Jul 22, 2013
Executives
Janet Drysdale - Vice President of Investor Relations Claude Mongeau - Chief Executive Officer, President, Director, Chairman of Donations & Sponsorships Committee, Member of Strategic Planning Committee and Member of Investment Committee of CN’s Pension Trust Funds 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
Analysts
Ken Hoexter - BofA Merrill Lynch, Research Division Benoit Poirier - Desjardins Securities Inc., Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Cherilyn Radbourne - TD Securities Equity Research Christian Wetherbee - Citigroup Inc, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Keith Schoonmaker - Morningstar Inc., Research Division David Tyerman - Canaccord Genuity, Research Division William J.
Greene - Morgan Stanley, Research Division Brandon R. Oglenski - Barclays Capital, Research Division Steven P.
Hansen - Raymond James Ltd., Research Division Scott H. Group - Wolfe Research, LLC David Vernon - Sanford C.
Bernstein & Co., LLC., Research Division Allison M. Landry - Crédit Suisse AG, Research Division Steven I.
Paget - FirstEnergy Capital Corp., Research Division David F. Newman - Cormark Securities Inc., Research Division Turan Quettawala - Scotiabank Global Banking and Markets, Research Division
Operator
Welcome to CN Second 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.
Janet Drysdale
Thank you, Patrick. Good afternoon, everyone, and thank you for joining us.
I'd like to remind you of the comments that have already been made regarding forward-looking statements. With me today is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, our Executive Vice President and Chief Financial Officer; Jim Vena, our Executive Vice President and Chief Operating Officer; and 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.
Claude Mongeau
Thank you, Janet. The team and I are in Montréal.
We're pleased to take you through our solid Q2 results. But before I do so, I'd like to take a moment to make a few comments about the tragic Lac-Mégantic accident that occurred right here in Québec.
I would first like to say that our thoughts and prayers are with the families and loved ones of the 47 victims, and our expression of support goes to all the citizens of Lac-Mégantic, who have been severely impacted. Now CN was not involved in any way with the train movement.
But we had our safety, dangerous goods and environmental leaders on site from day 1 to lend a hand to MMA and to all the first responders involved. They were there to help but also to learn firsthand about the accident and the safety implications for CN, and learning is what we're doing as we speak.
Jim and his team are reenacting every aspect of what could have gone wrong on this highly unusual accident and are reviewing our policies accordingly. I think it's fair to assume that it will take a few months for the TSB to complete its investigation, but we are not waiting and have initiated a fact-based and rigorous risk assessment, with a view to further improve our solid safety record.
Okay. Onward to the highlights of our Q2 results on Slide 4.
Our second quarter results were strong. I think we have solid team execution.
You could see it on the solid top line growth that we delivered. Our revenues overall were up 4% at constant currency.
We saw growth in all of our business units, except for coal and automotive, as J.J. will further explain a little bit later.
We accommodated that growth at low incremental cost. Basically, all of our key productivity metrics are up.
Train load is up, car velocity, locomotive utilization, labor productivity, just to mention those. They're all up.
Jim will give you a sense of the -- what we focused on and the steady improvement that was not just operating metrics but also our service performance. We delivered solid free cash flow generation, solid earnings per share.
Our adjusted EPS is up 11%, and our free cash flow for the first 6 months is standing at $437 million. Luc will give you more detail on all of the numbers.
So clearly, a solid second quarter, solid team execution and steady improvement. With that, I'll let the team give you more color.
Jim, over to you.
Vincenzo Vena
Thank you, Claude. Great second quarter, proving the value of our agenda of Operational and Service Excellence.
Looking at our productivity, you can see our volumes are up, and we delivered steady productivity results year-over-year, even with an expanded capital plan. Before digging into the productivity metrics, I'd like to spend a few moments to talk about safety.
The events of July 6 in Lac-Mégantic are a horrific reminder that safety is a foundation of everything we do. My thoughts go out to the families, community and everyone affected by this strategy.
Personally, as an experienced railroader, and with all the employees of CN, we work together as a group to improve safety. Our commitment is reflected in our safety metrics, which demonstrate an improvement year-over-year and a 29% improvement in main-track incidents.
Having said this, we must not dwell on this improvement. Rather, we must continue to work hard to ensure we have the safest work environment for ourselves, our customers and the public.
As I mentioned earlier and Claude mentioned, the metrics are strong across the board. The regions are delivering on speed, put-through and volume absorption.
Specifically looking on Page 6, train productivity improved by 1%, allowing more traffic to be moved on the same number of trains. Yard productivity or cars handled per yard switching hour improved by 10%.
Terminal dwell, which indicates how much time our railcar spends in a yard, also improved by 1%. Key metric to see if you're missing those cars that come in and make the tightest connections, the 32-hour cars, which we measure on a daily basis, improved by 26%.
The result was an improvement in car throughput, with a decrease in yard switching hours. The focus was strong across our system.
Looking at locomotive utilization, and you've got to beg my pardon with my math background. I decided to add one more significant digit on here.
But if you look at locomotive utilization or GTMs per total horsepower, we went from 209.6 to 210.12. Janet, otherwise, was going to show me as flat.
The Western and Eastern regions were substantially better in the quarter. The Southern region held us back slightly, or else the overall result would've been even better.
Train velocity is a very important guide to network fluidity, and we again delivered on improvement from 27.26 to 27.31. The key metric is car velocity.
It's one that I look at every morning when I get up, and car velocity probably is the most important metric in showing a broader picture of how our railroad is performing -- has improved. We have been able to deliver a 4% improvement in car velocity.
I am proud that the improvements are reflected in all 3 regions across system cars, private cars, as well as any foreign cars we have on the railroad. Great job by Mike Cory, Jeff Liepelt, John Orr and Mack Barker in driving this across the whole company.
If you turn to Page 7, proof is displayed for our capability to balance Operational and Service Excellence. Switch window compliance or placement in promise window is at 91%; and our grain spotting performance, which is placement on day promised, is up 86% which, in turn, drives better operational balance, asset utilization, as well as improved service.
If you truly understand the value of end-to-end railroading in the supply chain, you are able to drive better asset utilization with better dwell, faster trains and increased car utilization. In turn, you drive better train yard -- train and yard productivity, with a keen operations and cost-control view.
I'm very proud to work with this group of professional railroaders and dedicated people. The operating team delivered a strong quarter in both service and operations.
With that, J.J., I'd like to turn it over to our Chief Marketing Officer to put more color to our quarter.
Jean-Jacques Ruest
Thank you, Jim, and thank you for all of you to joining us here on this beautiful July afternoon. I will start with the highlights of our quarter.
Our rail freight revenue was up 6% in the quarter. Breaking down the following same-store price on same-store sales, including coal, was up 3.4%.
The volume and mix produced 3.5% of the rail freight revenue growth. The carload grew 2.3%.
The revenue ton-mile grew 4.7%. The weaker Canadian dollar added almost 1% for our revenue, and the fuel surcharge, especially from WTI, reduced the revenue by almost 1%.
Now a quick rundown by this -- of each segment. I will do that as usual on the FX-adjusted basis.
Petroleum and chemical, the revenue was up 17% on 2% carload growth. Crude by rail revenue increased 150% in the quarter to reach nearly $100 million.
This was driven largely by new loading station on our network. We actually had 10 more loading station than last year, the same time.
In term of carload, our second quarter run rate was about 70,000 annualized. The Metals and Minerals revenue was up 3% on 2% carload growth.
The frac sand volume drove that segment, with new plants and rising production in our -- on our Wisconsin franchise. Sand revenue was up 50% in the second quarter.
The remainder of Metals and Minerals was flat to soft, except steel or pipeline projects. Forest product revenue was up 3% on flat carload.
On the very positive side, lumber and panel revenue were up 10% and 8%, respectively. Our export to U.S.
housing start into Asia were up in both cases, while the shipment to Canadian destination was down. On the negative side, the remainder of forest product was weak, namely, pulp export to Asia was down double digit because of demand.
Coal revenue was down 1% on a 2% decrease in revenue ton-mile. Revenue for pet coke export and for coking coal export were up in both cases.
Thermal coal for domestic and export was down from last year. Now looking at grain and fertilizer.
The carload was down 4%, but the revenue was up 4%. The great story in that segment was potash, which revenue was up 40%; and fertilizer, which revenue was up 12%.
However, grain was another tale. Canadian carload were down 12% on lack of grain for export activities.
U.S. grain was also lackluster, with lack of soybean and corn for inventory -- in inventory to be able to sell.
Automotive revenue was down 4% on negative revenue ton-mile of 7%. Carload volume was flat.
RTM was down, and we had less overseas import for the Canadian consumers. Intermodal revenue was up 3% on 6% carload growth.
Please remember the charge in comparable we have with last year, when one of our competitor experienced a work stoppage. Overall, CN's intermodal second quarter revenue were up actually 20% from 2011.
The business in overseas was up 5%. The Port of Vancouver posted a strong 19% revenue growth, and it's constantly growing.
Rupert was soft, as the port customer lost share. On the domestic side, revenue increased 2% with strong grain -- gain from the industrial sector.
Our overall intermodal revenue per unit was impacted by the weaker WTI fuel surcharge and by the year-over-year mix change from the work stoppage comparable. So all in all, a solid quarter in the second quarter.
Now moving to the outlook. Broadly speaking, when you look at the third quarter, the carload will probably be positive but will be muted because of the weak coal and grain, fertilizer market.
Both coal, grain and fertilizer will be weak in the third quarter. We think the carload -- the total carload will pick up at a better pace in the fourth quarter, all that subject the new crop in Canada and the U.S.
Midwest. Looking at intermodal specifically, the comparable would be more favorable, and the market demand looks somewhat mixed.
So therefore, our business initiative will drive these results. For example, our excellent service, like our [indiscernible] by the turn morning; our new product like our focus on reefer service; new market like our Joliet terminal, which has opened a few weeks back; new customers, like Chemoil [ph], as well as filling underserved market like in Saskatoon.
On bulk, we remain guarded as it relates to the coking coal market in Asia, especially China, and also remaining also guarded when it comes to thermal coal in general. The outlook for manufacturing, we see sustained demand for crude by rail from a number -- an increased number of loading station and increased overall activities on the network.
We also see ongoing growth demand in energy consumable for drilling, for example, frac sand. There will also be ongoing growth for lumber and panel to the U.S.
and Asian markets. In conclusion, all in, we will be able to outperform the economy and maintain objective to achieve inflation-plus pricing.
So Luc?
Luc Jobin
Thanks, J.J. Starting on Page 14 on the presentation, let me walk you through the key financial highlights of our second quarter's performance.
Revenues were up $123 million or 5% at nearly $2.7 billion. This was a record quarter for rail freight revenues, gross ton-miles, revenue ton-miles and carloads.
All in all, volume was up 2.4% in terms of carloads and 5% in terms of RTM. Operating income was $1.042 billion, up 6% versus last year, as solid productivity and service levels were coupled with expense management in the quarter to complement revenue growth.
Here, again, this is also a quarterly record. Our operating ratio was 60.9% in the quarter, which represents an improvement of 40 basis points versus last year.
Other income stood at $28 million in the quarter, compared with $9 million in 2012. We concluded in this quarter an agreement with another class 1 railway to swap operating easements, including track and roadway assets on specific rail lines.
While this did not involve any monetary considerations, we accounted for the transaction at fair value, resulting in a gain of $29 million or $18 million after tax. In the second quarter, we had a $5 million increase in deferred income tax expense, resulting from the enactment of a higher provincial corporate income tax rate.
This was offset, however, by a $15 million tax recovery from the recognition of U.S. state taxes relating to nonoperating losses.
Excluding the impact of these items, our effective tax rate is 28%. So our reported net income for the second quarter is $717 million, up 14%; and the reported diluted EPS stands at $1.69, up 17% versus last year.
Excluding the impact in the quarter of the deferred income tax expense and the gain on the exchange of easements, the adjusted diluted EPS stands at $1.66 in 2013, which represents an 11% increase over last year's second quarter. Turning to Page 15.
Operating expenses were $1.624 billion, up 4% versus last year or 3% on a constant-currency basis. At this point, I'll refer to the changes in constant currency.
Labor and fringe benefit costs were $498 million, a decrease of $9 million or 2% lower than last year. This was the result of an increase in overall wage costs of 4.4%, mostly the product of wage inflation and a 1.4% increase in average headcount versus last year's.
GTMs were up 5%, so we did enjoy 3% -- a 3% gain in labor productivity in the quarter. Second element is a higher pension expense accounting for 3 percentage points of the variance.
Offsetting these cost increases were 2 factors: the first was a lower stock-based compensation expense in this quarter versus last year, accounting for 4 percentage points. The other factor relates to more capital work being performed in the second quarter of this year versus last year.
Purchased services and material expenses were $341 million, up 11%. This was the result of higher volume and costs incurred in repairs and maintenance.
6 percentage points of the variance is the increase -- is due to increase in -- or higher locomotive and freight car repair costs, as well as higher facility and maintenance expenses. The balance of the increase for 5 percentage point relates to the contracted services with third-party carriers due to volume increases in non-rail transportation, including intermodal trucking and transloading.
The fuel expense stood at $402 million, an increase of 5%. Higher volume represented 4 percentage points of the increase in the quarter, while higher consumption rate accounted for the balance.
Although actually, when you exclude this onetime inventory adjustment relating to previous periods, the average consumption would actually be flat versus last year. Depreciation is $19 million higher than last year or 8%.
This is due to a combination of asset additions, depreciation studies and other adjustments to the remaining useful life of specific assets. Equipment rent at $68 million were $8 million higher than last year or 14%.
This is attributable to increased car hire costs and a higher rental charges for intermodal and rail car lease equipment. Casualty and other costs were $65 million, $17 million favorable to last year, as we incurred lower environmental, legal and other claims, partially offset by higher general costs.
Turning to free cash flow on Page 16. We generated $437 million of free cash in the first half of the year.
$1.384 billion was generated from operating activities. This was higher than 2012 by $48 million, mostly as a result of $350 million of lower pension contributions and better working capital.
This was partially offset by higher tax payments for $427 million. In 2013, $572 million of cash was used in investing activities versus $277 million in 2012.
The difference is mostly a function of $260 million lower proceeds from non-core asset sales and higher capital expenditures in 2013. Meanwhile, our balance sheet remains strong with debt and leverage ratios within our guidelines.
We also continue to advance our stock buyback program of $1.4 billion announced last October, consistent with our strong shareholder returns agenda. In the second quarter, we bought back 3.6 million shares for a consideration of $365 million.
Finally, on Page 17, our 2013 financial outlook. We continue to see a gradual, although modest improvement, in the North American economy, combined with opportunities in domestic energy-related commodities.
However, as J.J. pointed out, we're witnessing some softness, specifically in bulk markets, including grain as well as domestic and export coal.
And so, with a strong second quarter performance to our back, cautious optimism is warranted, as we look ahead to what may be a challenging second half of 2013. Nevertheless, we are maintaining our annual guidance, which aims for high-single-digit EPS growth in 2013 over the 2012 adjusted diluted EPS of $5.61.
We also continue to target free cash flow in the $800 million to $900 million range. On that note, I'll turn it back over to you, Claude.
Claude Mongeau
Okay. Thank you, Luc, and team.
As you can see, this team of railroader has solid momentum. The second quarter products achieved a number of performance records.
We're pursuing growth opportunities on all fronts, and we are also tightly managing our costs. Clearly, there's a soft patch in terms of demand here, particularly in the third quarter, and we hope the economy will continue to help us in the fourth quarter.
But we are gearing up to meet our full year outlook and deliver solid performance for our shareholder. And with that, Patrick, I will turn it over to you.
Operator
[Operator Instructions] The first question is from Ken Hoexter from Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch, Research Division
Maybe if we could just talk about your outlook. Are you using just -- initially, are you using $1.69 or $1.66?
And on that, what are your thoughts on the cost per employee going forward, in terms of the volatile labor line, given what you talked about on the incentive comp and the like?
Luc Jobin
Yes, we always use the adjusted diluted EPS, so $1.66. And secondly, looking forward, in terms of headcount, we're looking probably somewhere between flat to up slightly, somewhere around 1%.
We continue to enjoy pretty good productivity, obviously, as we try to contain the headcount increase, but we're still seeing some favorable GTM growth. So I think that's kind of where we're heading.
Otherwise, the wage inflation is about 3%.
Operator
The next question is from Benoit Poirier from Desjardins Capital Markets.
Benoit Poirier - Desjardins Securities Inc., Research Division
Claude, we've seen your comments with respect to CN's robust train securement policy. Could you please share with us your thoughts on the broader safety implication for CN and the rail industry, following the runaway train accident on the MMA at Lac-Mégantic?
Claude Mongeau
It's a fair question. As I said earlier, we are analyzing every aspect of what could have gone wrong on the MMA to cause a runaway train situation, and we're also assessing all of our train securement policies.
When it's for a train that is attached to locomotives, our policies require our crew members to put on a full application of air brake on the entire train. And that's in addition to adding the independent and the hand brake applied on the lead locomotive.
We also require our locomotives to be locked when they're unattended and have a reset safety control device in place to act as backup to prevent uncontrolled movement, even if the locomotive is shut down. So bottom line is we feel that our train securement policies are robust, but we are nevertheless reviewing them in light of the accident.
But before we conclude our assessment, we first need to understand what actually happened here. We don't know at this point exactly what happened, and suffice it to say that it's much more complicated than just finding out how many hand brakes were set.
The TSB will have to answer several questions to understand how many issues combined to breach multiple safety defenses and caused this tragic accident. Were the hand brakes properly secured and was the push-pull test done?
What caused the fire on the controlling locomotive? Why was the locomotive shut down without compensating actions?
Why did the air pressure on the independent brake leak out in minutes, as opposed to in hours? And even then, why did the required rate -- reset safety control device not play its role as an ultimate backup safety defense to stop the train when it detected movement?
As you can appreciate, a lot of things have to go wrong, and it really is premature to conclude or render judgments on safety policies without all the proper facts. This accident is a sobering remember to industry that safety is of the utmost importance, and I hope that stakeholders, as well as regulators, will allow careful analysis to shape decisions and properly target actions to further improve safety in the future.
Operator
The next question is from Tom Wadewitz from JPMorgan.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
I think this is a question for you, J.J. You mentioned that you're up to a run rate of about 70,000 annual loads, I think, in the crude by rail.
How do you think that -- well, how do you expect that to trend in the second half of the year? Do -- would you expect to further step up?
And I guess, one of the questions that's come up for other railroads is just any kind of impact from spreads. I know you wouldn't be tied as directly to kind of WTI-Brent.
But is there any kind of change in the customer, I guess, discussion that you have, related to the kind of broader changes in spreads?
Jean-Jacques Ruest
Well, starting with the -- our expectation for the next 6, 12, 18 months, we still believe the -- there will be an increase in the volume. The percent may not be the same, because the base is getting bigger.
But they're still a likelihood that crude by rail will continue to rise in volume. The question of the spread, we're more tied to the Western Canada Select than we are to the spread with the Brent.
I think that's more relevant to our marketplace. Those spreads have been narrowed, but they're not as narrowed as the spread between WTI and Brent.
I think, short term, it has -- the change in the spread has no impact because people already made a decision. They bought their product.
Product that has been bought, they will be delivered. So the question is maybe more a couple of months from now and whether or not there will be some changes in run rate.
I think all in, the value of using the true mode is real. It has generated much better pricing for the Western Canadian and Saskatchewan producers, and I think based on those success, there was improvement year-to-date on spread.
People would be likely to maintain the use of the 2 modes, because it have really worked out for them. Time will tell after that, but what we see today in the change of spread has been the result of using the 2 modes.
Operator
The next question is from Cherilyn Radbourne from TD Securities.
Cherilyn Radbourne - TD Securities Equity Research
I also wanted to ask you, one, on crude by rail. Because on last quarter's call, you alluded to some discussions that you were having with larger producers and refiners with respect to crude by rail investment.
So I just wondered if there was any update you could give us on those dialogues and when we might hit an inflection point and see it shifts to more unit train traffic on your network versus manifest.
Jean-Jacques Ruest
Okay. Yes, most of these projects are based in Western Canada, mostly Alberta, mostly around Edmonton.
Those investments are proceeding, meaning, terminal around Edmonton or North of Edmonton, who will be able to hit a new one or what's more sort of a -- more likely as unit train that could load unit train and ship that out. So sometime late this year and next year, you will see a trade that will move into movement of the block based on the terminal, which are built by a large companies, well put together something with lot of efficiencies, something eventually also will mean that more and more refineries will probably get the product directly as opposed to via transfer terminal.
Or from an investment, it's still there today.
Operator
The next question is from Chris Wetherbee from Citi.
Christian Wetherbee - Citigroup Inc, Research Division
Maybe just a question, when you think about kind of the guidance for the second half of the year or what's implied by the guidance the second half of the year, J.J., you mentioned that the volume outlook is a little -- is positive but a little bit softer in the third quarter. And it kind of implies a bit of a pickup on the volume side into the fourth quarter.
Maybe you could help us kind of run through some of the dynamics that may change as you go from the third quarter into the fourth quarter with a pickup in that volume. I think it's mostly around the bulk side, but just curious to get a little extra color there.
Jean-Jacques Ruest
Yes. So definitely, when you look at the summer months, summer being all the way to the end of September, the grain will be soft.
Because both in Canada and the U.S., it's basically barely any grains for us to move. So we have to wait for the next crops.
So that's one of the difference between third and fourth quarter. The difference is in the summer month.
Right now, we're moving barely any kind of -- significant amount of fertilizer, whether it's potash or nitrogen-based fertilizer. Again, we hope that in the fall, there'll be a good application season and what's was already in the marketplace.
Inventories are very high. But if there is a potash application in the fall that -- we'll see some of that.
And then you have intermodal, which there will be a peak, and nothing to have a nosebleed but there will be some kind of an pickup in intermodal. Some our customers are saying maybe, like, a 3% increase in the run rate, if you wish, from quarter-to-quarter.
Some are saying it could start as early as some time in August. Some are saying it might be as late as September.
Time will tell. But these are some of the difference between third and fourth quarter.
Big difference in the bulk side. Bulk is soft, grain is soft, and coal has been -- coal is sort of changing a bit of direction here.
Whether it's coking coal or thermal coal, we've had more success in the past.
Operator
The next question is from Walter Spracklin from RBC Capital Markets.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Just wanted to follow up on the volume expectations, J.J. It seems to me, going through the quarter following your weekly carloads, that you had been running still at a very strong rate right up until the very end of the quarter.
It seemed to take in a little bit of a hit toward the end. I would assume that, that's sort of backing behind your caution going into the third quarter.
My question, I guess, is around the nature of that decline. It does seem broad based, but I'm curious as to whether you're seeing any -- just a significant reduction in demand.
Or are we seeing some market share shift to truck or over to your competitor? Just if you could give us a little bit of color around the dynamic around the declines you're seeing.
Jean-Jacques Ruest
Yes, the month of June -- the month of June was different -- is different to what we had in May and April. The month of June is where we start to see this major slowdown in the grain export.
In June, we start to run out of grain export both Canada and the U.S. There was not a whole lot in the U.S.
to start with. We also saw the decline of the fertilizer, namely potash.
Potash was still fairly strong in month of May, namely through the U.S. and overseas, and then that eventually get hit -- we've hit the wall with our customers.
So what I was talking about in term of the third quarter, some of that we've already start to experience significant win the month of June so...
Walter Spracklin - RBC Capital Markets, LLC, Research Division
No market share shift there or...
Jean-Jacques Ruest
No, there's no market share shift in any of our market of any significance. There's always some puts and takes back and fourth, but these are not the reason for the change in run rate between May, April, June, July.
The fundamental amount of product out there for us to move, especially on the bulk side.
Claude Mongeau
I would just add to J.J.' s point, in fact, if it was not for our market share gains, we -- there is a soft patch in demand, particularly in bulk.
But we are holding our own and continuing to make gains and that, frankly, is the strategy for the balance of the year. We need to outperform base markets in order to drive our agenda forward, and that's what we've been doing in the first half and will be doing in the second half.
Operator
The next question is from Keith Schoonmaker from Morningstar.
Keith Schoonmaker - Morningstar Inc., Research Division
I'd like to ask a particular question on coal and maybe you could elaborate a little bit on shifting demand trends. That competitor indicated a strength in Illinois Basin.
Has this portion of your franchise grown?
Jean-Jacques Ruest
The -- on the U.S. coal -- on the U.S.
coal, both our domestic and export were weaker. On the domestic side, because our franchise geographically is quite limited, we don't serve as many [indiscernible] as any other railroad in the U.S.
The exposure we have for the franchise on thermal coal of the U.S. domestically will probably see some pickup in 2014 and -- but probably not so much this year.
On the export, it's all about the pricing overseas. Anybody's crystal ball as the price of thermal coal in the open market and the price of coking coal in the open market.
Slightly better price would help us. The price is weak.
Our producer have a bit of a challenge. So reading the crystal ball of the world market, these 2 commodity is what will eventually turn the tide for thermal coal and coking coal in export market.
Claude Mongeau
We do find some comfort, Keith, that the producers on our line for export met coal are low-cost producer. So it's difficult for all producers in a tough market, but they're working hard to maintain their advantage from a cost standpoint, and we hope the business will recover into 2014.
Jean-Jacques Ruest
And in the meantime, we keep building the infrastructure, both the service to Rupert and service to the Central Gulf, such that as market come back, we don't have logistical bottleneck at the ports. So those efforts logistically and as well as investment in this terminal is still going on, getting ready for the next up-cycle.
Operator
The next question is from David Tyerman from Canaccord Genuity.
David Tyerman - Canaccord Genuity, Research Division
I was interested in your comment, Claude, that you've been making market share gains in the first half. You intend to in the second half, too.
I was wondering what areas you're seeing, particularly, that you're making gains. And related to that, obviously, your major Canadian competitor is lowering its cost base significantly.
I'm wondering if you're seeing any more aggressive market share things going on from them at this point.
Claude Mongeau
We focus to outperform base market. That means we have to gain market share against other railroads, not just our principal competitor in Canada, but all railroads that we compete with.
We also have to make a market share gains against other modes of transportation, trucks, first and foremost, but also pipeline; and to a lesser degree, shipping, barge and other shipping opportunities. And that's basically what we're doing.
We're trying -- we're innovating, for instance, in our intermodal service, both overseas and domestic. And we're gaining market share against trucks, against other railroads.
And it's a range of initiatives that are helping us outperform base market in that particular segment. Similar story in merchandise.
It's about leveraging our franchise in frac sand and energy consumable. It's about improving our service, so that we can help our customers win in their own market and allow them to give us a higher share of their wallet.
We're doing it in Bulk. The market share there is more against other sources around the world.
Especially in tough times, we have to have the best possible service so that our coal producers don't miss a beat and move as much coal as the market will allow, especially in a down market. And so at the end of the day, for the last 3 years, we've been outpacing markets because we are gaining market share in all of those segments against all modes, and that's what we plan to continue in the future.
Operator
The next question is from Bill Greene from Morgan Stanley.
William J. Greene - Morgan Stanley, Research Division
Luc, maybe I could ask you to comment a little bit on your cost inflation. What -- sort of where do you peg it and what do you target in terms of productivity each year?
Luc Jobin
Well, it's a tough question. It's from the standpoint of -- it depends again what the business volumes are and what we're seeing in terms of train starts and those kinds of things.
So -- I mean, ideally, we'd like to see a continuous push on productivity. The business is not linear, so there are moments where we're adding on more business and it just -- it goes up in terms of step function.
Clearly, we're seeing a little bit of a slowdown. And I think we're going to be mindful of just pacing ourselves in terms of headcount and ensuring that we're getting the most out of the productivity of the existing workforce.
So typically, we've been more on the -- hiring a little bit ahead of schedule, given that we were seeing some -- a little bit steeper growth. So now, we're kind of recalibrating that a little bit.
And maybe Jim has a few comments he'd like to add on that.
Vincenzo Vena
Look, we're always looking to make sure that we got the best train productivity, the most amount we can add on the train service we have and you hit it right on the nail. There's times when you have to -- you have the new -- have new service on.
When you open up the frac sand and the Barron Sub that we opened up last year, it's a brand-new service and you have to add people on there but you can't add anything from scratch. On the other hand, I think with where everything I'm being told from J.J.
and what the marketing expertise I'm getting, we're looking at -- we are going to tighten up how we hire. We're not going to be looking out so far forward and make sure we've got a lot of ways in the company to be able to help ourselves with the use of -- the way we use people.
So I think we're going to tighten up forward our hiring and not be looking out quite as far just to make sure that we're not long.
Operator
The next question is from Brandon Oglenski from Barclays.
Brandon R. Oglenski - Barclays Capital, Research Division
Maybe if I can just follow up on that question from Bill. Specifically, on D&A, that had a big upstep this quarter.
And Luc, should we be modeling that new level of run rate of D&A? And then secondly, I do think you called out an item in casualty and other.
But how do we look at casualty expense going forward? There's obviously some volatility there.
Luc Jobin
Yes. I mean, D&A, I think, overall, as you look through the year, I'd probably peg it somewhere around 10% of revenues, I mean, ballpark.
And what we did indicate is we're seeing some headwind in terms of the depreciation studies that we're in the course of completing. They're not all done, but we have more to do there.
All in all, I'm expecting probably somewhere in the order of about $75 million increase in depreciation, as we look to complete the year. So we'll see.
I mean, that's still a little bit up in the air because we haven't completed all the depreciation studies. On the C&O, again, it can be a bit bumpy.
So these things don't -- are not linear, and they don't go in every quarter like clockwork. We did have a very good quarter.
And again, we're very mindful of expenses. So somewhere between $75 million, $80 million a quarter is usually something that I would think is doable.
So I look around $80 million as a safe number to use. All in all, that's about 3% again of revenues year in, year out.
Operator
The next question is from Steve Hansen from Raymond James.
Steven P. Hansen - Raymond James Ltd., Research Division
As it relates to the crude by rail phenomenon, several of the Canada's largest heavy producers seem to have suggested here that their intent on strategically committing a certain portion of their output to crude by rail, and that would seem to suggest their growth commitment irrespective of the spread environment. I'm just wondering whether or not you guys are seeing, in your discussions, any sort of type term commitments out there or take-or-pay type commitments on some of the terminaling side and/or in the rail business itself.
Jean-Jacques Ruest
Yes, Steve, definitely there's -- when you talk about the heavy crude, the one that you would move before you actually add the diluent, you know you're into a different ballgame. The spread is important.
But the fact you'd be at least sending a product, which is undiluted, also a very important for both the seller and the buyer. The buyer is looking for heavy crude is looking for heavy crude in that diluent, and if the seller would rather not put the diluent into it, if he can sell it as is.
So there is quite a number of these terminal, which are being built in -- around Edmonton, which are targeting a more heavier-type product, if you can capture it before it gets diluted to a pipeline spec, and that's one of the attraction of moving in by rail is moving in product, which is more heavy and more attractive to those who can refine. And so it is one of the positive story of rail, and it's one where some of the investment are coming in as we speak in Alberta, both on the fleet side, because you need a different tank cars and also on the loading side because you obviously load and unload these products differently than if it was back in crude.
Vincenzo Vena
And it requires a little bit of their -- more investment in terms of steaming capability here. So those supply chain are being built as we speak, and they require large refiners or couple of producers to back up those investments.
And we're there in the middle to connect those markets to destinations with the flexibility that comes with rail.
Luc Jobin
Well, you're right. That is -- the producer would back up those capital investment, either terminal or fleet, with volume commitment or commitment to use them.
And these are obviously part of their ways to hedge the commercial risks of one mode versus another.
Operator
The next question is from Scott Group from Wolfe Research.
Scott H. Group - Wolfe Research, LLC
So first real quick, hopefully, this doesn't count as my one. But Luc, can you just clarify what you said, one earlier question on D&A.
When you talk about the $75 million increase, were you saying full year '13 versus '12 or kind of the second half versus the first half is the $75 million?
Luc Jobin
No, full year '13 versus '12.
Scott H. Group - Wolfe Research, LLC
Okay, perfect. Okay, great.
And then just -- so my question is on the yield side. We saw -- 3 of the segments reported yields down slightly year-over-year, and we haven't seen that in a while.
And just kind of wondering if you think that, that's kind of inter-commodity mix or if there's any underlying slowdown in pricing. And why aren't -- just maybe at a higher level, why aren't yields better if you're getting 3%, 4% pricing and RTMs are growing faster than carloads?
I would think that'd be positive for mix, and yields would be even better.
Luc Jobin
Scott, you're referring yield as in cent per RTM?
Scott H. Group - Wolfe Research, LLC
Revenue per carload, I guess, is how we have it in our model.
Luc Jobin
Okay. Revenue per carload -- again, your revenue per carload, the biggest factor in revenue per carload is length of haul, so you're going back to mix and same thing for cent per RTM.
I mean, that's -- I guess, fortunately or unfortunately, I mean, the data -- the public data does not really give a good reading when it comes to yield. The real yield come from same-store price, exact same sales, year-over-year, same payer, same origins, same destinations, same car.
And that's -- and after you strip out the fuel surcharge impact and you strip out the exchange. That's how you get to yield.
And based on those more precise figures, and that's how we manage yield, the price is the same. So price, as I said, was up 3.4%.
And by the time you get that into our revenue per carload or cent per RTM, now you get a whole impact on fuel surcharge, the whole impact, especially of mix and exchange. And lastly, we had -- one of my competitor had a work stoppage.
Our mix of business, obviously, year-over-year was kind of a little different from a run rate point of view. So the same-store price was 3.4%.
The rest is all in the basket of mix and these other things that we talked about.
Operator
The next question is from David Vernon from Bernstein.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
I wanted to see if you could maybe comment a little bit on the length of haul for the crude oil business by rail and then also how that's impacting the employee productivity, which, congratulations in another all-time high in the quarter of 4.25, based on our quick math anyway.
Claude Mongeau
Clearly, the -- we hit a number of records on productivity metrics and also in terms of our overall volume and profitability. The crude business is very length [ph] -- a long haul.
Our franchise from Western Canada, all the way down to the Gulf or our franchise from Western Canada, all the way to Eastern Canada, are very long-haul moves. And so it's business obviously that allows us to have efficient train service, and it's volume that's helping our productivity and helping also our volume and revenue mix.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
Do you have a specific number on the length of haul, just to help us kind of model out what the RTM will be looking like we?
Claude Mongeau
I don't have a specific number, and Janet would be happy to give you a sense of things. But it's about the longest haul we have.
When you get all the way down to the Gulf Coast, it's more than 2,000 miles. And depending on where you're going in Eastern Canada, it's clearly above 1,400 miles to get from Alberta, say, to Eastern Canada refinery.
Operator
The next question is from Allison Landry from Crédit Suisse.
Allison M. Landry - Crédit Suisse AG, Research Division
I was wondering if you could give us your thoughts on the Canadian rail service legislation that was passed recently and how you think that might affect the competitive landscape for the rail industry going forward.
Claude Mongeau
Well, we've been on this file for the last 4, 5 years, Allison, as you know. The -- and our strategy is to improve service and become a true supply chain enabler.
So we will continue with that strategy as long as we offer good service. We hope the customers will recognize that and give us more business and be willing to pay a fair price for our services.
The changes in the law are in. We'll see how it goes.
But as long as we provide good service, hopefully, we don't need to go to the government for arbitration.
Operator
The next question is from Steven Paget from FirstEnergy.
Steven I. Paget - FirstEnergy Capital Corp., Research Division
On intermodal, do you believe you might gain some pricing power in the second half of the year after per-unit prices declined in the first half?
Jean-Jacques Ruest
On intermodal, again, it's a question of same-store price versus revenue per unit or revenue or per cent per RTM. So we'll have this issue of mix behind us eventually in term of the relation with the work stoppage.
In intermodal, our fuel surcharge is based on WTI. And you saw what's happening to WTI is a little weak, and then it's eventually going to come back up.
On the same-store pricing, I think the intermodal segment is not our biggest segment from a price power, but we're working very hard to make sure that we trend in the right direction step by step, step by step. And that's where the effort is all about.
Operator
The next question is from David Newman from Cormark Securities.
David F. Newman - Cormark Securities Inc., Research Division
Yes, one for Jim here. It looks like you guys pulled out all the stops, pardon the pun, in Q2 versus Q1 on a tough weather comp.
I guess my question is, how much is systematic based on some of the initiatives you put in, in the past to SmartYard versus tactical to recover from Q1? I guess, how sustainable is it?
And are these the new levels we can kind of expect going forward?
Vincenzo Vena
Well, we appreciate the question, David. First of all, I didn't even look back at Q1.
You never heard me mentioned it.
David F. Newman - Cormark Securities Inc., Research Division
It's a tough weather comp, but I'm just kind of looking at -- the Q1 was tough. So obviously, you made a concerted effort in terms of improving the operations in Q2, which, I believe, customers appreciated.
But where are you at, and is this sustainable?
Vincenzo Vena
Well, we're lapping previous year's numbers and in fact, in June, we had a spectacular June in our operating metrics and we're doing it by going on -- being out on the ground. I spent a lot of time out in the field with the whole team.
And I know John Orr, he's willing to give up his holidays or vacation to get out there and see what we can do better. But I tell him to go because it's important to go.
So is it -- is -- can we maintain this? I think we can maintain.
There's always an operation things you can't control and weather could be one of it. So I'm always cautious in saying this is maintainable forever, but I don't see anything else stopping.
We were able to take the extra volume that came in this past quarter and be able to keep the metrics running at -- where I'd like them. And maybe there's a little bit of room left even to make them a little bit better.
So I'm looking forward to the challenge with the rest of the team.
Claude Mongeau
David, Jim is very humble. I've been watching him here for the last couple of months, and I have to say that it's a range of initiatives, blocking and tackling, leveraging on the fundamental structural initiatives that we have out there to improve service and improve productivity at the same time, and we are hitting new heights.
The -- I mean, every one of our metrics is at or near our best performance ever, and I see momentum. I think it's the floor.
You'll see continued progress. As long as we can focus with discipline, we can accommodate that business at low incremental costs.
We can do it with good operating metrics and continue to improve service. That's the game plan.
It's working, and Jim is doing a bang-up job.
Operator
The next question is from Turan Quettawala from Scotiabank.
Turan Quettawala - Scotiabank Global Banking and Markets, Research Division
I had a quick question on intermodal. J.J., you talked about some weakness here at Rupert, and I know you said it was rare that shipping company is changing market share there.
I'm just wondering, are you gaining some of that back, I guess, in Vancouver? Or is that being lost to your competitors, just based on the changes in shipping companies or maybe even leaking to the U.S.?
Jean-Jacques Ruest
Yes, we are -- I have to believe that, in large part, we are gaining it back. We're -- when you look at the total market share, without getting into specific numbers, we are the dominant carrier in Canada for overseas.
So business, from time to time, shift from one shipping line to another. In that case, it probably shifted from the Port of Rupert to the Port of Vancouver.
Our Vancouver result are very strong. Some of that might be products that used to be coming over at Rupert.
One of their line in Rupert is -- tried to be very aggressive on pricing, and they have lost some business during that May contract season. They're trying to get some of this business back, but they lost to somebody else.
And that somebody else is probably more likely coming out 1 of the 3 terminal in Vancouver. So I would call that market share shifting one in the shipping line more so than shifting between one railroad to another.
The Canadian market is maybe not quite as strong as one would have think, and the U.S. economy is a little better than the Canadian market right now.
So we've seen better days in some of the transpacific trade, all in Canada and the U.S., but I think what's happening at Rupert is specific over one shipping line strategy for this year's contract season.
Claude Mongeau
And we applaud their effort, because the shipping line has to improve pricing over time. And the -- it's quite constructive.
I would just add to J.J.' s comment that with housing starts on the -- on demand year with good recovery, this should bode well, not just for lumber movement between Canada and U.S., but also for container traffic out of the West Coast port.
The -- when people buy new house, they tend to buy furniture, TVs and a whole lot of appliances. And typically, for every housing starts, there is lumber, but there's also a lot of container goods that comes from Asia.
So we're hopeful that the trend in Vancouver, which is very positive, will continue. And we are hopeful that Rupert will gain momentum here in the next little while.
Mar [ph] has ordered and he's about to install another crane at their terminal, and Luc was giving me a report today that our siding at the -- on the cane [ph] siding is going to be complete between now and year end. So we will have capacity to accommodate growth at Rupert when the business comes back.
Turan Quettawala - Scotiabank Global Banking and Markets, Research Division
Great, that's very helpful. And I guess, really quickly, is there a change in the U.S.
to Canada volume for your intermodal?
Claude Mongeau
Our business to the U.S. is still growing.
It's growing as a result of slow adjusting here in economy and housing starts but also growing because we added these smaller terminal, which are just about to start up.
Operator
Thank you. This concludes today's question-and-answer session.
I would like to turn the meeting back over to Mr. Mongeau.
Claude Mongeau
Well, thank you, Patrick, and thank you to all of us. You were very disciplined.
I think we had 2, 1.5 questions and a number of very good questions. We are pleased as -- again, as I said, we are pleased with our results in the second quarter.
We do have momentum in place, and we are gearing up to finish the year strong and deliver on our commitment to you and our shareholders in terms of overall financial performance for 2013. To all of you, have a safe day, and wish to talk to you soon on our Q3 results.
Thank you.
Luc Jobin
Thank you.
Jean-Jacques Ruest
Thank you.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time, and thank you for your participation.