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Canadian National Railway (NYSE:CNI)

Q2 2012 Earnings Call

July 25, 2012 8:30 am ET

Executives

Robert E. Noorigian - Vice President of Investor Relations

Claude Mongeau - Chief Executive Officer, President, Director, Chairman of Donations & Sponsorships Committee and Member of Strategic Planning Committee

Keith E. Creel - Chief Operating Officer and Executive Vice President

Jean-Jacques Ruest - Chief Marketing Officer and Executive Vice President

Luc Jobin - Chief Financial Officer and Executive Vice-President

Analysts

Turan Quettawala - Scotiabank Global Banking and Market, Research Division

William J. Greene - Morgan Stanley, Research Division

Benoit Poirier - Desjardins Securities Inc., Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Scott H. Group - Wolfe Trahan & Co.

Cherilyn Radbourne - TD Securities Equity Research

Christian Wetherbee - Citigroup Inc, Research Division

Fadi Chamoun - BMO Capital Markets Canada

Ken Hoexter - BofA Merrill Lynch, Research Division

Jacob Bout - CIBC World Markets Inc., Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

David F. Newman - Cormark Securities Inc., Research Division

David Tyerman - Canaccord Genuity, Research Division

Operator

Welcome to the CN Second Quarter 2012 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Robert Noorigian, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigian.

Robert E. Noorigian

Good morning, and thank you for joining us for CN Second Quarter 2012 Financial Results. I'd like to remind you again about the comments that have already been made about the forward-looking statements. With us this morning is Claude Mongeau, our President and Chief Executive Officer; Luc Jobin, Executive Vice President and Chief Financial Officer; Mr. Keith Creel, Executive Vice President and Chief Operating Officer; and Mr. J.J. Ruest, Executive Vice President, Chief Marketing Officer.

In order to be fair, as we've done with the other quarters, could you please limit your questions to one each. And with that, it's now my pleasure to turn the call over to Mr. Claude Mongeau, our President and Chief Executive Officer. Claude?

Claude Mongeau

Thank you, Bob, and thank you to all of you for joining us bright and early on this call. It's sunny in Montreal, and the leadership team here at CN is pleased to be with you to discuss our results. I think our second quarter results show a lot of strength. We are very proud that our team of railroader has been able to deliver strong operating, service and financial results throughout the quarter.

If you look at the key highlights, our revenues are up 10% on a year-over-year basis, if we look at them on a constant currency basis. We were able to accommodate that growth at very low incremental costs, and the proof of that is our operating ratio at 61.3%, which is the same as what we did last year. You bring these 2 elements together and that allowed us to show forth a -- adjusted diluted EPS of $1.50, which is up 19% over last year. And free cash flow was -- for the first 6 months was just over $700 million. So clearly, again, if you look at it from a service standpoint, if you look at it from an operating standpoint, and Keith will discuss some of those trends in a minute. And you look at it from a financial standpoint, our agenda is working. We do have momentum and we are pleased with these second quarter results at this point in time. So Keith, over to you.

Keith E. Creel

Okay. Thanks, Claude. Listen, as we close out the first half of 2012, I'm not going to hesitate saying I'm extremely proud of our operating team's performance in the second quarter.

Our team produced solid results in what proved to be a record quarter in CN's history. We moved more traffic than we ever have before, handling on average over 1 billion GTMs per day. Intermodal, Automotive, Coal, Petroleum and Chemicals, and our Metals and Minerals business units all registered double-digit gains in revenue 10 miles driven by economic growth, market share gains and a labor disruption of the key competitor.

And I'd be remiss not to point out that we handled this record volume while continuing to gain traction in our service and operational excellence agenda. So let's spend a few moments reviewing the highlights of the key productivity metrics we speak to each quarter.

As you can see, the team produced year-over-year improvements in virtually every productivity category. We're moving bigger trains, handling increased volumes to our terminals, 7% faster. We're using less yard resources per car handled. These improvements in our productivity, again, I'll remind you are being done at the same time we were absolutely focused on improving the reliability of our first-mile/last-mile performance.

Locomotive productivity improved in car velocity, I'll note, is at record levels. And again, this is being accomplished against a backdrop of our improved customer service in terms of car supply performance, which is helping drive a lot of our revenue growth. In the second quarter, we achieved 96% corridor fulfillment performance and provided empty cars by the requested date and times of our customers, with an 86% reliability level.

The only metric we didn't see improvement on is our industry train speed, which as we all know is a standard AAR metric that measures train speed performance and, emphasis added, terminal-to-terminal.

As you can see, while absorbing an over 8% GTM growth, second quarter this year versus last, we were down slightly. This is driven more specifically by line segments where we've experienced concentrated significant growth in 2011 and, again, in 2012, which has created a strain on our long train line capacity, which impacted this metric. One meaningful example of this is our BC North territory running to Port of Prince Rupert, where in large part, coal, grain and intermodal growth is driven 13% volume growth in 2011 and an additional 17% in 2012. So effectively, 30% volume growth in a 2-year time span.

To manage this growth, we're in year 2 of a 4-year capacity improvement plan. We've got 7 additional long sidings that will come online late third quarter, early fourth quarter this year that will increase our long train capacity, which, obviously, will help us drive our industry train speed back up and add capacity for continued growth in this key corridor.

So with that said, we have and we'll continue to report industry train speed externally to allow an apples-to-apples comparison to other roads. But in line with our supply chain, end-to-end mindset at CN, we've also established a network train speed measure 2 years ago that is an all-inclusive train speed measure which is meaningful to speak to. So whereas the industry train speed excludes time spent in terminals or accrued change points, network train speed does not. It captures both road and yard time for our trains. What is meaningful about this at CN is during the same time we were slightly down on our industry train speed, we've made gains on network train speed in spite of this GTM growth that we've experienced across our network. Our network train speed actually improved just under 3% quarter-to-quarter despite this growth.

So the network train speed improvement, what it's done for us is help us fuel some of the additional customer flexibility J.J. and our marketing team are converting into carload growth. At the same time, it's contributing to improvements at our core metrics that you see in car velocity and locomotive productivity.

Another example of investing in our network for the future are the upgrades that we continue to pursue in the Chicago terminal leveraging benefits of our EJ&E transaction. Work will be completed this year on several more key connections, which will enhance our already very liable and efficient rail corridor around the city of Chicago that connects the north, east, south, and western portions of our network to one another.

In line with these improvements, we're working closely with our rail partners in Chicago developing new interchange agreements that make use of this new infrastructure, which improves the efficiencies of the traffic flow between CN and our connecting carriers in this key corridor. Beyond the connection side of this transaction in August 2011, we announced our plans to invest $165 million over 4 years to expand Kirk Yard. I'm happy to say that this work is well underway. This fall, we'll complete reconstruction of our hub facility, which will add more capacity to help additional cars, currently the capacity is about 1,000, 1,200 cars. We're creating a yard that will have a capacity to hump consistently 2,500 cars a day.

Effectively, we're going to expand receiving and departure tracks in line with this expansion this year as well and open our new administration building there in the facility. This sets the stage for Kirk to be a significant player for us at the key switching facility in this key Chicago corridor, allowing us to consolidate our switching activities to this efficient modern facility.

These types of strategic investments continue to position us well for the growth that J.J. and his team continue to deliver on. So with that, I'll turn it over to J.J. to expand.

Jean-Jacques Ruest

Well, thank you, Keith. And thank you for moving 1 billion GTM on average per day during the second quarter. And good morning to everyone who is on the phone with us today.

In the next few minutes, I will review the revenue, give you an outlook, and I will also touch on some initiative that we have to give you more color on how we intend to keep growing the top line.

As Claude mentioned, the second quarter was really solid. Not only was our strategic agenda working, but we also had a phenomenal strike performance during the CP strike. With only 72 hours, Keith and my commercial team jumped into fray, serving preselected trusted partners and producing an incremental $40 million.

In summary, the second quarter revenue were up 13% versus last year and 22% versus 2010. About 5.5% came from volume, the RTM increased 8%, the length of haul was up 7% and the carload was up 4%. Same store price on same store sales increased almost 4%, in line with our guidance of inflation plus pricing. 2% came from fuel surcharge. Mix was slightly negative. And finally, the 3% came from exchange of Canadian dollars, was $0.043 weaker this year. All in all, a solid quarter.

Now let's review the revenue by segment. And as always, I will do that on the FX-adjusted basis. Starting with Petroleum and Chemical revenue, which were up a big 16%. The length of haul in P&C was up 9%, therefore, producing solid RTM growth of 14%. We had some brand new long haul crude movement, as our team initiated sales from 2 new crude loading station, one of them in Sixsmith, Alberta, the other one in Unity, Saskatchewan, both shipping conventional heavy crude. By using rails, small and mid-sized crude producers get a better netback for their barrel. That's why they use rail for better netback.

Iron ore revenue increased 8% but the iron ore carload decreased at the end of quarter. Metals increased 4% but was up 28% versus 2010. We experienced sustained demand from the automotive sector, energy and industrial construction in Alberta. Minerals was up 34% from last year and 51% from 2010, a phenomenal progression namely in frac sand and construction aggregate.

Forest product revenue was up 6%, the U.S. harving [ph] stock drove a 13% increase in our lumber and panel carload to United States. Automotive revenue gained 15%. Our carloads were flat, but the length of haul was up 15%, producing nice RTM volume at 16% higher.

The story for coal remain exciting, supported by our infrastructure export supply chain strategy. Core revenue was up 13% in the quarter, driven by a 14% increase in revenue ton-mile. The 30% drop in our carload of domestic terminal coal was made irrelevant by the success of our export strategy. In any event, the domestic coal is now only about 1.5% of the total CN book of business. Pet coal from the oil sand also increased 25% in carload using our recent Fort McMurray infrastructure investment. Canadian grain revenue was down 3%. U.S. grain revenue was down 6%. We had weak export for corn and peas, but we had good export for Canadian barley and Canadian canola. Fertilizer was almost flat. The North American market is still soft, but we moved the Canpotex exports during the 9-day CP strike. Overseas, intermodal remained very strong and sustained. Our revenue came in 15% up from last year and 35% up from 2010. The CN transpacific volume outpaced the North America West Coast run rate average again, and Rupert is just a phenomenal product in the marketplace with very strong support from service-sensitive [indiscernible] owner.

On the East Coast, our transatlantic business was flat. Domestic revenue was also just as robust as the overseas revenue. We had a 14% increase over last year and 30% increase over 2010.

The domestic story is quite simple. It's driven by new product, new geographic coverage and new services. On the operating side of intermodal, our train length was up 2%, and, even more relevant, our revenue CEU per train was up 4.5%. But all in all, what is truly driving our growth is our people. We have one of the best team in the industry.

Now if we could move on to the outlook, and I will start with the page on intermodal. For CN, the second half outlook is positive. The overall fall peak will be higher than last year, but will only be somewhat higher. On the West Coast, the CN transpacific supply chain should outperform the market again. On the East Coast, we have weaker European fundamental, and the growth will be less.

On the bulk. I'm now looking at a page on bulk on the outlook. I would like to start with an -- giving you an update on our coal export initiative. When we sold the Convent terminal in 2011, our strategy was to have it expanded into a major coal export fleet. We were targeting 8 million ton of export within a few years. We are well ahead. In 2012, we're in phase to do about 7 million tons, which would be about $50 million of incremental revenue over 2011.

On potash, we now have a solid long-term partnership with Canpotex, which is in place as of the 1st of July. Asian demand for Canadian met coal and for Canadian oil sand pet coke remain in place. In the U.S., electricity production from natural gas is now in the range of 30% to 32% of the total production, which is same -- almost same as with coal. In my opinion, the hot summer will not reverse the fundamental trend. Cheap natural gas is the new normal. Therefore, the striving coal producer of the future will be those with very low production cost for BTU and those with solid export solution already in place.

The U.S. Midwest heat is burning the corn crop. And versus last year, our corn will be worse. However, the bean might be better. I took down my second half internal forecast to be more in line with last year's revenue on U.S. grain.

The Canadian crop looks good, and we do have the higher carryover from last year, which is what we're moving in July and August. Our fleet is pre-inspected, pre-deployed and ready for record. With the Canadian Wheat Board monopoly coming to an end, the October-to-December fall peak, we believe, might be more pronounced.

Now looking at the outlook for the Manufacturing sector. First, an update on our frac sand initiative. As an example, we are close to investing $35 million in Wisconsin to reopen a 40-mile subdivision and serve some new frac sand plant to be opened by year end. More detail coming later as in the weeks to come.

Regarding our crude by rail initiative, you will remember that you have seen our press release in conjunction with Southern Pacific, putting a new supply chain in place for market underserved by the pipeline industry. The bottom line is better netback per barrel is why producers use rail. And this year, we are tracking to be about $140 million above last year in crude by rail by year end.

Paper is in its usual secular decline. Iron ore and sulfur will decline but eventually will cycle backup. The automotive revenue will be strong, but strong from a RTM point of view, while the carload will be near flat.

Lumber and panel will be strong, driven by U.S. shipment, and we also still have 5 to 7 panel mill idle on CN. This is about 15,000 carload, old car, if you wish, waiting for the future development in the U.S. housing start.

I also want to make a general statement on the volume outlook. Iron ore and domestic coal carload will drop, but long haul export coal, long hold crude by rail and long haul intermodal will overcompensate in RTM volume growth.

To understand CN's true volume growth in the second half, you will need to pay more attention to our weekly revenue ton-mile.

In conclusion, another solid quarter, phenomenal strike performance, positive volume outlook ahead and more proved point that our strategic agenda is working. Now I'd like to take it over to Luc.

Luc Jobin

Thanks very much, J.J., and good morning to everyone. Now turning to Page 14 of the presentation. Let me walk you through the key financial highlights of our quarterly performance.

Revenues were up 13% to $2.5 billion, and that's 10% on a constant currency basis. A moderate growth in the economy and volume gains during one of our competitor strike constituted a favorable set of conditions in the quarter compared to last year.

J.J. and Keith and their teams combined efforts to help us achieve solid volume increases in practically all commodity sectors. And once again, several categories performed better than base market conditions.

Operating income was $985 million, that's up 13% versus last year, driven by strong revenue growth handled at low incremental cost. In fact, our operating ratio for the quarter was 61.3%, and that's in line with what we have seen last year. During the second quarter, we had an unfavorable one-time tax adjustment of $28 million or $0.06 of EPS. This was needed to adjust our deferred income taxes as a result of the enactment of higher future provincial corporate income tax rates. But this was also partially offset by a small tax recovery resulting from the recapitalization of a foreign investment. So our net income for the second quarter of 2012 was $631 million, up 17%, and the reported diluted EPS was $1.44, up 22%. Excluding the one-time tax adjustment, the adjusted diluted EPS for the quarter stood at $1.50, that's a 19% increase over 2011 and that's up 17% on a constant currency basis.

The impact of the foreign currency was actually $13 million favorable on net income or $0.03 of EPS in the quarter. Even when excluding the favorable foreign exchange, the fuel lag benefit, which was actually about $0.04 per share in the quarter, and the CP strike, our adjusted diluted EPS would be up about 10% versus 2011, which actually is remarkable given the pension headwind that we have been facing this year and given a very modest economic backdrop.

Now let's turn to the operating expenses on the next page. As Keith pointed out, we came through with another solid quarter in terms of operational productivity and customer service. Yet this performance did not come at the expense of overall cost management. Our operating expenses were $1,558,000,000, up 12% versus last year or 10% on a constant currency basis. At this point, I'll refer to the variances in constant currency.

Labor and fringe benefit costs were $504 million, that's up 15% higher than last year. The overall wage cost was actually up 6%, and this was the result of wage cost inflation of about 3% and a 2.5% higher headcount in the quarter versus last year. Our average headcount was just over 23,745 employees. So up 2.5, while at the same time, we were growing our GTMs by up to 8%. So the headcount dynamics continue to be driven by advanced hiring and head of attritions who allow for training, along with our assessment of future volume growth.

Meanwhile, fringe benefit costs, including pension, accounted for 8 percentage points of the increase, mostly due to the amortization of the accumulated actuarial pension losses as expected. This also included a higher stock -based compensation expense, which was of 1 percentage point unfavorable during the quarter.

Our purchased services and material were $305 million, up 12%. This was mostly a factor of higher volumes leading to more repairs and maintenance and higher contracted services relating to non-freight volume increases.

The fuel expense stood at $379 million, an increase of 3%. Higher volume represented 8 percentage points of the increase in the quarter, but this was partly offset by a lower price and improved fuel efficiency. Actually, the fuel efficiency was favorable 1.5%, which is very good given the much higher intermodal volume that we carry during the quarter.

Casualty and other costs were $81 million, up $19 million versus last year, as we incurred higher expenses relating to environmental issues. And we also recorded a higher personal injury claims cost resulting from an actuarial study that we have done in the quarter.

Turning to free cash flow. In the first 6 months of the year, we generated over $700 million of free cash. This compares to $823 million last year. The difference comes principally from higher net income and lower tax payments offset by higher working capital, which mostly resulted from the voluntary pension contribution of $450 million, which we made in the first half of the year this year, versus last year it was actually done in the second half of the year.

Our balance sheet remains strong, and our debt ratios are well within our internal guidelines. We also bought back 4.5 million shares in the quarter and we now stand at about 75% of our stock buyback program for the year, which is supposed to end at the end of October for 17 million shares.

Finally, let me speak to our 2012 outlook. We continue to see modest improvements in the North American economy. While we do not assume at this point a significant change to prevailing condition, there is a risk that things could slow down somewhat in the second half of the year in North America. Obviously, we're also keeping an interested watch on China as it attempts to re-energize the pace of its economic growth.

All in all, we're still looking at mid-single-digit carload growth in 2012 and pricing above inflation. But we do have more difficult comparatives in the second half of this year, as we grew revenues by 9% and 12% in the last 2 quarters of 2011. With this in mind, we're now revising upward our guidance on the basis of our strong performance in the first half of the year and assuming continued positive economic conditions in the second half of 2012. Our annual 2012 guidance, therefore, now has us aiming to deliver double-digit diluted EPS growth of up to 15% over the 2011 adjusted diluted EPS of $4.84.

And this, despite the pension headwind of $100 million that we are facing in 2012. This implies high-single-digit EPS growth in the second half of the year, but keep in mind that we will be lapping strong EPS growth in 2011 of 16% in the third quarter and 20% in the fourth quarter.

We're also calling for free cash flow to be in the order of $1 billion. This takes into consideration our capital investment program of approximately $1.8 billion. It also considers a potential additional voluntary pension contribution in the order of $250 million, which could occur in the latter part of 2012. And this, on top of the $450 million that we have done earlier this year.

Given that we're on the top, please allow me to say a few more words on the pension area. As you know, interest rates continue to decline and market returns have been both subdue and volatile. In fact, on the basis of current conditions, we foresee another pension headwind for 2013 of the same magnitude that we experienced in 2012, so in the range of $100 million. This would bring our pension expense roughly in line with our cash contributions for current service cost, which is approximately $145 million.

In any event, in closing, we're very pleased with our second quarter results for 2012 is also lining up to be a good year, and we maintain our focus on delivering superior returns no matter what economic conditions we have. On that note, I'll turn it back over to you, Claude.

Claude Mongeau

Thank you, Luc. And our team -- as you can see, the team is clearly ready to seize on the opportunity and we've shown that in the second quarter. We did achieve record volume in terms of throughput during the second quarter, the best performance this railroad has ever seen. In fact, if I look at the first 6 months of this year, each and every one of those months on an RTM basis has been above our previous peak in the history of CN. We've also had record operating and service metrics, and this is what drove the excellent financial results that we have just explained to you.

The confidence we have based on this first half result is what allows us to have a revised outlook, which is upward from previous guidance. We are confident if the economy holds that we can get close to that 15% EPS growth on a year-over-year basis and deliver that $1 billion of free cash flow, even though we will have to most likely contribute another $250 million for our pension contribution.

So all in all, clearly our strategic agenda is gaining momentum. We are delivering shareholder value. Our agenda to help our customers win in their end markets with industry-leading service and supply chain performance is what drives this performance, and we see solid shareholder value for many years to come. With that, I will turn it over to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question from Turan Quettawala of Scotiabank.

Turan Quettawala - Scotiabank Global Banking and Market, Research Division

I guess, my question is just a little bit in terms of the risks. We've seen the economic environment sort of unravel a little bit here. Just wondering you always have been pretty solid, obviously. Looking into the next 6 months, which areas of your book do you think carry the most risks?

Luc Jobin

J.J. could comment further. But I would tell you, if I look at our volume performance and I extend into the beginning of the third quarter when I make these comments, we are seeing constructive growth pretty much across the entire book of business. Now that doesn't mean our customers are not mindful of the prevailing wins and focus on what could have been with the uncertainty that's out there. But certainly, we haven't seen -- our channel checks, we haven't seen evidence yet of any slowdown except for the non-economic sectors that J.J. alluded to, the grain crop, the difficulties in the U.S., for instance, for corn, et cetera. The rest of our book of business is actually quite constructive.

Jean-Jacques Ruest

That's right. Turan, it's J.J. The -- on the intermodal side, we will grow both domestic and overseas. It may not be the most fantastic peak, but as we do usually at CN, we're going to be helping ourselves and ride whatever peak come at us and do better than the average of the industry. On the grain, it's kind of good news, bad news. Canadian is good news and U.S. is bad news, so we'll take the 2 together. And on the merchandise and bulk side, as I went to the review. I think you've seen some areas where we have lagged and some other areas where there's some weakness. All in all, whereas intermodal bulk of merchandise, all of them should be growing in RTM and revenue obviously.

Operator

Our next question is from Bill Greene of Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

I'm wondering if you can comment a little bit about will there be any change in sort of your marketing strategy or your operating strategy now that you kind of have a very clear idea of what the competition is likely to do since you work so closely with him? Does it create opportunities to collaborate more with them or does it create opportunities to sell against their reputation?

Claude Mongeau

Bill, the -- as I said before, we have one franchise to manage, and we got our hands full doing that. And it's going well for us. The team has good chemistry. We have good momentum. We have a game plan that's pretty clear. We have a network reach and span that takes us across North America, and we are focused on delivering value to our customer day in, day out. So we are obviously mindful of the changes at CP. We think it's constructive for the industry. I'm convinced Hunter will focus on service, and I know he's mindful of the value of the services we provide with all of our hard work. And we will just wish him and the rest of the CP team good luck and focus on our own agenda.

William J. Greene - Morgan Stanley, Research Division

Yes. I just didn't know if there was a place of sort of collaboration where you could end up with maybe some operating gains that we hadn't thought through.

Operator

Our next question is from Benoit Poirier of Desjardin Capital Markets.

Benoit Poirier - Desjardins Securities Inc., Research Division

Could you maybe give an update on the opportunities in Northern Quebec with the [indiscernible]? More color about the milestone and also in terms of timing.

Claude Mongeau

Yes, Benoir, that's a good question. We focus on our second quarter results and we deliver value day in, day out. But we also have to have a pipeline of longer term opportunities, and this is clearly one of those with Northern Quebec, Labrador Iron Ore. Then we've been at it, working very hard with the miners that are looking to develop mines in that territories for almost a year now. I think we have a compelling offer that we have put forward with our partner, like [indiscernible]. And we do have a few mines that have signed up with us, but we do need several of them to join us if we are going to be able to make it an economic undertaking. That is pay for the share and the pay for the feasibility study and ultimately, share in the financing and the development of what would be a very significant undertaking. I'm talking here if it was the southern leg of that railroad, we are talking in excess of $3 billion in investments. If it went all the way north of Shepherdsville, we're talking in the range of $6 billion. So obviously, large investments, and we need the support of the majority of the mining customer in that territory. At this point in time, despite the compelling offer that we put in place, it would seem that some think they still have alternatives that would be much cheaper than what we believe the cost of this infrastructure will be. Some may be a little bit -- and I hesitate to say it that way, but that's what it is, free riding on the side, thinking that maybe CN will get moving even if they don't sign up so that they could share in the small cost of the feasibility study. And so what we've done recently is effectively put a deadline out there. We will give it another week or 2 for people to sign up. If they do, we would move forward, file an application, do the feasibility study and continue to update you. If they don't, we will wish them good luck and move on to other opportunities.

Operator

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

Walter Spracklin - RBC Capital Markets, LLC, Research Division

So my first question, I guess, is on sustainability. I mean, you've posted what is clearly a very strong volume year here. Part of it, great railroading, great service. Part of it, some of the problems that CP is having. I think your guidance this year is in line with where everyone was expecting. The real question may come, the sustainability of some of those volumes, particularly on the intermodal side, given CP's efforts to recoup their lost market share. My question is whether you can -- is there strategic assets that you have, and I want to point toward Prince Rupert in particular, that you can use to leverage or maintain market share gains because of that non-replicable service that you can offer going up to Prince Rupert? And is there -- and I'm -- is that the right way to look at it? And can you expand Prince Rupert further and do you have plans to do so, if that is indeed the case?

Claude Mongeau

I think, Walter, that Prince Rupert is certainly a key competitive advantage for CN. There's no question about that. And we are making a good use of it. The terminal, as of late, has been running at an annualized run rate of more than 600 CEUs per year. And there is the subdued peak that J.J. is thinking about for the fall. We might get awfully close to that capacity at least on an annualized basis in Q4. Rupert is investing. They're going to get another crane in the fourth quarter, and we continue to see growth opportunity in that territory. But I would say that our agenda, though, and our success in outpacing base market condition is much broader than just Rupert. We are growing our Vancouver gateway very nicely -- in fact, if you look at it at the moment, the -- our Vancouver franchise -- our Vancouver relationship for corridor is just as large as Prince Rupert, even for the U.S. in terms of U.S. gateway traffic. We are growing beyond intermodal and gaining -- outpacing base market condition in merchandise. We're doing so in bulk. And it's not against CP. It's against -- it's our customers that are winning in the marketplace, and it's against all railroads and it's against trucks. It's the broad-based strategy. It's anchored on a solid game plan, and I think it's highly sustainable.

Operator

Our next question is from Tom Wadewitz of JP Morgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask you, J.J., you've got a lot of positive things to talk about. I think you had a brief comment on capacity and that could -- if we could see some volumes in the housing side and some idle panel mills. Can you give us a further sense of, I guess, what you're seeing in terms of lumber or associated volume increase related to an initial move up in U.S. housing market? And then if there is some further momentum, how would you frame the opportunity, let's say, next year for what you could see on lumber and panel and so forth?

Claude Mongeau

We do have still idle capacity on our line for even for lumber. We obviously have a lot of capacity in our line for panel, which I would broadly estimate depending on how many would come back, if there was a demand of 15,000 carload annualized. Another aspect also is that there could be some shift of lumber from Asia back to United States. We did see in the second quarter, a reduction in our carload to Vancouver going to China, and some of that lumber going to United States because of better net back to the producer. So when you add all these things, I mean, definitely, [indiscernible] this better because of the demand. Definitely, it is better because it's better net back in China at this point. So you have length of haul, you have idle capacity, and that idle capacity is even more prevalent in panels because panel had a bigger drop, if you wish, during the housing recession. So the housing starts for us has been good the last 2 years. It has driven our volume in the U.S., especially lumber on a conservative basis. We did some model for both panel and lumber as to what point we would be so-called sold out with the capacity that we have in our railcar fleet, as well as sold out in term of when our customers' existing capacity would be sold out. And one does not need to get to 1.5 million housing starts to reach these -- to get this capacity out to the marketplace. But we'll see how the market evolves.

Operator

Our next question is from Scott Group of Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

So if we think about CN, you guys have been leading the industry by far on margins for years without much bulk business. It feels like bulk is really kicking in with long-haul export coal. Now, the potash is starting to ramp up and crude oil. And the weave board [ph] is going away, too. So once we get through these pension headwinds, should we think about a kind of a step function in terms of potential margin improvement going out the next few years? Or are we not thinking about the potential implications of more long-haul bulk correctly? How do you think about that?

Claude Mongeau

Well, Scott, let me make a few comments and then maybe J.J. will want to add to it. But essentially, again, we're showing some very good numbers in terms of operating ratio. And we have been, this year, able to absorb the pension headwind. I did mention that unfortunately, we're seeing a similar headwind showing up for next year, so we have our work cut out to continue to try to keep the operating ratio within the low to mid 60s. But again, we'll come up with the good. There's no question that the franchise has been very good and very strong in the shifts through longer haul, has helped us considerably. So I think it bodes well for us to stay within that sort of window of low to mid 60s. And hopefully, at some stage, we can see interest rates coming up a little bit and we can have a little bit more air to breathe in terms of the pension pressure. But I still believe that, that's going to be around for the next couple of years and we have to deal with it.

Jean-Jacques Ruest

Yes, we finally had the -- what we call bulk may not necessarily be in the train. A lot of the grain that we move is actually moving in merchandise. And we also track our revenue in term of train service. And our train service on pure unit train that was RTM up 10%. But the RTM also for the carload service, for example, moving probably in cars, also up 10%. So when we say bulk, often, we mean that from a commercial point of view. From Keith's point of view, when to him, unit train is -- there's a lot of bulk, that we so call bulk, that we don't move in unit trains. So we're not necessarily moving. This isn't doing a big shift here.

Scott H. Group - Wolfe Trahan & Co.

That makes sense. How about the weave board going away? Are there positive margin implications there?

Jean-Jacques Ruest

The weave board will be an important player in the marketplace. We understand it might be as much as 30% what they used to be, and they'll be one without asset. So they will change the marketplace, I'm sure. Time will tell more clearly. One of the things that we think will happen is that when the market really heats up and people want to sell product, that people will probably be more prevalent. Because the weave board was really a pool-type system, where the farmer was selling the weave board and getting an average price over the 10 months. Now most other companies on the grain side don't do that. They do catch save it on the pool sale, so people want to move into -- when the market wants to move, it might move at higher peak, and when the market is slow, the market might be a little slower.

Claude Mongeau

Although, I would say that the capacity to peak, and it's not a rail road issue, it's a supply chain issue. When you look at the ports and all the pieces coming together, there is a limit to what the supply chain can peak at. But I agree with J.J., that we should see more, if anything, potential for efficiency over time. But the fundamental structure of the grain business is not changing because of the decision to move away from the CWP [indiscernible]. Maybe a good thing long term, Scott.

Operator

Our next question is from Cherilyn Radbourne of TD Securities.

Cherilyn Radbourne - TD Securities Equity Research

So you're at record workload, which is pretty amazing. And the mix has shifted, which, I think, raises the question of capacity to some extent. And I realize that, that's a bit of a nebulous concept when you talk about a railroad, but if we set aside the BC North, is there anywhere else on the network where you foresee needing to put growth capital sometime in the next few years based on what you're seeing?

Claude Mongeau

Yes, Cheryl, there's some locations that certainly, we've got a plan to put some strategic investment into. Another key corridor of growth, that growth is moving over to BC North territory, concentrated in large part because of the coal that originates BC North and terminate, so to speak, exported to Prince Rupert. But if we take the other business, the intermodal business, you take the potash business, a key corridor forces the Winnipeg to Edmonton corridor. So we're taking and we've got a plan to invest there. Actually, I was out last week on the territory and rode a train from Saskatoon to Edmonton where we're bringing on a lot of that Canpotex business, where we're making a plan to put some strategic investment. As well in the south, on the south end of the railway, we've got significant growth with frac sand, with crude oil, the pipeline that's going to be going down the Geismar. So we're looking at that in conjunction with the client total growth to put some strategic investment, Illinois South and the south end of the railway. So we'll see some soddings, we'll see a little bit of improvement in our Harrison Yard facility for servicing trains and then down on the Baton Rouge side. And an industrial complex, which effectively, along switching weave we'll add some additional capacity to handle this growth with crude oil, frac sand, as well as the coal.

Jean-Jacques Ruest

Thank you, Cheryl. And to add up to that, that's one of the key assets of CN. We have targeted investments to make -- to keep our network in sync with the growth, but we have a lot of available capacity on a line basis or the -- our structural growth opportunity is significant across our entire network.

Operator

Our next question is from Christian Wetherbee of Citigroup.

Christian Wetherbee - Citigroup Inc, Research Division

Maybe just a quick follow-up to that. As you think about some of the opportunities to add incremental capacity, I mean, should we be thinking about CapEx any differently than we have? It sounds like they're going to be fairly targeted kind of investments, but I guess I just wanted to get a sense if you guys are kind of back at or at record volumes, how you think about CapEx? Does it change at all as we go forward over the next couple of years assuming continued growth in the economy?

Luc Jobin

Yes, I think -- I mean, we -- our view on CapEx, I think, was quite well described by Claude. We always try to anticipate where the business and where the puck is going to be heading, and then to be prepared to handle the growth in a seamless and low-cost fashion. So clearly, we're looking at the capacity issues. We're looking at where business is going to be growing for us, and I wouldn't, at this point, foresee any decline in terms of our capital expenditure program. First and foremost, we remain focused on the fluidity and the safety of our networks, so that's the base, and that takes, usually, care of about over $1 billion. And the balance is really to try to, again, to prepare the network to handle the business and the growth and to look for these opportunities where we can continue to take this franchise to the next level.

So we've been -- we'll be around the 18% to -- 18%, 19% of revenue in terms of CapEx. I mean that's kind of where I think things should be heading for us, and I wouldn't expect anything significantly different otherwise.

Operator

Our next question is from Fadi Chamoun of BMO Capital Markets.

Fadi Chamoun - BMO Capital Markets Canada

So a lot has been discussed, but a question on the intermodal side. We're seeing fairly big amount of investments going into the intermodal network in the U.S. by your partner carriers there. I was wondering whether there were sort of meaningful collateral benefit for CN Rail in terms of marketing some of the services you have on the international side from Canada into the U.S.

Jean-Jacques Ruest

Thank you, Fadi. It's J.J. Yes, there might be. Definitely, we like what see. For example, there's much -- some of the things that CSX did where they provide a good service connection from Chicago to go east, and some of the yard that they have in the market, their regions, makes it attractive to come from the West Coast. We also look where the KCS is going and whether or not there's a better market to be connected between Mexico and Michigan and Eastern Canada that CN and KCS kind of can capitalize. So definitely, some of this business might be network business beyond one railroad. And I mentioned 2 here, and it's for us to be able to access market that otherwise, obviously, we can't access on our own self. So there is some potential and these are being worked on.

Fadi Chamoun - BMO Capital Markets Canada

Okay. The other thing, maybe you can help us understand the magnitude of the crude by rail pie, and looking out maybe 2 or 3 years out.

Jean-Jacques Ruest

It could be quite a significant pie for CN. Everything we do today, by the way, is all in merchandise service. We're very good at merchandise service, and including that crude by rail is on merchandise train. It has been our fastest growing revenue segment this year, and we'll see how next year is. The crude producer like rail, especially for the thick, viscous bitumen from Alberta, as it does not require a condensate, which is expensive. And it gets them to market where they have access to the Brent pricing as opposed to WTI pricing. There's a huge gap between Brent and WTI. So it's not so much a question of transportation cost, it's a transportation cost when you back out the condensate and when you get to a market which is a Brent market as opposed to a WTI market. So when you look at it from the point of view of the junior and midsized crude producers, even more so those who are in Alberta, from the Alberta crude as opposed to Bakken crude, they're very focused on improving their net backs. So there is real potential there.

Claude Mongeau

And I would add to this, Fadi, that, I mean, we went from a concept a few years ago to aggressive trials by a number of customers over the last year or 2, to a real business now. As J.J. said, we see our crude business exceeding 30,000 carload this year. That's more than 50,000 barrels per day. So it's already a small pipeline if you think about it this way. And of course, we see a lot of potential growth into next year, just the carryover of that run rate leaving 2012. What's happening is really a game of net back. And we believe we are -- we can bring bottom line value to these producers long-term. It's not just about the matching a gap or an issue with pipelines to come. It's about supply chain, it's about diversity and it's about real dollars, the bottom lines of these producers.

Luc Jobin

That's right. We can execute very quickly. We have the rail line, we have the capacity, we have all the permit. We can get product anywhere in our rail line and connecting all the railroad. The pipeline industry is challenged with execution, timely.

Operator

Our next question is from Ken Hoexter of Bank of America.

Ken Hoexter - BofA Merrill Lynch, Research Division

Can you talk about, on the strike volumes, did most of that kind of migrate back to its original source? Did you keep any of that? And I guess following up on that, with the Canpotex contract that kicks off, any update on the Prince Rupert access link?

Claude Mongeau

Let me comment and J.J. can add the color. The -- we were pleased to be able to help in the circumstances. The railroads are typical -- are important supply chain, and we are a backbone to the economy. So when one railroad is facing a labor disruption, the fact that the other railroad is able to step up and provide service in those circumstances is a good thing. I'm very pleased with the way J.J. and Keith and their team came together to be able to do just that because it takes a lot of planning and a lot of execution focus. And it does show the resiliency of our business model. We were able to flex up for that 2-week period. Now much of that business, except perhaps a few customers, much of that business is now back over to their natural carrier, but it was a great opportunity for us to showcase our service. And we see it as a lead into a deeper relationship in the future. A good example is Canpotex. We were able to show them during the strike again, and I believe that their owners, whether it's Agrium, Mosaic or PCS, are all happy we were there to step in and protect their results in Q2. I believe Canpotex had a record export program in Q2 and for sure, we were there to help them. We are carrying that through with our normal contract at the moment and we are in discussion with them about Rupert and hopefully, we'll make a decision between now and year-end. Everything is lined up. We are working on the roadrail utility corridor. We are -- they are seeing as firsthand that the value of a diverse supply chain with 2 carriers. And I think we will extend that to a 2-corridor strategy in dialogue with them. But it's their decision and they will make it on their own timeline.

Ken Hoexter - BofA Merrill Lynch, Research Division

That's very helpful, Claude. If I could just follow up on grain yields. They're up about 3.5% at CN and over in double digits at CP. Would there be anything, I guess, J.J., that we could read into that? Is there any -- is it a mix difference or anything kind of contractually that you can kind of think of that causes a difference like that?

Jean-Jacques Ruest

Ken, I'm not sure I understood the question. The difference in yield, what -- could you...

Ken Hoexter - BofA Merrill Lynch, Research Division

Your grain yields for CN were up 3.7%. At CP, it was up over 13%.

Jean-Jacques Ruest

You're talking the revenue per carload or...

Ken Hoexter - BofA Merrill Lynch, Research Division

Yes, yes.

Jean-Jacques Ruest

Okay. Well, on revenue per carload, all I would read into that is the mix, length of haul, and I did adjust my pricing. It went into revenue cap for the second quarter, so that would be in excess of the cap so I took some pricing down to come in line with the regulation by August 1. And then August 1, we'll start a new year again. So all there is in there is mix, timing issues on how we manage the revenue cap. Could be length on haul. In July, our carload's actually quite up from last year because we do still moving last year's crop, same thing in August. So all in, we're very satisfied with our Canadian grain and looking good for the coming season. The coming season should be good for most because the Canadian grain, so far, anyway, touch wood, crop looks good.

Operator

Our next question is from Jacob Bout of CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

I was hoping you could provide a little more detail on the U.S. drought and some of the hot weather that you're seeing there, so specifically, thinking about the impact on ethanol, the movement of ethanol, grain. And I guess there is going to be some -- we're reading a bit about corn coming up from Brazil. Are you seeing any examples of that? And then the barge traffic on the Mississippi is -- with the lower water levels, is there positive impact there as well?

Claude Mongeau

Maybe if we start with the barge traffic. The barge traffic, I mean, is affective and it's not. It's all the same by region because there has been, if you remember, there was a lot of rain in Minnesota. In fact, I think Keith was traveling with some flooding that we had there on our own network. So some area had drought, some area had a lot of rain, and all of that eventually found its way to Mississippi River. So even though the Mississippi River, at this point, might be somewhat challenged on the level of water, it has not affected, the I would say, the railway or the rail volume. Not so far anyway. Corn looks -- doesn't look too good. The FDA numbers, USDA numbers will probably come down in term of the acres per -- yield per acres when the revised numbers come out. So the official numbers are probably higher than what they really are, but I think the market understand that, is just missing that and that's why the price of corn is up. And as far as corn coming from Brazil, I don't know if that's going to be the case or not. Regarding ethanol, definitely, I think the carloads for ethanol for most railroads during the second quarter were down. It is maybe known as a factor of the gasoline consumption, right? The overall gasoline consumption in the U.S. is not as strong as it used to be years back. So we have lower consumption of gasoline ethanol as a result, and the subsidized amount of ethanol that has to be in the pool is in the pool. Over and above that, you got to buy corn, quite expensive, and make ethanol. And that's probably not a very profitable business right now. So as long as you're winning the regular amount of the pool, it works out, but the total consumption is weak from that point of view. So the ethanol industry might be facing different time this year than they've had in the years past. I hope that helped.

Operator

Our next question is from Brandon Oglenski of Barclays.

Brandon R. Oglenski - Barclays Capital, Research Division

Luc, if we can discuss your expectations here on labor cost for the second half of the year, productivity was really good in the quarter, but I'm assuming some of that came on the back of the CP traffic for a while. Was there any extra overtime that you're running in the quarter? And as well, can you also talk about stock comp? I know year-on-year, you said the variance was minimal, but was it significant in the quarter itself? So how do we think about these things looking forward?

Luc Jobin

Yes, let me start with the stock-based compensation. The impact in the quarter was actually very small. It was a negative $4 million, so it's not significant and it accounted for about 1% of the change -- unfavorable change in the labor variance. I think in terms of productivity, we did not have a significant amount of overtime in the quarter. We had a little bit, but not very much. And again, as we look through the back end of the year, I mean I would expect our numbers to continue to show some good productivity. It really depends on the business that comes our way, and we have demonstrated the ability to absorb that business with minimal increase in staffing. So we keep going at a little bit faster pace in terms of lining up our resources to make sure that we have time for training of the folks. It takes about 6 months to train the conductors, so -- and we continue to see attrition running at about 500 people or so per quarter. So those things are what is driving the changes in terms of headcounts. But productivity is going to continue to be part of the equation for the back half of the year. There's no question about it.

Operator

Our next question is from Matt Troy with Susquehanna.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

A quick question just on end market exposure in coal. I was interested in your commentary on how small the domestic component has become as part of the mix. Could you just refresh us in terms of your export coal business that has been fairing so well? What percentage of it is met versus thermal, roughly? And in terms of end market exposure, I know you've alluded to the fact that Asia is the primary driver, but maybe just the top 1 or 2 countries as we help try and formulate an outlook for export coal in the second half as prospects for China appear to be dimming somewhat.

Jean-Jacques Ruest

Okay. Well, you would take – thank you, Matthew. It's J.J. You would take our coal revenue and then 1.5% -- roughly 1.5% of our total revenue at CN is met coal -- thermal coal in the U.S. You would take that out. And after that, what you would take out is some petroleum coke revenue, which, by and large, is all export. So it's all of our export coming from the Gulf is the thermal coal, and our exports from the Canadian West Coast is mostly met coal and some thermal coal and some pet coal. The destination for the met coal are historically, Japan, Korea and more and more China. And on the thermal coal, it's-- when you go into the Asian side, obviously, it's by and large, China. And then some of the thermal coal from the U.S. Gulf also goes to Europe. So that's the kind of the breakdown of that. I don't have the exact breakdown between thermal and pet coke and met, but take out the 1.5% of our book of business, which is U.S. domestic, the remaining is product which is export, either met coal, thermal coal or petroleum coal.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

That gets me what I was looking for and just the follow-up would be then, what is it that gives you comfort that the long haul business, the export business that's been going so nicely for you, should continue just again with storm clouds? Maybe just perceptually, gathering a little bit more noticeably in China? Is it customer conversation? Is it stockpile levels? What is it that you look at on a concrete basis to get comfortable with that because that's a good business still in the second half, a nicely growing business?

Jean-Jacques Ruest

On the met coal, obviously, it is all, on a relative basis, all longer haul than our domestic thermal coals in U.S. Domestic thermal coal in U.S. average is less than 200 miles, so it's not difficult to read that on the length of haul. So the mix is always improving. So thermal coal -- the met coal, the sign there would be looking at a price of met coal in the world market. Teck produced their result this morning. I think they were saying that they're pricing set for the third quarter is in the range of the premium, up to $225 a ton on an average $198 a ton. At those prices, the Canadian met coal producers should be making money and be competitive. On the thermal side, we really arrived on the back of the strong production cost on the BTU basis of the Illinois mine that we serve. It is tough to compete in world market from the U.S. to sell thermal coal, so you got to have a real low cost. And that's what Plain Energy [ph] has, which is a prime source of export coal for CN. And they do have laid down very nice export capacity and doing a great job running Convent. So on thermal, what gives me comfort is our producer are low cost. And on met coal, what gives me comfort is the selling price of met coal in the world market seems -- even though it's weaker, it still seems to be relatively good enough for the Canadian met coal producer to make money and run a decent business.

Operator

Our next question is from David Newman of Cormark.

David F. Newman - Cormark Securities Inc., Research Division

Just you've alluded to it, but I just -- your strategic investments seem to be paying off, the soddings, the J. Keith sounds downright excited about the J and the opportunity there. Can you scale the opportunity? I think one of the things coming out of the J is you said U.S. velocity could increase. Obviously, this eliminate some tinge points, et cetera, for the long haul, RTM. Like how do you scale that up? Where could it be, and how does that open up areas like Rupert and other areas that you might see potential pinch points on?

Jean-Jacques Ruest

You're right about Keith being excited about the J, so I'll let him take that question.

Keith E. Creel

Okay, let me say this. Train speed, we talked about this. Southern region growth is up in Chicago. Train speed, we talked about industry train speed is down. But in this growth, we've actually improved train speed in Chicago, which is a key connection, the busiest connection with all of our carriers. In and around through that corridor, train speed, solid double-digit improvements, in spite of all this growth, which is a very, very significant component to our ability to convert our markets and to provide that reliable service that connects to Prince Rupert. So by extension, Prince Rupert, Vancouver, Chicago, if you look at that triangle, everything we're doing in Chicago provides a reliable service base to leverage for growth and expansion at those key ports in Western Canada. So as we move forward, not only the connection piece, this other piece as far as switching cars, providing consistent service. We do a lot of our switching in Chicago and Markham Yard, which is the old IC. Used to be a dual hop, it's not a very efficient place to switch cars. As we get this yard online, September, October this year, we're going to shift that switching into Kirk Yard and effectively garner and convert, much to Luc's happiness, that's some operational savings, safety savings, safety improvements, as well as operational efficiency. So it's strategically, I don't want to say it's genius, I don't want to say it's luck. It took a lot of time and a lot of investment, energy and a lot of credibility to make that transaction happen. But I'll tell you, it's a once-in-a-lifetime transaction for an operating guy that I think 'and the people that made it happen day in and day out.' Every day, we run that place more consistently, more reliably.

David F. Newman - Cormark Securities Inc., Research Division

And just one add-on, just quickly. Beyond Kirk Yard, is there anything else that remains to be done around the J that you need -- that we should anticipate? And when might it be completed?

Claude Mongeau

Yes, there's some tweaking and we got it there on the chart. We've kind of put a timeline on it. There's a few more connections that will provide some additional efficiencies for us. You'll see the fourth quarter 2013, and that's probably the longest out at Munger. Right now, we've got trains that operate through the city, that have to operate through the city efficiently because we don't have a connection there to efficiently take a right, for lack of a better term, and go south down to Madison. So as we get that northwest leg of the wire, southwest leg of the line and start in 2013, we'll take some additional train starts out of the city and put them south to Munger, run them down to Madison and up in -- over to Gary, where we're going to switch boxcars over south on our network. So that's going to help the additional step-up at least, and we're going to have a double track up there that's going to add some additional capacity, pick up some train speed improvements there, as well as the velocity on our cars and locomotives. And then finally, the connection down at Joliet. We've got Joliet subdivision, which runs into the city of Chicago. It's heavily used by Amtrak, it's heavily used by Metra and now, it's being used as well by UP coming out of their global floor terminal. We're going to take the Glen Yard access. Right now, we have to go to the city, again, to get to Markham, which in the future will be Kirk. We're going to put in a connection and that allows us to come out of Kirk and Gary, stay out of the city, go down to Joliet and take a right and go up into Glen. So that's going to take additional savings, synergies, car velocity, locomotive improvements and cost that we're paying to the harbor to the Belford [ph] track jacks at speeds. That's another step for improvement in that corridor.

Operator

Our last question is from David Tyerman of Canaccord Genuity.

David Tyerman - Canaccord Genuity, Research Division

Broad question. I'm wondering how much outlook visibility really have, going forward, if we are looking at a downturn, how far out can you see? Is it months? Is it quarters? Is it weeks?

Claude Mongeau

Listen, it really depends on the market, but generally speaking, and I speak from experience, the things can turn fairly quickly on you if people are concerned and they stop to deplete inventory. But we do have visibility for a few months out. We do constant channel checks with our customers, and we are privileged to have a huge database of information in terms of what's actually going on in the economy. So we're well positioned to see the turns coming, and we would react accordingly. But the visibility is in a few months as opposed to weeks. But we certainly don't have much more than a few months.

David Tyerman - Canaccord Genuity, Research Division

Okay, that's very helpful. And just -- can you tell us where we are in the Canadian rail review and if there's any risk there?

Claude Mongeau

We have a -- we have an industry-leading service and we've been working at it hard here for the last several years. And I think it's fair to say, if you go out on the property, whether it's in grain country or whether it's across the territory in the forest product sector, et cetera, the customers are recognizing the significant improvement, and we're continuing to add to it. We just launched recently, Keith did a new service notification, the process for first model akma [ph], which is something our customer base has been asking us. And so we're doing what we have to do on the ground. The government has received the report from Mr. Dinning. Mr. Dinning, I think, was a very wise and smart man. I think he said it the way it is. Things are good, but some customers continue to want legislation. And we will have to convince the government that this is not good for innovation, this is not good for the country. And if we can't do that, we will have to convince them to make sure that whatever legislation they put forward, is balanced and will be good for all stakeholders, not just the shipper associations.

Operator

This concludes today's question-and-answer session. I would like to return the meeting back with Mr. Mongeau.

Claude Mongeau

Thank you, Anne, and thank you, all, for this call. If you're attending on this call, let me just repeat that I believe our agenda of operational and service excellence is delivering value. We are clearly having success in outpacing base market conditions on the top line. We are accommodating that business at low incremental costs. We're rolling with the punches, including the big ones like pensions that are difficult to control other than, from an accounting standpoint, facing you. And it's all coming together, driving value for our customers and our shareholders. So we are pleased with how things are going and are looking forward to report again on a solid third quarter next time we're together.

Operator

Thank you. The conference has ended. Please disconnect your lines at this time. And we thank you for your participation.

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Source: Canadian National Railway Management Discusses Q2 2012 Results - Earnings Call Transcript
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