Apr 23, 2014
Executives
Janet Drysdale – VP, IR Claude Mongeau – President and CEO Vincenzo Vena – EVP and CFO Jean-Jacques Ruest – EVP and Chief Marketing Officer Luc Jobin – EVP and CFO
Analysts
Scott Group – Wolfe Research Benoit Poirier – Desjardins Securities Chris Wetherbee – Citigroup Walter Spracklin – RBC Capital Markets Brandon Oglenski – Barclays Capital Bill Greene – Morgan Stanley Cherilyn Radbourne – TD Securities Allison Landry – Credit Suisse Steve Hansen – Raymond James & Associates Jason Seidl – Cowen & Company Ken Hoexter – Merrill Lynch Thomas Kim – Goldman Sachs David Tyerman – Canaccord Genuity David Vernon – Sanford Bernstein Keith Schoonmaker – Morningstar Steven Paget – FirstEnergy Capital David Newman – Cormark Securities
Operator
Welcome to the CN First Quarter 2014 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, Eric. Good afternoon, everyone, and thank you for joining us.
I would 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. 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 of you on the call who have joined us. We are in Sunny Vancouver today for our Annual General Meeting and we are pleased to have you on the call here to give you an update on our first quarter results.
There is no question we just went through a very difficult quarter from the standpoint of the weather that we have to face. It is the harshest winter that at least I have been involved with and I’ve been with CN for 20 years.
And I think Jim will tell you later that it’s probably one of the harshest he has had too and he has been here with CN for longer than me. So, very, very difficult winter conditions that impacted not just railroads, but all transportation sectors and it clearly impacted our ability to meet all of the customer demand that we had in front of us.
So, at the end of the day, winter is winter, we are learning from it and what I am most proud of is the resiliency and the ability of our team of railroaders to face up to that diversity and perform on a relative basis exceptionally well despite the elements. So, solid performance financially.
Luc will give you some of the details in a minute, but good top-line growth. It could have been better without the winter.
Solid expense performance, obviously impacted by the additional expenses, but we were able to manage productivity and keep solid earnings growth in the circumstances. And it puts us in a good position even though it was a tough quarter to face up to the balance of the year and remain on track.
In fact, as I look at April, the recovery is well underway. Our safety, our operating, our service metrics, all of those are quickly returning to the pre-winter levels and that bodes well for the balance of the year.
We are very focused on continuing to basically deliver on our supply chain collaboration agenda. I’ll be taking questions later on, I am sure, but we did had a setback.
I think it’s highly unfortunate that the Canadian government decided in the heat of the moment to react to the one crop – grain that we have and introduced legislation which I think will do little to help move grain and sets us back in terms of a sound transportation policy in Canada. But, Parliamentary sovereign and I’ll be happy to answer any questions you have on that matter after the team gives you an update.
With that, I’ll turn it over to the team. Jim?
Vincenzo Vena
Okay. Thank you very much, Claude and I am going to be quick, just two slides today, but wanted to start off with a representation.
You’ve all heard the story of the coldest winter and it affected us and just traveling public everywhere in North America whether it was down in the Chicago or Eastern Canada or through the Far East where we traditionally have tasted the winter every year. So, this slide, it was just a quick representation to say the amount of quarters that we have and what was affected and how we operated through that.
Now, operating these tough conditions know what to answer but added some one-time cost to our day-to-day operations. We had to make sure we had more snow removable.
We have number of contractors come in and Luc will give you a reference of where and what it impacted us to the bottom-line and our cost structure. If you take a look at the bottom of the page, we talked about metrics that are very important to us, train speed and terminal dwell and they both were up substantially, especially during January and February.
We saw a recovery in March when the weather started to break and worsened as intense in all the quarters we had. But we had a reduction in train speed, terminal dwell and one number that we do not have on there but we saw the similar drop in the close to 5% region is our car velocity.
And car velocity of course is a measure that gives us a good feel of all the networks working. We delivered in the first quarter GPM growth and RTM’s growth and Luc will take you through the exact numbers and our train load was actually up.
A lot of that happened because of the results of what happened in March and what we are able to deliver. But there is no way that we would have been able to deliver at what has been one of the key four foundations that builds the railroad.
So locomotives, well I think we did a good job of planning and we have a long-term plan of how we bring locomotives in and purchase of the AC locomotives last year and the additional purchases this year. We’re in the right position moving forward that helped us.
But, it was truly the employees who worked for us, the managers, the frontline people, we had people from IP, people from accounting, people from operations out there operating trains and that is only way that we were able to operate and be able to deliver a growth in GTMs on a very severe winter. And as Claude said, I’ve been around here a little longer than 20 years and this is a tough one, but it is worth it.
That’s an outdoor sport and there is no use to plan but let’s move ahead. So, if you take a look at the second slide under the recovery underway, the investments that we’ve done both on capital in the last few years and we continue to analyze this as a long-term view, not just short term.
I think we’re seeing the benefits and we will continue to invest whether it’s work to the investment in the EJ&E and our capability to go around Chicago. The investments at Kirk yard give us more hunk capacity there.
But we saw that operation through Chicago operate not quite as good as fluid as when you’d have no winter weather. But really it was not as much of an impact to us as it could have been if we did not have a structural foundation that we’ve built up in Chicago interchanging with other carriers also, the capability it gives us to move the traffic to interchanges further down the railroad whether it’s in Memphis or Salem or other locations that are much more fluid.
So, excellent there. We know we are going to continue to work to get more resiliency and recoverability and we’ll talk about that.
The $100 million that we spent last year in addition to our regular plan that we put in about this time last year, we did see the benefit of that through the winter as our recoverability was quicker. It was still as cold, it was colder for a longer period of time.
Snow, but when we got to being able to move, we are able to move quicker in a faster fashion. So, bottom-line is, there is no change in what we are trying to do.
We need to stay excellent at moving the railroad, moving the box cars as fast as possible, but on the other hand and make sure we are balanced and we provide good service to our customers. I think we impacted a number of them in the first quarter and we are going to work hard to as the year goes on, we gain everybody’s confidence and move all the business that J.J.
is bringing on. Well, J.J., over to you
Jean-Jacques Ruest
Thank you, Jim, and good afternoon to all of you who are joining us this afternoon including our very valuable customers and shareholders. The next few minutes I’d like to review the last quarter and after that give you a market outlook.
The month of January and the month of February were very challenging as Jim described. Most days in the – were below 25 degree centigrade or minus 13 degree Fahrenheit.
Therefore carloads was down about 1% and revenue was up only 1.5% FX adjusted during that period. March got progressively better.
We had less days below minus 25 degrees centigrade, carload grew 5% and revenue was up 7% adjusted. Overall for the quarter, revenue growth was 9% as reported, broken down as follows; volume and mix was up 2%, same-store price and same-store sales after fuel and exchange was up 3% and that’s including, it’s an all-in number including regulated grain and export coal.
The fuel impact on revenue was flat and 5% came from exchange. So therefore when you look at our revenue for the first quarter, broadly speaking, do not infer a relation between our volume and our customers’ demand.
The first quarter was about exceptional winter condition and the resulting impact on network velocity and network capacity. So now looking at the quarter in more detail and I will do that as usual in a FX adjusted basis.
I will start with petroleum and chemical which was up 16%. The volume growth came from crude, from LPG and most of our base chemicals and plastics.
We also had a strong market environment in energy as well as in energy-based manufacturing. In that segment, both condensate and sulfur markets that were soft.
Metals and minerals revenue was up 1% excluding iron ore. Frac sand revenue was up an impressive 23%.
Our Wisconsin franchise continued to flourish with the addition of new production capacity and further scale-up of existing facilities. Other revenue from our metal segment was down 7% mostly driven by lower shipment of pipe, steel and aluminum.
Iron ore, revenue was down 19%. We had a very difficult winter condition in Midwest which negatively affected our supply chain operation in that area.
Forest products revenue declined 6%, lumber was very strong and it was supported by constant approval in U.S. housing starts.
However, winter affected network capacity in Western Canada and did put a downward pressure on our overall ability to lumber, pulp and panel carloads. The Port of Vancouver had a one month truck strike which also impeded lumber and wood pulp export via that port.
Coal revenue was up 2%. We experienced lower export of pet coke and thermal coal and these were offset by a very strong demand for U.S.
domestic utilities. Grain revenue increased 9%.
We had revenue growth which was driven by a big crop in both Canada and United States. The demand for Canadian export is huge and our supply chain shifted to full gear with the arrival of spring a few weeks ago.
Recall that pricing in regulated grain was reduced by the government by 1.8% for the 2013-2014 crop year and it is a year-over-year negative on our same-store price. Fertilizer revenue fell 20% due to network challenge and also to a shortfall sourcing of – by one of our customer who changed the sourcing in the year-over-year.
Automotive revenue and carload dropped 10%. Finished vehicle revenue was negatively impacted by North American industry-wide TTX car supply shortage.
Intermodal revenue grew 9%, the international business was up 15%, the domestic rose 2%. We had solid growth in the industrial sector, consumer products and as well from a geographic perspective, we have strong trans border shipment to and from Western Canada with the United States.
Our coal supply chain service is gaining market traction in the marketplace and presents double-digit growth. The early Chinese New Year congestion in the Port of Vancouver – this last month has put a toll in our port operation, especially in Vancouver.
Now looking forward, first I want to reaffirm like I did on last conference calls, our year-over-year line all performance will be driven by current strong demand for most of our products, by our network capacity to meet that demand and a still weak Canadian dollar. Looking at intermodal, the business is looking strong.
It’s helped by strong U.S. economy, U.S.
consumer confidence, also and by still very fairly positive customer sentiment toward the CN product just by the stronger tough winter and as well as some recent market share in the marketplace. Most promising is the business out of the Port of Vancouver, the Port of Montreal and as well as the domestic retail.
Our petrol and chemical, we will also produce growth, shale gas is having a positive implication on manufacturing mostly petrochemical, crude by rail with continuous progression, although I am increasingly more interested in the immediate price improvement of that segment versus strictly on the volume growth. Metals and minerals will be driven by oil and gas production consumable and by the North American automotive manufacturing.
We further expect some further gain in frac sand in the course of this year and maybe next year. Forest product will be driven by good U.S.
housing start and by the existing high inventory of pulp, lumber and panels at near the production sites. The last Q1 housing starts especially in the U.S.
will not be made up, but most of our customers believe that the run rate there will be back. For grains, we have a lot of Canadian grain to export.
We will have all of the – to export all calendar 2014 as well as in 2015 to be carried over. For fertilizer the potash export looks solid for the next few months excluding maybe during the part of this summer.
Exchange rate will likely be a positive tailwind since the average exchange rate was $1 to Canadian or $1 U.S. during Q2 of last year.
In closing, the strong market demand remain intact, housing, energy, automotive, grains, fertilizer, domestic, thermal coal, iron ore, intermodal, all are looking solid. Export coal looks weak, same as pet coke and sulfur also look weaker.
We have a disciplined inflation plus approach to pricing and as the overall North American rail network capacity is getting snug, our rail capacity will increase value over time. Thank you, Luc, we’ll go to financials.
Luc Jobin
All right. Thanks, J.J.
Starting on Page 14, let me walk you through the key financial highlights of our first quarter performance. These are strong results considering the adversity we faced, but let me give you more specifics.
As J.J. highlighted revenues were up $227 million or 9% to nearly $2.7 billion.
Operating income was $820 million, up $40 million or 5% versus last year. Our operating ratio was 69.6% an increase of 120 basis points versus last year, pressured by difficult winter conditions throughout the first quarter and extending over most of our networks.
As Jim pointed out, our team worked very hard, but we couldn’t get to all of our customer demand. And also it resulted in higher operating costs.
Other income was $94 million versus $42 million last year. In the quarter, we sold a portion of a sub-division in the Greater Montreal area to the local transit agency resulting in a pretax gain of $80 million.
This compares to a similar transaction done last year, but last year was in the Greater Toronto area for a gain of $40 million. Net income for the first quarter was $623 million, up 12%.
Foreign currency translation contributed to a favorable impact on net income of $26 million or $0.03 of EPS in the quarter. So the diluted EPS reached $0.75, up 15% versus last year.
Now when excluding significant property disposals which occurred in each of the first quarter of this year and last year, the adjusted diluted EPS stands at $0.66 up 8% versus 2013. Turning to page 15, let me address the operating expenses.
Those stood at $1,873 million, up 11% versus last year or 6% on a constant currency basis. At this point I’ll refer to the changes in constant currency.
First, labor and fringe benefit costs were $587 million essentially flat versus last year. This was the result of three main elements.
First, an increase in overall wage cost including overtime of $37 million or about 2.5 percentage points which partly was offset by higher capital work being performed in the quarter versus last year for about $8 million. The second element is the lower pension expense or $24 million of the labor variance.
The third element is the lower stock-based compensation expense in the quarter versus last year which also represented $8 million of the variance. Purchase services and material were $388 million, an increase of 15% or $48 million versus last year.
We had higher volume about 5% more revenue ton miles, along with significant increase in winter-related costs. As such repair and maintenance expenses were up some $20 million accounting for seven percentage point of the increase.
As well we had higher utility and material costs or five percentage points of the variance. Crew accommodation and increased intermodal trucking expenses made up the majority of the remaining increase for two percentage points.
On the fuel side, the fuel expenses stood at $468 million, up $24 million or 6% versus last year. Higher volume represented an increase of 5 percentage points in the quarter while an increase in price drove the remaining one percentage point.
Depreciation was $256 million, $13 million higher than last year or 6% due to a combination of asset additions and the impact of depreciation study. Casualty and other costs were $97 million, $11 million or 14% higher than last year.
We had higher property taxes and general costs which were offset by lower workers compensation expense. We also incurred higher accident related cost for approximately $10 million which explains for the most part to the variance.
Turning to free cash flow on Page 16, we generated $477 million of free cash in the first quarter, an increase of $343 million versus last year. Cash from operations benefited from higher earnings, lower income tax payments and better working capital.
On the investing side, we had higher proceeds from property disposals, partly offset by higher capital expenditures. So our balance sheet remains strong with debt and leverage ratios well within our guideline.
Finally on page 17, our 2014 financial outlook. We are coming back strong from the extreme weather condition experienced in the first quarter and which have arguably slowed down many parts of the North American economy as well.
Our network is quickly catching up with demand and we are optimistic with our prospects for the balance of the year. Given this perspective, we are reaffirming our annual guidance and thus we are aiming for double-digit EPS growth in 2014 over the 2013 adjusted diluted EPS of $3.06.
Our guidance also continues to call for free cash flow in the range of $1.6 billion to $1.7 billion. We are increasing however, our capital investment programs from $2.1 billion to approximately $2250 million.
This additional $150 million will go towards higher investments and network capacity in our key corridors and additional mode of fall. So the CN team remains committed as always to delivering superior results for its customers and shareholders, no matter how challenging the circumstance is as we continue to unfold the strategic agenda in 2014 and beyond.
On this note, I’ll turn it back over to you Claude.
Claude Mongeau
Yes, indeed, Luc, our strategic agenda is delivering. I am very pleased with those first quarter results which are solid in the circumstances.
As I said earlier, we are focused on the balance of the year. Luc just reaffirmed our guidance and we are committed to deliver on that guidance and the key is to regain our network solidity which is exactly what we are doing.
I think in the month of April as it stands, it looks like we might actually have a month with $1.3 billion GTMs per day on average which would be by far the highest we have ever done on a consistent basis for a full month. So that’s a good sign that the volume is out there.
The fluidity, the speed of the network is recovering and behind that is our focus on first mile, last mile on end-to-end visibility basically regaining our footing in terms of customer service levels. Nothing is more important to our long-term future, because we are committed to continue to grow faster in the economy and do so at low incremental costs so that we can please our shareholders for many, many years to come.
In order to do that, as Luc just indicated, we are going to be investing effectively $150 million more, I think this is all part of our multi-year plan and which is taking advantage of the smart monetization. I thank you Luc again this year for finding a way to create value by selling assets that we don’t need for frac the business.
And to do so at a profit generating cash flow that we can reinvest in our business. So, I will turn it over to you for question and answer, but rest assured that we feel good about the balance of the year.
We feel we have momentum to deliver solid results again in 2014. Operator?
Operator
Thank you. We will now take questions from the telephone lines.
(Operator Instructions) And our first question is from Scott Group from Wolfe Research. Please go ahead.
Scott Group – Wolfe Research
Hey, thanks, good afternoon, guys.
Claude Mongeau
Thank you.
Scott Group – Wolfe Research
So, JJ, I heard you mention, I think a couple of times that the volume in 1Q wasn't reflective of the demand environment. I want to get your perspective first on what you think the demand environment is from a growth perspective.
How much do volumes want to grow? And then just kind of second with that how much do you think the network – how much growth do you think the network can handle, so it's like, I think it's the second year in a row you've had to raise CapEx in the middle of the year.
Are we getting to the point where you can't handle some of this growth or is it kind of just the weather was unusual, I just want to understand that a little bit better?
Jean-Jacques Ruest
Thank you, Scott. I’ll do that, take up the first one and Jim will take up the following capacity.
Most of segments have very good demand in the first quarter and it was looking good for the second quarter in most cases beyond. Especially anything has to do with energy causing automotive frac sand, a number of these different things where we have softness, is export coal, export sulfur and export pet coke.
And where we have some capacity which is not necessarily relate to CN but capacity which is more of a North American capacity how fast sent being that are coming back on my road toward the lumber that I have, same thing with the box cars to ship out the panel offline and same thing for the automotive finished vehicles. Demand looks fairly good and I mean, there is sector like grain is just huge, again it keeps us busy in the spring and the fall and spring and the summer and Jim if you want to make some comments on network capacity.
Vincenzo Vena
Right, well, network capacity we don’t look at it as a short-term view. We need to take a look at as a long-term view, Scott.
So we take a look and we’ve always got a book that looks at what do we need to do this year and next depending on where the business is. We want to make sure we are at the right level of capital against our revenues, so we still stay within that 18% 20% range and Luc can jump in if you want to add anything to it.
But when we looked at everything that’s happening, we thought and with the change in the regulations for locomotives, we thought we needed to take and put some money and deliver in some locomotives this year and providing ourselves some options for next year. So that's part of the increase and we wanted to make sure we stayed ahead of the curve there and won't waiting till the last minute and the other we’ve identified some areas that we had to, we knew we had to increase the capacity.
So we feel with where we are in the business growth that we see movement forward and what we’ve just seen in April, we want to get some of that done this year instead of waiting till next year and the following year. So, that’s what it’s all about.
Luc Jobin
I can just add Scott maybe, we are moving $1.3 billion in April. So we don’t need this capital to be able to over perform our outlook for the year, but we do take it on a multi-year basis.
We really like the way the AC locomotives perform for us this winter. It was a very, very tough winter but they perform well for us in the circumstances and we have a chance here to buy more of them before we move to tier 4, so that's for the locomotives and for the rest it’s really we know where the pinpoints are.
We have the ability to reinvest in the business and we are addressing those pinch points in a very, very methodical disciplined way to support our growth long-term.
Scott Group – Wolfe Research
Okay, thanks for the color, guys. I appreciate it.
Jean-Jacques Ruest
Thank you.
Operator
Thank you. Our next question is from Benoit Poirier from Desjardins Capital Markets.
Please go ahead.
Benoit Poirier – Desjardins Capital Markets
Hi. Jim, could you comment on the $100 million of capital that was invested in the Edmonton, Winnipeg corridor after last year's challenging winter?
And maybe perhaps more broadly talk about some of the things that you did to prepare operationally going into this year's winter? Thanks.
Vincenzo Vena
Okay, Benoit. Let’s go with the $100 million first.
What we identified was the last winter is as we had a – how fast you could recharge the system, how fast you could get the trains and the yard’s movement. So we spent the money very strategic – on the north line that allowed us an option to be able to move trains quicker.
It’s not our primary route, it’s not quite as quick as our mainline. So you don’t want to use, but it was important to do that.
We spent money in Winnipeg and yard just because of the growth that we’ve seen in traffic in the plough. We’ve gone there probably 30%, 40% growth in that yard and traffic moving through there the last few years.
So we knew we have to do that. And what we found this winter is, it really made a difference.
We recovered quicker even with the worst winter Winnipeg less than – we did the previous winter. Now what did we do to get prepared?
We’ve run in the northern part, I think there isn’t anybody at a class one that operates further north than us. We know winter is going to happen.
The question is as how bad and how long the intensity of it. So what we do is and we are very methodical about this is that you need people, so we are lucky enough and we’ve taken that head on to train a number of people to supplement our unionized workforce.
That’s not our key, but just in case we get into the position where we need it and this winter we had people from across the company working – we have account managers, they were getting calls from customers and they were out when the train wasn’t moving of course they were out taking calls and dealing with this. So we did that.
We watch the yards very carefully. We managed it on a day-to-day basis, the senior group in operations watch everything we were doing.
It just grows on what we do every day on the rest of the year but yet to be very productive in the yards. Yard productivity again in April is better than it ever has been.
So we can see that the recovery is there. Our train speed is coming back up where it needs to be and we did that quickly with what we have invested going through the winter.
So it’s a continuous process to see where we can look for opportunities to make the place better Benoit.
Benoit Poirier – Desjardins Capital Markets
Okay, thanks for the time.
Vincenzo Vena
You bet.
Operator
Thank you. /Our next question is from Chris Wetherbee from Citi.
Please go ahead
Chris Wetherbee – Citigroup
Thanks, good afternoon. Maybe just a pace question on the sort of pace of recovery into the second quarter maybe focus on volume that was left on the table in the first quarter due to weather what you can sort of makeup and maybe how you think about market share opportunity in light of what we've seen as a pretty tough winter so far, any sort of new opportunities that come up as a result of that.
But I guess I just sort of roughly want to get an idea of how much volume upside you have over the next quarter or two how quickly can you kind of make up what you lost?
Jean-Jacques Ruest
Maybe I can start, Chris as J. J.
told market share opportunity I don’t think there is a resulting market share as part of from the winter. The winter has been challenging for all of us and as for CN whether good book of business.
We have the customers that we have and our focus is to serve those existing account. Regarding the business that we want to be able to serve during the winter, we work hard in some cases we are going to work hard a few weeks, some cases it will be month, in some cases there will be rain up into next year.
We don’t necessarily have the number specifically but we do have, as Jim said, we are doing extremely well the last few weeks with our GTM and the book of business is there. We have demand and it looks good for the next little while there.
Luc Jobin
Hi, Chris, it’s Luc. I mean, just to amplify a little bit on what J.J.
has mentioned, I mean, our order of magnitude we don’t want to focus on a specific number but order of magnitude will be probably less behind about $100 million or so of revenues and we just couldn’t get to. So, the quickness in terms of recovery that Jim pointed out is all about going after that volume.
We know it’s out there and we are getting on top of it very quickly. So we have every reason to believe that there is a little bit that probably was lost but by and large we will be able to recover most of it.
Claude Mongeau
And to give you maybe one example, specific example, U.S. domestic thermal coal, the utility that we serve in one of the new customers of CN have ended the winter with very low inventory, much lower than what we would like to be call for at this point.
So we would just spend the summer, spring summer and fall. So we have build it back to the level that we like to enter next winter.
Chris Wetherbee – Citigroup
Thank you.
Operator
Thank you. Our next question is from Walter Spracklin from RBC please go ahead.
Walter Spracklin – RBC Capital Markets
Thanks very much. Good afternoon, everyone.
I want to turn to a little bit more of a difficult topic on regulation and Claude you have been addressing this very well in your – both in terms of your comments today but also in your public presentations. One of the questions I have and I posed it the last – on the CP call there earlier this morning as well, is less of a focus on the interchange expansion of the 160 kilometer and all that.
All of that sunsets of course in a year or so. It is going to take a backseat to the Canada Transportation Act Review.
My question is should – is it your sense that cooler heads might prevail now? You mentioned how it was a heat of the moment decision by the politicians that they came out with this regulation and this proposal.
This is going to be arguably a year maybe two-year process in which they're looking at the CTA. What might come about in terms of changes to the CTA if interchange takes a backseat?
What might we be faced with? Could it be a watering down or more compromise or are you worried that something else might come out of left field on us like the interchange did and catch us by surprise?
Claude Mongeau
Yes, I think we will have, I mean, we are moving grain at the moment in line with what the grain elevated companies are able to unload. I said that would happen a few weeks ago when it’s happening as we speak.
So we will be able over the summer to show that railroads are not the only issue in the supply chain that we can only be as good as the collective capacity of grain elevators to load and unload and rail road’s to move in between. So, I think that will help as we move more we are going to have a record year in terms of overall grain throughput and people will have to step back and look at what they’ve done during the winter when emotion went high.
I believe the Canadian government effectively gave super priority to the grain business. Now this summer, we are going to have a chance here to operate hard for everybody but what they’ve done is give super priority to the grain business.
I think other commodity shippers are going to have to sit back and has been felt was that a good thing. And I am hopeful that some will be wise enough to engage in the debate so that it’s not just the railroad talking that customers from all sectors are saying, these guys are trying to make trade-offs, these guys are managing priorities, they have their incentives, normal commercial incentives.
It broadly aligns with what we are trying to do in the commercial system is what we trust more than the super priority for grains. So I think that hopefully will get people to think through and be wise about how they interact with governments over the next few months and years as the dust settles.
That’s at the level of sectors, but within the regulation that came about the government also introduced a new regime for service level arbitration for instance, penalties things of that nature. It’s the same basic issue, if you allow certain customers that are more regulatory bent to use the regulatory leverage and jump the queue, get in the line and get a better deal, try to make the railroad become a taxi as opposed to a bus service.
I think customers are going to see that the ones that are commercial that they are allowing others to jump the queue and get a better deal by going to Ottawa is that’s what happens. That also should get people who are wise and understand the logic of a commercial system to engage in the debate.
So we are going to use this decision which I believe was not a good decision. I think it was taken in the heat of the moment for the wrong reasons and we are going to have a chance to explain to stakeholders our other shippers and the regulators that there is a much better approach that approach is to encourage supply chain collaboration to have the sound policy that builds on commercial incentive.
And that we will be able to make that case and make it to a point that they not only sunset these provisions in a couple of years, but also don’t use the CTA review as a big football game around how much do we regulate the railroads. That’s my hope and that’s the case we are going to put forward.
I think it’s important enough for Canada that the cooler heads and the wiser head will prevail in due course.
Walter Spracklin – RBC Capital Markets
And that makes a lot of sense. Okay, thanks very much, Claude.
That’s my question.
Operator
Thank you. Our next question is from Brandon Oglenski from Barclays.
Please go ahead.
Brandon Oglenski – Barclays Capital
Good afternoon everyone and Claude, thanks for those comments there. Luc, I did want to follow-up on the compensation line and looking at the revenue growth of 9% and compensation growth of only 3%, how do we think about that relationship going forward?
I know you talked about a lot of moving pieces in the comp line.
Luc Jobin
Yes, I mean, again, I think in the first quarter, we had the first time that the pension started to be a bit of tailwind for us as opposed to headwind. So that is part of the explanation for the change.
There was also a fair amount of stock, favorable stock-based compensation swing. But if you look at the longer term across the year, we are still looking for labor to be in the sort of 20% of revenue category.
So, order of magnitude that’s still the number that we have in mind. We are going to be growing our average headcount probably to the tune of 1% to 2% and we are mean to see wage inflation around 3%.
So, those elements will be there throughout the year and we’ve guided for the pension expense to be favorable to the tune of $70 million to $80 million this year, versus last year. So that's broad terms I think is what we are looking at for the labor category.
Brandon Oglenski – Barclays Capital
Thank you.
Luc Jobin
Thank you, Brandon.
Operator
Thank you. Our next question is from Bill Greene from Morgan Stanley.
Please go ahead.
Bill Greene – Morgan Stanley
Hi, good afternoon. I wanted to ask J.J.
about currency. Are we yet seeing any reaction north of the U.S.
border from your shippers? Have they been able to ramp up production?
Is this going to be a meaningful driver in the second half? Any color you can give us, and if the answer to that’s no, maybe sort of what’s a normal timeframe for when they would start to react?
Jean-Jacques Ruest
I think if you look at – thank you, if you look at those really off the U.S. currency some of exports, what our lumber, for example pulp also got EBIT but it’s sold in United States within U.S.
currency. It does get then the bump right, they are more competitive in world markets, if you ship to the overseas and they make more profit if you ship to the U.S.
So I think you already see that impact, especially in markets where you don’t necessarily have a lot of contracts out there like the lumber and panel pulp is – quarter-by-quarter. Currencies also in the factory in other markets like in the case of export coal for metal for example, the Australian dollar is weaker, so the dollar to price – the price of the product is in the U.S.
funds. Canadian dollar is weaker, but other currencies around the world are also weaker when it comes to U.S.
dollar. But I think when you take all that in the – right now we are about $0.90 $0.91 and it’s okay, typically for Canadian manufacturing sector $0.91 is easier than $1 and we have no impact either way and we are right with both segments.
But I think – but then you see right we already see the impact of some the Canadian manufacturing sector having some positive benefits. When you sell to world markets now you have to look at other world currencies and I guess it will complicate it.
Bill Greene – Morgan Stanley
Sure. Okay, thank you.
Operator
Thank you. Our next question is from Cherilyn Radbourne from TD Securities.
Please go ahead.
Cherilyn Radbourne – TD Securities
Thanks very much. Good afternoon.
You guys had a bit of a tough winter last year as well, nothing to the extent of what you saw this year. But my sense was last year that you weren't as pleased with the way that you handled the winter.
I wonder if you could just compare and contrast this winter versus last winter a bit for us and just your ability to regain momentum this year versus last year.
Claude Mongeau
I think – I was able to give the keys to Jim this winter. So he did much better than I did in the middle of February.
Seriously, the big difference is last year, but this year on a relative basis, we are doing much better than the other railroads despite being the most exposed in terms of the weather. Last year, we have an issue which was winter but also the lack of recovery capability, towards the end in the March period and that was because we were bumping against the line capacity in that Edmonton to Winnipeg corridor and so it was a bit more unique to CN and it’s something that we should have been smart enough to get ahead of the curve and so that’s why we did what we did last year and introduced a $100 million program and we always have and will continue to be ahead of the curve looking at our pinch points.
We learn every time, we face adversity and make investments ahead of the curve, so that we don’t bump up against resiliency issues. It’s tough enough to face up to adversity.
You want to avoid facing up to recovery lag time when weather gives you a break. So I think those would be the two differences between last year and this year, Cherilyn.
Cherilyn Radbourne – TD Securities
Great, thanks for that color. That’s all for me.
Operator
Thank you. Our next question is from Allison Landry from Credit Suisse.
Please go ahead.
Allison Landry – Credit Suisse
Hi, good afternoon. Thanks for taking my question.
You mentioned earlier that shale was actually contributing to some growth in the industrial sector. And I was wondering if you could discuss some of the potential projects that you have in the pipeline in Canada specifically, whether it’s frac sand, inbound materials or even LNG exports.
And I think a few weeks ago, there was an announcement that a large-scale frac sand train load facility would open in Alberta exclusively served by CN, so just hoping to get some commentary surrounding this topic.
Jean-Jacques Ruest
Thank you, Allison. It’s J.J.
so maybe, I’ll pick that one. I mean, cheap gas or cheaper gas really means a whole lot for North American economy including CN.
So as the cheap gas means, it means people who make petrochemical can make more of them and be profitable. Same thing for fertilizer which some producer on the CN line same type of people who make plastics, like plastics plants that we serve in Alberta and Louisiana.
When you look LNG there is a number of project for LNG export terminal in Canadian west coast whether it’s – because those projects, even though they don’t approve yet people all do heavily in northern DC to get gas, because when the project goes forward, you really need to be able to charge this project with lot of gas. So people that are drilling today, they drill, they frac, they cap, they drill, they frac, they cap, so already moving pipes and frac in northern DC to build up a base of readily available natural gas from wells and when the project is announced, they say it takes three four years to build it.
Then there is going to be a huge amount of drilling, huge amount of fracs, and when we say huge amount of fracs that we mean train quantity. And that’s where the market is heading to in Western Canada just like I think it is in Texas, people want to ship 50 car blocks and eventually leading to 100 car blocks and with loop track already high efficiency high scale operations.
All these things mean a lot of good things for railroad and lot of good things for CN, whether it’s manufacturing or just other the resource itself.
Allison Landry – Credit Suisse
Okay, great. Thank you very much.
Claude Mongeau
Thank you, Allison.
Operator
Steve Hansen – Raymond James & Associates
Yes, good afternoon. My question leads to your emerging crude by rail franchise.
I was just hoping you could provide some added color on your suggestion that in addition to volume growth. I think you said you are also starting to see some pricing growth or acceleration and can you provide some color specifically on what’s driving those gains, what basins or origin destination are driving those corridors and what specific corridors, that would be helpful?
Jean-Jacques Ruest
Okay, Steve, to say you again what I was saying is that, it’s good to be focused on profitable volume growth, but it comes at time in some market that are growing at such a pace and everybody gets excited on them that the profitable market actually gets sacrificed. I just want to be sure on the stand, even though we provided guidance as to how much we want to grow that business, we will not grow it at the expense of price.
So if we are short of our volume target, it will be because we want to be sure that we are focused on first profitable before we get on to big volume. And after having said, what I have seen in the last six months here is that the market may have got too excited to the point where some of the deals were necessarily that we would like to have say two three years from now we took a pass in some cases and we want to focus our capacity where it makes more sense.
Typically for us, it’s – the business starts somewhere in Alberta in the northwest and it goes east to a CN served refinery or goes south to either a refinery and largest to get to another refinery. So the floors are from the west to the east and the west to the south.
Steve Hansen – Raymond James & Associates
Yes, that helps.
Claude Mongeau
Thank you, Steve.
Operator
Thank you. Our next question is from Jason Seidl from Cowen & Co.
Please go ahead.
Jason Seidl – Cowen & Company
Good afternoon, guys. You talked a little bit about your same-store sales being up 3% and I believe you stated that included regulated grain and the export coal.
If you remove those two items, where would we be at?
Claude Mongeau
Even though we threw this calculation we don’t provide that level of detail, but my philosophy in same-store price is – same-store price really means the good too bad the ugly and – between, it see that the whole thing – my message to my troop is, we always already are weakest in areas of stress and our game plan is to make the average where it needs to be.
Jason Seidl – Cowen & Company
But I am assuming the number will be higher than.
Claude Mongeau
That would be correct just because of grains.
Jason Seidl – Cowen & Company
Yes.
Claude Mongeau
Things are very consistent and I like the way of thinking. It’s like playing a hockey game and the player is asking, could we just forget ten minutes of the game.
No, no, hockey game is the period, it’s the whole thing that’s just 80% of it, sometimes.
Jason Seidl – Cowen & Company
Guys, unfortunately my hockey team only played about two-thirds this year. That’s why they are on the back nine right now.
Claude Mongeau
Right, if you just want to have go to all the distance here. Thank you.
Jason Seidl – Cowen & Company
Thanks guys.
Operator
Thank you. Our next question is from Ken Hoexter from Merrill Lynch.
Please go ahead.
Ken Hoexter – Merrill Lynch
Great, good afternoon. Claude, when you go through the whole regulatory discussions, is there a discussion in terms of what you can do more of in terms of capacity, it sounded like you had mentioned before you are already meeting what the grain elevators can put out.
So what are the – are the regulators telling you they expect you to be able to even do more than that? I just want to understand how the discussions have flowed as you have progressed here as the weather broke?
Claude Mongeau
Yes, I think the – being the best way to put to you Ken is the following; I think there has been a lot advocacy throughout the winter. I can understand the grain grower side being concerned about the grain not moving as fast as they would have hoped.
But you also had grain elevators companies that are private sector companies there are few that control a big part of the supply chain that did a lot of grain shifting and basically a lot of self-serving regulatory advocacy. And all I am saying to the government is, let’s follow the facts that of course in the winter there was a shortfall.
We couldn’t meet all the demand and all the capacity of the supply chain. But as soon as the winter broke, we started to ramp up and at the moment, we are on top of, they cannot move more.
We are on top of Vancouver this weekend there was 500 hopper cars while they were taking a bridge for Easter weekend and those cars were sitting not being unloaded. We are full except a one elevator in and there is only a few vessels coming through the eyes that is still blocking the channel going to.
So we are moving just above 5000 cars and we are absolutely in sync with the grain elevator company. So that’s what the supply chain is able to period, not just the railroads, but the railroads and the grain elevator companies.
So we are going to go back to the government and we are going to say, it’s one or two things. You either align the supply chain on a commercial basis the alignment of incentives and you use the commercial trident to approach to make sure that people deliver for Canadian farmers or we regulate and if we regulate, we should regulate it all.
Grain elevators, railroads, we should do the coordination, we should tell what people are supposed to do and do it on a regulatory basis. It’s really a choice of – at the moment, the government spoke in the middle of the winter with railroads being blain.
Now the factor coming out. They are going to have another chance to look at this far and the size.
I am hopeful that cooler heads will prevail and that supply chain collaboration and the sound policy framework that we worked so hard in Canada to build. We have the best railway system in the world, period.
We have the lowest rate, the best service. Before we mess with success, we should think it through.
And so it’s either supply chain collaboration or it’s a regulatory approach and if it’s regulatory, we are going to be arguing that we should regulate the grain elevators and the railroads because that's the only way the bargain for the farmers if that’s their goal.
Ken Hoexter – Merrill Lynch
Appreciate the insight. Thanks, Claude.
Operator
Thank you. Our next question is from Thomas Kim from Goldman Sachs.
Please go ahead.
Thomas Kim – Goldman Sachs
Thanks. Can you quantify the dollar impact of weather on a few of your cost items, purchased services, fuel and equipment rents?
Claude Mongeau
Yes, I’d say, Tom is that, broadly speaking in terms of expenditures we are probably looking at something in the order of magnitude of about $50 million of higher expenditures attributable to the harsh winter. So give or take.
Thomas Kim – Goldman Sachs
Okay, would you be able to break that down into three different buckets or whatever buckets that you have?
Claude Mongeau
That’s part as good as it gets.
Thomas Kim – Goldman Sachs
All right, okay. Thank you.
Operator
Thank you. Our next question is from David Tyerman from Canaccord Genuity.
Please go ahead.
David Tyerman – Canaccord Genuity
Yes, good afternoon. My question is on your guidance.
You’ve raised your capital budget $150 million, but not changed your free cash flow guidance. I am wondering what is filling in the gap?
Luc Jobin
Well, we were able to – it’s Luc, we were able to dispose of the part of a sub-division in the Montreal to Greater Montreal area. So we realized the proceeds of just shy of $100 million.
So, we’ve been running pretty good cash managing the working capital and in addition to which we have this realization. So all in all, we were able to address the increase in the capital expenditures while at the same time, not changing our free cash flow guidance.
Claude Mongeau
And we had very solid start to the year on free cash flow.
Luc Jobin
Very, very good – strong position.
David Tyerman – Canaccord Genuity
Perfect, thanks.
Operator
Thank you. Our next question is from David Vermon from Bernstein.
Please go ahead.
David Vernon – Sanford Bernstein
Hey, good afternoon guys. I guess with the $50 million weather impact, if you were to adjust that out, the stronger start to the year here would that make you more constructive about being able to hit the double-digit EPS growth kind of as you look out through the rest of the year or is there something else that is going to be maybe keeping you from getting a little bit more constructive?
Claude Mongeau
No, we are always very constructive, but at the same time disciplined and that you have our guidance, we are committed to deliver on it.
David Vernon – Sanford Bernstein
Okay, maybe then just as a quick commercial follow-up. In terms of the expansion of the length of haul that we saw in the manufacturing business, is that something that had a weather impact to it or is that something you would expect to be sustained through the next couple of quarters given the underlying sort of mix trends in that segment?
Claude Mongeau
Well, I think the first quarter was kind of unusual. So before the winter we had average length of haul increasing in some of the sector.
Already, I think we spoke about in the past quarter, but also during the winter our mix of business was not quite than what it was used to. For example in lumber, lot of our customers truck, so they truck to close this point, Port of Vancouver from Northern DC and it kept the rail cars through Vancouver to Chicago.
So the mix of business for the last quarter has been more about network and customers’ choice to use the best possible, it’s worked in the way that serve them the most, not necessarily they are natural flow?
David Vernon – Sanford Bernstein
But you wouldn't expect that 50% uptick in length of haul to sustain?
Claude Mongeau
Well, I am saying, I guess the first quarter was not a good quarter, but was not reflective of demand, it was not reflective as usual pattern kind of an odd ball not sure we can draw a lot of long-lasting conclusion from that.
David Vernon – Sanford Bernstein
All right, great. Thanks a lot, guys.
Claude Mongeau
Thank you.
Operator
Thank you. Our next question is from Keith Schoonmaker from Morningstar.
Please go ahead.
Keith Schoonmaker – Morningstar
Thanks, we've heard other rails side Chicago again as a major source of delays this quarter. Jim, I am interested in hearing greater detail on how you are using the J.
For example there is most of the traffic moving to and from your Southern lines – to the city on the J or just hand off from other rails have to move on the belt lines?
Vincenzo Vena
If we take a look at the way what the J. has done, what the EJ&E enabled to have that line or on the city we still have to deliver some traffic into the belt in over the IHP.
We moved everything we can off those two lines and on to our own railroads. We moved the interchanges, when we worked hard the last couple of years to move the interchanges with all the other class ones that we could away from the belt in the IHP and over to our own locations and we are using the yards that we have in the city.
So what we’ve been able to do is we control our own destiny. Chicago did slow down for us, because we are impacted, it wasn’t as fluid as it normally would be, but, so we were impacted with everything else that was going on, but we did not have a lot of trains sitting waiting.
We did not have like we would have before the EJ&E trains sit at the north end of the city for a few days trying to get through. So, the investment was right and we just finished with a one more piece of expansion left to do on the line and connections we’ll finish that off early next year and we’ll have the railroad built the way we want and we are finishing our Kirk yard to make us even more capacity-intensive to be able to handle more traffic through Chicago, at this year we’ll have that finished by the end of summer.
Claude Mongeau
It’s huge, Kirk yard as a hump facility right there in Chicago that’s huge for us and the ability to buyback Chicago for the vast majority of our traffic, I got to tell you, I was glad we own the EJ&E this winter.
Keith Schoonmaker – Morningstar
Okay. Thank you.
Operator
Thank you. Our next question is from Steven Paget from FirstEnergy.
Please go ahead.
Steven Paget – FirstEnergy Capital
Good afternoon and thank you. Just looking at historical CapEx and this year's forecast CapEx as a percent of revenue, run rate seems to be around 20% if I have that correct.
Is that a fair run rate to use for the future?
Luc Jobin
Yes, I mean, this is Luc, I’d say Steven, that we are running with – we’ve run historically somewhere between 18% to 20% and so right now we are going to be running to the slightly to the higher end of it and that’s a reflection again of our growth agenda. I mean, we are seeing a lot – our growth is a lot faster than what the economy brings and we got pretty good visibility on it.
So, we see the opportunities to improve our performance, improve our network and accommodate all of that growth. So, we are going to be running at a higher end of the range probably for the next couple of years, again and I am assuming that we are going to be getting all of this growth that’s out there in front of us.
Steven Paget – FirstEnergy Capital
If I may ask as a follow-up, what physical assets is the increased CapEx buying?
Luc Jobin
Well, as I mentioned earlier, I mean, there is some of the additional requirement that is going to secure an increased number of locomotives. So the last year, we acquired over 80 locomotives, this year we are going to be acquiring about 60 locomotives.
So the mode of power is a big component of that, but at the same time, we are putting infrastructure investments such as the $100 million last year on the Winnipeg Edmonton. We are putting money into some of our key yards to increase our capacity and the ability to store and move cars with this.
When you are moving 1.3 billion GTMs per day, that’s a lot of traffic on the networking in the yard. So, we want to be in a position where it’s not only to help us with resiliency in the winter, but basically as we can maintain the performance, the metrics that we have as well as the service as we accommodate the growth.
So those are the two main areas that are going to see the capital investment.
Steven Paget – FirstEnergy Capital
Thank you, Luc.
Luc Jobin
Thank you, Steven.
Operator
Thank you. Our last question will be from David Newman from Cormark Securities.
Please go ahead.
David Newman – Cormark Securities
Hi, good afternoon.
Claude Mongeau
Hey, good afternoon, David. You just squeaked in on the…
David Newman – Cormark Securities
I did, right under the wire, right under the wire. As I look at the some of the truckers were talking, they are just going gangbusters this past winter and some of them might have been weather-related whatever.
But, the trucker spot rates and contractor rates in both TL and LTL were all going up. And as I look at your sort of domestic mixed merchandise and intermodal overall, you are talking about CPI plus type increases.
I mean could we see CPI plus, plus here at some point your forward book of business? I think J.J.
talked about you are busting the seams. Demand is very strong and the only thing to give here is in the pricing you talked about in crude by rail but are you seeing it across the other segments as well or what can we anticipate just on the pricing overall?
Jean-Jacques Ruest
Yes, I think the word I used was not, this is only a busting. And as Jim always reminds me to try to get a little more money for services which we work very hard to provide.
Spot rate for truck this last winter were very high and those truckers – trucking firm who worry those to keep capacity outside to be sold on spot meets very well on that and then what is sold on regular rate it would cost you probably still little more money on fuel and conductors, drivers I am sorry, to make it happen. I think we want to be middle of the road, we want to do, we have been very steady with in-station bus pricing which is picking through that.
We recognize that more and more the North American network capacity is maybe little snug, so that what we have is very valuable, what we have valuable is rail capacity. Rail capacity is very difficult to recreate, you don’t buy other railroad.
If you buy them – the capacities they already have business on it. And building track, we know that from our own program here it takes time to experiment, it’s not easy and it’s capital-intensive.
So, what we have is very valuable. The economy in North America is getting progressively better.
Recession was in 2009 how quickly we forget and I think as I said should have little more value than the past. One thing doesn’t show in the same-store price is, when we work on the sub-lane that may not be as attractive today they were four years ago and those lanes sometimes change from one rail carrier to another, it doesn’t show up in price, but it does show up in your overall bottom-line.
And that’s also I think part of what’s ahead of here to be more selective and mindful, Not of customers, but which line of customers fits best us with and without extended that to switching.
David Newman – Cormark Securities
Does it help at all – will this help at all in terms of any market share gains on the TL guys? I know it's one area that you kind of focused on but is it – does this help accelerate that market share gain?
Jean-Jacques Ruest
I think as I said earlier, domestic model looks promising for us. It’s probably promising for all railroads, including domestic, intermodal lines using for example wholesale partners and I think that’s an area that makes sense because of length of haul, because of trucking costs, because of driver shortage, I think that was there six months ago, when it’s obviously going to be there even more so 24 months from now.
Long haul truck is expensive and demanding.
Claude Mongeau
And it’s right in our sweet spot, David, it’s all about selling one CM. It’s about putting a product out there that has a lot of value and getting paid for it.
But you got to earn it one load at a time and that’s our journey.
David Newman – Cormark Securities
Excellent, thanks for taking my call guys, the last call of the day.
Claude Mongeau
Okay, well thank you. Thank you all and now listen, we are very, very pleased with the fact that despite the adversity we can able to deliver a solid first quarter.
As you can hear, we are committed to deliver a solid 2014 and I would just invite you all to be safe and look forward to have you on our second quarter call.
Jean-Jacques Ruest
Thank you.
Luc Jobin
Thank you.
Operator
Thank you. The conference has now ended, Please disconnect your lines at this time and we thank you for your participation.