Canadian National Railway Co

TSX:CNR

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the CN First Quarter 2019 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations.Ladies and gentlemen, Mr. Butcher.

[Paul Butcher, Vice]

Thank you, [ Azizi ]. Good afternoon, everyone, and thank you for joining us for CN's first quarter 2019 earnings call. I would like to remind you about the comments already made regarding forward-looking statements.With me today is J.J. Ruest, our President and Chief Executive Officer; Mike Cory, our Executive Vice President and Chief Operating Officer; and Ghislain Houle, our Executive Vice President and Chief Financial Officer. Also joining us on the call today for the Q&A session is Keith Reardon, our Senior Vice President, Consumer Products Supply Chain; and James Cairns, who was just recently appointed Senior Vice President Rail-Centric Supply Chain. [Operator Instructions]It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, J.J. Ruest.

[Jean-Jacques Ruest]

Well, thank you, Paul. And good afternoon, everyone, and welcome to our earnings conference call. After a very, very cold, bitter winter, we delivered good result and have a positive outlook to report. In the first quarter, we produced adjusted EPS growth of 17%, revenue growth of $350 million and the adjusted operating ratio was 67.2%. Our volume and cost was impacted by extreme and prolonged cold weather, down to minus 35, minus 40 degrees Celsius, which impacted train cost and restricted revenue ton mile volume growth to 3%. Our CapEx and winter operating plan, which include our air -- railcars produced good result at temperature as low as minus 25 degrees Celsius, which we called the Tier 1 train restriction. But when temperature dropped to Tier 3 and Tier 4, which is at minus 35 Celsius, minus 40 Fahrenheit, for about 7 weeks, we were losing significant train capacity and in some instance, we could not operate during part of the 3 or 4 nights. In order to protect customer service and to manage regulatory risk as we know them, we had decided to operate this winter with some additional resource in terms of locomotive, rail cars and train crews. Given the extreme winter condition that we experienced, that was the right decision.As we do after every winter, we are now taking the opportunity to rightsize our asset base, including the return of leased locomotive and putting railcars into storage. In addition, we also take into account the current softness of crude-by-rail following government-imposed crude production cutback.Now a quick review of the top line for the first quarter.We had our best ever first quarter at over $3.5 billion of revenue or $350 million of top line growth. During Q1, CN's carload were up 1.5%, the best Class 1 performer. Intermodal revenue was up 4%: automotive revenue was up 7%; coal revenue grew by 15%; Canadian grain revenue was up 8%; CN Canadian grain export tonnage is now up 1.9 million metric ton, ahead of the last year-to-date crop. Our CN railroaders are already getting the job done for the grain industry. U.S. grain revenue was also up 14% in the quarter. On crude, we move on average 250,000 barrels per day back in December but demand took a nosedive in February to less than 100,000 barrels per day after reduction in production was imposed by the province of Alberta. By CN has a capacity to move more crude. It is a national priority to get our natural resource to market, so as to protect the country's economy GDP and create jobs. Our CN railroaders are ensuring that we have the infrastructure to move any and all natural resource to world markets.Looking to the balance of the year. We have a diverse pipeline of growth opportunities ahead of us. For example, short term during Q2, the start-up of the Coalspur-Vista project, a coal export mine in Alberta, is to start up soon. We also have the start-up of the AltaGas propane export terminal in Rupert and the introduction of the new container service by ZIM line in Rupert. We also have immediate capacity to move more crude. In April, we are running at 145,000 barrels per day but we do have a capacity to quickly ramp up to 300,000 barrels per day. Midterm, we have some other coal business, Alberta chemical business and automotive business coming our way. At the upcoming June Investor Day, we will give you an update on our growth opportunities for the next 3 years. In the meantime, we are reaffirming our guidance for the year.With that, I will turn it over to my team for them to give you an update on the winter operation and the financial detail. Over to you, Mike.

[Michael A. Cory, Executive VP & COO]

Thank you. Thank you very much, J.J. And first, as always, and especially after the challenging weather conditions they tackled day in and day out, I want to sincerely thank all the railroaders of CN for their efforts.Now look, from my perspective, the operating challenges that they faced were nothing short of some of the toughest that I've seen over my career. But their overall efforts allowed us to fight through and continue to provide service to our supply chain.So with the tough weather conditions, GTMs were up 3% versus volumes in Q1 2018. And looking specifically at Q1 operating highlights, our network train speed was down 8% versus Q4 but essentially flat versus Q1 of 2018. Our car velocity was down 15% versus Q4 but up 8% versus Q1 2018, and our through dwell was up 15% versus Q4 but down 12% versus Q1 2018. The extreme weather started to really affect our operation initially in our Winnipeg to Toronto corridor. And when I say inclement, I'm referring to consecutive nights at minus 40 to minus 50 degrees Celsius, which as you know, at 40 degrees below 0 Celsius, it's the same as Fahrenheit. This type of weather then started to set hold in our Winnipeg to Wisconsin corridor. And by the last week of January, our Western Canadian franchise began to feel the same effects right through the beginning of March. Under Tier 1 restriction, at around 25 degrees Celsius or minus 13 degrees Fahrenheit, our operating performance was much like in Q4, as evidenced by our velocity, train speed and productivity. Under those harsh conditions, the capacity improvements we made in our network and in our equipment, such as increasing our fleet of AC locomotives and air cars really paid off.When temperatures dropped below minus 30 to minus 35 and even colder at minus 40, we deployed more air cars and DP locomotives per train. However, we could not keep up with the demand as the freezing temperatures did not subside and the customer demand remained strong. As well, when temperatures dropped to minus 40 and colder, we ceased operations some nights until the temperatures warmed in the morning, something closer to minus 25 to minus 30.So to give you an example of the effect of the most severe weather, at minus 25 we effectively ran our trains at a normal run rate, with 1 air car and/or DP configuration with the air sources between 4,000 to 5,000 feet apart. At minus 35 and colder, our train length was almost cut in half. This results in the need for additional air source in order to maintain train length as the between length was reduced down to as low as 1,500 to 2,000 feet. Even with this inclement weather, our overall service to our customers was less impactful than the year before. While port dwells did increase at times, overall, we were able to work with our partners to ensure fluidity was maintained. And our grain movement has seen record volume year-to-date. With the addition of center beams and boxcar fleet, we're able to stay relatively current with our forest product customers through the worst periods of cold. As well, our Alberta petrochemical customers stayed fluid.Now this was purely a result of our overall investment strategy, specifically more resiliency in key areas in Western Canada, sourcing of crude, mainline capacity and the investment in equipment I spoke to you before. To effectively shut down over some of the nights in very dense volume corridors as we did and recover each day as quick as we did could only have come about through these investments. By mid-March, the recovery started. And right now, all of ours supply chains are very current. Our operating metrics for Q2 have come back into line and our volume is in record pace. With good weather, we're seeing the payoff of our track capacity projects, and we are very, very active in rightsizing our asset base as we're looking to drive velocity, productivity to short-term reduction of cars, locomotive and people.With record volumes in April and normalized weather, we see a significant opportunity to gear up for the demand for the year ahead and improve our overall productivity.As J.J. spoke to our growth opportunities, we're commencing another round of capacity improvement. In all, our engineering team will be delivering another big program in 2019. 22 projects are planned, including segments of double track, new sidings, and siding extensions and yard investments. Two projects have already been completed and put in service in Q1. And for 2019, to be specific, we're looking at 9 projects between Winnipeg and Edmonton; 5 projects between Edmonton and Vancouver; 4 projects between Taverna, which you would know as Jasper, and Prince Rupert; 2 projects between Winnipeg and Chicago; 1 project South of Chicago; a project east of Winnipeg. The rest of the remaining 140 locomotives will come online, and we're building new air cars and also installing equipment inspection portals.What's also going to help us is a further rollout of our scheduled locomotive maintenance program where we started to already experience more availability and reliability for our locomotive fleet. As these projects are completed, we'll continue to move more of our customers' business at low incremental cost.Finally, we struggled with our safety performance in the last quarter, specifically in the latter part of January as temperatures started to decrease dramatically. However, while our FRA accident and injury ratio has increased in the quarter, our significant injuries and accidents were well within our 5-year average. We continue to focus on the value we placed on safety as being instrumental to our success as we move forward in our journey of being the best-in-class transportation provider. With that, over to you, Ghis.

[Ghislain Houle, Executive VP & CFO]

Thanks, Mike. Starting on Page 9 of the presentation, I will summarize the key financial highlights of our first quarter performance.As J.J. previously pointed out, revenues for the quarter were up 11% versus last year at over $3.5 billion. Fuel lag on a year-over-year basis represented a tailwind of $27 million or $0.03 of EPS, driven by a favorable lag this quarter of $17 million versus an unfavorable lag of $10 million for the same period last year. Operating income came in close to $1.1 billion, up $50 million or 5% versus last year.Our operating ratio came in at 69.5% or 170 basis points higher than last year. During the quarter, we booked a charge of $84 million in depreciation and amortization related to the replacement of our Positive Train Control, PTC, back office system. Excluding this item, our operating income was $1.164 billion with an adjusted operating ratio of 67.2%, 60 basis points lower than last year.Net income stood at $786 million or $45 million higher than last year with reported diluted earnings per share of $1.08 versus $1 in 2018, up by 8%.Excluding the expense related to the replacement of the PTC back office system, our adjusted diluted EPS was up a solid 17% versus last year. The impact of foreign currency was favorable by $30 million on net income or $0.04 of EPS in the quarter.Turning to expenses on Page 10, our operating expenses were up 14% versus last year at $2.464 billion. Expressed on a constant currency basis, this represented an 11% increase.At this point, I will refer to the variances in constant currency.Labor and fringe benefit expenses were $798 million, 10% higher than last year. This was mostly the result of higher wages driven by increased headcount and higher stock-based compensation expense. I would also highlight that the sequential increase in headcount is mainly attributable to the onboarding of slightly over 1,300 TransX employees in March.Purchased services and material expenses were $558 million, 14% higher than last year. This was mostly the result of higher outsourced services and repair and maintenance expenses, including higher snow clearing cost, mostly due to the difficult winter conditions. Fuel expense came in at $398 million or 4% lower than last year. Lower fuel prices accounted for $30 million of the reduction, while higher volumes were $9 million unfavorable variance versus 2018. Fuel productivity was unfavorable by 1.6% or $6 million in the quarter versus last year. Depreciation stood at $440 million, 33% higher than last year. This increase was mostly driven by a charge of $84 million for the replacement of our PTC back office system and net asset additions. Equipment rents were 3% lower than last year.Casualty and other costs were $156 million, which was 8% higher than last year, mostly due to higher incident cost, which was driven by a crude oil train derailment partly offset by lower legal provisions.Now moving to cash on Page 11. Free cash flow was $286 million excluding net cash from the acquisition of TransX. This is $36 million lower than in 2018 and mostly the result of higher capital expenditures driven by the upfront deliveries of new locomotives, partly offset by higher net cash from operating activities.Finally, let me turn to our 2019 financial outlook on Page 12. Although there are signs of slower growth in certain markets and volatility in crude-by-rail, we continue to see a broadly positive economic backdrop in North America and consumer spending remains healthy. We have seen specific opportunities that will drive further growth such as the new coal mine from Coalspur and the new propane terminal in Prince Rupert that will start shipping in the second quarter. This environment should continue to translate into high single-digit volume growth in terms of RTMs for the full year versus 2018 in a favorable pricing environment.As J.J. mentioned, we are taking the opportunity to rightsize our resource base, and we remain confident in achieving our EPS guidance of low double-digit growth versus 2018 adjusted diluted EPS of $5.50.On the capital front, as winter subsides, we are focused on delivering on our large capacity track expansion programs. We have received so far 63 new locomotives that helped us during the winter, and we expect another 52 to be delivered before the end of Q2. Furthermore, we continue to reward our shareholders with consistent dividend returns, and we are on track with our current share buyback program of $1.7 billion, having repurchased 2.4 million shares for the amount of around $280 million since the end of January.In closing, we remain committed to our agenda of operational and service excellence with our supply chain focus as we continue to manage the business to deliver sustainable value for today and for the long term. On this note, back to you, J.J.

[Jean-Jacques Ruest]

Well, thank you, Ghislain. We are positioned to deliver solid results going forward. And we're investing for the long term, for growth, for efficiencies and resiliencies when there is harsh railroading condition. We are actively working to feed our network with growth, example our TransX, efforts on Canadian ports, efforts on export of natural resource. We have a proven ability to adjust short-term costs for short-term demand fluctuation for the crews, locomotive or cars, and we are committed to protect our core natural resource customers like the Prairie grain, the Alberta oil, B.C. and Québec lumber, and Canadian and U.S. coal export.Our approach to operating ratio and return on invested capital, which stood at 15.7% in 2018, is also balanced and long-term focus.On this note, Azizi, operator, I would like to turn it over to question, which both James Cairns and Keith Reardon will also join us.

[Operator]

[Operator Instructions] The first question is from Chris Wetherbee of Citigroup.

[Christian F. Wetherbee, Vice President]

I guess I wanted to talk a little bit about the network and the OR potential of the business and compare this year maybe to last year. So last year, this time, you're coming out of challenges. You had some congestion in the fall leading into a very challenging winter. Now I guess another challenging winter again this year. You added a significant amount of capital. Can you give us a sense of sort of what the OR potential of the business can be as you get out of the weather, start to get some of that volume? And is it as recoverable or is it more recoverable today than it was, I guess, a year ago?

[Jean-Jacques Ruest]

Okay. So Chris, it's J.J. Thanks for that question. Just to give you a few element of color without getting into our guidance for quarterly operating ratio. Last year -- this year, the winter has been actually been tougher than last year because of the deep cold for about 7 weeks. And also last year, when we ended the first quarter, we had backlog of business. Now you remember that there was quite a few customers, especially in the world of natural resource, who were waiting for us to get caught up. This year, we actually -- because of the resource that we had, we actually did better. We actually were able to grow versus last year. And we did not finish the first quarter with a backlog of grain or potash or lumber. We are fluid and we are current. At least, at the CN side, this is how we ended the winter.So therefore, right now, the focus is on pulling down resource, stocking locomotive, cars and crews, fill demand, pick up in line the capacity that we have. And one of the factors that we are waiting to see where things will go is crude-by-rail. So crude-by-rail this month ran at 145,000 barrel, which is better than what it was in March, but we do have capacity to ramp it up within a few weeks only to 200,000 barrels. So I think that will also be an element as to how a good operating ratio will be in the second quarter. It would be on how much we can use the resource that we actually now have available for our natural resource customer.

[Operator]

The next question is from Steve Hansen of Raymond James.

[Steven P. Hansen, Senior Vice President]

Look, on the growth opportunity side, I'm sure we'll hear a bunch more about it at the upcoming Investor Day but I was hoping that you could perhaps give us a little bit of a color here on how the TransX acquisition is going thus far. And as sort of a secondary part of that question is just how you view the internal opportunities for capital versus the external opportunities for capital, and how you're weighing those going forward.

[Jean-Jacques Ruest]

Keith will do that TransX part.

[Keith Reardon, Senior Vice]

So on the TransX piece, we have been integrating since the close. We see a lot of opportunities on the commercial side. We see a lot of opportunities on the synergies with regard to cost take out on both sides. But we also -- one of the main reasons, and we've talked about this, is the talent and the entrepreneurialship that TransX brings. We've already had several examples where we needed to find a solution to something, and within hours of talking to them and sitting down, we were able to come up with those solutions. So we're very, very pleased with how it's going. We've actually seen some growth come back to the railroad through TransX. As Mike and his team are improving the service that's also going to happen in the traditional, domestic part of our business as well as bringing it back to TransX. So we're very, very pleased.

[Ghislain Houle, Executive VP & CFO]

Yes. Maybe quickly, Steve, just laying on the capital side, I think, I mean we're just following our plan. I mean we told the market that this year, our plan was for $3.9 billion, so we are following this. We're receiving locomotives. We'll receive 140. As I said in my remarks, we'll receive 63 in the first quarter. We'll receive another 52 in the second quarter. Mike talked a little bit about the capacity projects that are out there so we're well-geared. I think we've learned a little bit of how to deploy and how to execute on this capacity investment this year from last year. So I think we're very optimistic, and we're just following our plan of what we told everybody.

[Jean-Jacques Ruest]

And we'll continue to look for organic growth opportunity as well as they may come up.

[Operator]

The next question is from Ravi Shanker of Morgan Stanley.

[Ravi Shanker, Executive Director]

So pretty impressive that you were able to maintain your high-single digit RTM guidance despite a tough 1Q. Can you help isolate maybe 1 or 2 drivers -- kind of what drives the ramp to get there in the back half. I'm certain you guys aren't counting on significant crude-by-rail volumes until that actually shows up, so what's exactly driving that? And maybe on a related note, can you give us an update on the Port of Halifax and kind of how that process is going? And are you guys counting on additional volumes on some of the new projects to be able to hit that guidance?

[Jean-Jacques Ruest]

It's J.J., Ravi. Thanks for the question. So definitely, as usual, it will be a combination of a number of factors. We always want to be working every aspect of our portfolio. So crude-by-rail is an opportunity that we expect at this point will produce growth in the second half. We also expect, and our focus on intermodal, whether domestic or overseas, will also produce some volume growth. For the second quarter, automotive, even though the North American market is a little soft, should be a growth area for CN because the OEM that works with us still have some product on the ground that is left over from slow North American network from the TTX fleet. Frac sand, we'll see what kind of drilling activities we have. On the forest product, you may have noticed that even though they've announced some shutdown of saw mill in DC, the price of lumber went up, which means that there's still good demand out there. So there's a number of factors.And also what's happening here in the second quarter. So this Coalspur will start up. They're actually shipping, I think, next week their first [ new ] train. We hope that, at least at the beginning, they'll be able to run -- hit the 3 million ton a year run rate, and that's from the 0 or what it was. And then also the first few cars of propane to the AltaGas export terminal in Rupert also started to flow in. So there's a little bit of slow delay versus our expectation on these propane export as well as the Vista project but now they're finally gearing up. And in the case of the second half, hopefully, they should be in good position. I think that's more or less kind of what we expect. On the Port of Halifax, so the Port of Halifax look it looks like will be changing to a new owner. Our company -- we can't share exactly who that is but it's a company that we know very well. And assuming it's those folks that eventually take over the terminal, they're an excellent world-class operator. And more to come on that, but we are actually optimistic on how we, over the next few years -- and hopefully, that transaction will proceed how we can work with these people to make much better use of our East Coast port to serve the central part of the continent. So more to come on that.

[Ravi Shanker, Executive Director]

So just to confirm the -- you're also confident in the opportunity there with the -- whoever is winning the bid?

[Jean-Jacques Ruest]

Yes. So the -- it doesn't necessarily mean that we have to be financial partners. I mean they're different scenarios, but what's important here is they have now selected who they want to sell the terminal to. We know these people. We actually are going to be having discussion with them. And at this point, I would leave it at that as to what our financial role will be. But one thing for sure is we see opportunity to grow the rail business out of Halifax into the interland, which is really the point of what we call feeding the beast using Rupert Port of the East.

[Operator]

The next question is from Cherilyn Radbourne of TD Securities.

[Cherilyn Radbourne, Analyst]

I thought I'd use my one to ask J.J. about the recent management restructuring you undertook, which was then followed up with some pretty broad changes to the management team, particularly in the operating department. Just wondering if you could elaborate a bit on your thinking there.

[Jean-Jacques Ruest]

Okay. Thank you, Cherilyn. And if you go on the deck that we have for this call, the last page, in the Appendix, Page 22, is where we highlight the most important fact of this management change, which took place in the last 2 months. So some are involved in our operating department. We did promote -- we have very solid schedule railroading operator. People have been doing this all their life even though they may be only in their 40s and 50s. And namely James Thompson is now heading the West; Derek Taylor heading the South. And we've asked Doug Ryhorchuk to become the godfather, if you wish, of the operation by leading the Network Center. And we've also asked Doug MacDonald. Doug MacDonald has a very strong career on the commercial side. And I've asked Doug to -- myself and the Board have asked Doug to lead the East and learn operation. But at the same, Doug has always been very close to the operating team. So we are really giving the chance to those who are the next -- maybe the part of the generation of schedule railroaders to take this very senior job. By doing that, then also we're given the chance to promote some people in commercial side, people who are very good top line hunters with strong track record like James Cairns, Allen Foster and our friend, Buck Rogers. And we've also beefed up the Department of Technology. So we're increasing the number of people who are either coming from outside to help us redefine the yard with possible in the rail industry, and we're giving the chance to our people who have been -- worked very hard producing very solid results the last 15, 20 years, to be given opportunities at very senior level or an area which are new to them for them to kind of finish their overall learning as to how to become some of the best of the best. We do have a strong bench, and we're developing it.

[Operator]

The next question is from Turan Quettawala of Scotiabank.

[Turan Quettawala]

I guess I was wondering if you could talk a little bit about CapEx this year. Obviously, another big year with regard to CapEx going into the summer. And with the winter being so tough, just maybe talk a little bit about the levels of preparedness here with regard to the CapEx program going into the summer.

[Michael A. Cory, Executive VP & COO]

Hey, Turan, it's Mike. In terms of preparedness -- so first, I'd just like to go back. If you look at the results we produced in December and through the first couple of weeks of January, that was a direct result of the capacity, especially through Western Canada and especially the yards in Edmonton and Winnipeg. And so we are -- as just mentioned earlier, we learned how to better logisticate, I would say, between our materials procurement, our materials delivery. In fact, our engineering department has become one of our big customers for transportation. And whether it's straight communication, we developed tools so that we can refine the process, get more done with less. And with that capacity we've added, it allowed us to get a better unit cost. If you remember, I'll go back to '16 and '17 when volumes were lighter, we have the capacity. We produced a lot more in terms of what we got done in the hours we had. It was very difficult the last 1.5 year doing not just the special capital but the basic capital under such stress of traffic. Well, we're able now -- we've already got some good results from the first month or so. It's a big gang that we have out there on all 3 regions. We're starting to get unit cost back in line. So we are prepared. We learned from last year. We've developed better communication, better tools. But really, we're going to stretch that dollar as far as we can.

[Operator]

The next question is from Allison Landry of Credit Suisse.

[Allison M. Landry, Director]

So I just wanted to gauge your confidence in hitting the high single-digit RTM growth this year and whether it has changed at all the given the combination of the slow start to the year and softer crude volume. And if it hasn't changed, if you could maybe speak to whether the Q2 RTM growth will accelerate from what you're seeing now or if you think the full year hinges more on a step up to maybe 9% or 10% growth in the back half of the year.

[Jean-Jacques Ruest]

Thank you, Allison. So maybe I can start. So I mean we would rather have an easier winter with this kind of demand that we have back in December and early January when the railroad was running very well and there were some business out there, but it is what it is. So we're starting with a bit of a slow start. But yes, at 3% revenue ton mile growth, I think we're one of the leader in the industry here in terms of volume growth. I think we are the leader in the industry in volume growth. And at this point, we're very current but we're also very fluid, and we will have some asset that we're parking, which is our good asset and good, qualified people that we can easily bring back into as things picks up. So it will partly be what's happening with natural resource, what's happening with consumer product, what's happening with intermodal. And I think we're only in the fourth quarter, fourth month of a 12-month season, and there's still a lot of time left to go on the clock, just like last year, the same situation. So I think we are -- no, we're looking at the future, at this point in very good position. And if we have a little help from the demand side, we will do it.I don't know if you want to add something, James, on what you see on the natural resource or in the manufacturing side.

[James Cairns, Vice President of Petroleum & Chemicals]

Yes, I think certainly, J.J., we're coming off a -- some kind of a tough first quarter weather-wise in February. But even if you draw back the crude-by-rail, you look at how we came out of December. We handled 250,000 barrels a day of crude-by-rail. Clearly, line of sight leading December to move about 300,000 barrels a day. The only thing that stopped us was government curtailment. And if you look at some of the positive things going on and moving forward here in the province of Alberta, whether it's crude-by-rail and what might happen with curtailment in the future or some of these new plans coming on board, we really are very optimistic about how we are going to finish up this year.

[Operator]

Next question is from Benoit Poirier of Desjardins Capital.

[Benoit Poirier]

Could you please comment about what you see in terms of pricing environment? I know that you don't disclose any precise number. But if you could comment overall in light of the current market environment.

[Jean-Jacques Ruest]

James?

[James Cairns, Vice President of Petroleum & Chemicals]

Yes. We continue to see opportunities of price ahead of railway cost inflation. Our customers have come to expect that from us. We need to be able to price ahead of railway cost inflation so we can invest back in our network. So we can invest in hiring people, buying locomotives, invest in our rail infrastructure so that we can handle our customers' goods-to-market in a very expeditious manner. Our goal is to be there to grow in lockstep with our customers, and pricing is a key component of that.

[Operator]

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

[Kenneth Scott Hoexter, Managing Director and Co]

J.J, pretty solid job. And I've been in Western Canada for one of those minus 42 degrees days, so I hear you there. Mike, just some thoughts on the projects, maybe dig into this a little bit. Are we talking more capacity expansion on the network or is it equipment? I guess I want to understand are you at full network capacity so you could see squeezing if volumes start popping up in certain areas? And maybe talk about how you target those projects after the 22 last year. How do you figure out where you're going to need that growth target?

[Michael A. Cory, Executive VP & COO]

Okay, Ken. Essentially, Ken, it's in the same -- I would say almost the same location as last year. We still, when you look at our -- it was called the breadbasket between -- and I'll go far as Jasper, Alberta to Chicago. Or just take Edmonton to Winnipeg, for that matter, that 800 miles. We started a couple of years ago. We have 15%, if it only double tracked. Now first tranche we did brought us up to maybe 25%. We don't have the luxury of having 800 miles of straight double track like others do. So a lot of the infrastructure is going to go in that corridor. At the same time, we know we have growth to the West Coast, especially the Vancouver and especially with Coalspur starting up. So from West of Edmonton towards Vancouver, we see pinch points that will take place as the volumes grow. Grain will continue to be strong. Keith's intermodal is very strong, going to both Rupert and Vancouver. Around going to Rupert, we have more capacity in there. And then we still have that area, from Winnipeg to Chicago, that crude -- again, more commodities that are going in that direction. But really it's not a lot different than last year. The locomotives are -- it's a big year for us this year. Just mentioned, 140 of another 80 to come. We spoke about that last year. And really, other than that, we're talking technology, and that's where the rest of our capital's going. But really, similar to last year, same areas. We've still got work to do in that Winnipeg to Edmonton corridor.

[Operator]

The next question is from Jason Seidl of Cowen & Company.

[Adam Kramer, Associate]

This is Adam on for Jason. I want to follow up on the TransX acquisition and potential future M&A and just ask if there are other types of nontraditional rail or non-rail companies that you guys could potentially look at? What types of companies? And how could you see these types of companies maybe fitting into your network or fitting into your business in a broader sense?

[Jean-Jacques Ruest]

It's J.J. So it's basically businesses that would bring about more carload on our networks. So you look at our rail line, our mainline rail line, and you look at businesses who would contribute to increase the amount of carload and container on that rail line. So it's something that would feed the beast. So in the case of TransX, it's a [ national ] company. They move containers. They also move also freight over the road. We're looking for them to help us grow the container business at a higher pace and also looking for them to help us convert more customers from the road to the railroad. We talked about port business, the example earlier on Halifax, it's the same thing. When we use a port very, very well, like in the case of Rupert, I think it's a proven recipe that it does create a lot of volume on the railroad when port and railroad really work together in a very connected way. So these are 2 examples of things which are good long term for our rail franchise.

[Operator]

The next question is from Fadi Chamoun of BMO.

[Fadi Chamoun, MD & Analyst]

So you are -- I wanted to ask, when you look at your network, is this, at this point, resourced fully for the ramp-up in volume that you're expecting in the second half of the year? And really, I'm trying to understand that you're guided for strong volume, I guess, as we go into the second half but the operating leverage implied in the guidance is a little bit more muted. How should we think about that kind of H2 outlook?

[Jean-Jacques Ruest]

Yes. So maybe I'll start and then if anybody else here wants to complete my answer. But in the Western network, our network the last few years have been under stress from a capacity resiliency point of view, especially when we hit harsh condition. And we want to invest for the long term, not just for the quarter or the year. We want to be sure that we can handle growth when growth come in, in the west. We want to be sure that we can run efficiently so we can purchase good KPI from a schedule railroading point of view. And we also want a network that when tough time come in, that we can show resiliency to our customers and not put a country into a hard time. And with 3% revenue ton mile growth in the first quarter, which most of it was in the west, we've proven that we were there for the national resource customers. So in the east, we've got lots of capacity on the network, which is underutilized. That's why we're so interested as to what we can do in domestic as well in the east. When I say the east, I mean Chicago to Halifax. And also what we could do with any of their eastern ports.So looking forward, we just need to be mindful of keeping a balance between capacity, as in rail cars, locomotives and crude, and demand which is fluctuating. And right now, the biggest aspect of fluctuation was crude, which went up 250,000 barrels. We were basically ready to do 300,000 at that time. Went down to about 90,000 barrels per day, and now it's slowly coming back. It went from 90,000 to 125,000. And we hope that we can help Alberta remove the curtailment in production and get it back up to what it was expected to be a few months back.

[Operator]

The next question is from Scott Group of Wolfe Research.

[Scott H. Group, MD & Senior Transportation Analyst]

So can you give us maybe just some revenue and operating ratio numbers to think about for TransX? And then just bigger picture with the guidance. So if RTMs end up mid-single digits instead of high single, are we still confident we can do double-digit earnings growth? I know we did in the first quarter. Or do you think, given the amount that we're spending here, that we sort of need the volume growth to come in where you want it to be to get the double-digit earnings growth for the year?

[Ghislain Houle, Executive VP & CFO]

Yes, Scott, this is Ghislain. Obviously, we're not going to splitting the OR of TransX versus the OR of CN. I mean we're not offering segmented information in the financial data of now. And results of the TransX will be embedded into CN. And that's what it is. I think on the guidance side, I think we're comfortable, very comfortable. And we look to -- and as we do every quarter, we look -- we do a detailed bottom-up, top-down with the team, and we did reaffirm the guidance today. And as like J.J. mentioned, it was tough quarter. And frankly, it was a tough February and March because January was pretty solid actually. And I think we have another 9 months to go, and stay tuned. But we're comfortable with our high single-digit volume growth and our double-digit -- our low double-digit EPS growth. And that's our guidance, and we're comfortable with it.

[Jean-Jacques Ruest]

Yes. We're going to work the lever of the cost, lever of volume and lever of price. As we always do, we adapt.

[Scott H. Group, MD & Senior Transportation Analyst]

I understand you don't want to give OR on TransX, that's fine. Can you at least give us a revenue sense so we know how to model the other revenue line going forward?

[Ghislain Houle, Executive VP & CFO]

I mean this was --- before we bought TransX, if you go on their website, it was 400, give or take, revenue company. So that's what it was. And I know now -- you know Keith is working with Mike Jones, who was their COO there, closely. And those revenue was going to be embedded into the intermodal revenue numbers on our financial statement. So -- and stay tuned. But I think, Keith, as you mentioned, you're pretty optimistic about some of the opportunities and some of the learnings, on both sides, that we will get from TransX.

[Keith Reardon, Senior Vice]

Yes, we are. I mean we're going to work as a team to help them be able to drive more revenue, more profitable revenue at TransX. And they, in turn, are teaching us to be a little bit more entrepreneurial and be able to get things done a little bit quicker, a little bit more nimble.

[Operator]

The next question is from Justin Long of Stephens.

[Justin Trennon Long, Managing Director]

So maybe to follow up on TransX as well. Just curious if you have any thoughts around the revenue growth for that business going forward, even if it's kind of longer term over the next 3 to 5 years? And then for the model, also wanted to see if you had any updated thoughts around headcount, I guess excluding the TransX ads, and then the tax rate as well, any of your assumption or range on that front has changed at all.

[Jean-Jacques Ruest]

Maybe I could start with your last one because that's what we'll remember the -- that's what I remember because it was 3 questions in 1. But on the tax side, again, if you look in the quarter, the effective tax rate came in about 24%. And some of this is due to some of the higher excess tax benefit that is resulting from a settlement of equity-settled awards in this quarter. But when you look at the tax, if you remember, Justin, we, at the beginning of the year, gave a guidance of 26% to 27%. And as we look forward, we think we're going to be more in the range of 26% going forward on our tax rate this year. So that's on the tax side.Keith, you want to touch upon revenue for TransX?

[Keith Reardon, Senior Vice]

Well, we're going to be looking at all opportunities. They have quite a large book of business already, a lot of customers that we don't have in our book of business and then we have some customers that we deal with that they don't. So there's a lot of opportunity to help each other out there as well as they are in the coal supply chain, and they do a very good job there. And as you know, we've been working on investment in the coal supply chain, whether it's exports overseas or domestically. So we'll be working together with them and our other wholesalers in the business to be aggressive and grow that business. There's a lot of opportunity in the coal supply chain. As food safety becomes more of an emphasis in North America, we want to be right there because it is a differentiator for us in the marketplace.

[Ghislain Houle, Executive VP & CFO]

And Justin, I think the last piece, on headcount, I think, as J.J. mentioned, we are rightsizing our resources and the volatility of crude right now is such that we are reducing, somewhat, our headcount on a short-term basis. We're hopeful that the crude, as James mentioned, will come back and then we'll get this people back. But the catch up on headcount and on hiring has been done. We're normalizing, and we're now rightsizing our resources in light of the business that's coming at us. So if you look at headcount, at the end of the first quarter versus the fourth quarter of last year, if you exclude TransX, then we were flat essentially.

[Operator]

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

[Walter Noel Spracklin, Analyst]

So J.J., just on some of your growth aspects, coal is coming on pretty fast here, as you pointed out, in Alberta. But I know that the terminal in Prince Rupert there, Ridley, is having some trouble, having gone through a couple unexpected shutdowns that were pretty significant. I think they're signaling more to come. Does that interrupt your opportunity in coal? Is there other avenues for that coal to find its way into the market? And how sustainable is that fix if there is one there?

[Jean-Jacques Ruest]

Yes. Thank you for the question, Walter. There is other avenue for that coal to get to market if Rupert's Ridley can't get it done. We are not getting into confidential information of all these different contract work between the terminal operator and its customers, if they can't perform some of that, it can definitely go a little more south to the other coal terminal and still go-to-market. So I think from that point of view, we, as a railroad, have the capacity and the corridor and the crews in the 2 different corridors to get the new mines to be able to serve and ship overseas. And just talking about the Vancouver. I know you wrote a piece back in the day on the CTA. I was almost hoping, Walter, you'd ask me a question of that. We want to be sure that people understand that we disagree with this decision with the CTA regarding Vancouver. We will be appealing the decision. In our view, we did a great job of moving 10% volume growth during the month that they were talking about. We moved 1.9 million more metric ton of grain this year versus last year. This is a solid performance. And as I said, we will appeal the decision. However, looking at long term, Vancouver is a very busy place. There's not that much industrial land left in the city. And as you could see from our Page 17 in the Appendix, we have a significant capital plan to serve both the South Shore and the North Shore of Vancouver for the next 3 years. No, we want to be part of the solution, and we will be part of the solution for the export terminal in Vancouver.

[Operator]

The next question is from David Vernon of Bernstein.

[David Scott Vernon, Senior Analyst]

Ghis, I would like to know if you can tell us kind of what impact weather had on the cost lines. Obviously, the constant currency variance on labor and purchased service, but surely weather had a lot of big impact on that. But is there any way you can dimension how the first quarter sort of margin, that the margin were negatively impacted by weather?

[Ghislain Houle, Executive VP & CFO]

Yes. David, I mean definitely the weather had an impact on cost, definitely had an impact on revenue as well, it had an impact on volumes. I mean if you can -- if you have to shorten your trains or in some cases, can't even move because it's minus 40 and it's not safe to move, then obviously, there is impact on revenue and there is impact on cost. You'll have more recrews, you'll have more deadheads. Your trains are shorter, therefore you need more locomotives, you need more cars. And then there's no clearance. I mean if you look at my remarks, I said there were more expenses related to snow clearing, related to repairs and maintenance and the likes. And we're not going to give specific estimate of the winter per se because at the end of the day, it's -- I mean it is what it is. And obviously, when it's very cold and you consume more fuel, and therefore, from a fuel standpoint, it's more expensive. So -- but I mean you can have the bits and pieces of our cost that are higher due to winter, and I'll let you do the math but these are the big pieces.

[David Scott Vernon, Senior Analyst]

Okay. And then maybe just as a quick follow up. If we think for the full year ex-PTC depreciation add back, depreciation's up about 10%. Is that a good run rate for the full year?

[Ghislain Houle, Executive VP & CFO]

Yes.

[Operator]

The next question is from Seldon Clarke of Deutsche Bank.

[Seldon T. Clarke, Associate Analyst]

Just getting back to margins for a second. With everything going on across the industry in regards to the PSR, do you feel like the floor for OR has been lowered at all from the high 50s level you guys have previously talked about? And if so, you think CN can return to sort of being an industry leader there?

[Jean-Jacques Ruest]

Well, where's the floor? It all depends how much risk you want to take the business. So one can have a lower floor and then take the risk and not be able to meet demand or not being able to respond to pressure when demand and harsh condition come in. So we had a plan that we want to be a cost leader but a cost leader that also takes things in balance from how we serve our customers and move the economy, but also be a leader that's also looking at the return investment capital as much as EPS growth, as much as operating ratio. So the one trick pony of operating ratio only does not necessarily give you the best EPS growth. And when we have investment that can generate a good investment capital and take in to our cost of capital, we are inclined to do these things as opposed to sit on the sidelines and shave off one more point of OR. So this is -- we're sort of evolving from what we were doing the last 15 years. And we're looking at cost efficiencies, organic growth, some acquisition, strong focus on return on investment capital but also a strong focus on operating ratio. So what you see and what you think you're seeing is a more balanced scorecard than strictly pure PSR.

[Seldon T. Clarke, Associate Analyst]

All right. So that's still at high the 50s level is the right way to think about it longer term?

[Jean-Jacques Ruest]

We don't guide on the -- we're not going to get drawn in into the PSR discussion, on how low can you go on the limbo contest. We'll leave that for others.

[Operator]

The next question is from Brian Ossenbeck of JPMorgan.

[Brian Patrick Ossenbeck, Senior Equity Analyst]

J.J., just want to go back to the Vancouver investments you called out in the slide deck. Would you characterize these more improving fluidity and resiliency or you're actually expecting to get some capacity expansion and growth off of that? And to that point, you had mentioned on the CTA, when do you expect the resolution of that appeal? And is this a signal they might expect a more aggressive and more involved regulator as a result of what just happened earlier this year?

[Jean-Jacques Ruest]

Yes. As it relates to the appeal, these things take time, and I'll take whatever time it takes. That's not really -- that's not a concern for us. What's a concern for us is that the process is fair and reasonable to all, including the railroad.Regarding the capital investment we're making in Vancouver -- and also, I want to recognize that we're doing this in conjunction with others. I only have, in one case, it's about CAD80 million. It's between CN, the Port of Vancouver and the federal government. And it is to serve the expansion in the South Shore center or DP World is expanding their container terminal. So when they're ready some time in 2020, we will be ready with them as well.And the GCT, who owns Vanterm, is also planning some expansion. So these things are really in sync with other people's investment on the South Shore. And same thing on the North Shore. On the North Shore, it's even more capital money. It's about CAD200 million over 3 years, again, here with funding from the Port of Vancouver and CN and the federal government of the 200, we're roughly CAD85 million. And that really is to serve the export of natural resource in the bulk. You're talking more coal going to the North Shore of Vancouver, the G3 grain terminal and a number of other items. So the investment on the North Shore and the South Shore, eventually, are part of the CN long-term or midterm growth plan, and we're investing in conjunction with others. But again, as I said earlier, we moved 1.9 more million ton of grain this year, this [ quarter ] than last year. And we're not getting a whole lot of noise from the grain industry about our performance the last winter even though we had some supercold condition. And back in November, December, which was a period of which CN was criticized, we did more 10% more volume than the prior year. So from our point of view, these are pretty reasonable performance and this whole investigation was maybe uncalled for from our own point of view.

[Operator]

The next question is from Brandon Oglenski of Barclays.

[Brandon Robert Oglenski, VP & Senior Equity Analyst]

J.J. or maybe Mike, you guys have historically spent more than maybe some of your North American peers but you've also gotten more growth out of it. So I mean I know there's been a lot of questions on capital this call but -- and I don't want to steal the thunder from your Investor Day either, but can just talk to where you still see the pinch points in the network? And if the outlook for 2020 was to be high-single digit RTM growth, would we have to be spending at a similar level or is it really some upfront tech investments that have made the past couple of years so much higher and that should come down looking forward?

[Michael A. Cory, Executive VP & COO]

Yes. It's Mike here, Brandon. We'll just go back to -- I think Ken asked the question, I didn't mention. Like, if you look at corridor that we're putting the capacity into, Western Canada handles 50% of our volume. If you stretch that out through Wisconsin to the route to Chicago, you're not talking 55% to 70%, and those are big growth lanes for us. So in one sense, we're picking up volume but we're catching up to just the capacity we need to be efficient and reliable. There's a technology jump over the last few years with PTC. We've spent a good amount, and that's starting to come down. Then the other technology that -- we're looking for effective capacity with that, so whether it's the train inspection portal, some of the things we're doing, from equipping our crews with the handheld devices, whether they're car mechanics or conductors, then autonomous track inspection. Those are things to really take advantage of the capacity, the hard capacity we're building in the ground. I see it catching up this year with this next round. Again, it's all dependent on future volume growth but we really hit hard the area that's the toughest. And as J.J. said, whether it's the winter conditions across the Prairie, I will just remind you that we're still only at 35% double track capacity there. And that's not as resilient as we need it to be.

[Jean-Jacques Ruest]

And maybe, Brandon, to go to your question on CapEx for 2020. As we've said previously, I mean, the big capacity, big CapEx program, we said, was for 2 years, 2018, 2019. We are now in our second year of our CapEx catch-up. 2020, we said, we were going to go back in the range of historical levels but obviously, we will look at the growth that comes at us. And again, I want to remind everybody that our use of cash policy has never changed. The first use of cash is towards the business and that's what we've done. And when you look at our ROIC, that has delivered in [ spades ]in the range of 15% to 16%. So we're continuing to do what we said we're going to do. And next year, we've said that we will go back to historical levels but obviously, we'll look at the growth that comes at us and we'll assess as that growth and as we have a better visibility of that growth.

[Operator]

The next question is from Tom Wadewitz of UBS.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

I know you've touched on the topic quite a bit so maybe I'm just not understanding what's implied within the comments. But you clearly identified the capacity on crude and you've reiterated the high single-digit RTM guidance for the year. Are you assuming in that RTM guidance that you see the ramp up towards that 300,000 barrels a day capacity in crude? Or are you assuming that you stay at the current level and you can get there other ways? Or how do we think about linking those 2 together?

[Jean-Jacques Ruest]

James, do you want to talk about maybe how some of the middle ground in terms of crude?

[James Cairns, Vice President of Petroleum & Chemicals]

Yes. So if you kind of think about how we're thinking about crude is we build the capacity for our customers. We're very hopeful that they're going to be using it from the second half of the year. We have some solid contracts that kick in starting in July but that's not kind of built in that core guidance that we have. If you look at our core run rate, I think that's kind of the bottom end of what we're going to achieve. I think when we talk about having capacity to go up to 300,000 barrels a day, that kind of gets us to that next level, I would say. And then quite frankly, if you step back and you just look at the supply/demand for crude, whether it comes in July of this year or January of next year, it will be there.

[Thomas Richard Wadewitz, Managing Director and Senior Analyst]

Right. Okay. But you get to the high single-digits without a ramp in crude?

[James Cairns, Vice President of Petroleum & Chemicals]

That's correct, Tom.

[Operator]

We have no further questions registered at this time. I would now like to turn the meeting back over to Jean-Jacques Ruest.

[Jean-Jacques Ruest]

Well, thank you for joining us on the call. I'm hoping that many of you, if not most of you, could join us on our Investor Day on June 3 and 4. On the afternoon of the 3, you'll have a chance to meet our team of railroaders as well as to see the different item of technology that we're deploying. And on the 4, we'll do our usual presentation and give you our outlook for the next 2 years. So thank you very much. Thanks for joining us. See you back in early June. Operator, we turn it back to you.

[Operator]

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