Operator: CN fourth quarter 2018 financial results conference call will begin momentarily. I would like to remind you that today's remarks contain forward-looking statements within the meaning of applicable securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN fourth quarter 2018 financial results press release and analyst presentation documents that can be found on CN's website. As such, actual results could differ materially. Reconciliations for any non-GAAP measures are also posted on CN's website at www.cn.ca.

Please standby, your call will begin shortly. Welcome to CN fourth quarter 2018 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: Thank you Patrick. Good afternoon everyone and thank you for joining us today for CN's fourth quarter and year-end 2018 earnings call. I would like to remind you about the comments already made regarding forward-looking statement. With me today is JJ 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 Doug MacDonald, our Senior Vice President Carload as well as Keith Reardon, our Senior Vice President Consumer Products.

In order to be fair to all participants, I would ask you to please limit yourself to one question. The IR team will be available after the call for any follow-up questions. It now my pleasure to turn the call over to the CN's President and Chief Executive Officer, JJ Ruest.

JJ Ruest: Thank you Paul and good afternoon everyone. Welcome to our winter earning call.

And before I start, I would like just to take a short moment to congratulate Jim Vena on his return to the rail industry. Best of luck, Jim. We wish you all the best. We have a solid result and outlook to report. In the fourth quarter, we produced adjusted EPS growth of 24%, revenue growth of $0.5 billion, our best-quality pricing of the last seven years, pretty solid volume growth of 12% in revenue ton mile, higher fuel surcharge and especially in December, much improved operating metrics resulting from our CapEx and resource plan, that is improved car velocity, improved train velocity, less total number of cars online and our lean high horsepower fleet is running at much higher uptime.

Also last quarter, the overall adjusted operating margin was 38.8% and the adjusted operating ratio was 61.2%. To be noted about December, we downsized our nonunion labor force and took a one-time $27 million restructuring charge. Now turning to page five. The year of 2018 in review. After a dismal first quarter in 2018, in the last nine months we bounced back to increase revenue by $1.3 billion producing adjusted operating margin of 40.4% during those same nine months, proof again of the CN skill in growing the rail business profitably.

Now a quick review of the fourth quarter book of business, starting with intermodal. Intermodal revenue was up 9% from better pricing and good volume growth on the port of Prince Rupert and the port of Vancouver. Overall coal revenue grew by 21%, mainly from West Coast export to Asia and Gulf Coast export to Europe. Canadian grain revenue grew by 17% with Q4 Canadian shipment up 14%. This crop year, which hits from its beginning since last August, CN Canadian grain export tonnage is 1.5 million metric ton ahead of last year's pace.

This is an all-time company record for crop year-to-date. Our CN railroaders are getting the job done for the Canadian grain farmer. Potash, semifinished steel, refined products, each grew revenue at solid double-digit. Paper, wood pulp and chemicals grew low double-digit. Lumber, after a plea last year from shippers to get more supply of lumber car, the lumber business is down and we currently have 1,200 lumber cars parked.

On crude, we moved on average 230,000 barrels a day in the quarter versus about 130,000 barrel a day in the third quarter. Our CN railroaders are also getting the job done for the Alberta oil industry and we are willing to do more as needed. In Vancouver, from November 1 to mid-January, we moved solid 10% more volume than last year. CN and a good number of world-class supply chain terminal operator that are committed to the efficiency of running 24 hours a day, seven days a week have kept the big port of Vancouver going at a time of strong demand and harsh condition. Automotive was up about 5% and we are entering a phase of overall market softness.

Looking to 2019, we have a good start to the year with about 10% increase in our production to-date of revenue ton mile volume. We have diverse and solid opportunity ahead of us and we are aiming for high single digit volume growth for this year as measured in RTM. So please refer to our detailed topline outlook in page six. I am going to pass it on to Mike for his operational review. Mike?

Mike Cory: Thank you JJ.

And yes, kudos to Jim JJ, I want to say congrats on being named Railroader of the Year. I think you are either the third or fourth one I have worked with and hopefully be around to have about five or six more.

JJ Ruest: Thank you.

Mike Cory: Look, first is, always I just want to thank the great team of railroaders at CN for their day-to-day commitment in delivering what I would say is a very strong quarter on many fronts. When you consider the rough start we had the last year, they delivered on everything they said they would in very demanding environment.

So a little overview of the impact of our 2018 capacity resource projects. Our network's train speed was up 4% versus Q3. Our locomotive utilization was up 2% versus Q3. Ad our through dwell was improved by about 4% versus Q3. This was all accomplished.

GTMs grew to record Q4 level in 2018. In fact, GTMs were up 6% versus Q3, which was a quarter that already was at a record level. And the growth, of course, is not linear. Our growth is more concentrated in our Western and Southern regions. On a year-over-year basis, our GTMs were up 11% over Q4 2017.

Our network speed improved by 4%. Car velocity improved by 10%. And our through dwell improved by 15%. With this exceptional team of railroaders, we are able to achieve these results and for this I am extremely thankful. So during the quarter, our service level met all the demand for Canadian grain, we moved all available frac sand, we moved record amount of crude and we fulfilled all double customer demand while meeting forest product orders.

In Q4, we completed the capacity projects we outlined to you earlier and added the remainder of the 60 new locomotives that we purchased. We also added just over 300 qualified operating employees. Most of these employees again, were deployed to our busiest region in Western Canada. Our run rate for operating employee demand is now normalized. On the safety front, we saw a sequential improvement in both FRA accident and injury ratios.

We continue to place an extremely high focus on developing systems and technologies to ensure safe train operations. Turning to the next slide. Our engineering team continued to work right through Q4 in preparation for another solid program this year. This work consists of some new capacity addition in our Southern region and the design and permitting for projects commencing in spring of this year. As I have stated many times, growth is not spread equally across our network.

So our capacity projects are aligned to where our network requires capacity. On the technology front, we are installing equipment inspection portals in key areas of our network to improve our mechanical capabilities. These inspection portals will improve our ability to develop deep databases on component life, improve our maintenance intervals, reduce dwell time in major terminals and allow our car mechanics to focus on fixing defects. We have also developed and will deploy autonomous track inspection cars that can run at track speed. Like the inspection portals, this will allow us to direct our track maintenance employs more clearly to areas requiring repair, all the while providing key data points to better deploy capital and understand the lifecycle of the components.

Both of these technologies will fully support a safe railway, better reliability and reduce cost over time. Lastly, in 2019 we will acquire 140 new AC locomotives. These locomotives will replace older locomotives as well as those still under lease. All of these actions will continue to properly position us as we go forward into the next evolution of scheduled railroading. We are working to create effective capacity through systems and technology.

2019 is going to be a big year for operations at CN and let me tell you, we are ready for is. We have a solid pipeline of growth opportunities and we are ready to accommodate it at low incremental cost. With that, I will pass it over to you, Ghislain.

Ghislain Houle: Thanks Mike. Yes, JJ congratulations on Railroader of the Year.

Very proud to be working with you. I am very pleased with our solid performance in the fourth quarter and capping out at turnaround year. Starting on page 11 of the presentation, I will summarize the key financial highlights of this performance. As JJ previously pointed out, revenues for the quarter were up 16% versus last year at slightly over $3.8 billion. Fuel lag, on a year-over-year basis, represented a tailwind of $27 million or $0.03 of EPS, mostly driven by an unfavorable lag last year.

Operating income came in $1,452 million, up $227 million or 19% versus last year. Our operating margin came in at 38.1% or 80 basis point higher than last year. During the quarter, we recorded a provision of $27 million for the management workforce reduction initiative. Excluding this, operating income was $1,479 million with an adjusted operating margin of 38.8% or 150 basis point higher than last year translating into an adjusted operating ratio of 61.2%. Net income stood at $1,142 million or $1,468 million lower than last year with reported diluted earnings per share of $1.56 versus $3.48 in 2017, down by 55%.

Excluding the impact of non-core asset sales and provision for workforce reduction in the quarter and the impact of deferred income tax expense from the U.S. tax reform, including the enactment of higher provincial tax rate in Canada in 2017, our adjusted diluted EPS for the quarter was up a solid 24% versus last year. The impact of foreign currency was favorable by $24 million on net income or $0.03 of EPS in the quarter. Turning to expenses on page 12. Our operating expenses were up 14% versus last year at $2,356 million, impacted by strong volumes, higher fuel prices and higher labor costs while operating metrics improved versus last year's levels.

Expressed on a constant currency basis, this represented a 12% increase. At this point, I will refer to the variances in constant currency. Labor and fringe benefit expenses were $791 million, 17% higher than last year. This was mostly the result of higher wages driven, by increased headcount and increased pension expense and severance costs related to the management workforce reduction initiative, partly offset by higher capital credits. Purchased services and material expenses were $527 million, 10% higher than last year.

This was mostly the result of higher outsourced services and repair and maintenance expenses, mainly from higher volumes partly offset by favorable capital credits. Fuel expense came in at $466 million or 18% higher than last year. Higher volumes accounted for $38 million of the increase, while higher fuel prices were $31 million unfavorable variance versus 2017. As network fluidity improved, fuel productivity was favorable by 1.6% in the quarter versus last year. Depreciation stood at $346 million, 8% higher than last year.

This was mostly a function of net asset additions. Equipment rents were up 4% versus last year, mostly driven by additional car leases. Finally, casualty and other costs were $111 million, which was 9% lower than last year, mostly due to lower legal claims. Now let me turn to our full-year results on page 13. We completed 2018 with revenue slightly above $14.3 billion, almost $1.3 billion or 10% higher than 2017 with all of the revenue growth generated in the last three quarters of the year.

Our operating expenses at around $8.8 billion were 13% higher than last year producing a 5% increase in operating income versus 2017. The operating margin stood at 38.4%, 180 basis point lower than last year. Adjusting for the provision for workforce reduction, our adjusted operating margin came in at 38.5% or 170 basis point lower than last year. Net income was down 21% at slightly above $4.3 billion. Excluding the impact of one-time line sales and workforce reduction provision in 2018 and income tax adjustments, primarily the U.S.

tax reform in 2017 adjusted net income was up 7% and adjusted diluted EPS came in at $5.50, up 10% versus 2017. This is quite a performance in light of a challenging first quarter of 2018. In fact, as JJ mentioned earlier about CN's performance, in the last three quarters of the year, our adjusted EPS from Q2 to Q4 was up 17% versus the same period last year, so quite a turnaround. Now moving to cash on page 14. We generated free cash flow of roughly $2.5 billion for the full year 2018.

This is $264 million lower than in 2017 and mostly the result of higher capital expenditures, partly offset by higher net cash from operating activities. Our capital investment finished slightly higher than our budgeted $3.5 billion and our balance sheet remains strong with debt-leverage ratios well within our guidelines. Finally, let me turn to our 2019 financial outlook on page 15. The demand environment remains solid in a number of different sectors and we continue to see of broadly positive economic backdrop in North America, particularly as it relates to consumer confidence. In addition, we expect CN-specific opportunities to enable us to grow up above base economic conditions.

This environment should translate into high single digit volume growth in terms of RTMs for the full year versus 2018 in a favorable pricing environment. On the capital front, as Mike highlighted, we are committed to reinvesting in our business to support safety, service and growth. Given the strong volume growth we experienced in the latter part of 2018 and to continue to support future growth opportunities at low incremental cost and deliver superior service, we are setting our capital envelope at around $3.9 billion. Infrastructure capacity investments should be in the same range as 2018. With this, we expect to deliver EPS growth in the low double digit range versus 2018, adjusted diluted EPS of $5.50.

We are assuming the Canadian and U.S. dollar exchange rate to be approximately $0.75 and fuel prices to be in the range of $50 to $55 per barrel for WTI. Finally, our effective tax rate should be around 265 to 27% for the year versus 25% in 2018, adjusting for capital gains treatment on asset sales. Furthermore, we continue to pursue our shareholder return agenda. In 2018, we returned to shareholders slightly above 80% of our adjusted net income through dividends and share repurchases and our current three-month buyback program of up to 5.5 million shares will be completed by the end of January.

Finally, we are pleased to announce, as JJ mentioned, that our Board of Directors has approved an 18% dividend increase for 2019, reflecting our solid performance in 2018 and our confidence in the future as we aim to reach a 35% dividend payout ratio. In addition, our Board of Directors approved a share buyback program of up to 22 million shares for an amount of $1.7 billion to be returned through a normal course issuer bid from February 1, 2019 to January 31, 2020. 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 our customers and shareholders today and for the long-term. On this note, back to you, JJ.

JJ Ruest: Well, thank you guys.

And as you could see, we are well positioned to deliver solid result going forward. The service matrix are back to schedule railroading level. We have organic volume growth where also we had organic acquisition. We have capacity CapEx plan for long-term growth and service resiliency. Some of that CapEx for the next two years is for the Vancouver gateway infrastructure, namely two projects totaling $300 million that CN will be jointly fund with Ottawa in the port of Vancouver.

We are deploying smart technology to drive CN into the next evolution of rail transportation and supply chain productivities. More to come on that at our Investor Day in early June. Our approach to shareholder distribution in dividend and buyback is balanced and steady. Our approach to operating margin and return on invested capital, which stood at 15.7% in 2018, is also balanced and has a long-term focus. Patrick, we are turn over to the questions.

And as a reminder, we have Doug MacDonald on the carload side and Keith Reardon on the consumer products side joining us for the commercial questions. Patrick?

Operator: [Operator Instructions]. The first question is from Turan Quettawala from Scotiabank. Please go ahead.

Turan Quettawala: Yes.

Good afternoon and thank you for taking my question. I guess, maybe I will start off on the guidance front here. Just looking at some fairly easy lap years, obviously, here in first half and you talked about that in your comments and sort of the high single digit RTM growth. It seems like you are being a little bit conservative on the EPS line. I understand there is a bit of uncertainty of on economy but are there any specific areas maybe that you are concerned about when you think about your guidance? Thank you.

JJ Ruest: So if I maybe start around, thanks for the question, is we had a great solid start at the first 15 days of the month because of the network. The weather was forgiving to the railroaders and a good week also. We have had this vortex where it's been minus 40 degree centigrade in Northern Ontario, Northern Quebec. So we don't take anything granted for the wintertime. And the first quarter is always a challenge for workers, potentially challenging quarter, not necessarily on the business side.

On the operating condition side, we are in much better shape. But we always like to see the winter before we step up too far and we have good guidance, in our view, take into account how the economy looks. I don't know if you have more to add anything, Ghislain?

Ghislain Houle: No. I would totally agree, JJ. I think that this is our best foot forward on guidance as we speak.

And as we usually do every quarter, we review our numbers, we review with the outlook, we do a top-down bottom-up and as we go through the year, we will do the same thing. But at this point, this is the best view that we have forward.

JJ Ruest: Yes. High single digit.

Turan Quettawala: Thank you very much.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Chris Wetherbee from Citigroup. Please go ahead.

Chris Wetherbee: Yes.

Many thanks. Good afternoon. I wanted to ask about CapEx a little. I think a step up on a year-over-year basis to a relatively high number as a percent of revenue, maybe you could help us a little bit in terms of you highlighting some of the specific opportunities and maybe how you think that could generate growth beyond 2019? And then also maybe just for following up on the last question, are there some sort of operating penalties, if you will, associated with the CapEx as you undertake all the projects over the course of potentially the summer time that may dilute a little bit of the expected operating leverage of the business?

JJ Ruest: So the CapEx, if I may start with that, Chris, thanks for the question. The CapEx is for growth and for resiliency.

So growth will be reflected on the topline and resiliency will be next reflected also within our cost. Well, this year, we want to be sure we create a fallback that gives us the run rate for 2020, 2021, 2022 in terms of attracting good long-term business with CN, but also that allow us to have operating metrics that help us to slowly growing the profit margin. So it's really aiming to these two things, safer railroad, capacity for growth, especially in Western Canada, where there is still a lot of business opportunity and as well as working on our costs.

Chris Wetherbee: In terms of any of the cost penalties for this year, do you think that impacts operating leverage at all? Or not really?

JJ Ruest: Mike, you want to talk about the impact of having major capital programs in the summertime on the operating matrix?

Mike Cory: Chris, no. Generally in the summertime, we see some of the commodity mix change where we are able to get into the track in these places in Western Canada.

So no, I don't see it as having a big penalty. And you have got to remember, last year we were on the back tees when we started. We had to start it right from scratch, getting materials, building the plan very quickly, if you remember, after Q1 we added some more capital to it. This year, from what we learned last year, we are going to do some different spacing in how we go about doing the basic capital versus the new special capital. We are also looking to do some grading and having them in position so that we can start to use the 12 months of the year to build the track.

For instance, in Western Canada you can build track in the middle of winter as long as you have got a good grade. So we are going to mix some of that in for years going forward, but next year, I don't as much in penalties as we have taken this year.

Chris Wetherbee: Okay. Thank you very much.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Cherilyn Radbourne: Thanks very much. Good afternoon.

JJ Ruest: Good afternoon.

Cherilyn Radbourne: I wanted to ask for a bit more color on the natural resource export growth through Prince Rupert. So can you speak to the current run rate on some of that traffic? How you expect it to ramp up as year progresses? And whether you think that ramp up is at all sensitive to the economic backdrop?

JJ Ruest: Maybe Doug can answer that. Doug MacDonald?

Doug MacDonald: Thanks Cherilyn. So from a natural resource standpoint, through the West Coast we expect to see some significant growth, obviously, in our coal franchise.

So we have had two mines startup that will obviously overlap into this year. So that's the CST mine as well as of the other mine from Conuma Coal. And then we actually have a brand new mine coming up very early, really in Q2 but I will saw even at the end of Q1 and that will be the Coalspur Vista Projects. So that will be significant. At the same time, we expect we are doing very well in grain as an export route up there as well.

So we are probably be going to close hitting a record there this crop year.

Cherilyn Radbourne: Thank you. That's my one.

JJ Ruest: Thank you.

Doug MacDonald: Thank you.

Operator: Thank you. The next question is from David Vernon from Bernstein. Please go ahead.

David Vernon: Hi guys. Thanks for taking the time.

I wanted to kind of ask the CapEx question a different way. It looks like high single digit RTMs, pricing in the low singles, you are still looking at a CapEx budget for 2019 around 25%. As you guys do sort of your long-term planning around the three, five, seven years, is that kind of the right number do you think? Or are we doing quite a bit of expansion that you are going to be flexing into over the next five to seven years?

Ghislain Houle: Yes. Hi David, this is Ghislain. Listen, we have said that 2018 would be a big capital year and it was.

It was around 25% of revenue. And we said that you should expect the same range in 219. So that's where we are. And if you look at the various categories, to try to help you, I mean, usually on basic maintenance we are very consistent and we are always in the range of about $1.6 billion. We are very consistent on that.

We have said that the infrastructure capacity investment this year would be in the same range as last year. I would tell you that the bump up this year versus 2018 is really the locomotives. Remember, last year we received 60 locomotives. This year we are going to received 140 which is very good news. And 120 of those will be in the first half of the year.

And naturally, 70 of them will be in the first quarter. So they are upfront. And again, we still have about 130 locomotives that are under lease. We are going to come out of winter and as velocity is going to improve, we are going to look at every opportunities to return the lease units and use the brand new units that's coming online. Good news on CapEx from a PTC standpoint, it's starting to go down and you can assume about $300 million of PTC in 2019.

And frankly, going out of 2019, we said and we are committed to continue to do that. You should now expect after 2019 our capital envelope to go back to historical levels in the 20% of revenue range. So we are following our game plan. We are doing exactly what we said we are going to do. But we need the capital and the infrastructure to continue to deliver that superior growth that we are shooting for.

JJ Ruest: Go ahead.

Mike Cory: If I may add, David, is when you compare us to our peer in the United States, a big railroad, mid-class in the U.S., our high horsepower fleet is quite lean, right. We have total fleet ranging in the range of 1,550 units. So we are not other railroads who is working with 400 or 500 or 600 unit part that we can bring in. We are running with a fleet which is already sweating these assets.

Therefore, we need to have more power, more reliable power. And as we get more power and more reliable power, we actually return the less reliable and the older power. So we are running with a lean fleet, which means that since we are a growing company and we grew revenue by $0.5 billion in the fourth quarter, we need to add high horsepower to the network so that we can continue to grow across profitably.

David Vernon: That's very helpful. I appreciate that.

And then maybe just as a follow-up, the slide presentation mentioned organic and inorganic growth opportunities. Now CN takes a pretty different approach to the market in terms of owning sort of assets around other modes besides beside just the railroad as compared to peers. Is there some sort of appetite for you guys to maybe diversify a little bit more? Or is this going to be more about a focus on smaller sort of tuck-in kind of things? I am just wondering if there is something in this message around inorganic that should signal an approach to the market that's a little different than maybe you have had in the past, maybe a little bit broader from a service perspective?

JJ Ruest: Yes. I would suggest, David, that the approach is different than in the past. Maybe different than the Class I.

Our objective, our appetite is to find ways to make more use of the existing network. So we have mainlines from East to West and North to South which is not fully utilized to the exception of the Edmonton to Winnipeg line. All other aspect of our railroad has capacity to grow in the existing mainline. So what can we do as of tuck-in acquisition or joint ventures that would bring more business to our mainline. That really is the focus.

So it's in that light that we do these due diligence and we look at different business. TransX is one of them. The first one that we have run out because we have an agreement with seller but the we don't have an agreement yet with the government to actually take control of the company. But what TransX is, is a company who is in the intermodal business and we believe they can help us to bring more business to the CN railroad using our network. In that case, specifically Halifax to Vancouver, to divert traffic from the road to railroad.

So historically, we may have been looking at buying short line. We have bought a number of short line in the past. Now, there is not as many of these opportunity out there that we could execute. So we are looking at other ways to actually bring more business on the railroad. But the principle is still the same but it is not necessarily something that is a Class II or a Class III railroad.

It is something that brings in more business to the existing network which, by and large, with the exception of the section that Mike talked about, has capacity and is still underutilized.

David Vernon: All right. Thank you guys.

JJ Ruest: Thank you.

Operator: Thank you.

The next question is from Fadi Chamoun from BMO. Please go ahead.

Fadi Chamoun: Thank you. Good evening.

JJ Ruest: Good evening

Fadi Chamoun: So a bit of a follow-up on this last question is, how do you think about this in terns of ROIC? When you are taking kind of railroad capital and going into these adjacent assets like port assets or like you mentioned TransX.

Does the ROIC profile of the business change? Or do see that as potentially being accretive to the overall growth ROIC profile?

JJ Ruest: So I will start and then Ghislain can add. But I am happy that you asked a question from an ROIC point of view and not from an operating ratio point of view. Because when we look for growth, we are looking for return on investment and we think return on investment for the business that we buy and also what does it do to actually improve and maintain the return on investment on the large asset that we have already, the mainline, right. So it is return on investment is one thing that we actually are now going to publish once a year. It is something that we are aiming in the range of 15% to 16% and it is in the light of making better use of the rail asset but at the same time getting an overall return on investment for the shareholders on the total enterprise that's attractive.

So as we are evolving from scheduled railroading, doing the transformation to bring the operating ratio down, now that some of our assets are leaner we still want to grow organically and Doug mentioned some of that earlier, in fact, he forgot to talk about the propane terminal in Rupert which will open this spring, but also other needs to bring growth business. Maybe sadly, the rail industry in general and hopefully that will change hasn't grown as much as it should or as it could and we want to create this model where we can grow without necessarily having to rely only on the bulk and the carload business. And if you want to add something, Ghislain Houle?

Ghislain Houle: Yes. Maybe JJ, just to add to your point when we look at these, TransX is a good example and Fadi, you and I know that their OR is not the same as the railroads. But to JJ's point, we look at the ROIC.

And I can assure you that the return of that investment is a very good one. And we have said that outside when we look at internal projects at CN, our internal threshold, it's 12%. And we have all the projects go through the grinder to make sure that again we deliver return on the money that we invest. So return on invested capital is very important at CN. And as JJ mentioned, whatever we do that is the measure that we look at and it has to produce.

And I can assure you that what we do, it does and you know that's why we continue to shoot for 15% to 16%. And that's very good.

JJ Ruest: Yes.

Fadi Chamoun: Maybe one quick follow-up on this to Keith. Prince Rupert had a lot of success in terms of tapping into that import of container, I guess, from Asia to the U.S.

Midwest. When you look at Halifax, like how big is that addressable market, I guess, that you could potentially be tapping into to divert volume the same way you did on the West Coast?

Keith Reardon: That market is evolving all the time and it's only going to increase as the manufacturing capabilities that are in China today are moving out as the higher cost are occurring. They are moving into Malaysia, Indonesia, Vietnam. We were there in November. And the number of plans that are being built is significant.

So as that trade moves further South, that gets right into the wheelhouse of the Halifax-Suez Canal connection and we feel very, very comfortable that we would be able to play in that market. That's one of the reasons why we are looking at Halifax so extensively. So it's a play that we want to make we feel we will be successful. We are going to market it as Prince Rupert of the East and we feel it has the exact same attributes and we will be successful.

Fadi Chamoun: Thank you.

Operator: Thank you. The next question is from Benoit Poirier from Desjardins. Please go ahead.

Benoit Poirier: Good afternoon everyone. And my question is related to, could you mentioned maybe some color about what do you see for crude by rail in light of recent volatility and differential and also in light of the current curtailment? Do you expect uptick in Q2? And may be provide some visibility throughout the 2019? Thank you.

Doug MacDonald: Sure Benoit. It's Doug calling. So we are expecting to see, obviously we had a great run rate in Q4. We are expecting to see that dip a little in Q1 with some of the curtailments that are being on from the Alberta government. But we are still going to have a great year-over-year comparison and then we are expecting that to ramp back up in Q2 as most of the curtailment issues we believe will come off and we should do much better.

Benoit Poirier: Okay. Perfect. And a quick follow-up, just for Halifax. Any color on the timing and maybe the magnitude of the investment that is required in Halifax?

JJ Ruest: So we are in due diligence. So we can't really talk too much about the details.

But the timing is, we are still a number of weeks, a number of months before this whole thing comes together. But our vision of the Rupert of the East could be played more than one way and we more than one iron in the fire. But Halifax is definitely one of them.

Benoit Poirier: Thank you very much for the time.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.

Unidentified Analyst: Hi. Just a follow-up on the crude.

I am just wondering what is the assumption that you have built in for your 2019 guidance? Is it much higher than the 130,000 carloads for the last peak?

Doug MacDonald: Yes. Doug MacDonald. So yes, we are expecting to see significant growth still over 2018.

Unidentified Analyst: Okay. No specific carload guidance?

Doug MacDonald: We are not giving specific carload guidance at this time.

JJ Ruest: Yes. We don't go down by commodity. Our guidance was in revenue ton mile.

Doug MacDonald: Yes.

Unidentified Analyst: Got it.

And we are approaching the time of the year for another CN Analyst day. So wondering, can you give us an update on that event? And also, how does the CN today compare to the CN of two years ago? Maybe in terms of topline growth opportunity and margin expansion, especially after you guys made heavy investments in peer network already?

JJ Ruest: Okay. So we are working the program, but it will be early June. There will be half a day where we will showcase specifically technology where people have the chance to see and touch and then on day two, we will get to the business and what's our plan on the capacity, on service, on potential investment. By then, we may have other things that have been done where we will do the business on the second day.

But the first day, there will be lot of messages as to how do we become a scheduled railroader, a scheduled railroad industry that's started to really use technology to create better service, better safety and lower our cost. And lowering our cost, not just close, we close the yard and we park locomotive, but lowering our cost because we too leverage technology like many other industrials have done.

Unidentified Analyst: Great. That's helpful. And then I will try and squeeze out one more.

Are there any financial impact from the congesting in Vancouver in early January? And are service levels fully fluid now?

JJ Ruest: No financial impact and the service has been back. We would argue the service has been good all along. Thank you.

Unidentified Analyst: Wonderful. Thank you.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Allison Landry from Credit Suisse. Please go ahead.

Allison Landry: Thanks.

I wanted to ask about the long-term OR trajectory. I understand the goal is to maximize EBIT dollars and returns, but considering that some of your U.S. peers are rolling up PSR and have talked about a mid-50s operating ratio. How do we think about where the CN network can operate within the construct of an improved North American rail system?

Ghislain Houle: Hi Allison. This is Ghislain.

I think I will go back to the guidance that we provided in the 2017 Analyst Day, I think, that you participated. And we said at that time that our OR was going to be in the mid-50. Now, as you know, with the pension re-class that hits Canadian railroads, that adds about 200 or 240 basis point to it. So it's in the high-50s and I think that's what we are looking. I mean we have said many, many times that we are enamored by the OR, that the OR is result of what we do.

We want to grow the business. And frankly, we would rather be a $20 billion at 58% than a $14 billion or $13 billion at 55% or 56%. So we have a great cost foundation and we are using this to grow the business. Now, in 2018 because of our lack of capacity, as you know, the OR went up a little bit and we said that as we get the right infrastructure in place, which we are getting, we did a big year in 2018. We will do another big year in 2019, that our cost go back and reduce naturally and will go back with the high-50s OR.

And then the use of technology that JJ mentioned and we have five key projects that you have in your appendix actually on the presentation, they are out of the lab, we are actually deploying these projects out there as we speak and we see some significant savings coming from it and we are pretty excited. So that's the OR.

JJ Ruest: And if I might add, so that since part of our plan is to do some tuck-in connection to the network but not rail acquisition, but acquisition that will feed the network, we are thinking as of the next time we report our result to separate the rail business, the rail revenue from the non-rail so we can give you visibility on the rail OR as opposed to the overall blended, which we will provide all the result but we are still very focused on the profit margin of the rail, but also the ROIC and be mindful that at some point to give visibility to just our rail operation, we will start segregate our result.

Allison Landry: Okay. Maybe if I could just follow-up.

Outside of that pension change, is there anything structural that we need to consider between CN and your U.S. peers, if they can for example get to 55?

Ghislain Houle: No, I think the pension change is there. I don't see anything else. I have mentioned to help you guys that our effective tax rate was going to slightly go up in 2019 versus 2018. And that's the result of the regulations that were just issued in December related to the U.S.

tax reform. But other than that, we are on even keel with the U.S. railroads.

Allison Landry: Okay. Thank you.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Seldon Clarke from Deutsche Bank. Please go ahead.

Seldon Clarke: Hi.

Thanks for the question. Just getting back to your guidance for a second, given all the moving pieces that impacted the operating ratio in 2018, how should we think about operating leverage in 2019? Should we see some acceleration in incremental margins from the 50% level you guys did in the fourth quarter?

Ghislain Houle: I think we are pretty proud of the 50% incremental margins in the fourth quarter. And as I said, as we get out of the winter, as we get our new locomotives, our workforce have stabilized I think there's opportunities for sure and you know, like we said, we have got still 130 lease locomotives out there and I would rather depreciate a brand new locomotive over 35 years than pay $700 a day on the lease locomotives, but more so it's all about the reliability as well. Now you get a brand-new reliable locomotive versus an older one that breaks once is a while. So I am not going to give you a specific number but stay tuned.

I think that as we get the right infrastructure and these growth opportunities that Doug and Keith are talking about, they are real and they are really coming at us. And with the infrastructure coming, we are pretty confident that the incremental margins will continue to improve.

Seldon Clarke: All right. So is it fair to say that they should, in 2019, the incremental should be higher than what they have been in the past, just given some of the onetime costs you guys had in 2018? Or are there similar one-time cost, just given that these investments are longer-term story that would offset some of the benefit to operating leverage?

Ghislain Houle: Listen, in 2018, as we have said, the key was that we had a lot of growth and we did not have enough capacity. So as we get the capacity and you can see in Q4, the proof is in the pudding.

Our OR is actually down or better by 150 basis point which we told the market this was going to happen. If you remember, our OR and our operating metrics, they were improving sequentially from quarter-to-quarter but they were still down from a year-over-year basis. And we said that in Q4 with capacity coming online that you should see the operating metrics getting better and you should see the OR improving and it happened. And frankly, these capacity projects came in sometime in October, mid-October. So we didn't benefit from a whole lot of that capacity coming to us.

So the capacity, we are going to do some more this year. To Mike's point, we are going to try to be a little bit more creative from the way we plan our work. We are learning with the team, under Mike's guidance, had a good [indiscernible] because we are learning, we are humble. And without giving you any specific numbers, we are comfortable that we are going to continue to improve.

JJ Ruest: We are going to hit that.

Ghislain Houle: And we are going to get better.

Seldon Clarke: All right. I appreciate the color.

Ghislain Houle: Thank you.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Justin Long from Stephens. Please go ahead.

Justin Long: Thanks and good afternoon. So, sorry if I missed it, but I was wondering if you could share what the same-store pricing number was in the quarter and what you saw in terms of renewal trends? And then I also wanted to ask about headcount.

Clearly, we saw a big ramp in 2018. So just curious if you have some initial thoughts on 2019 headcount and maybe could share what's getting baked into the guidance?

JJ Ruest: I will do the same-store price and Ghislain will talk about the headcount. On the same-store, we did not provide a specific number like we did in the past. What I said in my comment is that, this was our best quarter over the last seven years. Obviously, it must be above prior quarter of this year, to give a sense.

We have noticed that railroads, more and more, provide either vague or no specific on same-store price. So we decided it was time for us to do the same thing, since some of that is used against us sometime in the marketplace on how we think we should contract. So we didn't provide same-store price specificity but I think the fact that what we made as a reference point should give you a good sense.

Ghislain Houle: On headcount, Justin, I am happy to report that we stabilized. We have catched up on our conductor hiring.

If you look at our headcount at the end of the third quarter versus the end of the fourth quarter, we are actually down by over 400 people and this relates to the management reduction that we talked about. So in 2019, you could assume that we will hire for attrition only and under JJ's guidance we will continue to look at management's productivity and make sure that we are as lean and mean as we can be.

Justin Long: Okay. That's very helpful. Thanks for the time.

JJ Ruest: Thank you.

Operator: Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin: Thanks very much.

Good evening everyone. So I guess maybe this question is for Keith. We saw with the service disruptions in prior quarters, a little bit of dislocation in the customer base, a little bit of dissatisfaction. And I know CP touted a little bit on some gains that they made and some wins in their area. I was wondering if you could talk a little bit about your conversations with some of your customers with both respect to rail competition but also on the trucking side, whether we are seeing trucking coming back in now a little bit more with more capacity, if that's at all playing out? Just a little bit on the competitive environment and the tone of the discussions you have with your customers.

Keith Reardon: Sure. Well, when people talk about the softness in the trucking and that the rates may go down, that's not all across the board. That is in certain markets. So we are feeling that as of yet. With regard to competitiveness, we compete every day.

We win business every day. We may lose a little bit. But if you look at our track record on the intermodal side over the last five years, I think our batting average is extremely good. There has been some discussion about some of our accounts that are open for contracts moving forward. You should not be mistaken that we will compete very hard.

We have every intention of signing those customers up. We have more than speed from A to B and we have more than price. And it's what we have been working on the last five years that have allowed us to grow with our customers. We had to take a little break last year on the domestic side, but we focused on pricing yield. Moving forward, we are open for business and we will compete hard to grow the domestic business.

Walter Spracklin: Great. That's good color and I will keep it to one. Thanks.

JJ Ruest: Thank you.

Operator: Thank you.

The next question is from Ken Hoexter from Merrill Lynch. Please go ahead.

Ken Hoexter: Great. Good afternoon. Mike, you talked last year a lot about the 27 projects you were focused on in the construction and catching up to fill up that capacity.

What kind of pinch points do you see now? On that slide you presented on page nine, you kind of ran through a couple of major projects. Is there anything that where you look now ahead you really need to focus on in terms of adding that capacity that will make a capacity difference as you go forward?

Mike Cory: Yes. Ken, I think again we align any capacity to where the growth is going to take place. Again, well, we are talking mostly between our Western and Southern regions. And if you look at the map, we are really talking Edmonton to Chicago.

And I am very, very happy with where we have performed over December. I think it was either JJ or Ghislain who spoke about the tough winter conditions we have had in the last week with the resources that we have put in place, whether it's the air compressor cars, the people, the locomotives and the track, especially on that Winnipeg to Edmonton corridor, we have withstood it really well. Our numbers are doing well this first quarter. So again, the approach we are taking next year is still to look at that Edmonton to Winnipeg corridor. We have specific locations.

But now really probably honing in the Chicago area, making sure that as we get the goods to the Midwest that we have got the same resiliency as we see that corridor growing in the future. So the same one more year, pretty much the same thing, Ken. I don't see a lot in yards. We did some really good work at some of our major yards this year. It's that highway that I keep talking that creates speed, that drives the productivity, all the things about cost and reliable service we are trying to deliver.

Ken Hoexter: So this not solely focused on whether it's crude by rail coming out of out of Alberta or intermodal around Chicago. It's just your main corridor? Or are there commodities that are focused on the expansion?

Mike Cory: No. Look, we have got great growth opportunities in many corridors. I work very closely with Keith and Doug. And we make sure that we are aligning our resources right to those opportunities that we are getting.

So the main corridor between Edmonton and Chicago, that is something we continue to pay focus to, but it's all commodities. Our diverse book of business needs that.

JJ Ruest: Yes. It's the main line.

Ken Hoexter: Yes.

Perfect. Thank you for time.

JJ Ruest: Thank you Ken.

Operator: Thank you. The next question is from Tom Wadewitz from UBS.

Please go ahead.

Tom Wadewitz: Yes. Good afternoon. I have a follow-on too. I guess it's somewhat similar to the prior question.

But how do you think about that highway or the line capacity and relate that to the level of growth that you would expect to achieve? Like, given your spend this year, are you getting ahead of things? So if you see mid-single digits RTM growth next year, can you ease up on that the line spend? Or is this something where each year you put up good volume growth number, you have got spend at a very high level on the line? And then just one other one if I can throw out there. On the Halifax, how do think about Halifax versus Montréal in terms of advantages, disadvantages, the one versus the other as the East Coast landing spot?

JJ Ruest: Maybe I can start, Tom. And Keith can talk about the ports, the Rupert of the East and how one can do that. But our guidance for high single digit RTM, but it's not spread out evenly over the network, right. So to get high single digit RTM, obviously, we will be fairly heavy on corridor between Edmonton and Winnipeg or Edmonton to Chicago.

Also when you get to the coast, you have two highway now to get there. So when you look at our volume, it's very significant growth if you just apply that to the Western network. So this is where I think you need to take into account our CapEx that is put into place where to do high single digit we need to do much better than that's in the works. So I think that's the context. And also, when you look at the operating ratio of CN or the operating margin, it is also a corridor that matters a whole lot because we have a lot of our business going through there.

So to run a fluid railroad at good cost, we need to invest the capital. And just as a reminder, we did increase our revenue by $0.5 billion in the fourth quarter. So the more we wear and tear the railroad, the more we have to fix it and the more we have to add to the capacity. You want to say something, Mike?

Mike Cory: Yes. So what I look at when I am just looking at capacity, obviously I am looking at the growth.

I am looking at the speed. So train speed, car velocity and terminals, well, those are the things I am trying to build the highway to hit. And that's going to drive, whether it's OR, the reliability we need and in many cases, the safety. Those are the three big things I look at as we building this.

JJ Ruest: But where the mainline has no capacity restriction, is between Halifax, all the way to Chicago.

And going back to your question about the port business, maybe Keith can give you some color.

Keith Reardon: Yes. So the markets for Halifax and the markets for Montréal are really two different markets. And it's because of the physical nature of the port, Halifax is a deepwater port, ice-free. We are planning on that to be big ship, big train ready.

Montréal is more of a niche market for our customers. It's a higher cost per container, if you have smaller vessels coming in versus being able to come in with large vessels at Halifax. So they are two separate markets. We look at them in two different ways. And I believe our customers do as well.

Tom Wadewitz: Okay. Great. Thanks for the time.

JJ Ruest: Thank you Tom.

Operator: Thank you.

The next question is from Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Ossenbeck: Yes. Thanks. Good afternoon.

So two quick ones, one for Keith and Doug. Keith, on the consumer products side, can you just elaborate on the rationale benefits for joining the E&P program? And also what you think some of the opportunities are later this year when Canada seemingly rolls out ELDs? And Doug for you on the lumber cars that are parked now. Are those able to be redirected because of volumes redirected to Asia for export, which has been a bit of relief valve for some of the type of products in the past?

Doug MacDonald: Yes. So to start with regard to the E&P. It's been a long time since CN has been part of a container pool.

a long time. And we have been an agent in the E&P program but you do not have the benefit as a full supporter with putting containers into it. If you look at that market, it's from the Canadian West out to Southeast U.S. and from the Northeast Canadian market down to the Southwest. It's opening up a market for us that we cannot play in today.

It's not very easy to put our boxes in. We work very well with the NS and the UP and the discussions on this program. I see it as a game changer for us as well as we are already growing in some of those market and we will continue to grow in some of those market with our U.S. I&C friends, folks like Schneider, J.B. Hunt and others.

So we see it as an accretive thing to our programs we are already working on, not a substitution for.

Keith Reardon: And Brian, on the lumber side, we are starting to see orders pick up. So we are starting to pull those cars slowly out of storage now and we should see them fully utilized before we are hoping at least into Q2. At the same time, Vancouver, the market has picked up there. We are using it as an export relief valve with our customers for Asia and we continue to see that happen, not just while there is a small downturn in the U.S.

but really all the time. So they want to continue to use that on a regular basis and we are going to be there for them through the Vancouver and Prince Rupert and Prince George export submarkets.

JJ Ruest: Okay. Thanks Brian.

Brian Ossenbeck: Thanks for the details.

JJ Ruest: And operator, we will wrap this up. So I want to think all of you for joining us today. Many of you, we will see on the road between now and the next earning call in April where CN will also be celebrating our 100 years anniversary. And as we said earlier, we will have an Investor Day early June. So thank you for joining us today and have a good evening.

Thank you.