business. And then the second is to have a strong balance sheet when there's soft economic conditions or to give us an opportunity to do a strategic move, if there's one available. And the third is the shareholder distribution, starting first with dividend, not the amount of growth, but the consistency of growth, and then we use a share buyback as a way to get to a targeted leverage. And that's -- so our first use of cash is towards the business. And when there is projects at CN that delivers a return on invested capital that's higher than our internal threshold, then obviously, this is good use of shareholder money, and that's what we do.

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Operator [11]

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The next question is from Fadi Chamoun from BMO Capital Markets.

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Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [12]

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Okay. Just a question on 2020 guidance a little bit. I mean, you seem to have a lot of kind of positive here going into the next 18 months in terms of operationally you've made the investment, you have the capacity. And I'm just wondering, the top line growth and the EPS growth doesn't really underscore that there is a lot of operating leverage that we would expect this year. Are there things on the cost side that you want to kind of highlight? Or what's behind the lack of operating leverage implied in the guidance?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [13]

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Would you like to offer some color, Ghislain?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [14]

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Yes, I can. Fadi, I can offer some color. Yes, there are some cost headwinds that we have in 2020 that are specific to CN. If you look at my prepared remarks, our tax rate, our effective tax rate is going up by 25% -- from 25% to 26%. If you look as well on the pension side, and this is something that's specific to Canadian railroads. Last year, the discount rate like in December of 2019 finished at 3.1% and the year before, it was at 3.77%. So that creates a pension headwind in the range of about $60 million to $70 million. And then, of course, if you look at this year from a variant standpoint, our incentive compensation was a positive variance. And that -- the accrual for incentive compensation, including bonus, has to be reconstituted, and that is another, give or take, about $90 million to $100 million. So you have about 3 to maybe even close to $400 million of cost headwind that we have to address. And that's obviously all embedded into the guidance that we just provided.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [15]

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That's right. It's only guidance tax pension and replenishing the incentive compensation program.

Thank you, Fadi.

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [16]

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And I would say the last one is depreciation, which you can do the math, but the depreciation with 2 years of high elevated Capex. Depreciation is obviously year-over-year step up as well.

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Operator [17]

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The next question is from Cherilyn Radbourne from TD Securities.

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Cherilyn Radbourne, TD Securities Equity Research - Analyst [18]

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A question for Rob. I also wanted to dig in a little bit on some of the automated inspection technologies. Just curious what your discussions are like with regulators and on both sides of the border and what you think you're going to have to demonstrate in order to substitute technology for manual inspections.

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [19]

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Right. Thank you for the question, Cherilyn. So specific to the autonomous track inspection cars. Obviously, we operate in 2 different countries. So 2 different regulators. We are working with both. On the autonomous track inspection cars, we've already made a submittal to the FRA in terms of our phased approach plan, which really allows us to run them more and ultimately, take some of the high rail inspections off to an extent and really turn our track inspectors from finding things to really fixing things and being responsive to that. So we continue to work with the FRA and transport Canada. The same holds true with the autonomous inspection portals. Again, a little different regulations north of the border versus south of the border. But they're in tune with everything we're doing, and we continue to work with them every month, whether it's Ottawa or Washington, DC.

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Operator [20]

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

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [21]

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Gentlemen, my question is for Ghislain. When we look at your free cash flow this year, it's expected to be up at $1 billion, $1.3 billion. So just aside the dividend increase in NCIB, where would you like to -- the main focus for 2020? Is it to reinforce the balance sheet given the uncertainties? Or do you see other investments to be made in the current business?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [22]

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Yes, I think, (foreign language) thanks, Benoit, for your question. I think you're right, free cash flow will be up. Obviously, the CapEx is coming down, and it's coming down to historical levels, which was what we have told the market. So I think it's all balanced. When you look at our capital envelope, when you look at the share buyback, when you look at the dividend, then that puts us, again, in a strong balance sheet. And as you know, we've said that our target in terms of leverage, adjusted debt-to-EBITDA is in the range of 1.7% to 1.9%. And all those things bring us 2020 into that -- close to that range. So it's all balanced. And that's how the numbers stick together.

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Operator [23]

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The next question is from Chris Wetherbee from Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [24]

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So I guess I wanted to ask a question about the operating ratio. So I guess, for 2020, given some of the puts and takes, Ghislain, that you mentioned, it seems maybe difficult to potentially improve on a year-over-year basis. I wanted to get a sense of your view on 2020s, the potential for improving the OR in 2020. And then maybe bigger picture, if I look at the last kind of 3-ish years, even the last 2 years, you've been running over 61%. This year, maybe it's going to be over that again. We'll see. Longer term, do you think once we get past 2020 and some of the cost headwinds are there that there will be the opportunity to leverage some of the top line growth to kind of see a return to something closer to 60% or maybe sub 60%? Or is it more focused on sort of top line growth and potentially sort of expanding the markets that you're addressing?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [25]

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I think, again, thanks for the question. I think, Chris, the -- like we've said before, the -- we're not enamored at CN by the OR, we'd rather be a $20 million or $25 billion business with a 60% OR than be a $14 billion business at a 59%. If you look at what JJ quoted in some of his remarks, I mean, our strategy is working quite well. I mean, when you look our -- in 2010, from -- since 2010, we grew the top line by 80% while maintaining our scheduled railroading foundation and even improving the OR going from 65.4% to 61.7%. So I think this is -- this strategy is working.

Obviously, to your point, for us, the OR is the result of everything we do. And my view is, with the cost headwinds we have in 2020, obviously, it's going to be difficult to get to the high 50% OR, which was our long-term, more or less, guidance that we provided at the Analyst Day. But definitely, as volumes come back up and as those technology investments are producing value and some of what Rob is saying is, actually, it's coming in. We can see the results. It's very exciting. I think we're still confident over the -- like mid, long term, over the next 2 to 3 years to get back to the high-50% range, and this is what we told you at the Analyst Day. So our view is, we're pretty confident of that.

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Operator [26]

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The next question is from Scott Group from Wolfe Search.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [27]

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So can you give us a little bit of color on pricing? Maybe, would you characterize the pricing environment is stable, slowing, maybe improving? And then can you give us any color on what to expect for headcount this year?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [28]

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So maybe, James, would you like to comment on pricing?

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James Cairns, Canadian National Railway Company - Senior Vice-President of Rail Centric Supply Chain [29]

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Yes, absolutely. So we continue our long-term strategy at CN, the price ahead of railway cost inflation. This has been something that we've been doing for many, many years, and there's no reason to divert from that strategy. At the end of the day, our customers have come to expect from us a level of service that requires us to invest back in our infrastructure and network. In order to do that, we need to have very consistent, reliable and predictable, long-term approach to pricing.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [30]

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Ghislain on headcount.

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [31]

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Yes. Listen, on headcount, if you look from a sequential basis, at the end of Q4 versus Q3, our headcount is down around 1,500 people. So we will continue to rightsize our resources. We're following demand closely. And we'll rightsize either up or down. I mean -- I think there's opportunities this year that James will work hard on. Crude is a good example. And if -- and we might have to hire a little bit if volumes go up. And if we're successful, in getting some of that business. So again, stay tuned on headcount. But I think we've shown in 2019 that we're quite resilient, and we've shown as well that we are moving, and we can move swiftly on rightsizing our resource whether it's headcount, whether it's locomotives or whether it's cars. And we are going to continue as a team to do that for sure. (inaudible) Go ahead.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [32]

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Can you just clarify where you ended the quarter on headcount if it was meaningfully different than the average?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [33]

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Yes, it was. I mean, if you look at, on average, in the quarter, and you've got to be careful that you've got to look at the fact that we have onboarded TransX employees. So if you look in Q4, for example, on average, headcount is slightly up by about a few hundred people, but if you adjust for the 1,200 people of TransX that we onboarded, our headcount is actually, on average, it's actually down close to 800 people.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [34]

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Look at it sequentially to Q3 to Q4.

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [35]

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That's right.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [36]

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Because we had TransX in both quarters.

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [37]

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Yes. And sequentially, the headcount was down around 1,300 people.

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Operator [38]

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

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [39]

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I just want to come back to the CapEx question. I know the last question was framed around your CapEx being higher than typical railroad. However, it is down quite a bit this year, 25%, roughly, almost $1 billion. What my question is, by reducing your CapEx as much as you have, and I applaud it. But at the same time, I want to be mindful that the capacity constraints that we saw a little while ago aren't going to rear their head again. Can you -- and so in that line of thinking, what are you not going to be spending on this year in that 25%? And do you have any sense of what your available capacity? I know there's a tough question, but you're roughly -- how much volume could you take on? And what capacity do you have to take it on from your current level of -- and your CapEx spend for this year?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [40]

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So it's -- thank you. Thank you, Walter. I'll start, and then Rob can talk about capacity. But basically, we have replenished capacity in the last 2 years. So we're not spending as much CapEx on capacity in 2020 because we did spend capacity on CapEx in '18 and '19. So that's one of the lower run rate. That's not that we're not spending capacity on CapEx next year. This year, we are going to be still doing some work, especially on Rupert in Vancouver. And number two, remember, PTC was a big, too big of a piece of the pie, the CapEx envelope. We now are caught up on PTC. We're no longer catching up, and the run rate of CapEx will also come down. You want to talk about how much capacity we have and if we're concerned with capacity, Rob?

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [41]

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Yes, absolutely. And what I've seen in my 7 months here is that the capacity we added in the last 2 years has been very beneficial in terms of the resiliency of the network. Whether it's post strike, whether it's coming out of the winter blast we just had here in the second week of January, it's paid benefits. What I see right now is that we're in a good position to handle more volume with what we did. We are adding capacity, as JJ said, it's not like we're not adding capacity this year. We are adding capacity in the critical spots on the West Coast. And we prepare -- if we start to see forecasts change going into the years in advance where we're going to add capacity. The other thing about our CapEx, over the past few years, that also included locomotives. We brought on 260 locomotives, and we're at the end of that. We're getting the last of those locomotives here in the first quarter. And that -- when I talked about mechanical reliability, a lot of that has to do with the updated and upgraded fleet we have.

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Operator [42]

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The next question is from Allison Landry from Crédit Suisse.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [43]

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Ghislain, I know you talked about the free cash flow and leverage guide as being balanced. And you raised dividend, buybacks up a little bit, but it still seems like you'll have some incremental dry powder. So considering all that, could you maybe speak to how you're thinking about potential for M&A this year?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [44]

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Well, I can start and then, JJ, you can jump in on M&A. Thanks, Allison. I think, again, we -- as you saw, we acquired TransX. We closed H&R. We're very pleased about that. And whatever else is out there that can create value that can feed the network. It's got to feed the network. It's got to bring us into markets that we don't do today. The Massena line that we bought from CSX is another good example where it's bringing us -- it's bringing CN to the New York state market where we didn't go before. So we're always on the lookout. That's one of the reasons why we believe that a strong balance sheet is a good thing to have because not only is it good when times are soft, like you have them today, but also that when these opportunities come along, we can go and jump on them very quickly. So we're going to look. But again, it's about feeding the beast is what we call it here, it's not about diversification. It's got to fit with our network. It's got to either extend our reach or bring more business on the rail. And that's the notion. And we're going to continue to look for opportunities to add value for our shareholders. JJ, you want to add anything?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [45]

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Yes. So I mean, briefly, again, to the point I made earlier, we're not waiting for the economy to bring us the freight. So we also need to, as an industry, this is not just over 3 months. But if you look out at this year and next to the year after, we need to self-help and go and get some freight creation product to do that. So definitely, if the opportunity presents to the acquisition in the world of, what I would call, domestic intermodal, the port platform or adding some small short lines to the CN network, we would do that. Because the economy in itself, I think that's true for the whole rail industry, eventually, will only get us so far.

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Operator [46]

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The next question is from Jason Seidl from Cowen and Company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [47]

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I want to talk about capacity in a little bit of a different light. Can you talk about the different levels of capacity in both the Eastern and Western network. Are you guys still in imbalance out east compared to your Western network? And how should we think about you going after business to help rebalance sort of that imbalance that you do have?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [48]

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Yes. So thank you, Jason. So I think that's -- it's a theme, we've socialized among ourselves with the Board, but also a number of investors. So like any other railroad, we have some of our -- part of our network, which is running hard because there's a strong regional demand to run the network, that would be out West. And right now, the places we have the fastest growth is Edmonton to Prince Rupert, of all the stuff that James and Keith are working, namely on propane, coal, liquid, grain and intermodal. And then we have part of the network, which is looking for business, which would be the Eastern network. I would say, Halifax to Chicago, we got capacity galore, meaning as the industrial space in North America is in slow decline for the last 25 years, we need to be relevant to who to the consumers and the consumer generate freight that is a typical container freight. And that's why our focus on the core platform as well as the focus on the domestic intermodal. So as the economy evolves, we need to invest. And at CN, we believe it's the case, and we do that at 20% this year. And in our case, it will either be East to find ways to work with partners, they would feed on network. And in the West, it's more about investing in our rail network because we have partners like Teck, with Vancouver who are investing, I think, it's about $800 million into a coal terminal, and we're going to be investing behind them so we can feed it.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [49]

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Do you think the pending ELD regulations in 2021 will help some of that eastern truck competitive traffic find its way back to the rail network?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [50]

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Do you want to comment on that, Keith?

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [51]

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What we're seeing on the ELDs, when it first came in, in the states and now coming into Canada is, a lot of the folks that are hauling that freight today already have ELDs. Your larger firms are -- have all that in place. I'll tell you where we're seeing some opportunities for to move truck traffic over to the rail. And that is with a lot of the insurance issues that the trucking market is having right now. So we're not waiting for either of those to occur. That's why you heard me talk about our E&Ps, our temperature-controlled business, our door-to-door retail product. All of those are firing on all cylinders, and we're going after that traffic today. But the ELDs, it could have some impact, but I do not think that, that's going to be a huge impact.

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Operator [52]

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The next question is from Seldon Clarke from Deutsche Bank.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [53]

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I know you don't give quarterly guidance, but could you just give us a sense of maybe how you think volume should trend throughout the year? And just remind us of some of the nuances in regards to contract wins and maybe where you are as it relates to the government crude by rail contract?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [54]

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So we're not getting into the -- we did provide a sense of volume for the year. And if you look at the month of January, we're below last year at this time. So we would hope to see some ramp-up between first half and second half. And when you look at our comparable for the second half, especially the last few months of last year, namely our labor issue, the comparable also getting better by the time you get to the fourth quarter. But at this point, anybody who's really trying to forecast that level of precision. Eventually, as you end up eating your own crystal ball. So we're not going to do that. I think the guidance we give for volume this year is as good as they can be in terms of how we can predict the economy and some of our initiatives.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [55]

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Can you just talk about some of the contract roll-offs? And how that shifts in like intermodal, in particular?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [56]

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Yes, nothing really new. I mean, you want to repeat what we've already said?

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [57]

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I'll repeat my comments earlier is that as the 2 big ones that are exchanging hands this first half of the year. The Yang Ming and the ONE. We'll start to see upside, as I said, in that late April and on into the second half of the year as the mix in the volumes exchange hands there.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [58]

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Yes, no change on that. Yang Ming moved out and ONE eventually moved in late spring.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [59]

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And then if I could just follow-up on the $3 billion of CapEx this year. You talked about the 40 locomotives coming in the first quarter, are those already paid for? Or is that in this year's budget?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [60]

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This year's budget.

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [61]

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This year's budget, yes.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [62]

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Okay. So when you guys refer to historical levels of CapEx, are you talking to the sort of $3 billion number? I mean, you didn't really give that much specifics at the Investor Day or I know you don't like to guide as a percent of revenue, but how should we think about that historical level of CapEx? Is $3 billion like the right number moving forward? Or should we assume it stays similar (inaudible)?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [63]

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Yes. Well, and this would be your last question. So historical means historical, if you go back at our history, you would see that we were in the range of 19%, 20%.

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Operator [64]

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The next question is from Konark Gupta from Scotiabank.

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Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [65]

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Just wanted to understand in your low single digit RTM growth assumption, is carload growth positive or negative? And what are your assumptions for crude by rail in that because obviously, crude by rail has a big impact on RTMs versus carloads?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [66]

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So James, do you want to do that?

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James Cairns, Canadian National Railway Company - Senior Vice-President of Rail Centric Supply Chain [67]

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Yes, carload growth is positive. If you think about crude by rail, we expect to exit the first quarter, March, at a run rate close to our record run rate of 250,000 barrels a day. So very positive for the first quarter. A little bit of unknown coming into the second and third quarter, it's really going to depend where the differentials lie. So we're not planning on big breakout volume in Q2 and Q3. Q4, again, I think, is going to be extremely strong volume for crude by rail. Again, this is a seasonal piece of the business where you see the differentials widen out as pipe capacity gets constrained with additional diluent being added to the diluent blend in order to make sure that the product can flow in the pipelines.

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Operator [68]

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The next question is from David Vernon from Bernstein.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [69]

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And only 2 questions, JJ. First one would be on framing the forest products volumes for the year. I know you mentioned something about a secular shift in there. Is there a way that you can kind of give us a sense for what you'd expect the car loadings to be in that segment for 2020? Just so we can kind of understand how big of a secular ship that is.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [70]

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So forest product. James?

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James Cairns, Canadian National Railway Company - Senior Vice-President of Rail Centric Supply Chain [71]

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Yes, 2019 is behind us. And I'm very grateful for that on the forest product side of the business. About 2 billion board feet of production capacity came out of the BC forest products industry. What we're expecting for 2020 is a more stable run rate kind of what we've seen in the first quarter here. And we're projecting for that to be relatively stable for the balance of the year. Hopefully, we're right. We'll see where it ends up.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [72]

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Second short question.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [73]

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Second's your question. It felt like over the course of the last half of 2019, it felt like a little bit of a battle of doing press releases. Every couple of weeks, we get something from you or from your competitor about great big share wins, and this is obviously a fairly consolidated market. How -- can you comment at all about how difficult or how more competitive it is to find new opportunities to kind of drive traffic on the network? I mean, are we going to see increasingly this become a little bit of a zero-sum game? Or do you think that there's still opportunity to kind of push with your existing customers in each -- leverage your own unique franchises in ways that don't kind of step on each other's toes as much?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [74]

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Yes. So it's a good question. It's a fair question. And we're very mindful that for the rail industry to be successful, including at CN, we need to grow the pie, right? So just exchanging pieces of the pie, that's not a long-term solution. The long-term solution is, yes, we have to have a product that compete. And yes, railroad do compete, and we aren't shy about the fact that we compete, we're proud of it. But at the same time, as I said a number of times earlier, we need to have a platform for growth beyond what just economy might bring in or not bring in. So the port platform, the domestic intermodal platform, which is to compete with the highway, and then if we can buy some short line or increase on network that would be part of what we want to do. That's why we're very focused on what can we do that has nothing to do with contract win or contract loss, long term. That's how we view the success of CN. And I think if you look back last 10 years, we must have done something right because CN is the railroad that drove it on a steady basis operating ratio down. But in terms of revenue growth, we had the biggest one by far.

It's getting late. So I want to make sure everybody gets a chance to ask their one question.

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Operator [75]

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The next question is from Steve Hansen from Raymond James.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [76]

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Guys, single one, I promise. Just localized question here pertaining to the North Shore of Vancouver, perhaps Rob or JJ. Just curious if you're worried at all about the huge amount of volume that your customers are looking to push on to the North Shore? I'm thinking G3 and Teck specifically. I know that bridge over the North Shore is pretty limited. I'm just trying to understand the fluidity of the opportunity or risk that might lie on that North Shore corridor.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [77]

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Yes, G3 and Teck, 2 major expansions in the North Shore. Rob?

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [78]

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Yes. So you point that out, and we are very well aware of that with working with James and keeping us advised to that. When we talk about capacity improvements for this year, part of that is directly a result of that business. So we're prepared for it, and we're well aware of the growth there, and we welcome it, and we've taken the necessary steps.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [79]

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Yes. And if I may add, you've seen some of our press release in the past in terms of how we've been able to leverage funds from the Federal Fund and fund from the Port of Vancouver, and our program to invest into the North Shore has actually been in support of 2 other source of money, which is a federal government and the Port of Vancouver. So these are good projects, and we love the fact that customers come in, put up their major capital plan on CN because we're -- as a physical carrier who can physically deliver to their facilities as long as we invest in the asset that you talked about, it gives us a long-term advantage from a service point of view.

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Operator [80]

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The next question is from Brian Ossenbeck from JP Morgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [81]

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So question for you, Rob. Obviously, fuel efficiency is a focal point for you not only from the cost side, but on -- like on the ESG as well. The network already being the most efficient in North America. What else do you think you need to do to keep driving that? And how far you think you are from more of a steady state? What else specifically are you going to be doing besides adding the new locomotives to drive that? And then if you could just clarify the comments on the automated train inspection portal, if there's anything in the near-term from a regulatory perspective, any sort of time line as to when you might be able to move away from more manual inspections on a full network basis?

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Robert E. Reilly, Canadian National Railway Company - Executive VP, COO and Interim Chief Information & Technology Officer [82]

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Okay. On a fuel efficiency standpoint, as I mentioned, all-time record. But when you look at the year-over-year comps, obviously, the first quarter last year was very difficult with the winter, fourth quarter was impacted by a strike. So when we look at going into next year, just looking at those comps, we have the ability to improve. A lot of it's based on discipline in terms of throttle limiting and isolation of locomotives as we move trains across the network. And there is an ability for technology here as that continues to develop to help our engineers out there in terms of saving fuel across the network. So we're very optimistic that we'll improve here going forward into 2020. On the autonomous inspection portals like I said, with Cherilyn, we are working with the regulators. There's nothing imminent at this time, but we've continued to keep them very well in the loop in terms of what we're doing, what we're finding, sharing the data with them. And we'll continue that. And it's really -- it's about making our network safer. And it's also about our employees can now turn from inspecting and finding things to really repairing and fixing things. So that's really where we want to be. It allows us to repurpose the individuals that are out there ultimately.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [83]

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Makes us safer, service is more reliable, and you actually freed up capacity because of service because the network is more reliable.

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Operator [84]

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The next question is from Tom Wadewitz from UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [85]

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So I wanted to ask you a bit -- perhaps, JJ, just about view on second half. I think you pointed to improvement in activity in second half? I know you have a lot of idiosyncratic things. But I guess, we heard from CSX kind of not much visibility to improvement, UP said trade agreement gives you some lift. How are you thinking about what drives strength in volume in second half? Are you optimistic on economy or trade agreement impact? Or how do you think about it?

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [86]

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Yes. So we definitely -- we know pretty much about today. Today being January first quarter because we're in it. And the first quarter, it has its own challenge in the volume growth year-over-year. As you go later in the year, definitely, the USMCA agreement has been passed. I mean that can only be positive. I know it's not going to be a huge positive. But rather than going backwards, we're going to be moving forward. And eventually, there should be momentum coming out of that. The fact that there's an agreement for at least for the first phase between China and United States is also a positive. I know there's another question about these things as to how much impact that will be, but that's definitely a better environment than having an increased tension. So we're now heading into a mode where maybe China, United States will make some progress, especially as we get closer to the election in the United States. So I think the trade agreement -- the trade environment, when you look at how negative it was last year and how things seems to be at least turning that at some point in the months to come or quarters to come that we will start to see some of the positive of that. I know at the same time, nothing is guaranteed, but our view that we will build our plan and our capacity in-house as well as our employee resource effort is, we're looking at the second half at a time where we might be a little more -- we'll have a little more business coming out of -- than the first half.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [87]

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Can you offer a quick thought on inventories with respect to intermodal whether they're kind of at the right levels now or are they still a bit too high?

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [88]

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Yes, thanks...

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [89]

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Yes, Keith will cover that.

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Keith Donald Reardon, Canadian National Railway Company - Senior Vice-President of Consumer Product Supply Chain Growth [90]

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Yes. We're actually seeing, in some parts, I've seen some customers say that their inventories are depleted, and they need to fill stock again. So there's a mixed story out there. And I think JJ is correct that the trade agreement, Phase I or the USMCA. All of those things are having our customers with much more positive attitude. If you look at the ocean liners, they're -- although that they're -- they've been blanking some sailings, there's a lot of boxes that want to get on those. And as I said, we've done very, very well in Rupert. We've done well on the East Coast also. So there's a lot of sentiment that says that the inventories need to be restocked.

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Operator [91]

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The next question is from Justin Long from Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [92]

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So I was wondering if you could provide an all-in EPS impact from the labor strike in the fourth quarter. I just wanted to get a better sense for what a more normalized 2019 EPS number would look like that would be more comparable to that 2020 EPS guidance. And maybe as we think about the cadence of earnings over the course of the year, it's a bit tricky with the fluctuations we're seeing in the comps. Is your best guess high level that first half earnings are down low single digits, mid-single digits? Is there just a ballpark way to help us frame that up?

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Ghislain Houle, Canadian National Railway Company - Executive VP & CFO [93]

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Yes. Thanks, Justin. This is Ghislain. On the strike, your question related to the strike. As you know, we did issue a press release, and we did estimate at the end of November that the strike would have an impact of about $0.15 on EPS. I can tell you that -- and we did put a little caveat in there that some of this dependent on how the network would recover in December. And I can tell you that Rob and the operating team did a hell of a job recovering the network and that the network recovered much faster than we thought. So the impact of the strike, I will say, is not as much as the $0.15. It came in better. But I mean, I'm not going to go into the detail about how much it did cost. But you can do the math, but we did move more business in December than we would have otherwise, which was business that was -- that should have been moved in November, but it was not moved because of the strike. So we did better but I'm not going to give you a detailed number. And some of this estimate, by the way, as you know, is more an art than a science. In terms of the -- again, the EPS cadence. I mean, you heard JJ and the team talk a little bit about volume. So you can make your model here, and we've said that we saw more optimism in the second half than the first half. So again, we're not going to go into detail about quarterly EPS guidance. We're very comfortable at this point with what we know that we can deliver the mid-single-digit EPS growth. And frankly, when we look at the long term, past 2020, we remain still quite bullish on our long-term structural growth opportunities, and we did talk about this, and we'll continue to talk about it, but whether it's Rupert, whether it's Ridley, now being owned by the private sector that James talked a little bit about, whether it's stock it, whether it's working closely with PSA to bring a lot of business coming to Halifax on our underutilized Eastern network. Whether it's -- and then lastly, whether it's the strategic long-term partnership that we're extremely proud of to have with Teck. So I think, again, from -- we're cautiously optimistic for 2020, but we're still quite bullish for 2021 and for the mid- to long-term basis.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [94]

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I think that was the last question, operator?

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Operator [95]

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Yes.

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Jean-Jacques Ruest, Canadian National Railway Company - President, CEO & Director [96]

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Okay. Well, thank you, Patrick, and thank you for all of you who join us tonight. Sorry, if we took a little more time than usual. And I want to take this occasion to also give a very special thank from myself, to all of the CN employees, who really, really, really worked hard in the fourth quarter, facing some unusual challenge for railroad. So kudos to all of you for working through that, and we're now in good shape to start 2020. So thank you. This is the end of the call.