Jan 30, 2014
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
Walter Spracklin - RBC Capital Markets, LLC, Research Division William J. Greene - Morgan Stanley, Research Division Turan Quettawala - Scotiabank Global Banking and Markets, Research Division Thomas R.
Wadewitz - JP Morgan Chase & Co, Research Division Scott H. Group - Wolfe Research, LLC David F.
Newman - Cormark Securities Inc., Research Division Jason H. Seidl - Cowen and Company, LLC, Research Division Benoit Poirier - Desjardins Securities Inc., Research Division Steven C.
Sherowski - BofA Merrill Lynch, Research Division
Operator
Welcome to the CN Fourth Quarter and Full Year 2013 Financial Results Conference Call. I would now like to turn the meeting over to Janet Drysdale, Vice President, Investor Relations.
Ladies and gentlemen, Ms. Drysdale.
Janet Drysdale
Thank you, Michael. Good afternoon, everyone, and thank you for joining us.
I'd like to remind you of the comments already 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. In order to be fair to all participants, I would ask you to please limit yourselves to one question.
It's now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. Claude Mongeau.
Claude Mongeau
Thank you, Janet, and thank you for all -- those who are on the call today. We're here in Montréal.
The temperature in the east is good and things are warming up slightly out west. So we feel good about that because weather has been a bit of a challenge lately.
We'll be discussing that through the call. But December was tough.
We had difficult weather, but Q4 overall was -- came up with very good results. The team will share the details, but solid revenue growth during the quarter, the ability to bring that business at low incremental cost again.
And that allowed us to deliver $0.76 for the fourth quarter, which is an increase of 7% from last year. Now, when we met with you in December, we had hoped that maybe we could finish at the higher end of that tight range that we have given you.
December brought us basically in line with the middle of that range. So we feel reasonably pleased with that performance, allows us to turn in a full year EPS on an adjusted basis of $3.06, which is effectively 9% year-over-year growth in line with our guidance for high single-digit or close to a double-digit EPS performance.
And, again, we're building on our supply-chain agenda. It's working.
We've been able, for the full year, to outpace the economy and grow faster in base market conditions. I think we finished the year with record volumes and record revenues.
The volumes were up faster than our peers in the industry, and that's consistent with our game plan. We were also able to maintain our industry leading operating ratio despite significant headwinds on pension and depreciation issue.
We turned in an operating ratio for the full year of 63.4%, again, for the full year, which is only half a point of an increase over the prior year. Maybe the number that I'm most pleased with given the challenges we faced lately with the focus on railroad safety performance is our safety performance for the full year in 2013.
We actually delivered 9% year-over-year improvement in our accident ratio. We had 33 main track accidents last year in the full year.
That's about as good as we've ever done. In fact, it matches effectively the record performance we had achieved in 2012.
And it's not just 2013, this is effectively a decade-long trend of improvement in our safety performance. Obviously, every accident is one too many and we've had a few accidents to deal with during the fourth quarter.
But that does not detract us from the focus on a continuous investment in detection technology, tightening of our processes and investments to have a quality planned infrastructure to continue to prevent accidents from happening in the first place and to respond effectively in the rare cases when we do have issues to deal with. So solid performance overall and good finish to the year in the fourth quarter.
We do have issues to deal with, with weather. December was quite challenging and it's continuing into January and I'm sure Jim will give you some insights into that idea, gives you right now an overview of our key operating metrics and what we're doing on the railroad.
Jim?
Vincenzo Vena
Okay. Thank you very much, Claude.
Overall, very impressed with our fourth quarter operating performance as we kept improving our metrics across the board. The story of the fourth quarter can be divided into 2 parts: October and November, when we finished those 2 months, our velocity was up by 6%, our train load was 3% better and the volume higher than ever before.
So very strong October, November. December, I'll have to admit, was difficult.
But we ended, even with all of that, when you put all the numbers in, we ended up with a 1% betterment in training productivity. 8% better in yard productivity, which continues a very strong year and our processing cars going through our terminals.
And a 2% betterment in car velocity, which most of you have heard me say is the single biggest metric that I like to look at that tells me how fast we are moving the cars. So even with a very difficult December, I think we've finished the year and delivered.
We have put ourselves on a little bit of a hole during the first quarter last year and we're able to deliver most of the metrics, the betterment through the year and we had a strong third quarter and continued with a strong fourth quarter that was tempered, some because of the weather. Now I've been in railroad for a number of years.
And I know some people have asked me how many years and some people have said that I was a rookie and other people have said I've been around forever. But I'll have to admit this year, December, January, they have been tough.
But I'm very proud of the team and everybody that works at CN, from the unionized employees out in the ground that are dealing with the very cold weather in a number of locations, not just the traditional Canadian prairies. We've had cold and we've had snow as far south as our territory runs into the United States.
Now, we continue to deal with the weather. January has been difficult and we continue to have to set priorities.
We have added a number of assets whether it was the new locomotives that we brought online on purpose during the end of the third quarter, the AC locomotives, whether it was the DP locomotives that we've put in place, whether was processes in the yard but even with all that, we are setting priorities and we know that we are not able to move all the business that J.J. was lining up for us to move in the first quarter.
Even given all that, though, to this date, our movement of -- number of GTMs we're moving per day is higher than it ever has been and hopefully we will continue to do that as we move forward. On safety, and Claude already mentioned how important it is to us and it was nice to see our safety record continue to improve.
And we've delivered the best ever numbers in some categories. But more importantly, we will continue to invest in technology, and we announced the $10 million additional investment in this last quarter and we will continue to invest smartly for technology and gains and especially on processes to continue to drive our safety record better and how we're handling all of our products.
Now, volume continues to grow. And J.J.
and the whole marketing team are doing a great job of continuing, and we will continue to invest strategically for productivity and capacity. We completed the previously announced $100 million additional investment between Winnipeg and Edmonton, for example, and we will be investing more this year on this corridor and specifically looking at some other corridors where we have it in the plan that we need to take a look what the increase in volume that we expect this year and moving forward that we need to make sure that we've got the capacity and the resiliency to operate.
Listen, no if ands or buts. We have our work cut out for us.
And just like last year, we will need to work hard to recover the expenses. I am very confident that we got the team and we will deliver this year the same as we did last year.
J.J.?
Jean-Jacques Ruest
Thank you, Jim, and thank you to all of our running trade and our engineering forces out there who've worked very hard the last 8 weeks and good afternoon to all of you joining us today on the call. The next few minutes, I'd like to review the last quarter, of course, and then I'll give you a commercial outlook for going forward.
The month of December, as Jim has been mentioning, has been extremely cold condition and it did impact the overall supply chain in Canada in many of our sector. Having said that, we did post solid revenue growth of 8%, which is 5% adjusted revenue growth on an exchange basis.
Now, looking at it from a freight revenue point of view, we delivered 6% growth on the FX adjusted basis, 4% came from the volume and mix, 2% came from price. Fuel surcharge impact was negligible in the quarter.
On the pricing side, to be more specific, same-store price came close to 3%, slightly down from the third quarter. As a reminder, same-store price is applied -- is calculated after deduction of fuel surcharge revenue and is applied on about 75% of our freight revenue on a -- which is a same-store book of business.
Regarding the mix for the quarter, we had an increased length of haul of 18% in petroleum chemicals. We also had an increase of length of haul 8% in metals and minerals, but we had a 9% decrease in the average length of haul for coal.
The carloads for the quarter were up 3%. The revenue ton for the quarter were up 5%.
And in both cases, it mostly came from the October, November operation. Now, looking last quarter in more detail, we'll do that on a FX adjusted basis as we do usually.
Metals and minerals revenue grew 7% mostly from energy consumable namely increased tracks and production on our Wisconsin network. The ferrous and nonferrous metal were weaker.
Ferrous product revenue grew 6%, mostly related to U.S. housing stock, while Canadian housing stock and ferrous product exports were flat to weaker in the quarter.
Petroleum chemical revenue was up 17%. All commodities made positive contribution to these results except for sulfur.
There was a number of new crude via rail loading facility coming online during the quarter. And of note, the 2013 crude carloads were almost 75,000 for the full year and the fourth quarter run rate was almost 25,000 carload.
Automotive revenue overall was flat but we did have -- we did see growth in our presence with the cities where we have [indiscernible] facilities and our Canadian bond revenue was up a strong 14%. But that was offset by a non-reacting fourth quarter 2012 military movement.
[indiscernible] revenue was up 10% from the average source of growth, namely in retail and industrial sector and our coal supply chain in the Port of Vancouver. Our recent return [ph] on investment which are aimed at making the CN [ph] map bigger and more dense also produced growth, namely in Joliet, Detroit and Saskatoon.
The coal revenue was down 12% on an FX adjusted basis for the quarter on the account of weaker exports for pet coke and [indiscernible] coal while the met coal export was actually a bright spot for CN. Canadian and U.S.
grain export demand was very strong. Revenue growth was limited to 3% due to the very cold Canadian December and resulting network challenge.
Fertilizer revenue was down 7% and as was the case in grain, December operation was a limiting factor. Now, if we want to look at -- looking ahead at the outlook on Page 10.
On the year-over-year basis, line already [ph] performance will be driven by strong demand, network fluidity as well as a weaker Canadian dollar. On a more promising side, incremental business is looking strong that is helped by a better U.S.
consumer confidence by positive customer sentiment toward for the CN product and by our recent gain in the marketplace. Most promising out of Port of Vancouver, the Port of Montreal and the domestic retail product.
Petroleum chemical demand will also produce strong growth. Shale gas is having positive implication on chemical and plastic manufacturing and crude by rail will continue its progression.
Metals and minerals would be driven by oil and gas production consumable, as for example frac sand. Actual ration [ph] of capital spending by industrial corporation should also foster a more positive backdrop for the metal segment.
Gross product will be driven by U.S. housing start which is led by lumber and panel.
Exchange rate will be a positive tailwind since the average exchange rate was CAD 0.99 for USD 0.01 during the first quarter of last year. Now with the uncertain side, the tepid coal market, which we are working diligently to offset with our domestic terminal coal initiative and with Canadian West Coast export.
Also of issue is the strong demand that we experienced for grain and fertilizer in the first quarter and the potential challenge and the operational challenge that it represented at the middle of the winter. Having said that, we should have a lot of grain to move out of calendar 2014.
So in closing, as we discussed at our recent Investor Day in December, we have an integrated sales model and a culture of service innovation to get it done in the marketplace, we have a disciplined inflation plus pricing approach in the marketplace and we have a clear vision of commercial strategy to continue our drive for growth. Thank you.
And now I'll pass it onto Luc.
Luc Jobin
All right. Thanks, J.J.
So starting on Page 12 of the presentation, let me kind of walk you through the key financial highlights of our fourth quarter and the 2013 full year performance. First, let's take a look at our solid fourth quarter results.
Revenues as J.J. indicated, were up $211 million or 8% to $2.745 billion.
Operating income was $967 million, up $45 million or 5% versus last year. Our operating ratio was 64.8% in the fourth quarter.
That's 120 basis points higher than last year as both Claude and Jim indicated pressured by difficult winter conditions in December. Other income was $2 million expense versus a $5 million expense last year, as we continue to see lower property and land sales to offset ongoing real estate and other costs.
On a full-year basis, in 2014, I would expect other income to turn slightly positive and be in the $10 million range. But as usual, this will likely be lumpy through the year.
Net income for the fourth quarter is $635 million, up 4%. And the diluted EPS reached $0.76, up 7% versus last year.
FX was favorable for $19 million on net income or $0.02 on EPS in the quarter. Our effective tax rate was 27.3% in the quarter, higher than last year at 26.6%.
Turning to Page 13. Our operating expenses were $1.778 billion, up 10% versus last year or 7% on a constant currency basis.
At this point, I'll refer to the changes in constant currency. First, labor and fringe benefit costs were $594 million, an increase of $120 million over last year.
This was the result of principally 3 elements. First, we had an increase in overall wage cost of 7%.
This was partly the product of wage inflation at 3% and a 1% increase in our average headcount versus last year. The balance of the wage cost increase relates to a higher over time for about $9 million, and less capital work being performed in the fourth quarter this year versus last year.
This was partly the result of volume increases, but for the most part, due to the harsh weather we had in the month of December. The second element is a higher stock-based compensation expense in this quarter versus last year, which represents 9 percentage points of the variance as we did have higher increase in the stock price through this quarter versus the same period in the previous year.
Keep in mind that our stock-based compensation in 2014, specifically in the first quarter, will not have the benefit recognized in the first quarter of last year resulting from the settlement of employment matters relating to former executives for $20 million. The last element of the labor variance is higher pension expense for $49 million, and that as such is the pension expense increased by about $30 million in the fourth quarter this year versus last.
The balance of the pension variance relates to 2012 when we recognized the gain resulting from the forfeiture of pension benefits for a former senior executive. We did, however, finish 2013 with some good news in terms of key assumptions for our 2014 pension costs.
The discount rate increased to 4.73%, and the return on our planned assets reached 11.2% in 2013. As such, we now expect our pension expense for 2014 to be in the $10 million to $20 million range.
A constructive improvement over the $90 million incurred in 2013. By the way, this represents about $15 million better than we had originally expected.
Turning to purchase services and material expenses. Those were $364 million, up 4%.
This was due to higher volume resulting in increased intermodal trucking expenses for 2 percentage points. Also, higher volume, along with winter-related cost including utilities, materials, namely wheels and others, repairs and maintenance expenses, accounted for about 6 percentage points of the variance.
Now, this was partly offset by lower project related contract and contracted services for about 4 percentage points. So the extreme cold weather brought us higher labor and higher purchase services in material costs in December, which at this point I would probably estimate to be approximately $15 million.
Unfortunately, this little twist of mother nature is also extending itself well into January. And consequently, we are having a similar monthly cost pressure to contend with starting in 2014.
The fuel expense stood at $422 million, essentially flat to last year. Higher volume represented an increase of 5 percentage points in the quarter.
Improved productivity constituted an offset of 1 percentage point. And price was also favorable by 2 percentage points.
The balance of the variance is attributable to the favorable impact resulting from fuel inventory adjustments for 2.5 percentage points. One item I'd like perhaps to just remind everyone is that revenue ton-miles is the best indicator of workload across a number of our expense categories and especially for fuel.
If any of you are still anchoring your estimates on carloads or other factors, you may be actually understating expenses as a result. Depreciation is $254 million, $13 million higher than last year or 5%.
And this was mostly due to asset additions and the impact of Canadian and U.S. depreciation studies for track in rural properties.
In 2014, we will be carrying out a depreciation study for rolling stock. So between asset additions, the full year impact of studies done in 2013, and the potential impact of 2014's depreciation study, I would expect our full year depreciation expense to be about $75 million higher than in 2013.
Equipment rents were $71 million, $4 million higher than last year or 6%. This is mostly attributable to increased freight car and intermodal equipment-leasing cost.
Casualty and other costs were $73 million, $38 million favorable to last year as we incurred lower legal and other claims-related cost, lower FELA and occupational disease cost, as a result of an actual review, in addition to lower general cost versus 2012. I would expect this category of expenditures to be in the $80 million per quarter range on average in 2014.
Now, let's turn to our full year results, which are summarized on Page 14. So we wrapped up 2013 with nearly $10.6 billion in revenue, a 7% increase.
This sets a company record in terms of both volumes and revenues. Our operating earnings grew 5% to reach $3.873 million, and our operating ratios stood at 63.4%, only 50 basis points higher than in 2012, which for us was a record year.
And this is quite an achievement when you consider that we faced in 2013 a strong pension headwind of 1 whole percentage point of OR along with other accounting and related matters. Net income was down $68 million or 3%, at $2.6 billion, mainly as a result of lower gains, on disposal of rail assets for $242 million, which was partially offset by an increase in operating earnings of $188 million in 2013.
So this translated into a 1% increase and reported diluted EPS of $3.09. Excluding the impact of major asset sales and income tax adjustments in both years, the adjusted diluted EPS for 2013 stood at $3.06, a 9% increase over 2012's $2.81, in line with our guidance calling for high-single digit growth.
Moving to free cash flow on Page 15. For the full year, 2013, free cash flow generated stood at $1.6 billion, just a little bit above $1.6 billion, $1.623 billion actually.
$38 million lower than in 2012. We generated over $3.5 billion of cash from operating activities.
Notable elements here were income tax payments of $890 million, working capital changes including pension contribution of $239 million. On the pension front, for the combination of higher discount rates and return on planned assets that I mentioned earlier, it should translate into a going concern surplus of $1.7 billion and a solvency deficit of $1.7 billion.
We estimate the required solvency contribution in 2014 will be $335 million, which will actually not require cash outlay from the company as the funds will be drawn down from the $470 million balance in our advanced voluntary contributions already made in prior years. So we estimate our cash contribution in 2014 mainly for current service cost will be approximately $130 million.
In 2013, $1.852 billion of cash was actually used in investing activity. Our capital expenditures in 2013 were $1.973 billion in terms of cash CapEx.
And when you actually take into account $44 million of assets acquired through capital leases, you get a total of $2.17 billion in line with our guidance. We have proceeds from non-core asset sales of $52 million and other investing contribution of $69 million to complete the picture in investing activities.
Deducting the change in restricted cash of $73 million leaves you with $1.623 billion, which is our free cash flow generated as per our new definition of free cash. For those of you trying to reconcile our old definition to our old definition of free cash, simply deduct the dividends of $724 million and the change in FX on cash of about $19 million and you get the $918 million of free cash generated in the year slightly ahead of our guidance in 2013.
Meanwhile, our balance sheet remains strong with debt and leverage ratios within our guidelines. Finally, on Page 16, let's take a look at our 2014 financial outlook.
We continue to see a very good progression in the North American economy combined with opportunities in grain, lumber, intermodal and domestic energy-related commodities. We expect otherwise a modest progression in other resource export markets.
We assume as well North American industrial production will increase by approximately 3% in 2014. Housing starts will continue to a strong progression and we estimate they will be in the range of 1.1 million units in 2014.
These and other key assumptions underpinning our outlook should translate into mid-single-digit car load growth in 2014. On the pricing front, as J.J.
mentioned, we maintain our inflation plus pricing policy. So having said this, we are reaffirming our annual guidance as communicated to all of you last December.
So we are aiming for double-digit EPS growth in 2014 over the 2013 adjusted diluted EPS of $3.06. Our guidance also calls for free cash flow in the range of $1.6 billion to $1.7 billion.
Our free cash flow guidance assumes that we will invest in capital programs to the tune of about $2.1 billion. Consistent with our strong shareholder return agenda, our board has approved today a 16% increase in our dividends.
In addition, we continue with our agenda of rewarding shareholders through our stock buyback program. In 2013, we've brought -- we bought back 27.6 million shares at an average price of $50.65 for $1.4 billion total.
In 2014, we continued with the program approved by our board last October to buy up to 30 million shares and have -- we have set aside about $1.4 billion towards achieving this objective. So in conclusion, the CN team remains committed to delivering superior results and creating value for shareholders as we continue to unfold our strategic agenda in 2014.
So on that note, I'll turn it back over to you, Claude.
Claude Mongeau
Thank you, Luc. And as you can tell, the team is lining up a number of impressive achievements in milestone.
There's a lot of be proud of in terms of our 2013 results. To deliver basically record revenues and record operating income and to continue our remarkable journey is the goal and basically 2013 came in, in line with that objective.
Our board is very confident and so is management and indeed the dividend increase of 16% reflects that confidence. I will note to you that it's a remarkable track record.
For 18 years, we've been increasing the dividend and the dividend has increased 16% on a compound annual growth rate for that extended period. Our focus now is turning to 2014 and we do have a challenge with weather.
We discussed this. Jim gave you the core element that we're dealing with, with the extreme cold weather.
It is rather unusual to have snow in New Orleans and to have Winnipeg -- I think Winnipeg was the coldest month of December since 1879. So we are dealing with very difficult weather conditions which have impact on our railroad operation.
And so we're dealing with it from an operation standpoint and we're focused on maintaining productivity. But we have line on sight on the impact this has on our customers.
We are managing priority the best we can so that we can avoid creating undue hardship and we'll be breaking loose as soon as weather gives us a break to rethink and get the network back in a mode where we can meet demand and deal with the rollover that we have from December into January. And even though the first quarter will be challenging, we have 2 months to go and we feel confident we will be able to deliver good performance in the first quarter and stay on track for our full year guidance as Luc just explained to you.
Our agenda of safety is first and foremost. We are taking it to the next level.
Our three-pronged approach to prevent accidents, to shape the agenda and help regulators and the industry come forward with solutions for those DOT-111 tank cars, to strengthen our capabilities together with industry and other carriers in terms of mutual aid and the capacity to respond when there is an unfortunate accident and to engage with communities to have an approach where we are transparent with information, share best practice and reassure the general public is our approach to meet the challenge and take our safety agenda to the next level. So we're pleased to take it over to you with question and we do so with a commitment to deliver a very solid 2014 again this year.
Operator, we'll go to questions.
Operator
[Operator Instructions] And the first question is from Walter Spracklin at RBC Capital Markets.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
I guess my first question here is on the Canadian dollar and perhaps you can update us on the revenue and expense impact if it's changed at all with the $0.01 move on that exchange rate. But really, I guess, what I'd like to focus my question is on flow of goods and if in your past experience as a Canadian dollar appreciated, certainly the export picture for Canada into the U.S.
was not as strong as it was when we had a cheaper Canadian dollar. Just curious if that's something you anticipate on the flip side now.
Is there anything that would exist that wouldn't suggest that this would reverse and are you seeing any indication from your customers that perhaps the flow of goods is starting to pick up as the Canadian dollar depreciates relative to the U.S.?
Luc Jobin
It's Luc. I'll take the first part and then I'll ask J.J.
to comment a little bit more in terms of the flow of goods. Just from a financial standpoint, every $0.01 translates into somewhere between $0.01 to $0.02 of EPS.
So that's really the impact netting out the revenues and expenses.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Do you have the revenue and expense specifically or?
Luc Jobin
No, we don't provide that.
Jean-Jacques Ruest
But on the -- Walter, on the revenue side, obviously, Canadian manufacturing companies, especially those who have ahead of the amount of their production on the Canadian side do benefit from the -- if they're exporting U.S. do benefit from the weaker Canadian dollars.
That is if they are in production today and they're not [indiscernible] as it is. So I think on a kind of a midterm basis, it's positive if you have a plan, you can run it harder.
You can seek more sales in the U.S. and have those profitable sales.
In the long term, you only want to be dependent on weaker dollar so much. Eventually, you want to be able to invest capital and rely on something else and just exchange.
So it's positive but...
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Any indication so far of any ramp up in that flow of goods at all or is it still too early to tell?
Jean-Jacques Ruest
I think it's too early to tell, right? We're only like a few weeks and I think the forest product sector, for example, whether it's housing, related construction material, pulp paper and the like historically have benefited from the weaker Canadian dollars.
Operator
The next question is from Bill Greene at Morgan Stanley.
William J. Greene - Morgan Stanley, Research Division
Claude or JJ, can I ask you to talk a little bit about sort of, if you feel like the underlying trends in the economy are actually improving. I know there's a lot of weather pieces here so it's hard to piece it together all.
You have a more positive outlook this year. So to some extent embedded in that may be a view that things are getting better.
But it also felt like fourth quarter had a bit of an inflection in demand in some segments of transport. So I'd like any color if you can provide it on what you're thinking on '14, how it may evolve?
Claude Mongeau
I think we have seen good demand in Q4. We're certainly seeing good demand as we speak.
Our challenge is to meet that demand in very cold weather when effectively our velocity being reduced. It's taking away our capability to meet all the demand.
But broad market in the U.S. are constructive.
The Canadian markets in general are also I think constructive. Obviously some commodity sectors like grain, we have a huge crop and things are looking good, well, for the balance of the year and probably well into 2015.
The only area where it's a little bit more touch and go, and I'll ask J.J. to give color and comment, is the global impact of concerns for commodity markets with Asia seeming to slow down a little bit at the moment.
J.J., any other color on that?
Jean-Jacques Ruest
Yes, Bill. Since December 2 or December 8, I think generally from that point on you can't really look at carloads from railroad, at least from the CN point of view as an indication of demand because now you've get the noise of what's happening in terms of the challenge in the network and the same thing on the January result.
Because right now, we're not in position to meet the demand but whether demand, this is where it gets tricky with what's in our book of business which is demand and how much it's just the pent up from the past week. But U.S.
housing start U.S. consumer confidence which would be reflected in the [indiscernible] containers of the 4, automotive looks good, energy, chemical plastics.
And as Claude says, grain looks great late -- during the third and fourth quarter last year, we want to assure fertilizer looks great. Fertilizer right now looks great for the first half for export and domestically.
What's maybe a little weaker is what used to -- we used to write in some of the year past which is a trade with Asia and namely shipping goods to Asia, natural resource, Canadian natural resource. That's obviously weaker.
So really our focus right now is more about the internal demand, what's happening in North America, where we're consuming and also at what cost can we consume it. In the case of Canada with the weaker Canadian dollars and in case United States with an industry we can now benefit from real affordable energy whether it's energy as in gas, energy as in electricity, energy as in oil.
So I think when we're passed this sort of Arctic vortex, we should start to see eventually again the relation between carload and the economy.
Operator
The next question is from Turan Quettawala at Scotiabank.
Turan Quettawala - Scotiabank Global Banking and Markets, Research Division
I guess, I just have a quick question on crude by rail. Obviously, there's been a lot of increase, regulatory scrutiny here on that, and it seems like there's probably pretty likely that there's going to be some tank car regulation at least coming in.
I guess, my question is just do you think that any of these changes at least from what you know right now can disrupt the volume trajectory at all on that front?
Claude Mongeau
I don't think so personally. My view is at the end of the day, what we know now is that the DOT-111 is the car that is more prone to failure.
It can have -- it's a low probability of having an accident but the high severity of the consequences is calling into question the design of those cars, which have been known for years to be more prone to failure. But now, obviously the focus and the industry has spoken.
Personally CN is on the record thinking that the DOT-111 cars have to be dealt with over time but phased out and we need to move to a new tank car design. As far as our own franchise, we move a lot of our business in coil-insulated cars or, we move a lot of our business in cars of the new standard, the CPC 1232 and those cars are materially safer.
The conditional probability of the CPC 1232 versus the DOT-111 is 50% less risk of failing. And if you look at the coil-insulated car, that is not exactly a thermal jacket but it acts like one and the risk of conditional release is probably something like 70% to 75% less than a DOT-111.
So we are dealing with safer cars. A lot of what we move is also crude oil from Western Canada that is Heavy Oil that has a higher flashpoint.
And the light oil, over time, will migrate towards safer car and the railroads will improve their safety records, and the regulator will make sure that we all are held to a higher standard. And I think if we succeed at that, we should be able to continue to serve those markets and help energy move the market efficiently.
That's our agenda and I don't think we have issues to deal with and a lot of people to reassure. But what I think -- the hard facts are supportive of the continued ability to do our job delivering energy to market.
Operator
The next question is from Tom Wadewitz at JPMorgan.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Let's see. Wanted to -- I suppose when it's this cold out, you could probably would ask for as much capacity as you could find in certain respects, but what's your view, Jim or Claude, on capacity in the network given that you've had pretty tough weather conditions for 2 months now?
Do you feel like you need to kind of ramp it up and spend more money or the network's more fragile in certain areas than you would expect? And kind of how do you match that up with the significant added volume you have coming on and maybe risk to handling that in the way that the customer likes?
Claude Mongeau
Great question. I think to start off with, we always have a long-term view of where the volume is going to be and what our planning period could be.
We don't want to react. If we have to react, like we did last winter, when we added $100 million, we'll do that and we have the capability to do that or move it from somewhere else.
Now, as far as what we've learned with the winter is, I think that everything that we've done and we did last year has helped us. But we need to make sure that we got the right capacity everywhere and we'll take a look at it as we go through this winter.
What I know for sure is, is the money that we spent last year between Winnipeg and Edmonton has helped us. We've seen a significant improvement of moving the trains through from Saskatoon and west and we've got money allocated this year to invest some more between Winnipeg and west towards Saskatoon.
So we're going to do that. We have -- we know we have an issue coming between Edmonton and Chicago and we're going to continue to build on that to make sure, especially with the way the traffic flow is.
J.J. keeps on going and selling more business in that corridor, which is good but we need to make sure that we're ready for it.
So I don't see anything specific that we've missed. But I'll tell you, if we do miss it, we'll be quick to react and we'll make sure we put the money in that we need quickly so that we can remedy any situation.
Luc Jobin
Maybe I could just add because -- to you but also to our customers. The hard reality here is it's not an issue of capacity, it's an issue of an extended period of extremely cold weather and the impact it has on train technology.
The reality is we have more locomotives. We have more network capacity.
But if you have a few days, which is normally the case, a few days or a few periods of a few days with minus 30 degrees, you cannot run the train, you cannot get the air to qualify and you lose capacity or velocity could come down 15%, you have to shorten trains. So you need more active and you obviously built up -- build up the backlog.
If that happens for short period and then you have a few days to recover, it's more bumpy in the winter like every winter. What we're seeing this year is just the extended period with no reprieve.
I said earlier December, you have to go back to 1879 to have a month of December in Winnipeg that was colder. But in Saskatoon, there were 18 days where the temperature was less than minus 30 degrees.
We've had a new record temperature south towards Chicago. And what that does is over an extended part of your network for extended periods of times, you have this velocity and train length impact reducing your ability to move cars in the whole pipeline.
This is not a network capacity. If we have more locomotive or more sightings [ph], we would not be able to push meaningfully more traffic than we are able to at the moment.
It's the way we're set up with the technology of air to basically speed the braking system of the train.
Operator
The next question is from Scott Group at Wolfe Research.
Scott H. Group - Wolfe Research, LLC
So, there's been a lot of talk about weather. I'm wondering if there's any way to put a number -- I'm trying to quantify what the impact was, one, in the fourth quarter and then is there any kind of early view as to what it could look like in the first quarter?
And I guess the crux of the question really is, you've got pension helping more than you thought, the dollar helping more than you thought and demand getting better, do you think that weather in the first quarter kind of fully eats away at those positive things or does it create some potential upside to the full year outlook that you guys have?
Claude Mongeau
I'll let Luc comment but I think you framed it right, Scott. We have a bit of a challenge and we have upside area and that's why we are reaffirming guidance for the full year.
Luc?
Luc Jobin
Scott, I mean just to answer your question, as I mentioned in my comments, when we looked at the fourth quarter, specifically December, I mean, again, these numbers are not always exactly precise but in the range of about $15 million more expenditures, were clearly incurred as a result of the very, very extreme cold. I would expect that we're going to see something similar for January.
So that's on the cost side. Obviously as well, I mean, you're not getting all of the volume through on the top line that you'd like, so that's something that we'll have to assess.
It's still a bit early because through the next 2 months, the team will be working very hard to try to recover some of that and so we'll see. On the pension front, yes, I mean we're getting a little bit of a better position than we expected.
I did mention that we do have some headwinds as an example. The settlement we had in terms of some of the labor cost last year.
So, I mean, net-net on labor cost, you're not going to see a big upside in the first quarter. You're likely to see a little bit of that through the third -- the second, third and fourth.
We do still have some depreciation headwinds that we have to contend with. But by and large, I mean, I think the way we ended the year, leaving aside for a second the winter impact, sets up -- sets us up reasonably well for fulfilling our guidance.
And that's why we reaffirmed it. We'll see how we end up fairing through the first quarter.
But I think we all feel pretty positive about the year. All the signals are looking good.
A little bit of extreme cold which we're dealing with. And I think that's where we are at this point.
Operator
The next question is from David Newman at Cormark Securities.
David F. Newman - Cormark Securities Inc., Research Division
Just to reconfirm, Luc, you said it's 1 5 million, 15?
Luc Jobin
Correct.
David F. Newman - Cormark Securities Inc., Research Division
Okay, very good. My question is more on the pricing side.
And obviously, weather is a bit of a hindrance right now. But as you look out, obviously, the demand environment is getting a bit better and the trucks are facing a lot more regulations, et cetera, so it's getting a bit tougher for those guys.
I mean, can you see a day when we get back to sort of better than CPI kind of price increases at some point here, as this evolves and obviously you guys are doing great on the service front. I mean, could you see that kind of picking up beyond those levels at some point?
Jean-Jacques Ruest
I think for this year, again, for this year, for 2014 calendar year, inflation plus pricing 3% is our goal. Taking track and everything you said.
Not all commodities, obviously, will carry the same weight. There is some segment when we can get more and there's some segment where we will get less.
One of the segment that will be the most challenging for us this year is regulated grain, which is basically what Canadian government decide and that would be a headwind for us first, second and third quarter. But on the -- maybe on the flipside on the other extreme, we are taking a bigger increase and more emphasis on the price for dangerous goods like TIH [ph] and LPG's for good reason.
And I think what's important also is to put the perspective of the price increase we get versus the inflation. Because in the end, we're looking for a net, right?
We're looking for the price increase which is better than inflation, and one of the thing that maybe this year look better is the inflation in North America is not that strong. And I mean, that's maybe one of the positive side of how this year might unfold on inflation plus minus inflation type scenario.
David F. Newman - Cormark Securities Inc., Research Division
Do you have any longer term contracts that you could shorten up? I know CP is talking about doing that, anything on that front at all?
Jean-Jacques Ruest
We don't have that many long-term contract. We're mindful, I think as all railroad is to how far out we want to extend ourselves in terms of commitment because it's tough to read the future.
For many reasons, sometimes keeping your option open is the best thing. Any contract we sign [indiscernible] all way to the end.
I think that's just good business if I'd be on the other side of the contract, I'd want my customer to do the same. But we are mindful of when we signed these contract, which are multiyear.
We're mindful of some of these industry that sometime give you pretty close to nothing. So we tend to shy away from that some of the index that sometime get you in a bit of a challenge.
David F. Newman - Cormark Securities Inc., Research Division
Okay. And if I can squeeze one more in.
In domestic intermodal overall, are you seeing any wins there, J.J., that you can illuminate on?
Jean-Jacques Ruest
Say that again?
David F. Newman - Cormark Securities Inc., Research Division
On the domestic intermodal side, are you seeing any recent wins that you could sort of highlight that you're seeing on the retail side?
Jean-Jacques Ruest
No, not specifically. This year, our bigger win more on the overseas market.
On the domestic side, it's more kind of one at a time, not so much one customer at a time but one piece of business at a time. And as you know, our domestic franchise is both Canada and U.S.
We do a significant enough amount of business on the U.S. side of the domestic business that you need to keep that into account of the marketplace.
We're more than just -- we're [indiscernible] in Canada through Ontario.
Operator
The next question is from Jason Seidl at Cowen and Company.
Jason H. Seidl - Cowen and Company, LLC, Research Division
Real quick going back to the crude. Claude, when you look at the DOT-111s and the current fleet and some of the proposals out there, how long do you think the industry needs to sort of get it up to snuff, if you will, and do you foresee maybe any issues where there's a shortage of cars that might impact volumes over your network?
Claude Mongeau
Yes. I think the industry, just like the railroad, have an incentive to reassure the public, and I think all of the strong players in that space are very safety conscious.
So I'm of the view that many of our customers today are looking at ways that they can evolve as quickly as possible away from the DOT-111. Now that's the responsible industry player, that's the railroads who are doing that, I think the regulators can help by framing that and making it a standard.
So you can hear noise of associations that say, we don't agree, but that doesn't mean the world doesn't agree that this is something that needs to be done. Having said this, we have moved for years using DOT-111 cars and we do so extremely safety.
The railroad industry move 98 -- 99.998% of dangerous goods to destinations without incident. And so we have to make sure that we keep things in context and give normal timeframe for the phasing out to occur.
Is that 5 years, is that 7 years, that will be flushed out over time. But I don't -- I think the world is recognizing that this needs to happen for highly flammable product.
Jason H. Seidl - Cowen and Company, LLC, Research Division
Okay, great. I guess, my next question is for Luc.
In terms of the CapEx for 2014 and even going forward, can you pull out the PTC impact for me?
Luc Jobin
Yes. On PTC, obviously we're ramping up.
Our view is we probably got about $300 million or so to fulfill the full program from this point on. And we're probably going to invest about $50 million or so during the course of 2014.
Operator
The next question is from Benoit Poirier at Desjardins Securities.
Benoit Poirier - Desjardins Securities Inc., Research Division
On the top start, given the tough weather minus 1.2%, but on the other side, the RTM is still up 4% during the quarter. And if we look at the spread, there was also positive spread back in 2012 of almost 4%.
So how should we be looking in terms of the RTM and carload spread going into 2014?
Claude Mongeau
At the moment, I think the first few weeks of 2014 have a bit of noise in them, Benoit, but there's no question. And you pointed out, we are growing as we speak.
In fact, in railroad terms, we have good growth for even through the very tough periods. We are a backbone to the economy and we have an agenda to help our customers win in the market.
When we tell you we're facing challenges, we measure that against the commitment and the demand we see from our customers. So we're proud of being in a growth mode despite difficult weather.
But we are mindful that we're not meeting the demand of our customers and impacting them in terms of their ability to reach markets and at times adding cost or a lot of sweat and anxieties because of our difficult service performance. So the 2 elements are not in contradiction and we're doing our best to come out of it.
We have February and March where we'll be running strong, if the weather permits. And recover the backlog, restore our normal service levels and grow from there and meet our overall guidance for the full year.
I think that's the best way to give you a straight answer on this question.
Operator
And the last question for today will be from Thomas Kim at Goldman Sachs.
Steven C. Sherowski - BofA Merrill Lynch, Research Division
Luc, can I just ask you a quick question with regards to your guidance for the effective tax rate, as well as the effective interest rate for the year?
Luc Jobin
The effective tax rate is going to be around 28% to 29%. I mean, that's -- I'd probably err on the side of the higher number there.
And in terms of the interest rates, we don't particularly provide guidance on that.
Claude Mongeau
But it doesn't really change the margin of our business. You can decide what interest rate is but much of our book of debt is fixed.
Okay. Well, thank you.
That was a good wrap-up question. We will leave it there and thank everybody who joined us on the call.
We are committed to deliver a solid 2014 year. We have good momentum, our agenda is on track and we will be looking forward to report on the first quarter results in a couple of months with hopefully some good news on how we were able to recover from the tough weather.
Thank you very much.
Luc Jobin
Thank you.
Operator
Thank you. Ladies and gentlemen, your conference has now ended.
All callers are asked to hang up their lines at this time and thank you for joining today's call.